SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission File No. 000-19235
SUMMIT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0892056
(State or other jurisdiction (I.R.S.
Employer
of incorporation or Identification
No.)
organization)
P. O. Box 1087, 937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address of Principal Executive Offices, including zip code)
(864) 242-2265
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class: COMMON STOCK, $1.00 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ______
The aggregate market value of voting and nonvoting common equity held by
non-affiliates of the Registrant computed by reference to the closing price of
such stock as quoted on the NASDAQ National Market, as of March 10, 2000 was
approximately $22.1 million. For purposes of the foregoing calculation only,
all directors and executive officers of the Registrant have been deemed
affiliates.
As of March 10, 2000, there were 3,393,700 shares of the Registrant's Common
Stock, $1.00 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Definitive Proxy Statement for 2000 Annual
Meeting of Shareholders is incorporated by reference in Part III.
<PAGE>
PART I
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Summit Financial Corporation's ("the Company") Annual Report on Form 10-K,
specifically certain of the statements set forth under "Item 1 - Business",
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Item 7A - Quantitative and Qualitative Disclosures
about Market Risk", and elsewhere in this Form 10-K, and the documents
incorporated herein by reference, contains forward-looking statements,
identified as such for purposes of the safe harbor provided in Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements are based on
current expectations, estimates and projections about the Company's industry,
management's beliefs and certain assumptions made by the Company's management.
Words such as "anticipates", "expects", "intends", "plans", "believes",
"estimates", or variations of such words and similar expressions, are intended
to identify such forward-looking statements. Readers are cautioned that any
such forward-looking statements are not guarantees of future performance and
involve a number of risks and uncertainties, and that actual results could
differ materially from those indicated by such forward-looking statements.
Important factors that could cause actual results to differ materially from
those indicated by such forward-looking statements include, but are not limited
to, the following: (1) that the information is of a preliminary nature and may
be subject to further and/or continuing review and adjustment; (2) changes in
the financial industry regulatory environment; (3) changes in the economy in
areas served by the Company and its subsidiaries; (4) the impact of competition;
(5) the management of the Company's operations; (6) changes in the market
interest rate environment and/or the Federal Reserve's monetary policies; (7)
loan prepayments and deposit decay rates; and (8) the other risks and
uncertainties described from time to time in the Company's periodic reports
filed with the SEC. The Company disclaims any obligation to update any
forward-looking statements.
ITEM 1. BUSINESS
GENERAL
Summit Financial Corporation (the "Company") was incorporated under the
laws of the State of South Carolina on May 26, 1989. The Company, headquartered
in Greenville, South Carolina, is a bank holding company formed under the Bank
Holding Company Act of 1956, as amended. Subsidiaries of the Company are Summit
National Bank (the "Bank", "Summit"), a national bank organized in 1990, and
Freedom Finance, Inc. (the "Finance Company", "Freedom"), a consumer finance
company organized in 1994. In 1997 the Bank incorporated Summit Investment
Services, Inc., an investment and financial planning company, as a wholly-owned
subsidiary. The Company engages in no significant operations other than the
ownership of its subsidiaries. The Company conducts its business from three
banking offices and eleven consumer finance offices throughout South Carolina.
The Bank targets individuals and small-to-medium-sized businesses in the
Upstate of South Carolina that require a full range of quality banking services
typically provided by the larger regional banking concerns, but who prefer the
personalized service offered by a locally-based institution. The Bank currently
has its headquarters and three full-service branch locations in Greenville,
South Carolina. Summit provides a full range of deposit services that are
typically available in most banks and savings and loan associations including
checking accounts, NOW accounts, individual retirement accounts, savings and
other time deposits of various types ranging from daily money market accounts to
longer-term certificates of deposit. Deposits of the Bank are insured up to
$100,000 by the Federal Deposit Insurance Corporation (the "FDIC"). The Company
has no material concentration of deposits from any single customer or group of
customers. Other services which the Bank offers include safe deposit boxes,
bank money orders, wire transfer facilities, remote internet banking and various
cash management and electronic banking programs. Through Summit Investment
Services, Inc., the Bank provides a full range of nondeposit investment products
including annuities and mutual funds, full and discount brokerage services, and
financial management services.
The Bank also offers a full range of short to intermediate-term, secured
and unsecured commercial and personal loans for business, agriculture, real
estate, home improvement and automobiles, credit cards, letters of credit,
personal investments and home equity lines of credit. It is the Bank's intent
to originate quality, profitable loans which will benefit the area's economy,
provide a reasonable return to our shareholders, and promote the growth of the
Bank. Management strives to maintain quality in the loan portfolio and to
accept only those credit risks which meet the Bank's underwriting standards. No
significant portion of the Company's loan portfolio is concentrated within a
single industry or group of related industries.
The Finance Company makes and services installment loans to individuals
with loan principal amounts generally not exceeding $2,000 and with maturities
ranging from three to eighteen months. The Finance Company, which is
headquartered in Greenville, South Carolina, currently has 11 branch offices
throughout South Carolina. The Finance Company's loan customers are primarily
in the low-to-moderate income brackets and are engaged in widely diverse
occupations. A loan investigation and credit history review is made for each
borrower, either through credit reporting agencies or directly by Company
employees. Freedom also makes available to borrowers credit life, accident and
health, and property insurance directly related to the extension of credit to
the individual. The business of the Finance Company is rather seasonal and the
amount of loans outstanding increases significantly at the end of each calendar
year due to the seasonal loan demand, while the first quarter of the calendar
year often results in substantial loan paydowns.
With the exception of the loans acquired to expand Freedom's branch
network, the Company has pursued a strategy of growth through internal expansion
since its inception. At December 31, 1999, the Company had total assets of
$191.2 million, total deposits of $158.0 million, loans, net of unearned income,
of $148.2 million and shareholders' equity of $17.6 million. This compares with
total assets of $170.5 million, total deposits of $140.2 million, loans of
$130.7 million and shareholders' equity of $15.7 million at December 31, 1998.
As a bank holding company, the Company is a legal entity separate and
distinct from its subsidiaries. The Company coordinates the financial resources
of the consolidated enterprise and maintains financial, operational and
administrative systems that allow centralized evaluation of subsidiary
operations and coordination of selected policies and activities. The Company's
operating revenues and net income are derived from its subsidiaries through fees
for services performed and interest on advances and loans.
TERRITORY SERVED AND COMPETITION
THE BANK: Summit National Bank and its subsidiary, Summit Investment
Services, Inc., are located in Greenville, South Carolina. The extended market
area encompasses Greenville County, with the principal market area being the
urban areas of Greenville County. Greenville, South Carolina is located in the
fast growing Interstate-85 corridor between Charlotte, North Carolina and
Atlanta, Georgia. The economy of Greenville is primarily industrial in nature
and the area is considered one of the Southeast's leading manufacturing centers.
Greenville, South Carolina is a highly competitive commercial banking
market in which all of the largest banks in the state are represented. The
competition among the various financial institutions is based upon interest
rates offered on deposit accounts, interest rates charged on loans, credit and
service charges, the quality of services rendered, the convenience of banking
facilities, and, in the case of loans to large commercial borrowers, relative
lending limits.
Many of the competitor banks in the Bank's market area are subsidiaries of
bank holding companies which own banks in other southeastern states. In the
conduct of certain areas of business, the Bank may also compete with savings and
loan associations, credit unions, insurance companies, securities firms, leasing
companies and other financial institutions, some of which are not subject to the
same degree of regulation and restrictions as the Bank. The Bank may also
compete with out-of-state financial institutions which operate loan production
offices, originate mortgages, accept money market deposits, and provide other
financial services. The Bank's investment subsidiary competes with larger
brokerage houses and financial planners, discount brokers and internet brokerage
service providers.
Many of these competitors have substantially greater resources and lending
abilities due to their size than the Bank or its subsidiary have and these
competitors may offer services, such as international banking and trust
services, that the Bank is not currently providing. Moreover, most of the
competitors have multiple branch networks located throughout the extended market
area, while the Bank currently has only three locations, which could be a
competitive disadvantage. As a result, the Bank does not generally attempt to
compete for the banking relationships of larger corporations, but concentrates
its efforts on small and medium-sized businesses and individuals. The Company
believes that the Bank is able to compete effectively in this market segment by
offering competitive pricing of services and quality, experience and personal
treatment in the execution of services.
The Bank and its subsidiary are not dependent upon a single or a very few
customers, the loss of which would have a material adverse effect.
THE FINANCE COMPANY: Freedom Finance, Inc. serves its customers from
locations in Bishopville, Columbia, Conway, Florence, Greenville, Kingstree,
Lake City, Manning, Moncks Corner, St. George, and Sumter, South Carolina.
Competition between consumer finance companies is not generally as intense as
that among banks, however, this segment of the market has become over-served in
areas of South Carolina. The amounts, rates, and fees charged on consumer
finance loans are restricted by state law according to the type of license
granted by the South Carolina State Board of Financial Institutions. Numerous
other finance companies which offer similar types of loans are located in the
areas served by Freedom.
The Finance Company competes directly with national, regional and local
consumer finance companies. The principal areas of competition in the consumer
finance industry are convenience of services to customers, effectiveness of
advertising, effectiveness of administration of loans and the cost of borrowed
money. Many of the finance companies competing with Freedom may have
substantially greater resources and lending abilities than the Finance Company
and may have more branches within the specific market areas in which they and
the Finance Company compete. The Company believes that the Finance Company is
able to compete effectively in its current markets.
EMPLOYEES
As of December 31, 1999, the Company employed a total of three executive
officers. Additionally, the Company and its subsidiaries employed approximately
74 full-time equivalent employees. Management considers its relations with its
employees to be good.
MONETARY POLICY
The earnings of the Company and it's bank subsidiary may be affected
significantly by the monetary policies of the Federal Reserve Board which
regulates the money supply in order to mitigate recessionary and inflationary
pressures. Among the techniques used to implement these objectives are open
market operations in United States Government securities, changes in the rates
paid by banks on bank borrowings, changes in the reserve requirements against
bank deposits and limitations on interest rates which banks may pay on time and
savings deposits. These techniques are used in varying combinations to
influence overall growth and distribution of bank loans, investments and
deposits, and their use may also affect interest rates charged on loans or paid
on deposits.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of financial
institutions such as the Company's subsidiary, are primarily monetary in nature.
Therefore, the Company's performance is not generally affected by the general
levels of inflation on the price of goods and services. While the Company's
noninterest income and expense and the interest rates earned and paid are
affected by the rate of inflation, the Company believes that the effects of
inflation are generally manageable through asset/liability management.
ACCOUNTING ISSUES
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS 133 changes the previous
accounting definition of a derivative and discusses the appropriateness of hedge
accounting for various forms of hedging activities. Under this standard, all
derivatives are measured at fair value and recognized in the statement of
financial position as assets or liabilities. This standard, as amended by SFAS
137, is effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000, with earlier adoption permitted. Management does not expect that
this standard will have a significant effect on the Company.
SUPERVISION AND REGULATION
GENERAL: The Company and its subsidiaries are extensively regulated under
federal and state law. These laws and regulations are primarily intended to
protect consumer borrowers and depositors, not shareholders. To the extent that
the following information describes statutory or regulatory provisions, it is
qualified in its entirety by reference to the particular statutes and
regulations. Any change in the applicable laws may have a material effect on
the business and prospects of the Company. The operation of the Company may be
affected by legislative and regulatory changes and by the monetary policies of
various regulatory authorities. The Federal Reserve examines the Company and
may examine the Bank and Finance Company.
THE COMPANY: The Company is a bank holding company within the meaning of
the Bank Holding Company Act of 1956, as amended (the "BHCA"), and as such, is
under the supervisory and regulatory authority of the Board of Governors of the
Federal Reserve System (the "Federal Reserve"). As a bank holding company
registered under the laws of the South Carolina Bank Holding Company Act, the
Company is also subject to regulation by the State Board of Financial
Institutions. Consequently, the Company must receive the approval of the State
Board prior to engaging in the acquisition of banking or nonbanking institutions
or assets. The Company is also required to file annual reports and other
information with the Federal Reserve and the South Carolina State Board of
Financial Institutions regarding its financial condition, results of operations,
management and intercompany relationships and transactions between the Company
and its subsidiaries. The BHCA requires prior Federal Reserve approval for,
among other things, the acquisition by a bank holding company of direct or
indirect ownership or control of more than 5% of the voting shares or
substantially all of the assets of any bank, or for a merger or consolidation of
a bank holding company with another bank holding company.
In November 1999, Congress passed the "Gramm-Leach-Bliley" Financial
Services Modernization Act (the "GLB Act") which repeals two provisions of the
Glass-Stegall Act that have previously separated banking, insurance, and
securities activities. The GLB Act creates a new financial services structure,
the financial holding company, under the BHCA. Financial holding companies will
be able to engage in any activity that is deemed "financial in nature".
Accordingly, the Company and its bank subsidiary will be able to affiliate with
securities firms, insurance companies and other financial-related companies as
well as consider new products and services including merchant banking and
securities underwriting, within the same financial holding company. In addition
to broadening the range of financial company affiliations and products or
services the Company may offer, other provisions of the GLB Act include new
consumer privacy provisions; changes in the Federal Home Loan Bank System as to
entry and collateral on advances; and a reduction in the frequency of CRA
examinations for banks under $250 million in assets and with a "satisfactory"
rating.
The GLB Act adopts a system of functional regulation where the primary
regulator is determined by the nature of the activity rather than the type of
institution. Although the Federal Reserve Board (the "FRB") is the umbrella
supervisor of financial holding companies, the GLB Act limits the FRB's power to
supervise and conduct examinations of affiliated companies of the financial
holding company. Rather, under the provisions of the GLB Act, the securities
activities would be regulated by the SEC and other securities regulators,
insurance activities by the state insurance authorities, and banking activities
by the appropriate bank regulator.
Under the policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. The Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), requires that a bank holding company guarantee that any
"undercapitalized" (as defined in the statute) insured depository institution
subsidiary will comply with the terms of any capital restoration plan filed by
such subsidiary with its appropriate federal banking agency up to the lesser of
(i) an amount equal to 5% of the institution's total assets at the time the
institution became undercapitalized, or (ii) the amount that is necessary (or
would be necessary) to bring the institution into compliance with all applicable
capital standards as of the time the institution fails to comply with such
capital restoration plan.
Under Section 5(e) of the BHCA, the Federal Reserve has the authority to
terminate any activity of a bank holding company that constitutes a serious risk
to the financial soundness or stability of any subsidiary depository institution
or to terminate its control of such subsidiary. Further, FDICIA grants federal
bank regulatory authorities additional discretion to require a bank holding
company to devest itself of any bank or nonbank subsidiary if the agency
determines that divesture may aid the depository institution's financial
condition.
In July 1996, South Carolina enacted the South Carolina Banking and
Branching Efficiency Act (the "Act") which provides that, except as otherwise
expressly permitted by federal law and in limited circumstances specified in the
Act, a company may not acquire a South Carolina bank holding company (as defined
in the Act) or a bank chartered under the laws of South Carolina unless the
company obtains prior approval from the State Board of Financial Institutions
(the "State Board"). The company proposing to make the acquisition must file
with the State Board a notice or application that the company filed with the
responsible federal bank supervisory agency and pay the fee, if any, prescribed
by the State Board. In addition, the company must publish prior notice of the
application once in a daily newspaper of general circulation in South Carolina
and provide an opportunity for public comment. If the company proposing to make
the acquisition is an out-of-state bank holding company, it must qualify to do
business in South Carolina or appoint an agent for service of process in South
Carolina. The Act also provides that approval of the State Board must be
obtained before an interstate bank merger involving a South Carolina bank may be
consummated.
The passage of the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act") has increased the ability of bank holding
companies and banks to operate across state lines. Under the Riegle-Neal Act,
with the approval of the Board of Governors of the Federal Reserve System, and
subject to nationwide and statewide concentration limits, the Company and any
other bank holding company located in South Carolina may acquire or merge with a
bank located in any other state and a bank holding company located outside of
South Carolina may acquire or merge with any South Carolina-based bank, provided
the acquirer is adequately capitalized and adequately managed, as defined in the
Riegle-Neal Act. The Interstate Banking Act also permits de novo branching
provisions. The legislation preserves the state laws which require that a bank
must be in existence for a minimum period of time before being acquired, as long
as the requirement is five years or less.
The Company is an "affiliate" of the Bank within the meaning of the Federal
Reserve Act, which imposes restrictions on loans by the Bank to the Company, on
investments by the Bank in the stock or securities of the Company, and on the
use of such stock or securities as collateral for loans by the Bank to any
borrower. The Company and the Bank are subject to Section 23A of the Federal
Reserve Act. Section 23A defines "covered transactions", which includes
extensions of credit, and limits a bank's covered transactions with any
affiliate to 10% of such bank's capital and surplus. All covered transactions
with all affiliates cannot in the aggregate exceed 20% of a bank's capital and
surplus. All covered and exempt transactions between a bank and its affiliates
must be on terms and conditions consistent with safe and sound banking
practices, and banks and their subsidiaries are prohibited from purchasing
low-quality assets from the bank's affiliates. Finally, Section 23A requires
that all of a bank's extensions of credit to an affiliate be appropriately
secured by acceptable and adequate collateral, as defined in the regulation.
The Company and the Bank are also subject to Section 23B of the Federal Reserve
Act, which generally limits covered and other transactions among affiliates to
terms and circumstances, including credit standards, that are substantially the
same or at least as favorable to a bank holding company, a bank or a subsidiary
of either as prevailing at the time for transactions with unaffiliated
companies.
THE BANK: The Company's subsidiary bank, Summit National Bank, is a
nationally chartered financial institution, and as such, is subject to various
statutory requirements, supervision and regulation, of which regular bank
examinations are a part, promulgated and enforced primarily by the Office of the
Comptroller of the Currency (the "Comptroller"). These statutes, rules and
regulations relate to insurance of deposits, required reserves, allowable
investments, loans, mergers, consolidations, issuance of securities, payment of
dividends, establishment of branches, and other aspects of the business of
Summit National Bank.
The Comptroller is responsible for overseeing the affairs of all national
banks and periodically examines national banks to determine their compliance
with law and regulations. The Comptroller monitors all areas of the Bank's
operations, including loans, mortgages, issuance of securities, capital
adequacy, risk management, payment of dividends, and establishment of branches.
In addition, the Comptroller has authority to issue cease and desist orders
against national banks which are engaged in unsafe or unsound practice in the
conduct of their business. Federal banking laws applicable to all depository
financial institutions, among other things, (i) afford federal bank regulatory
agencies with powers to prevent unsafe and unsound banking practices; (ii)
restrict preferential loans by banks to "insiders" of banks; (iii) require banks
to keep information on loans to major shareholders and executive officers, and
(iv) bar certain director and officer interlocks between financial institutions.
The Comptroller also administers a number of federal statutes which apply
to national banks such as the Depository Institution Management Interlocks Act,
the International Lending Supervision Act of 1983 and the Community Reinvestment
Act of 1977 ("CRA"). CRA requires that, in connection with their examinations
of financial institutions, the Comptroller shall evaluate the record of the Bank
in meeting the credit needs of the local community, including low and moderate
income neighborhoods, consistent with the safe and sound operation of the Bank.
These factors are also considered in evaluating mergers, acquisitions, and
applications to open a branch facility. The federal banking agencies, including
the Comptroller, issued a new joint rule which became effective for the Bank in
1997 related to evaluating an institution's CRA performance. The new rule
evaluates institutions based on their actual performance (rather than efforts)
in meeting community credit needs. Subject to certain exceptions, the
Comptroller assesses the CRA performance of a bank by applying lending,
investment, and service tests. The Comptroller assigns a rating to a bank based
on the bank's performance under the tests. To evaluate compliance with the
lending, investment and service tests, subject to certain exceptions, banks are
required to collect and report to the Comptroller extensive demographic and loan
data. Summit National Bank received a "satisfactory" rating in its most recent
CRA examination.
The Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLB")
which provides a central credit facility primarily for member institutions.
Members of the FHLB are required to acquire and hold shares of capital stock in,
and may obtain advances from, the FHLB. The amount of stock owned is based on
the Bank's balance of residential mortgages and the balance of outstanding
advances from the FHLB. The FHLB makes advances to members in accordance with
policies and procedures established by its Board of Directors. The Bank is
authorized to borrow funds from the FHLB to meet demands for withdrawals of
deposit accounts, to meet seasonal requirements, to fund expansion of the loan
portfolio, or for general asset/liability management. Advances may be made on a
secured or unsecured basis depending on a number of factors, including the
purpose for which the funds are being borrowed and existing advances.
Collateral on secured advances may be in the form of first mortgages on 1-4
family real estate, government securities, or other assets acceptable to the
FHLB. Interest rates charged for advances vary depending upon maturity, the
cost of funds to the FHLB, and general market conditions.
The Bank is also a member of the FDIC, which currently insures the deposits
of each member bank to a maximum of $100,000 per depositor. For this
protection, each bank pays a semiannual statutory assessment and is subject to
the rules and regulations of the FDIC. Further, the FDIC is authorized to
impose one or more special assessments in any amount deemed necessary to enable
repayment of amounts borrowed by the FDIC from the United Stated Department of
the Treasury. The FDIC has broad authority to prohibit Summit National Bank
from engaging in unsafe or unsound banking practices and may remove or suspend
officers or directors of a bank to protect its soundness. The FDIC requires
insured banks to maintain specified levels of capital, maintain certain security
devices and procedures and to file quarterly reports and other information
regarding its operations. The FDIC requires assessment to be paid by each
FDIC-insured institution based on the institution's assessment risk
classification, which is determined based on whether the institution is
considered "well capitalized", "adequately capitalized", or "undercapitalized",
as terms have been defined in applicable federal regulations adopted to
implement the prompt corrective action provisions of the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA"), and whether such institution
is considered by its supervisory agency to be financially sound or to have
supervisory concerns.
FDICIA also contains broad powers for federal banking regulators to take
certain enforcement actions against problem institutions as well as imposing
significant restrictions on undercapitalized financial institutions, including
establishing a capital-based supervisory system for prompt corrective action
("PCA"). Under the PCA provisions, regulatory agencies can require submission
and funding of a capital restoration plan by an undercapitalized institution,
place limits on its activities, require the raising of additional capital, and
can ultimately require the appointment of a conservator or receivor of the
institution if deemed necessary and prudent by the regulatory agency.
Interest and certain other charges collected or contracted for by the Bank
is subject to state usury laws and certain federal laws concerning interest
rates. The Bank's operations are also subject to certain federal laws
applicable to credit transactions, such as the federal Truth-In-Lending Act
governing disclosures of credit terms to consumer borrowers; CRA requiring
financial institutions to meet their obligations to provide for the total credit
needs of the community; the Home Mortgage Disclosure Act of 1975 requiring
financial institutions to provide information to enable the public to determine
whether it is fulfilling its obligation to meet the housing needs of the
community it serves; the Equal Credit Opportunity Act prohibiting discrimination
on the basis of race, creed, or other prohibited factors in extending credit;
the Fair Credit Reporting Act of 1978 governing the use and provisions of
information to credit reporting agencies; the Fair Debt Collection Act governing
the manner in which consumer debts may be collected; and the rules and
regulations of the various federal agencies charged with the responsibility of
implementing such federal laws.
The deposit operations of the Bank are also subject to the Right to
Financial Privacy Act which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds Transfer
Act and Regulation E issued by the Federal Reserve to implement that act which
governs automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
THE FINANCE COMPANY: The Company's subsidiary finance company, Freedom
Finance, Inc., is a consumer finance company licensed and regulated by the State
Board of Financial Institutions for South Carolina. Accordingly, the Finance
Company is subject to annual examinations by the State Board and various
regulatory requirements, including annual reporting, annual license renewal, and
other regulations pertaining to the extension of credit. Specifically, state
laws and regulations apply to maximum loan amounts, terms, interest rates and
credit insurance and other fee charges. These laws and regulations are subject
to both repeal and revision from time to time, often in response to pressures
exerted by consumer rights groups.
CAPITAL REQUIREMENTS
Pursuant to the general supervisory authority conferred by the BHCA and the
directives set forth in the International Lending Supervision Act of 1983, the
Federal Reserve and Comptroller have adopted risk-based capital adequacy
guidelines for banks and bank holding companies subject to their regulation as a
means for determining the adequacy of capital based on the risks inherent in
carrying various classes of assets and off-balance sheet items. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's and
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios of total
and Tier I capital (as defined in the regulation) to risk-weighted assets (as
defined) and to total assets. Management believes, as of December 31, 1999,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject. At December 31, 1999 and 1998, the Bank is categorized as
"well capitalized" under the regulatory framework for prompt corrective action.
To be categorized as "well capitalized", the Bank must maintain minimum total
risk-based, Tier I risk-based and Tier I leverage ratios. There are no current
conditions or events that management believes would change the Company's or the
Bank's category.
The Company's and the Bank's actual capital amounts and ratios at December
31, 1999 and 1998 as well as the minimum calculated amounts for each regulatory
defined category are included in this report under Part II, Item 8. "Financial
Statements and Supplemental Data" as Note 14 to the Notes to Consolidated
Financial Statements.
DIVIDENDS
The holders of the Company's common stock are entitled to receive cash
dividends when and if declared by the Board of Directors out of the funds
legally available therefor. The Company is a legal entity separate and distinct
from its subsidiaries and depends in large part for its income available to
distribute to shareholders on the payment of cash dividends from its
subsidiaries. While the Company is not presently subject to any regulatory
restrictions on dividends, the Bank is subject to such regulatory cash dividend
restrictions.
Specifically, approval of the Comptroller of the Currency will be required
for any cash dividend to be paid to the Company by the Bank if the total of all
cash dividends, including any proposed cash dividend, declared by the Bank in
any calendar year exceeds the total of its net profits for that year combined
with its retained net profits for the preceding two years, less any required
transfers to surplus. Additionally, the National Bank Act provides that a
national bank cannot pay cash dividends or other distributions to shareholders
out of any portion of its common stock or preferred stock accounts and that a
bank shall pay no cash dividend in an amount greater than its net profits then
on hand, after deduction of its losses and bad debts. As of December 31, 1999,
no cash dividends have been declared or paid by the Bank. At December 31, 1999,
the Bank had available retained earnings of $7.5 million.
On November 29, 1999, the Company issued its eighth 5% stock distribution
in the form of a stock dividend to shareholders of record as of November 18,
1999. This dividend resulted in the issuance of 153,822 shares of the Company's
$1.00 par value common stock.
SELECTED STATISTICAL FINANCIAL INFORMATION
The Company, through the operations of the Bank, offers a wide range of
financial related services to individual and corporate customers. The Bank is
subject to competition from other financial institutions. The Bank is also
subject to the regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities. The Company has no foreign
operations.
The consolidated financial statements of the Company are prepared in
conformity with generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period. The
consolidated selected statistical financial data provided on the following pages
presents a more detailed review of the Company's business activities.
<PAGE>
NET INTEREST INCOME ANALYSIS
- -------------------------------
Net interest income, the difference between the interest earned on assets
and the interest paid for liabilities used to support those assets, is the
principal source of the Company's operating income. Net interest income was
$8.7 million, $7.6 million, and $7.0 million for 1999, 1998, and 1997,
respectively. The Company's average interest rate spread is calculated as the
difference between the average interest rate earned on interest-earning assets
and the average interest paid on interest-bearing liabilities. This spread
increased between 1998 and 1999 because of the reduction in the cost of funds of
the Company due to the maturities of higher priced CDs combined with the
restructure of the deposit portfolio to lower costing, variable rate deposits.
The spread remained relatively constant between 1997 and 1998 as the reduction
in rates on interest-earning assets was offset by a decline in the rates paid on
interest-bearing liabilities. The increase in net interest income in 1999 is
directly related to the increase in the average loan and deposit volume of the
Bank of 15% and 7%, respectively, combined with the 36 basis point increase in
net interest margin during the year. Net interest income increased in 1998 also
related to the higher average loan and deposit volume of the Bank which was up
from 1997 by 9% and 10%, respectively.
For the year ended December 31, 1999, the Company's net interest margin was
5.31%, compared to 4.95% in 1998 and 4.94% for 1997. The net interest margin is
calculated as net interest income divided by average earning assets. The margin
for 1999 increased 36 basis points from the prior year due primarily to the
reduction in the cost of funds as CDs with higher rates matured and were
replaced with lower market rate deposits. The higher percentage of variable
rate deposits also contributed to the lower cost of funds as deposits were
repricing immediately in the declining rate period between late 1998 and
mid-year 1999. The margins between 1998 and 1997 remained fairly constant due
to the lower cost of funds in 1998 which offset the declining rate environment
experienced in the fourth quarter of 1998 and resulted in lower yields on
assets.
The Company manages interest rate spreads by monitoring the maturity of
assets and related liabilities, interest rates, risk exposure, liquidity,
funding sources, and capital resources. The objective of such monitoring is to
maximize net interest income over an extended period of time, while maintaining
associated risk within prescribed policy limits.
The following table presents the average balances, the average yield and
the interest income earned on interest-earning assets, and the average rate and
the interest paid or accrued on interest-bearing liabilities of the Company for
the last three years. Also presented is the average yields and rates for
interest-earning assets and interest-bearing liabilities at December 31, 1999.
Tabular presentation of all average statistical data is based on daily averages.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
(DOLLARS IN THOUSANDS)
12/31/99 1999 1999 1999 1998 1998 1998 1997
----------- -------- -------- ------- -------- --------- ------- ---------
Average Average Income/ Yield/ Average Income/ Yield/ Average
Yield/Rate Balance Expense Rate Balance Expense Rate Balance
----------- -------- -------- ------- -------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets:
Loans (net of unearned income) (1) 10.06% $138,989 $ 13,676 9.84% $120,455 $ 12,275 10.19% $110,812
Investment securities (taxable) 6.28% 16,038 951 5.93% 19,168 1,155 6.02% 18,597
Investment securities
(non-taxable) (2) 7.56% 10,113 500 7.50% 8,365 413 7.49% 2,705
Investment in stock (3) 4.58% 888 61 6.87% 771 50 6.48% 685
Federal funds sold 5.52% 2,015 102 5.06% 7,242 397 5.48% 7,542
Interest-bearing bank balances 5.33% 1,631 87 5.33% 2,047 126 6.15% 2,220
----------- -------- -------- ------- -------- --------- ------- ---------
Total earning assets 9.41% 169,674 $ 15,377 9.21% 158,048 $ 14,416 9.26% 142,561
=========== ======== ======= ========= =======
Non-earning assets 10,467 8,379 7,101
-------- -------- ---------
Total average assets $180,141 $166,427 $149,662
======== ======== =========
LIABILITIES &
SHAREHOLDERS'
EQUITY
Liabilities:
Interest-bearing deposits:
Interest checking 3.15% $ 10,409 $ 251 2.41% $ 6,931 $ 155 2.24% $ 6,793
Savings 2.43% 1,758 43 2.45% 1,643 42 2.56% 1,532
Money market accounts 4.64% 55,667 2,450 4.40% 44,214 2,058 4.65% 31,873
Time deposits greater than $100M 5.28% 20,869 1,074 5.15% 25,316 1,445 5.71% 27,872
Other time deposits 5.23% 43,765 2,268 5.18% 47,793 2,731 5.72% 48,958
----------- -------- -------- ------- -------- --------- ------- ---------
Total interest-bearing deposits 4.77% 132,468 6,086 4.59% 125,897 6,431 5.11% 117,028
Federal funds purchased
and repurchase agreements 5.25% 909 46 5.06% 836 43 5.14% 789
Other short-term borrowings 6.59% 510 33 6.47% 1,053 71 6.74% 776
FHLB advances 5.39% 8,530 463 5.42% 4,517 257 5.67% 2,607
----------- -------- -------- ------- -------- --------- ------- ---------
Total interest-bearing liabilities 4.82% 142,417 $ 6,628 4.65% 132,303 $ 6,802 5.14% 121,200
=========== ======== ======= ========= =======
Noninterest bearing liabilities:
Noninterest bearing deposits 19,204 17,497 - - 14,222
Other noninterest bearing liabilities 1,849 2,203 - - 1,740
-------- -------- ---------
Total liabilities 163,470 152,003 - - 137,162
Shareholders' equity 16,671 14,424 - - 12,500
-------- -------- ---------
Total average liabilities
and equity $180,141 $166,427 - - $149,662
======== ======== =========
Net interest margin (4) $ 8,749 5.31% $ 7,614 4.95%
======== ======= ========= =======
Interest rate spread (5) 4.56% 4.12%
======= =========
1997 1997
-------- -------
Income/ Yield/
Expense Rate
-------- -------
<S> <C> <C>
ASSETS
Earning Assets:
Loans (net of unearned income) (1) $ 11,491 10.37%
Investment securities (taxable) 1,173 6.31%
Investment securities
(non-taxable) (2) 135 7.56%
Investment in stock (3) 45 6.57%
Federal funds sold 410 5.44%
Interest-bearing bank balances 127 5.72%
-------- -------
Total earning assets $ 13,381 9.43%
======== =======
Non-earning assets
Total average assets
LIABILITIES &
SHAREHOLDERS'
EQUITY
Liabilities:
Interest-bearing deposits:
Interest checking $ 171 2.52%
Savings 43 2.81%
Money market accounts 1,451 4.55%
Time deposits greater than $100M 1,616 5.80%
Other time deposits 2,859 5.84%
-------- -------
Total interest-bearing deposits 6,140 5.25%
Federal funds purchased
and repurchase agreements 42 5.32%
Other short-term borrowings 52 6.70%
FHLB advances 170 6.52%
-------- -------
Total interest-bearing liabilities $ 6,404 5.28%
======== =======
Noninterest bearing liabilities:
Noninterest bearing deposits
Other noninterest bearing liabilities
Total liabilities
Shareholders' equity
Total average liabilities
And equity -
Net interest margin (4) $ 6,977 4.94%
======== =======
Interest rate spread (5) 4.15%
=======
<FN>
(1) Average loans includes nonaccruing loans.
(2) Yields on nontaxable investment securities have been adjusted to a tax equivalent basis assuming a 34% Federal
tax rate.
(3) Includes investments in stock of Federal Reserve Bank, Federal Home Loan Bank, and other equities.
(4) Net interest margin is computed by dividing net interest income (adjusted to a tax equivalent basis assuming a 34%
Federal tax rate) by total average interest-earning assets.
(5) Interest rate spread is the difference between the average yield on interest-earning assets and the average rate on
interest-bearing liabilities.
</TABLE>
<PAGE>
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL
- -------------------------------------------------
Net interest income ("NII") is affected by changes in the average interest
rate earned on interest-earning assets and the average interest rate paid on
interest-bearing liabilities. In addition, net interest income is affected by
changes in the volume of interest-earning assets and interest-bearing
liabilities. The following table sets forth the dollar amount of increase in
interest income and interest expense resulting from changes in the volume of
interest-earning assets and interest-bearing liabilities and from changes in
yields and rates. For the purposes of this table, changes which are not solely
attributable to volume or rate have been attributed to rate.
<TABLE>
<CAPTION>
VOLUME AND RATE VARIANCE ANALYSIS
(DOLLARS IN THOUSANDS)
1998 - 1999 1997 - 1998
------------------------------ ---------------------------
CHANGE RELATED TO TOTAL CHANGE RELATED TO TOTAL
--------------------- CHANGE --------------------- CHANGE
Volume Rate IN NII Volume Rate IN NII
------------- ------ ------ ------------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Loans (net of unearned income) $ 1,889 ($488) $ 1,401 $ 1,000 ($216) $ 784
Investment securities (taxable) (189) (15) (204) 36 (54) (18)
Investment securities (non-taxable) 86 1 87 428 (150) 278
Investment in stock 8 3 11 6 (1) 5
Federal funds sold (287) (8) (295) (16) 3 (13)
Interest-bearing bank balances (26) (13) (39) (10) 9 (1)
------------- ------ -------- ------------- ------ --------
Total interest income 1,481 (520) 961 1,444 (409) 1,035
------------- ------ -------- ------------- ------ --------
Interest-bearing liabilities:
Interest-bearing deposits:
Interest checking 78 18 96 3 (19) (16)
Savings 3 (2) 1 3 (4) (1)
Money market accounts 533 (141) 392 562 45 607
Time deposits greater than $100M (254) (117) (371) (148) (23) (171)
Other time deposits (230) (233) (463) (68) (60) (128)
------------- ------ -------- ------------- ------ --------
Total interest-bearing deposits 130 (475) (345) 352 (61) 291
Federal funds purchased and repurchase
agreements 4 (1) 3 2 (1) 1
Other short-term borrowings (35) (3) (38) 18 1 19
FHLB advances 228 (22) 206 126 (39) 87
------------- ------ -------- ------------- ------ --------
Total interest expense 327 (501) (174) 498 (100) 398
------------- ------ -------- ------------- ------ --------
Net interest differential $ 1,154 ($19) $ 1,135 $ 946 ($309) $ 637
============= ====== ======== ============= ====== ========
</TABLE>
INTEREST RATE SENSITIVITY ANALYSIS
- -------------------------------------
An important aspect of achieving satisfactory levels of net income is the
management of the composition and maturities of rate sensitive assets and
liabilities in order to optimize net interest income as interest rates earned on
assets and paid on liabilities fluctuate from time to time. The interest
sensitivity gap (the "gap") is the difference between total interest sensitive
assets and liabilities in a given time period. The gap provides an indication
of the extent to which the Company's net interest income may be affected by
interest rate movements.
The objective of interest sensitivity management is to maintain reasonably
stable growth in net interest income despite changes in market interest rates by
maintaining the proper mix of interest sensitive assets and liabilities.
Management seeks to maintain a general equilibrium between interest sensitive
assets and liabilities in order to insulate net interest income from significant
adverse changes in market rates.
At December 31, 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 end of 1999 of $27.5 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
62% 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 following table presents a measure, in a number of time frames, the
interest sensitivity gap by subtracting interest-sensitive liabilities from
interest-sensitive assets.
<TABLE>
<CAPTION>
INTEREST SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
As of December 31, 1999
Assets and Liabilities Repricing Within
---------------------------------------
3 Months 4 to 12 1 to 5 Over 5
or Less Months Years Years Total
--------- ---------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (net of unearned income) $ 93,906 $ 5,919 $46,180 $ 2,165 $148,170
Investments (1) 1,326 1,782 10,735 13,561 27,404
Federal funds sold 1,470 - - - 1,470
Interest-bearing bank balances 4,399 - - - 4,399
--------- ---------- ------- ------- --------
Total 101,101 7,701 56,915 15,726 181,443
--------- ---------- ------- ------- --------
Interest-bearing liabilities:
Demand deposits (2) 64,918 - - - 64,918
Time deposits greater than $100M 9,732 17,620 1,107 - 28,459
Other time deposits 13,414 24,123 3,202 57 40,796
Federal funds purchased, FHLB
advances, and other borrowings 6.500 - 7,000 - 13,500
--------- ---------- ------- ------- --------
Total 94,564 41,743 11,309 57 147,673
--------- ---------- ------- ------- --------
Period interest-sensitivity gap $ 6,537 ($34,042) $45,606 $15,669 $ 33,770
========= ========== ======= ======= ========
Cumulative interest-sensitivity gap $ 6,537 ($27,505) $18,101 $33,770
========= ========== ======= =======
<FN>
(1) - Presented at market value as all investment securities are classified as
"available for sale". Includes the Bank's investment in stock of Federal Reserve Bank,
Federal Home Loan Bank, and other equities.
(2) - Includes interest-bearing checking accounts, money market accounts, and
regular savings accounts.
</TABLE>
At December 31, 1999, approximately 60% of the Company's interest-earning
assets reprice or mature within one year, as compared to approximately 92% of
the interest-bearing liabilities.
Asset-liability management is the process by which the Company monitors and
controls the mix and maturities of its assets and liabilities. The essential
purposes of asset-liability management are to ensure adequate liquidity and to
maintain an appropriate balance between interest sensitive assets and
liabilities. The Bank has established an Asset-Liability Management Committee
which uses a variety of tools to analyze interest rate sensitivity, including a
static gap presentation and a simulation model. A "static gap" presentation (as
in the above table) reflects the difference between total interest-sensitive
assets and liabilities within certain time periods. While the static gap is a
widely-used measure of interest sensitivity, it is not, in management's opinion,
a true indicator of a company's sensitivity position. It presents a static view
of the timing of maturities and repricing opportunities, without taking into
consideration that changes in interest rates do not affect all assets and
liabilities equally. For example, rates paid on a substantial portion of
savings and core time deposits may contractually change within a relatively
short time frame, but those rates are significantly less interest-sensitive than
market-based rates such as those paid on non-core deposits. Accordingly, a
liability sensitive gap position is not as indicative of a company's true
interest sensitivity as would be the case for an organization which depends to a
greater extent on purchased funds to support earning assets. Net interest
income would also be impacted by other significant factors in a given interest
rate environment, including the spread between the prime rate and the
incremental borrowing cost and the volume and mix of earning asset growth.
Accordingly, the Bank uses a simulation model, among other techniques, to assist
in achieving consistent growth in net interest income while managing interest
rate risk. The model takes into account interest rate changes as well as
changes in the mix and volume of assets and liabilities. The model simulates
the Company's balance sheet and income statement under several different rate
scenarios. The model's inputs (such as interest rates and levels of loans and
deposits) are updated as necessary throughout the year in order to maintain a
current forecast as assumptions change. The forecast presents information over
a 12 month period. It reports a base case in which interest rates remain flat
and reports variations that occur when rates increase and decrease 100 basis
points. According to the model, the Company is presently positioned so that net
interest income will increase slightly if interest rates rise in the near term
and will decrease slightly if interest rates decline in the near term.
SECURITIES
- ----------
The Company maintains a portfolio of investment securities consisting
primarily of U.S. Treasury securities, U.S. government agencies, mortgage-backed
securities, and municipal securities. The investment portfolio is designed to
enhance liquidity while providing acceptable rates of return. The following
table sets forth the carrying value of the investment securities of the Company
at December 31, 1999, 1998, and 1997. There were no investments categorized as
"held to maturity" as defined in Statement of Financial Accounting Standards
("SFAS") 115, "Accounting for Certain Investments in Debt and Equity
Securities".
<TABLE>
<CAPTION>
SECURITY PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Available for Sale, at market value:
U.S. Treasury $ 495 $ 1,253 $ 2,750
U.S. government agencies 12,318 9,939 11,104
Mortgage-backed 3,537 5,421 7,251
State and municipal 10,116 10,489 7,108
------- ------- -------
$26,466 $27,102 $28,213
======= ======= =======
</TABLE>
The following table indicates the carrying value of each investment
security category by maturity as of December 31, 1999. The weighted average
yield for each range of maturities at December 31, 1999 is also shown. All
securities are classified as "Available for Sale" as defined in SFAS No. 115.
<TABLE>
<CAPTION>
SECURITY PORTFOLIO MATURITY SCHEDULE
(DOLLARS IN THOUSANDS)
After 1, Within After 5, Within
Within 1 Year 5 Years 10 Years After 10 Years Total
------------------ ----------------- ----------------- ----------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Market Average Market Average Market Average Market Average Market Average
Value Yield Value Yield Value Yield Value Yield Value Yield
------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U. S. Treasury - - - - - - $ 495 6.29% $ 495 6.29%
U. S. Government agencies $ 501 6.10% $ 9,033 5.90% $ 2,785 6.30% - - 12,318 6.00%
Mortgage-backed 170 5.58% 617 6.23% - - $ 2,750 6.38% 3,537 6.32%
State and municipal (1) - - 746 7.05% 2,104 7.23% 7,265 7.67% 10,116 7.50%
------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
Total $ 671 5.98% $10,396 6.00% $ 4,889 6.69% $10,510 7.30% $26,466 6.54%
======= ========= ======= ========= ======= ========= ======= ========= ======= =========
<FN>
(1) - Yields have been adjusted to a tax equivalent basis assuming a 34% Federal tax rate.
</TABLE>
The weighted average yields shown in the previous table are calculated on
the basis of cost and effective yields for the scheduled maturity of each
security. At December 31, 1999, the market value of the Company's security
portfolio was $26.5 million compared to its amortized cost of $27.4 million. At
year end, the average maturity of the security portfolio was 8.8 years, the
average duration of the portfolio was 5.7 years, and the average adjusted tax
equivalent yield on the portfolio for the year ended December 31, 1999 was
6.54%. Certain securities contain call provisions which could decrease their
anticipated maturity. Certain securities also contain rate adjustment
provisions which could either increase or decrease their yields.
Decisions involving securities are based upon management's
expectations of interest rate movements, overall market conditions, the
composition and structure of the balance sheet, and computer-based simulations
of the financial impacts of alternative rate/maturity scenarios. The Company
does not purchase or hold securities for trading purposes. However, securities
may be sold prior to their maturity as all securities in the Bank's portfolio at
December 31, 1999 were classified as "available for sale" and recorded on the
Company's balance sheet at market value.
LOANS
- -----
The loan portfolio is the Company's principal earning asset.
Management believes that the loan portfolio is adequately diversified. The
following table shows the composition of the loan portfolio at December 31,
1999, 1998, and 1997.
<TABLE>
<CAPTION>
LOAN PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Commercial and industrial $ 26,217 $ 24,100 $ 25,313
Commercial secured by real estate 55,647 48,527 41,172
Real estate - residential mortgages 47,366 42,832 37,683
Real estate - construction 10,135 6,463 3,685
Installment and other consumer loans 5,402 5,656 7,819
Consumer finance, net of unearned income 3,183 2,881 2,792
Other loans, including overdrafts 220 210 291
--------- --------- ---------
148,170 130,669 118,755
Less - Allowance for loan losses (2,163) (1,827) (1,728)
--------- --------- ---------
Net loans $146,007 $128,842 $117,027
========= ========= =========
</TABLE>
The Company's real estate loans are primarily owner-occupied
commercial facilities and other loans secured by both commercial and residential
real estate located within the Company's primary market area. The Company does
not actively pursue long-term, fixed rate mortgage loans for retention in its
loan portfolio. Commercial loans are spread through a variety of industries,
with no industry or group of related industries accounting for a significant
portion of the commercial loan portfolio. These loans may be made on either a
secured or unsecured basis. When taken, collateral consists of liens on
inventories, receivables, equipment, and furniture and fixtures. Unsecured
commercial loans are generally short-term with emphasis on repayment strengths
and low debt-to-worth ratios. At December 31, 1999, the Company had no foreign
loans.
A significant portion of the installment and other consumer loans are
secured by automobiles and other personal assets. Consumer finance loans are
those originated by the Company's consumer finance subsidiary, Freedom Finance,
Inc. These loans generally carry a higher risk of nonpayment than do the other
categories of loans, but the increased risk is substantially offset by the
smaller amounts of such loans and the higher rates charged thereon, as well as a
higher allocation of the allowance for loan losses related to Freedom's loan
portfolio.
LOAN MATURITY AND INTEREST SENSITIVITY
- ------------------------------------------
The following table shows the maturity distribution and interest
sensitivity of the Company's loan portfolio at December 31, 1999.
<TABLE>
<CAPTION>
LOAN PORTFOLIO MATURITY SCHEDULE
(DOLLARS IN THOUSANDS)
Over 1,
1 Year Less Than Over
or Less 5 Years 5 Years Total
-------- ---------- -------- --------
<S> <C> <C> <C> <C>
MATURITY DISTRIBUTION:
Commercial and industrial $ 16,148 $ 10,069 $ - $ 26,217
Real estate - commercial 12,045 43,109 493 55,647
Real estate - residential 17,012 22,058 8,296 47,366
Construction, development 7,071 3,064 - 10,135
Installment and other consumer loans 1,733 3,628 41 5,402
Consumer finance, net of unearned income 3,183 - - 3,183
Other loans, including overdrafts 220 - - 220
-------- ---------- -------- --------
Total $ 57,412 $ 81,928 $ 8,830 $148,170
======== ========== ======== ========
INTEREST SENSITIVITY:
Total of loans with:
Predetermined interest rates $ 9,495 $ 50,501 $ 80 $ 60,094
Floating interest rates 47,917 31,427 8,750 88,076
-------- ---------- -------- --------
Total $ 57,412 $ 81,928 $ 8,830 $148,170
======== ========== ======== ========
</TABLE>
NONPERFORMING ASSETS AND POTENTIAL PROBLEM LOANS
- -----------------------------------------------------
The Company's nonperforming assets consist of loans on nonaccrual
basis, loans which are contractually past due 90 days or more on which interest
is still being accrued, and other real estate owned ("OREO"). Generally, loans
of the Bank are placed on nonaccrual status when loans become 90 days past due
as to principal or interest, or when management believes, after considering
economic and business conditions and collection efforts, that the borrower's
financial condition is such that collection of the loan is doubtful. Payments
of interest on loans which are classified as nonaccrual are recognized as income
when received. Loans of the Finance Company are not classified as nonaccrual,
but are charged-off when such become 150 days contractually past due or earlier
if the loan is deemed uncollectible.
At December 31, 1999 and 1998, the Bank held no other real estate
owned acquired in partial or total satisfaction of problem loans. One loan
totaling $147,000 was on nonaccrual at December 31, 1999 while there were no
loans on nonaccrual at December 31, 1998. There were no impaired loans at
December 31, 1999 or 1998. Accruing loans past due 90 days and greater totaled
$130,000 or 0.09% of gross loans at December 31, 1999 compared to $483,000 or
0.36% of gross loans at December 31, 1998.
Management maintains a list of potential problem loans which includes
nonaccrual loans, loans past due in excess of 90 days which are still accruing
interest, and other loans which are credit graded (either internally, by
external audits or regulatory examinations) as "substandard", "doubtful", or
"loss". A loan is added to the list when management becomes aware of
information about possible credit problems of borrowers that causes doubts as to
the ability of such borrowers to comply with the current loan repayment terms.
The total amount of loans outstanding at December 31, 1999 determined to be
potential problem loans, based upon management's internal designations, was $8.4
million or 5.7% of the loan portfolio at year end, compared to $1.4 million or
1.1% of the loan portfolio at December 31, 1998. The increase in 1999 is
primarily related to several large commercial loans with a weakened financial
position. However, based on collateral position, management does not anticipate
losses on these. In addition, commencing in 1999, the consumer loan portfolio
received the same internal grading criteria as the commercial loans, thus
increasing the amount of classified loans in comparison with the prior year.
The amount of potential problem loans at December 31, 1999 does not represent
management's estimate of potential losses since the majority of such loans are
secured by real estate or other collateral. Management believes that the
allowance for loan losses as of December 31, 1999 was adequate to absorb any
losses related to the nonperforming loans and problem loans as of that date.
Management continues to monitor closely the levels on nonperforming
and potential problem loans and will address the weaknesses in these credits to
enhance the amount of ultimate collection or recovery on these assets. Should
increases in the overall level of nonperforming and potential problem loans
accelerate from the current trend, management will adjust the methodology for
determining the allowance for loan losses and will increase the provision for
loan losses accordingly. This would likely decrease net income.
PROVISION AND ALLOWANCE FOR LOAN LOSSES, LOAN LOSS EXPERIENCE
- ---------------------------------------------------------------------
The allowance for loan losses is based on management's periodic
evaluation of the loan portfolio and reflects an amount that, in management's
opinion, is adequate to absorb probable losses inherent in the loan portfolio at
any point in time. The allowance is established through charges to earnings in
the form of a provision for loan losses. Loan losses and recoveries are charged
or credited directly to the allowance. The amount charged to the provision for
loan losses by the Company is based on management's judgment and is dependent
upon growth in the loan portfolios; the total amount of past due loans;
nonperforming loans; known loan deteriorations and/or concentrations of credit;
trends in portfolio volume, maturity and composition; projected collateral
values; general economic conditions; and management's assessment of probable
losses based upon internal credit grading of the loans and periodic reviews and
assessments of credit risk associated with particular loans.
In assessing the adequacy of the allowance, management relies
predominately on its ongoing review of the loan portfolio, which is undertaken
both to ascertain whether there are losses which must be charged-off and to
assess the risk characteristics of the portfolio in the aggregate. The Bank
attempts to deal with repayment risks through the establishment of, and
adherence to, internal credit policies. These policies include loan officer and
credit limits, periodic documentation examination, and follow-up procedures for
any exceptions to credit policies. Loans that are determined to involve any
more than the normal risk are placed in a special review status. The Company's
methodology for evaluating the adequacy of the allowance for loan losses
consists of a three-tiered process. The first tier includes specific
allocations set aside for low rated credits as defined in the loan policy. The
second tier is the general allocation for problem credits and applies a
historical loss factor to pools of loans in each of several loan ratings as
defined in the policy. Finally, the third tier is the general portion of the
allowance which applies a historical loss factor to the entire loan portfolio,
not previously considered. Undisbursed commitments are also evaluated in this
third tier. The results of the three tiers are combined to determine the
required allowance.
On December 31, 1999, the allowance for loan losses was $2.2 million
or 1.46% of outstanding loans. This is compared to a $1.8 million allowance for
loan losses at December 31, 1998 or 1.40% of outstanding loans at that date.
For the year ended December 31, 1999, the Company reported consolidated net
charge-offs of $109,000 or 0.08% of average loans. This is compared to
consolidated net charge-offs of $191,000 or 0.16% of average loans for the year
ended December 31, 1998. During 1999, the Company charged a total of $445,000
to expense through its provision for loan losses, compared to $290,000 for 1998
and $392,000 for 1997. The change in the provision each year was directly
related to the level of net originations in each year as follows: $17.6 million
in 1999, $12.1 million in 1998, and $15.7 million in 1997. Another factor
influencing the amount charged to the provision each year is the total
outstanding loans and charge-off activity of the Finance Company in relation to
the consolidated totals. Loans of the Finance Company generally have higher
inherent risk than do loans of the Bank, and thus, require a higher provision.
Estimates charged to the provision for loan losses are based on management's
judgment as to the amount required to cover probable losses inherent in the loan
portfolio and are adjusted as necessary.
The following table sets forth certain information with respect to
changes in the Company's allowance for loan losses arising from charge-offs,
recoveries, and provision for the years ended December 31, 1999, 1998, and 1997.
<TABLE>
<CAPTION>
SUMMARY OF LOAN LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period $1,827 $1,728 $1,487
------- ------- -------
Charge-offs:
Commercial & industrial 74 26 40
Installment & consumer 343 382 388
------- ------- -------
417 408 428
------- ------- -------
Recoveries:
Commercial & industrial 51 25 55
Installment & consumer 257 192 196
------- ------- -------
308 217 251
------- ------- -------
Net charge-offs (109) (191) (177)
Provision charged to expense 445 290 392
Allocation for purchased loans - - 26
------- ------- -------
Balance at end of period $2,163 $1,827 $1,728
======= ======= =======
Ratio of net charge-offs to
average loans .08% .16% .16%
======= ======= =======
Ratio of allowance for loan
losses to gross loans 1.46% 1.40% 1.46%
======= ======= =======
Ratio of net charge-offs to
allowance for loan losses 5.04% 10.45% 10.24%
======= ======= =======
</TABLE>
Management considers the allowance for loan losses adequate to cover
probable losses inherent in the loan portfolio at December 31, 1999. In the
opinion of management, there are no material risks or significant loan
concentrations, and the allowance for loan losses is adequate to absorb loan
losses in the present portfolios. It must be emphasized, however, that the
determination of the allowance for loan losses using the Company's procedures
and methods rests upon various judgments and assumptions about future economic
conditions and other factors affecting loans. While it is the Company's policy
to provide for loan losses in the current period in which a loss is considered
probable, there are additional risks of future losses which cannot be quantified
precisely or attributed to particular loans or classes of loans. Because these
risks include the state of the economy, industry trends, and conditions
affecting individual borrowers, management's judgement of the allowance is
necessarily approximate and imprecise. No assurance can be given that the
Company will not in any particular period sustain loan losses which would be
sizable in relationship to the amount reserved or that subsequent evaluation of
the loan portfolio, in light of conditions and factors then prevailing, will not
require significant changes in the allowance for loan losses or future charges
to earnings. The allowance for loan losses is also subject to review and
approval by various regulatory agencies through their periodic examinations of
the Company's subsidiaries. Such examinations could result in required changes
to the allowance for loan losses. No adjustments in the allowance or
significant adjustments to the Bank's internal classified loans were made as a
result of the Bank's most recent examination performed by the Office of the
Comptroller of the Currency.
<PAGE>
- ------
COMPOSITION OF ALLOWANCE FOR LOAN LOSSES
- ---------------------------------------------
The table below presents an allocation of the allowance for loan losses for
the years ended December 31, 1999, 1998, and 1997, by the different loan
categories. However, the breakdown is based on a number of qualitative factors
and the amounts presented are not necessarily indicative of actual amounts which
will be charged to any particular category. Any unallocated reserve has been
included within the various loan categories in the table below.
<TABLE>
<CAPTION>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
1999 1998 1997
---------------------- ---------------------- ----------------------
Percent of Percent of Percent of
Allowance Loans in Allowance Loans in Allowance Loans in
Breakdown Category Breakdown Category Breakdown Category
---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial $ 383 17.69% $ 337 18.44% $ 368 21.32%
Real estate - commercial 812 37.56% 679 37.14% 599 34.67%
Real estate - residential 692 31.97% 599 32.78% 548 31.73%
Construction 148 6.84% 90 4.95% 54 3.10%
Installment and consumer finance loans 125 5.79% 119 6.53% 154 8.93%
Other loans, including overdrafts 3 0.15% 3 0.16% 5 0.25%
---------- ----------- ---------- ----------- ---------- -----------
$ 2,163 100.00% $ 1,827 100.00% $ 1,728 100.00%
========== =========== ========== =========== ========== ===========
</TABLE>
DEPOSITS
- --------
The Company has a large, stable base of time deposits, principally
certificates of deposit and individual savings and retirement accounts obtained
primarily from customers in South Carolina. The Company does not purchase
brokered deposits. At December 31, 1999, the Company had no foreign deposits.
The maturity distribution of certificates of deposit greater than or equal
to $100,000 as of December 31, 1999 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
3 months or less $9,731
Greater than 3, but less than or equal to 6 months 6,589
Greater than 6, but less than or equal to 12 months 11,032
Greater than 12 months 1,107
-----
$28,459
=======
</TABLE>
RETURN ON EQUITY AND ASSETS
- -------------------------------
The return on average shareholders' equity ratio (net income divided by
average total equity) and the return on average assets ratio (net income divided
by average total assets) for the years ended December 31, 1999, 1998, and 1997
are presented in the following table. The Company has not paid a cash dividend
since its inception. The holders of common stock are entitled to receive
dividends when and as declared by the Board of Directors. The Company's present
policy is to retain all earnings for the operation of the Company until such
time as future earnings support cash dividend payments.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Return on average assets 1.34% 1.14% 1.05%
Return on average shareholders' equity 14.45% 13.14% 12.60%
Average shareholders' equity as a percent of
average assets 9.25% 8.68% 8.35%
</TABLE>
ITEM 2. PROPERTIES
The operations of the Company and the Bank do not require any substantial
investment in fixed assets. The principal executive offices for the Company,
the Bank and the Finance Company are located at 937 North Pleasantburg Drive,
Greenville, South Carolina. In addition, this site serves as the Bank's main
branch. The building at this location is approximately 7,500 square feet in
area and is situated on a one-acre lot. The Company executed a lease for the
land and building and assigned the lease to the Bank effective on the Bank's
commencement of operations. The initial term of the lease commenced April 1,
1990 and renewal options were exercised in April 1995 and September 1998. The
term on the renewal of the lease is five years and the Company has an additional
option to renew for a five-year period under substantially the same terms. The
lease provides that the Company will be responsible for real property taxes,
insurance, utilities and maintenance with respect to the premises. During 1995,
the Bank completed construction on approximately .63 acres of land at 2201
Augusta Road, Greenville, South Carolina of its second full service bank branch.
The facility is approximately 6,500 square feet and is fully owned and occupied
by the Bank. During April of 1998, the Company entered into an agreement to
lease a facility for a branch located at 800 East North Street, Greenville,
South Carolina. This facility, which was occupied in October 1998, serves as
the third full service bank branch and as the Bank's operations facility. The
facility is approximately 8,000 square feet and has an initial lease term of
seven years. This agreement includes a renewal option for an additional seven
year period.
The eleven Finance Company branches throughout South Carolina are housed in
leased facilities averaging 1,200 square feet each with lease terms from three
to ten years. The lease agreements have various renewal options under
substantially the same terms as the original agreements.
ITEM 3. LEGAL PROCEEDINGS
Although the Company is from time to time a party to various legal
proceedings arising out of the ordinary course of business, management believes
there is no litigation or proceeding threatened or pending against the Company
that could reasonably be expected to result in a materially adverse change in
the business or financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the shareholders in the fourth
quarter of the Company's fiscal year ending December 31, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Summit Financial Corporation's common stock is traded in the Small-Cap
market on the NASDAQ system under the symbol SUMM. As of March 10, 2000 there
were approximately 411 shareholders of record of the common stock. The number
of shareholders does not reflect the number of persons or entities who hold
their stock in nominee or "street" name through various brokerage firms.
The following table presents the high, low and closing sales prices for the
Company's common stock for each full quarterly period within the two most recent
fiscal years. The source for the following information was the Nasdaq market.
<TABLE>
<CAPTION>
QUARTERLY COMMON STOCK SUMMARY
1999 1998
---------------------------------- -----------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
------- ------- ------- ------- -------- -------- ------- -------
Stock Price ranges: (1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $ 14.00 $ 13.33 $ 14.05 $ 15.66 $ 16.19 $ 15.19 $ 14.86 $ 14.51
Low $ 11.00 $ 11.19 $ 10.72 $ 11.91 $ 11.76 $ 9.98 $ 13.51 $ 11.56
Close $ 12.00 $ 12.38 $ 13.92 $ 12.62 $ 13.81 $ 14.29 $ 13.94 $ 14.46
Volume Traded 65,477 32,379 70,704 60,669 76,704 81,850 86,061 66,571
<FN>
(1) Share data have been restated to reflect eight 5% stock distributions issued between 1993 and
1999 and the two-for-one stock split in August 1998.
</TABLE>
The Company has not paid any cash dividends. The holders of common stock
are entitled to receive dividends when and as declared by the Board of
Directors. The Company's present policy is to retain all earnings for the
operation of the Company until such time as future earnings support cash
dividend payments. Accordingly, the Company does not anticipate paying cash
dividends in the foreseeable future. For information on dividend restrictions,
refer to Part II, Item 8. "Financial Statements and Supplementary Data", Note 14
under Notes to Consolidated Financial Statements.
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The information presented below should be read in conjunction with the
consolidated financial statements, the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained under Item 7 of this report.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
----------------------------------------------
(All Amounts, Except Per Share Data, In Thousands)
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C>
Net interest income $ 8,749 $ 7,614 $ 6,977 $ 5,583 $ 3,976
Provision for loan losses 445 290 392 516 277
Other income 1,560 1,408 1,035 980 611
Other expenses 6,520 5,826 5,150 4,401 3,469
Provision for income taxes 936 1,011 895 644 312
Net income 2,408 1,895 1,575 1,002 529
PER SHARE DATA: (1)
Basic net income $ 0.76 $ 0.60 $ 0.50 $ 0.32 $ 0.17
Diluted net income $ 0.65 $ 0.50 $ 0.46 $ 0.30 $ 0.16
Book value per share $ 5.42 $ 4.92 $ 4.22 $ 3.77 $ 3.46
Closing market price per share $ 12.00 $ 13.81 $ 11.23 $ 6.28 $ 5.49
BALANCE SHEET DATA (Year End)
Total assets $191,229 $170,485 $160,279 $134,162 $115,072
Loans, net of unearned income 148,170 130,669 118,755 102,692 75,712
Allowance for loan losses 2,163 1,827 1,728 1,487 1,068
Total earning assets 181,443 159,586 151,300 126,762 107,730
Deposits 157,996 140,243 140,928 117,805 99,319
Long-term debt 7,000 5,000 - - -
Shareholders' equity 17,591 15,674 13,369 11,637 10,664
BALANCE SHEET DATA (Averages)
Total assets $180,141 $166,432 $149,662 $121,997 $ 95,286
Loans, net of unearned income 138,989 120,488 110,812 88,482 66,451
Total earning assets 169,674 158,048 142,561 116,038 90,118
Deposits 151,672 143,399 131,249 106,363 80,670
Shareholders' equity 16,671 14,424 12,500 11,047 10,286
FINANCIAL RATIOS
Return on average assets 1.34% 1.14% 1.05% 0.82% 0.56%
Return on average equity 14.45% 13.14% 12.60% 9.07% 5.14%
Net interest margin 5.31% 4.95% 4.94% 4.81% 4.41%
Tier 1 risk-based capital 11.26% 10.91% 10.43% 10.79% 12.62%
Total risk-based capital 12.51% 12.16% 11.68% 12.17% 13.80%
ASSET QUALITY RATIOS
Allowance for loan losses to loans 1.46% 1.40% 1.46% 1.45% 1.41%
Net charge-offs to average loans .08% .16% .16% .17% .09%
Nonperforming assets $ 147 - - $ 110 -
<FN>
(1) All per share data has been restated to reflect all 5% stock distributions issued and
the two-for-one stock split in August 1998.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is presented to provide the reader with an
understanding of the financial condition and results of operations of Summit
Financial Corporation and its subsidiaries, Summit National Bank and Freedom
Finance, Inc.
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.
GENERAL
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 three full service offices in
Greenville, South Carolina. Summit provides a full range of banking services to
individuals and businesses, including the taking of time and demand deposits,
making loans, and offering nondeposit investment services. The Bank emphasizes
close personal contact with its customers and strives to provide a consistently
high level of service to both individual and corporate customers.
Freedom Finance, Inc. (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.
INCOME STATEMENT REVIEW
GENERAL
The Company reported record earnings in 1999 which were up 27% from 1998.
Net income totaled $2.4 million, or $0.65 diluted earnings per share, in 1999
compared with $1.9 million, or $0.50 diluted earnings per share in 1998 and $1.6
million or $0.46 diluted earnings per share for 1997. The improvement in net
income and earnings per share between 1998 and 1999 resulted primarily from the
growth in earning assets combined with a reduction in the overall cost of funds.
Increases in other income also contributed to the higher net income in 1999.
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 1999 the Company recorded net interest income of $8.7 million, a 15%
increase from the 1998 net interest income of $7.6 million. This is compared to
net interest income of $7.0 million for 1997. The increase in net interest
income in 1999 is directly related to the increase in the average loan and
interest-bearing liability volume of the Bank of 15% and 7%, respectively,
combined with the 36 basis point increase in net interest margin during the
year. Net interest income increased in 1998 also related to the higher average
loan and interest-bearing deposit volume of the Bank which was up from 1997 by
9% and 10%, respectively.
For the year ended December 31, 1999, the Company's net interest margin was
5.31%, compared to 4.95% in 1998 and 4.94% for 1997. The net interest margin is
calculated as net interest income divided by average earning assets. The margin
for 1999 increased 36 basis points from the prior year due primarily to the
reduction in the cost of funds as CDs with higher rates matured and were
replaced with lower market rate deposits. The higher percentage of variable
rate deposits also contributed to the lower cost of funds as deposits were
repricing immediately in the declining rate period between late 1998 and
mid-year 1999. The margins between 1998 and 1997 remained fairly constant due
to the lower cost of funds in 1998 which offset the declining rate environment
experienced in the fourth quarter of 1998 and resulted in lower yields on
assets.
INTEREST INCOME
Interest income for 1999 was $15.4 million which was a $1.0 million or 7%
increase over the $14.4 million for 1998. Interest income for 1997 was $13.4
million. The increases each year are primarily a result of the higher levels of
earning assets which averaged $169.7 million, $158.0 million and $142.6 million
in 1999, 1998 and 1997, respectively. Changes in average yield on earning
assets also affects the interest income reported each year. The average yield
decreased from 9.43% in 1997 to 9.26% in 1998, and 9.21% in 1999 due to the
general declining rate environment from the fourth quarter of 1998 through
mid-year 1999.
The majority of the increase in average earning assets between 1997 and
1998 and between 1998 and 1999 was in loans, which are the Company's highest
yielding assets that account for 82% of average earning assets for the year
ended 1999. Consolidated loans averaged $139.0 million in 1999 with an average
yield of 9.84%, compared to $120.5 million in 1998 with an average yield of
10.19%, and $110.8 million in 1997 with an average yield of 10.37%. The average
loan rate dropped in 1998 as compared to 1997 as a direct result of the decline
in the prime rate which averaged 8.44% in 1997 and 8.36% in 1998. The average
prime rate dropped again in 1999 to 8.00% resulting in further decreases in the
average yield on loans. Combined with the general declining rate environment in
1998 and into 1999, were continuing competitive pricing pressures in the
marketplace. The higher level of average loans each year, partially offset by
the decreases in average rate, resulted in increases in interest income on loans
of $784,000 or 7% between 1997 and 1998, and $1.4 million or 11% between 1998
and 1999.
The second largest component of earning assets is the Company's investment
portfolio which averaged $26.2 million yielding 6.54% in 1999. This is compared
to average securities of $27.5 million in 1998 yielding 6.47%, and $21.3 million
yielding 6.47% for 1997. The increase in the average yield of the investment
portfolio is related to the timing, maturity distribution and types of
securities purchased. The higher level of average securities in 1998, combined
with the increase in average rate, resulted in an increase in interest income on
investments of $260,000 or 20% between 1997 and 1998. However, the decrease in
average securities in 1999 offset the higher yields that year and resulted in a
$117,000 or 7% reduction in interest income on investments as compared to 1998.
INTEREST EXPENSE
The Company's interest expense for 1999 was $6.6 million, compared to $6.8
million for 1998 and $6.4 million for 1997. The reduction in the interest
expense in 1999 was a result of the 7% increase in average interest-bearing
liabilities being more than offset by the 49 basis point reduction in the cost
of funds. The increase in interest expense of 6% between 1997 and 1998 is
primarily related to the 10% increase in the average volume of interest-bearing
liabilities in 1998 partially offset by the decrease of 14 basis points in the
average rate on interest-bearing liabilities. The lower average cost of funds
in 1999 and 1998 was primarily a result of the maturity of higher priced CDs
combined with the restructure of the deposit portfolio to lower costing variable
rate deposits. Interest-bearing liabilities averaged $142.4 million in 1999
with an average rate of 4.65%, compared to $132.3 million in 1998 with an
average rate of 5.14%, and an average of $121.2 million with an average rate of
5.28% during 1997.
<TABLE>
<CAPTION>
AVERAGE YIELDS AND RATES
For the Years Ended December 31,
--------------------------------
(on a fully tax-equivalent basis) 1999 1998 1997
----- ------ ------
<S> <C> <C> <C>
EARNING ASSETS:
Loans 9.84% 10.19% 10.37%
Securities 6.54% 6.47% 6.47%
Short-term investments 5.51% 5.70% 5.57%
----- ------ ------
Total earning assets 9.21% 9.26% 9.43%
===== ====== ======
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits 4.59% 5.11% 5.25%
Short-term borrowings 5.61% 6.07% 6.21%
FHLB advances 5.42% 5.67% 6.52%
Total interest-bearing liabilities 4.65% 5.14% 5.28%
----- ------ ------
NET INTEREST MARGIN 5.31% 4.95% 4.94%
===== ====== ======
AVERAGE PRIME INTEREST RATE 8.00% 8.36% 8.44%
===== ====== ======
</TABLE>
PROVISION FOR LOAN LOSSES
The provision for loan losses was $445,000 in 1999, $290,000 in 1998, and
$392,000 in 1997. The change in the provision each year was directly related to
the level of net originations in each year as follows: $17.6 million in 1999,
$12.1 million in 1998, and $15.7 million in 1997. Another factor influencing
the amount charged to the provision each year is the total outstanding loans and
charge-off activity of the Finance Company in relation to the consolidated
totals. Loans of the Finance Company generally have higher inherent risk than
do loans of the Bank, and thus, require a higher provision. Estimates charged
to the provision for loan losses are based on management's judgment as to the
amount required to cover inherent losses in the loan portfolio and are adjusted
as necessary.
NONINTEREST INCOME AND EXPENSES
Noninterest income increased $152,000 or 11%, to $1.6 million in 1999 from
$1.4 million in 1998 and $1.0 million in 1997. Credit card fees and income, the
largest single item in noninterest income, rose 13% to $338,000 in 1999 from
$298,000 in 1998 and $248,000 in 1997. The increase is related to the higher
volume of transactions and merchant activity in the Bank's credit card portfolio
each year. The higher amount in service charges and fees on deposit accounts,
which increased 22% in 1999 to $247,000 from $203,000 in 1998 and $194,000 in
1997, is related to the increases in the transaction fees and the higher number
of Bank deposit accounts and transactions subject to service charges and fees.
In addition, service charge fee increases were implemented in March 1999 which
contributed to the higher income.
Insurance commission fee income increased $93,000 between 1997 and 1998 and
decreased $32,000 between 1998 and 1999 related to fluctuations in the level of
activity for both the Bank and the Finance Company. Included in insurance
commissions is income from annuity sales made in the Bank's nondeposit
investment sales department and earned commissions on credit-related insurance
products generated by the Finance Company.
The remainder of the changes in other income is related to (1) late charges
and other income on loans of the Bank and the Finance Company which increased
$35,000 in 1998 and $20,000 in 1999 related to the higher number of branches and
customer accounts; (2) the level of activity in the Bank's nondeposit financial
services and brokerage department which resulted in increased income in 1998 of
$73,000, and a decrease in 1999 of $29,000; and (3) gains on sales of company
vehicles in 1999 totaling approximately $18,000. Other increases each year are
related to the higher level of activity and transactions of the Bank generating
other income in the normal course of business.
Total noninterest expenses were $6.5 million in 1999, $5.8 million in 1998,
and $5.2 million in 1997. A majority of the increased expenditures each year
reflects the cost of additional personnel hired to support the Company's growth
and the new bank branch opened in the fourth quarter of 1998. The most
significant item included in noninterest expenses is salaries, wages and
benefits which amounted to $3.5 million in 1999, $3.2 million in 1998, and $2.7
million in 1997. The increase of $332,000 in 1999 was a result of (1) normal
annual raises and increases in the bonus and incentive payments due to the
Bank's growth and increased profitability; (2) the Bank incurring a full year of
expense for the additional employees added at the new branch in October 1998;
and (3) additional support and lending staff added in the normal course of
business throughout 1999. The increase of $441,000 in 1998 was a result of (1)
normal annual raises; (2) higher commissions paid related to the increased
volume of nondeposit product sales in 1998; (3) the amortization of compensation
expense related to restricted stock granted in late 1997; and (4) additional
benefit accruals pursuant to a new retirement plan implemented in 1998.
Occupancy and furniture, fixtures, and equipment expenses increased
$172,000 or 17% to $1.2 million in 1999 from $1.0 million in 1998 and $890,000
in 1997. The increase in 1999 was related primarily to there being a full year
of rent, depreciation, and other associated expenses for the new branch facility
which opened in October 1998. The increase in 1998 was related primarily to
higher depreciation and associated expenses at the Bank related to technology
implementations, furnishing and equipment additions, and other expenses for the
new branch facility which opened in October 1998.
Included in the line item "other expenses", which increased $190,000 or 12%
between 1998 and 1999, and $86,000 or 6% between 1997 and 1998, are charges for
insurance claims and premiums; printing and office support; credit card
expenses; professional services; advertising and public relations; and other
branch and customer related expenses. A majority of these items are related
directly to the normal operations of the Bank and increase in relation to the
increase in assets, the higher level of transaction volume, and the larger
number of customer accounts. The Bank's activity accounted for $216,000 of the
increase in 1999 (partially offset by decreases in the other subsidiaries) and
$45,000 of the increase in 1998. The Bank's increase is primarily related to
the higher level of activity and number of accounts as compared to each prior
year and the associated office support charges for the new branch which was open
for the full year in 1999. In addition, in 1999 the Bank incurred higher legal
expenses related to repossessions and collections of charged-off and nonaccrual
loans; advertising expenses related to the implementation and marketing of
internet banking products and a new web site; and Y2K expenses which totaled
approximately $24,000 for 1999.
INCOME TAXES
The Company recorded an income tax provision of $936,000, $1.0 million, and
$895,000 for 1999, 1998, and 1997, respectively. The effective tax rate in each
year was 28%, 35%, and 36%, respectively. The decrease in effective rate each
year is primarily related to the higher level of tax-free municipal investments.
BALANCE SHEET REVIEW
INVESTMENT SECURITIES
At December 31, 1999, the Company's total investment portfolio had a market
value of $26.5 million, which is a decrease of 2% from the $27.1 million
invested as of the end of 1998. Investments had an amortized cost at the 1999
year end of $27.4 million. The investment portfolio consists primarily of
United States Treasury securities, securities of United States government
agencies, mortgage-backed securities, and state and municipal obligations. The
Company has no trading account securities. At the 1999 year end, the portfolio
had a weighted average maturity of approximately 8.0 years and an average
duration of 5.3 years. Investment securities averaged $26.2 million yielding
6.54% in 1999, compared to the 1998 average of $27.5 million yielding 6.47%.
Securities are the second largest earning asset of the Company at 15% and 17% of
average earning assets for 1999 and 1998, respectively.
LOANS
The loan portfolio consists primarily of commercial and industrial loans;
commercial loans secured by real estate; loans secured by one-to-four family
residential mortgages; and consumer loans. Substantially all of these loans are
located in the Upstate of South Carolina and are concentrated in the Company's
market area. At December 31, 1999, the Company had no loans for highly
leveraged transactions and no foreign loans. The Bank's primary focus has been
on commercial lending to small and medium-sized businesses in its marketplace.
Commercial loans are spread throughout a variety of industries, with no industry
or group of related industries accounting for a significant portion of the
commercial loan portfolio.
As of December 31, 1999, the Company had total loans outstanding, net of
unearned income, of $148.2 million which represents an increase of $17.5 million
or 13% from the 1998 outstanding loans of $130.7 million. Outstanding loans
represent the largest component of earning assets at 82% of average earning
assets for 1999 compared to 76% for 1998. Gross loans were 77% of total assets
at both December 31, 1999 and 1998. The 13% increase in loans between 1998 and
1999 is attributable to internal growth as the Company did not purchase any
loans during the year. Freedom's outstanding loans, net of unearned income,
totaled $3.2 million, or 2.1% of consolidated loans at December 31, 1999. This
is compared to $2.9 million or 2.2% of consolidated loans at December 31, 1998.
For 1999, the Company's loans averaged $139.0 million with a yield of
9.84%. This is compared to $120.5 million average loans with a yield of 10.19%
in 1998. The interest rates charged on loans of the Bank vary with the degree
of risk, maturity and amount of the loan. Competitive pressures, money market
rates, availability of funds, and government policy and regulations also
influence interest rates. Loans of the Finance Company are regulated under
state laws which establish the maximum loan amounts and interest rates, and the
types and maximum amounts of fees, insurance premiums, and other costs that may
be charged. The decrease in the loan yield during 1999 reflects the general
declining rate environment experienced in the fourth quarter of 1998 through the
first half of 1999. During this time, the prime lending rate dropped 75 basis
points. Approximately 62% of the Bank's loan portfolio has variable rates and
immediately reprices with a change in the prime rate. The drop in prime during
1998 and into 1999, combined with the continuing competitive pricing pressures
on loans of the Company, reduced the overall yield on loans during the year.
The allowance for loan losses is established through charges in the form of
a provision for loan losses. Loan losses and recoveries are charged or credited
directly to the allowance. The amount charged to the provision for loan losses
by the Bank and the Finance Company is based on management's judgment as to the
amounts required to maintain an adequate allowance. The level of this allowance
is dependent upon growth in the loan portfolios; the total amount of past due
loans; nonperforming loans; and known loan deteriorations and/or concentrations
of credit. Other factors affecting the allowance are trends in portfolio
volume, maturity and composition; 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
adequate to cover inherent losses in the loan portfolio. However, management's
judgment is based upon a number of assumptions about future events which are
believed to be reasonable, but which may or may not prove valid. There are
risks of future losses which cannot be quantified precisely or attributed to
particular loans or classes of loans. Management uses the best information
available to make evaluations, however, future adjustments to the allowance may
be necessary if economic conditions differ substantially from the assumptions
used in making evaluations. The Company is also subject to regulatory
examinations and determinations as to the adequacy of the allowance, which may
take into account such factors as the methodology used to calculate the
allowance for loan losses and the size of the allowance in comparison to a group
of peer companies identified by the regulatory agencies.
The allowance for loan losses totaled $2.2 million or 1.46% of total loans
at the end of 1999. This is compared to a $1.8 million allowance or 1.40% of
total loans at December 31, 1998. For the year ended December 31, 1999, the
Company reported net charge-offs of $109,000 or 0.08% of consolidated average
loans. This is compared to consolidated net charge-offs of $191,000 or 0.16% of
average loans for the year ended December 31, 1998.
Loans past due 90 days and greater totaled $130,000 or 0.09% of gross loans
at December 31, 1999 compared to $483,000 or 0.36% of gross loans at December
31, 1998. One loan totaling $147,000 was on nonaccrual at December 31, 1999.
There were no loans on nonaccrual at December 31, 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 the loan becomes doubtful. Loans of the
Finance Company are not classified as nonaccrual, but are charged-off when such
become 150 days contractually past due or earlier if the loan is deemed
uncollectible. At December 31, 1999 and 1998, the Bank held no other real
estate owned acquired in partial or total satisfaction of problem loans. There
were no impaired loans at either December 31, 1999 or 1998.
INTEREST-BEARING LIABILITIES
During 1999, interest-bearing liabilities averaged $142.4 million with an
average rate of 4.65% compared to $132.3 million with an average rate of 5.14%
in 1998. The decrease in the average rate is primarily a result of maturing
certificates of deposit at higher rates that were replaced with lower current
market rates and the general restructuring of the deposit portfolio to a higher
percentage of variable rate demand deposits which have a lower cost of funds.
In pricing deposits, the Company considers its liquidity needs, the direction
and levels of interest rates and local market conditions. At December 31, 1999,
interest-bearing deposits comprised approximately 85% of total deposits and 91%
of interest-bearing liabilities. The remainder of interest-bearing liabilities
consists principally of Federal Home Loan Bank advances and federal funds
purchased.
The Company uses its deposit base as a primary source with which to fund
earning assets. Deposits increased 13% from $140.2 million at December 31, 1998
to $158.0 million as of year end 1999. The increase was primarily in the
non-interest-bearing demand accounts, interest-bearing demand accounts and time
deposits greater than $100,000. Average noninterest-bearing deposits, which
increased 14% during the year, increased to 12.7% of average total deposits in
1999 from 12.2% in 1998.
The Company's core deposit base consists of consumer and commercial money
market accounts, checking accounts, savings and retirement accounts, NOW
accounts, and non-jumbo time deposits (less than $100,000). Although such core
deposits continue to be interest sensitive for both the Company and the industry
as a whole, these deposits continue to provide the Company with a large and
stable source of funds. The Company closely monitors its reliance on
certificates of deposit greater than $100,000, which are generally considered
less stable and more interest rate sensitive than core deposits. Certificates
of deposit in excess of $100,000 represented 18% and 15%, respectively, of total
deposits at December 31, 1999 and 1998. The Company has no brokered deposits.
CAPITAL RESOURCES
Total shareholders' equity amounted to $17.6 million, or 9.2% of total
assets, at December 31, 1999. This is compared to $15.7 million, or 9.2% of
total assets, at December 31, 1998. The $1.9 million increase in total
shareholders' equity resulted principally from retention of earnings and stock
issued pursuant to the Company's stock option plans, offset by the increase in
unrealized loss on investments available for sale.
Book value per share at December 31, 1999 and 1998 was $5.42 and $4.91,
respectively. On November 29, 1999, the Company issued its eighth 5% stock
distribution in the form of a stock dividend to shareholders of record as of
November 18, 1999. This dividend resulted in the issuance of 153,822 shares of
the Company's $1.00 par value common stock.
In August 1998, the Company issued a two-for-one stock split which resulted
in the issuance of 1,444,299 shares of common stock. The stated par value of
each share was not changed from $1.00. All weighted average share and per share
data has been restated to reflect the stock split and all stock distributions
issued.
To date, the capital needs of the Company have been met through the
retention of earnings and from the proceeds of its initial offering of common
stock. The Company believes that the rate of asset growth will not negatively
impact the capital base. The Company has no commitments or immediate plans for
any significant capital expenditures outside of the normal course of business.
The Company's management does not know of any trends, events or uncertainties
that may result in the Company's capital resources materially increasing or
decreasing.
The following table sets forth various capital ratios for the Company and
the Bank at December 31, 1999 and 1998. The Company and the Bank are subject to
various regulatory capital requirements administered by the federal banking
agencies. At December 31, 1999 and 1998, the Company and the Bank were in
compliance with each of the applicable regulatory capital requirements. The
Bank exceeded the "well-capitalized" standard under the regulatory framework for
prompt corrective action.
<TABLE>
<CAPTION>
CAPITAL SUMMARY
The Company The Bank
------------------ ------------------
As of As of As of As of
12/31/99 12/31/98 12/31/99 12/31/98
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total risk-based capital 12.51% 12.16% 11.37% 11.12%
Tier 1 risk-based capital 11.26% 10.91% 10.16% 9.94%
Leverage capital 9.97% 9.08% 9.00% 8.25%
</TABLE>
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company. The Company must maintain an adequate liquidity position in order to
respond to the short-term demand for funds caused by withdrawals from deposit
accounts, maturities of repurchase agreements, extensions of credit, and for the
payment of operating expenses. Maintaining an adequate level of liquidity is
accomplished through a combination of liquid assets, those which can easily be
converted into cash, and access to additional sources of funds. The Company's
primary liquid assets are cash and due from banks, federal funds sold, unpledged
investment securities available for sale, other short-term investments and
maturing loans. These primary liquidity sources accounted for 13% and 17% of
average assets for each of the years ended December 31, 1999 and 1998,
respectively. In management's opinion, the Company maintains adequate levels of
liquidity by retaining sufficient liquid assets and assets which can be easily
converted into cash and by maintaining access to various sources of funds. The
primary sources of funds available through the Bank include advances from the
Federal Home Loan Bank, purchasing federal funds from other financial
institutions, lines of credit through the Federal Reserve Bank, and increasing
deposits by raising rates paid.
Summit Financial Corporation ("Summit Financial"), the parent holding
company, has limited liquidity needs. Summit Financial requires liquidity to
pay limited operating expenses, and to provide funding to its consumer finance
subsidiary, Freedom Finance. Summit Financial has approximately $1.8 million in
available liquidity remaining from its initial public offering and the retention
of earnings. All of this liquidity was advanced to the Finance Company to fund
its operations as of December 31, 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 December 31, 1999. Further sources
of liquidity for Summit Financial include borrowings from individuals, and
management fees and debt service which are paid by its subsidiary on a monthly
basis.
Liquidity needs of Freedom Finance, primarily for the funding of loan
originations and acquisitions, paying operating expenses, and servicing debt,
have been met to date through the initial capital investment of $500,000 made by
Summit Financial, borrowings from an unrelated private investor, and line of
credit facilities provided by Summit Financial and Summit National Bank, a
sister company.
The Company's management believes its liquidity sources are adequate to
meet its operating needs and does not know of any trends, events or
uncertainties that may result in a significant adverse affect on the Company's
liquidity position.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of changes in the relative purchasing power over time due
to inflation. Unlike most other industries, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates generally have a more significant effect in a financial
institution's performance than does the effect of inflation.
The yield on a majority of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates.
Approximately 45% of the Company's liabilities at December 31, 1999 had been
issued with fixed terms and can be repriced only at maturity. During periods of
falling interest rates, as experienced in late 1998 and through mid-year 1999,
the Company's assets reprice faster than the supporting liabilities. This
causes a decrease in the net interest margin until the fixed rate deposits
mature and are repriced at then lower current market rates, thus narrowing the
difference between what the Company earns on its assets and what it pays on its
liabilities. Given the Company's current balance sheet structure, the opposite
effect (that is, an increase in net interest income) is realized in a rising
rate environment as was experienced in the latter half of 1999.
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, as amended by SFAS
137, is effective for all fiscal quarters and years beginning after June 15,
2000, with earlier adoption permitted. Management does not expect that this
standard will have a significant effect on the Company.
YEAR 2000
The Company's management believes it has adequately addressed the Year 2000
issue and has successfully executed its Year 2000 Action Plan. Both the
Company's bank subsidiary and finance company subsidiary have successfully
processed transactions on a daily and month end basis in the year 2000. There
have been no errors or computer system problems determined since the calender
date rollover to January 1, 2000. The cost during 1999 of making modifications
and preparing for Y2K issues was nominal. Corrections and "fixes" to software
provided by third-party vendors was covered in the annual maintenance fees paid
by the Company on a regular basis. The Company has encountered no increased
credit risk or losses related to any customer Y2K issues since the century date
rollover. 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, 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 December 31, 1999, on a
cumulative basis through 12 months, rate-sensitive liabilities exceed
rate-sensitive assets, resulting in a 12 month period liability sensitive
position of $27.5 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 62% 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. In the fourth quarter of 1998, interest rates dropped,
leading to declines in the average yield on assets for 1998 as compared to 1997.
However, the Company was able to maintain the net interest margin relatively
constant with the 1997 margin due to the reduction in the overall cost of funds.
General market interest rates continued to decline into 1999 resulting in the
decrease in asset yield. The Company was able to increase its net interest
margin in 1999 as compared to 1998 due to the continued reduction in the cost of
funds. The lower rate on liabilities was the result of a higher percentage of
floating rate deposits in 1999 combined with the replacement of maturing
certificates of deposit and FHLB advances at lower current market rates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, investing, deposit gathering and borrowing activities.
Management actively monitors and manages its interest rate risk exposure.
Although the Company manages other risks, including 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 Company'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 Company's Board of Directors has adopted an
interest rate risk policy which establishes maximum allowable decreases in NPV
in the event of a sudden and sustained increase or decrease in market interest
rates.
The following table presents the Company's projected change in NPV for the
various rate shock levels as of year end. This table indicates that at December
31, 1999, in the event of a sudden and sustained increase in the prevailing
market interest rates, the Company's NPV would be expected to decrease, and that
in the event of a sudden and sustained decrease in rate, the Company's NPV would
be expected to increase. At December 31, 1999, the Company's estimated changes
in NPV were within the limits established by the Board.
<TABLE>
<CAPTION>
Market
Value of
Portfolio
Policy Equity Percent
Change in Interest Rates Limit (000s) Change
- ------------------------ ------- ----------- --------
<S> <C> <C> <C>
300 basis point rise 40.00% $ 16,280 7.50%
200 basis point rise 25.00% $ 16,640 5.40%
100 basis point rise 10.00% $ 17,083 2.90%
No change 0.00% $ 17,591 0.00%
100 basis point decline 10.00% $ 17,854 1.50%
200 basis point decline 25.00% $ 17,928 1.90%
300 basis point decline 40.00% $ 17,883 1.70%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<PAGE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,952 $ 5,377
Interest-bearing bank balances 4,399 623
Federal funds sold 1,470 400
Investment securities available for sale 26,466 27,102
Loans, net of unearned income and net of allowance
for loan losses of $2,163 and $1,827 146,007 128,842
Premises and equipment, net 2,890 3,101
Accrued interest receivable 1,337 1,132
Other assets 4,708 3,908
--------- ---------
$191,229 $170,485
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 23,823 $ 20,877
Interest-bearing demand 14,073 8,541
Savings and money market 50,845 50,047
Time deposits, $100,000 and over 28,459 20,633
Other time deposits 40,796 40,145
--------- ---------
157,996 140,243
Federal funds purchased 4,000 2,720
Repurchase agreements - 846
Other short-term borrowings 500 820
FHLB advances 9,000 8,000
Accrued interest payable 1,132 1,052
Other liabilities 1,010 1,130
--------- ---------
Total liabilities 173,638 154,811
--------- ---------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000 shares
authorized; 3,243,739 and 3,038,706 shares
issued and outstanding 3,244 3,039
Additional paid-in capital 14,730 12,726
Retained earnings 483 -
Accumulated other comprehensive (loss) income, net of tax (563) 313
Nonvested restricted stock (303) (404)
--------- ---------
Total shareholders' equity 17,591 15,674
--------- ---------
$191,229 $170,485
========= =========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except Per Share Data)
For the Years Ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $13,676 $12,275 $11,491
Taxable securities 951 1,155 1,173
Nontaxable securities 500 413 135
Federal funds sold 102 397 410
Other 148 176 172
-------- -------- --------
15,377 14,416 13,381
-------- -------- --------
INTEREST EXPENSE:
Deposits 6,086 6,431 6,140
FHLB advances 463 256 170
Other 79 115 94
-------- -------- --------
6,628 6,802 6,404
-------- -------- --------
Net interest income 8,749 7,614 6,977
PROVISION FOR LOAN LOSSES (445) (290) (392)
-------- -------- --------
Net interest income after provision for loan losses 8,304 7,324 6,585
-------- -------- --------
NONINTEREST INCOME:
Service charges and fees on deposit accounts 247 203 194
Credit card fees and income 338 298 248
Gain on sale of investment securities 22 1 -
Insurance commission fee income 254 286 193
Other income 699 620 400
-------- -------- --------
1,560 1,408 1,035
-------- -------- --------
NONINTEREST EXPENSES:
Salaries, wages and benefits 3,499 3,167 2,726
Occupancy 578 494 442
Furniture, fixtures and equipment 633 545 448
Other expenses 1,810 1,620 1,534
-------- -------- --------
6,520 5,826 5,150
-------- -------- --------
Income before income taxes 3,344 2,906 2,470
Income taxes (936) (1,011) (895)
-------- -------- --------
NET INCOME $ 2,408 $ 1,895 $ 1,575
======== ======== ========
NET INCOME PER COMMON SHARE:
Basic $ 0.76 $ 0.60 $ 0.50
Diluted $ 0.65 $ 0.50 $ 0.46
AVERAGE SHARES OUTSTANDING:
Basic 3,176 3,138 3,115
Diluted 3,727 3,762 3,443
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in Thousands)
Accumulated
Additional Other Nonvested Total
Common Paid-in Retained Comprehensive Restricted Shareholders'
Stock capital earnings income, net stock Equity
------- ----------- ---------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 2,670 $ 8,919 $ 48 - - $ 11,637
Net income for the year ended
December 31, 1997 - - 1,575 - - 1,575
Other comprehensive income:
Unrealized holding gains on securities
arising during the period, net of taxes of $47 - - - 90 - 90
---------------
Comprehensive income - - - - - 1,665
---------------
Stock options exercised 22 50 - - - 72
Issuance of common stock pursuant
to restricted stock plan 48 457 - - (505) -
Issuance of 5% stock distribution 136 1,482 (1,618) - - -
Cash in lieu of fractional shares - - (5) - - (5)
------- ----------- ---------- --------------- ----------- ---------------
Balance at December 31, 1997 2,876 10,908 - 90 (505) 13,369
Net income for the year ended
December 31, 1998 - - 1,895 - - 1,895
Other comprehensive income:
Unrealized holding gains on securities
arising during the period, net of taxes of $146 - - - 223 - 223
---------------
Comprehensive income - - - - - 2,118
---------------
Stock options exercised 18 70 - - - 88
Amortization of deferred compensation
on restricted stock - - - - 101 101
Issuance of 5% stock distribution 145 1,748 (1,893) - - -
Cash in lieu of fractional shares - - (2) - - (2)
------- ----------- ---------- --------------- ----------- ---------------
Balance at December 31, 1998 3,039 12,726 - 313 (404) 15,674
Net income for the year ended
December 31, 1999 - - 2,408 - - 2,408
Other comprehensive loss:
Unrealized holding losses on securities
arising during the period, net of taxes of ($531) - - - (860) -
Less: reclassification adjustment for gains
included in net income, net of tax of $6 - - - (16)
---------------
Other comprehensive loss - - - (876) - (876)
--------------- ----------------
Comprehensive income - - - - - 1,532
---------------
Stock options exercised 53 233 - - - 286
Amortization of deferred
compensation on restricted stock - - - - 101 101
Issuance of 5% stock distribution 152 1,771 (1,923) - - -
Cash in lieu of fractional shares - - (2) - - (2)
------- ----------- ---------- --------------- ----------- ---------------
Balance December 31, 1999 $ 3,244 $ 14,730 $ 483 $ (563) ($303) $ 17,591
======= =========== ========== =============== =========== ===============
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Years Ended December 31,
--------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,408 $ 1,895 $ 1,575
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 445 290 392
Depreciation 496 403 487
(Gain) loss on sale and disposal of equipment and vehicles (18) 34 (23)
Gain on sale of securities available for sale (22) (1) -
Net amortization of net premium on investment securities 75 56 26
Amortization of deferred compensation on restricted stock 101 101 -
(Increase) decrease in other assets (335) 226 (504)
Increase (decrease) in other liabilities 152 (143) 723
Deferred income taxes (179) (140) 23
--------- --------- ---------
Net cash provided by operating activities 3,123 2,721 2,699
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (7,483) (11,406) (18,953)
Proceeds from sales of securities available for sale 1,021 951 3,271
Proceeds from maturities of securities available for sale 5,632 11,882 6,091
Purchases of investments in FHLB and other stock (146) (84) (74)
Purchase of company-owned life insurance - (1,725) -
Net increase in loans (17,610) (12,106) (15,715)
Purchases of finance loans receivable - - (499)
Purchases of premises and equipment (315) (1,178) (208)
Proceeds from sale of equipment and vehicles 49 - 41
--------- --------- ---------
Net cash used by investing activities (18,852) (13,666) (26,046)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposit accounts 17,753 (685) 23,123
Net increase in federal funds purchased and repurchase agreements 433 2,763 42
Proceeds from FHLB advances 10,550 8,500 2,000
Repayments of FHLB advances (9,550) (2,500) (2,000)
Net (repayments) proceeds from other
short-term borrowings (320) (180) 450
Proceeds from stock options exercised 286 88 72
Cash paid in lieu of fractional shares (2) (2) (5)
--------- --------- ---------
Net cash provided by financing activities 19,150 7,984 23,682
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 3,421 (2,961) 335
Cash and cash equivalents, beginning of year 6,400 9,361 9,026
--------- --------- ---------
Cash and cash equivalents, end of year $ 9,821 $ 6,400 $ 9,361
========= ========= =========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - Summit Financial Corporation (the "Company"), a
South Carolina corporation, is the parent holding company for Summit National
Bank (the "Bank"), a nationally chartered bank, and Freedom Finance, Inc. (the
"Finance Company"), a consumer finance company. In 1997, the Bank incorporated
Summit Investment Services, Inc. as a wholly-owned subsidiary to provide
financial management services and nondeposit product sales. The accompanying
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES - The consolidated financial statements are prepared in
conformity with generally accepted accounting principles ("GAAP") which requires
management to make estimates and assumptions. These estimates and assumptions
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements. In
addition, they affect the reported amounts of income and expense during the
reporting period. Actual results could differ from these estimates and
assumptions.
INVESTMENT SECURITIES - At the time of purchase, investment securities are
classified by management into three categories as follows: (1) Investments Held
to Maturity: securities which the Company has the positive intent and ability to
hold to maturity, which are reported at amortized cost; (2) Trading Securities:
securities that are bought and held principally for the purpose of selling them
in the near future, which are reported at fair value with unrealized gains and
losses included in earnings; and (3) Investments Available for Sale: securities
that may be sold under certain conditions, which are reported at fair value,
with unrealized gains and losses excluded from earnings and reported as a
separate component of shareholders' equity, net of income taxes. The
amortization of premiums and accretion of discounts on investment securities are
recorded as adjustments to interest income. Gains or losses on sales of
investment securities are based on the net proceeds and the adjusted carrying
amount of the securities sold, using the specific identification method.
Unrealized losses on securities, reflecting a decline in value or impairment
judged by the Company to be other than temporary, are charged to income in the
consolidated statements of income.
LOANS AND INTEREST INCOME - Loans of the Bank are carried at principal
amounts, reduced by an allowance for loan losses. The Bank recognizes interest
income daily based on the principal amount outstanding using the simple interest
method. The accrual of interest is generally discontinued on loans of the Bank
which become 90 days past due as to principal or interest or when management
believes, after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that collection of
interest is doubtful. Management may elect to continue accrual of interest when
the estimated net realizable value of collateral is sufficient to cover the
principal balances and accrued interest and the loan is in the process of
collection. Amounts received on nonaccrual loans generally are applied against
principal prior to the recognition of any interest income. Generally, loans are
restored to accrual status when the obligation is brought current, has performed
in accordance with the contractual terms for a reasonable period of time and the
ultimate collectibility of the total contractual principal and interest is no
longer in doubt.
Loans of the Finance Company are carried at the gross amount outstanding,
reduced by unearned interest, insurance income and other deferred fees, and an
allowance for loan losses. Unearned interest and fees are deferred at the time
the loans are made and accreted to income using the "Rule of 78's" method. The
results from the use of the "Rule of 78's" method are not materially different
from those obtained by using the simple interest method. Charges for late
payments are credited to income when collected. Loans of the Finance Company
are generally charged-off when they become 150 days past due or when it is
determined that collection is doubtful.
IMPAIRMENT OF LOANS - Loans are considered to be impaired when, in
management's judgment, the collection of all amounts of principal and interest
is not probable in accordance with the terms of the loan agreement. The Company
accounts for impaired loans in accordance with Statement of Financial Accounting
Standards ("SFAS") 114, "Accounting by Creditors for Impairment of a Loan", as
amended by SFAS 118 in the areas of disclosure requirements and methods of
recognizing income. SFAS 114 requires that impaired loans be recorded at fair
value, which is determined based upon the present value of expected cash flows
discounted at the loan's effective interest rate, the market price of the loan,
if available, or the value of the underlying collateral. All cash receipts on
impaired loans are applied to principal until such time as the principal is
brought current. After principal has been satisfied, future cash receipts are
applied to interest income, to the extent that any interest has been foregone.
As a practical matter, the Bank determines which loans are impaired through a
loan review process.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is established
through a provision for loan losses charged to operations and reflects an amount
that, in management's opinion, is adequate to absorb inherent losses in the
existing portfolio. Additions to the allowance are based on management's
evaluation of the loan portfolio under current economic conditions, past loan
loss experience, and such other factors which, in management's judgement,
deserve recognition in estimating loan losses.
Loans are charged-off when, in the opinion of management, they are deemed
to be uncollectible. Recognized losses are charged against the allowance and
subsequent recoveries are added to the allowance. Management believes that the
allowance is adequate. While management uses the best information available to
make evaluations, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making the
evaluations. The allowance for loan losses is subject to periodic evaluation by
various regulatory authorities and may be subject to adjustments based upon
information that is available to them at the time of their examination.
LOAN FEES - Loan origination fees and direct costs of loan originations are
deferred and recognized as an adjustment of yield by the interest method based
on the contractual terms of the loan. Loan commitment fees are deferred and
recognized as an adjustment of yield over the related loan's life, or if the
commitment expires unexercised, recognized in income upon expiration.
PREMISES AND EQUIPMENT - Premises, equipment and leasehold improvements are
stated at cost less accumulated depreciation and amortization. Depreciation is
recorded using the straight-line method over the estimated useful life of the
related assets as follows: building, 40 years; furniture and fixtures, 7 years;
equipment and computer hardware and software, 3 to 7 years; and vehicles, 3
years. Amortization of leasehold improvements is recorded using the
straight-line method over the lesser of the estimated useful life of the asset
or the term of the respective lease. Additions to premises and equipment and
major replacements or betterments are added at cost. Maintenance, repairs and
minor replacements are charged to operating expense as incurred. When assets
are retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in income.
INTANGIBLE ASSETS - Intangible assets consist primarily of goodwill and
customer lists resulting from the Finance Company's branch acquisitions. On an
ongoing basis, the Company evaluates the carrying value of these intangible
assets and determines whether these assets have been impaired based upon an
undiscounted cash flow approach. Amortization of intangibles is provided by
using the straight-line method over the estimated economic lives of the assets,
which is generally from 5 - 7 years. Intangible assets are included in "Other
assets" on the accompanying consolidated balance sheets and have unamortized
balances of $497,000 and $654,000 at December 31, 1999 and 1998, respectively,
with related amortization of $157,000, $157,000 and $154,000 for the years ended
December 31, 1999, 1998, and 1997, respectively.
STOCK-BASED COMPENSATION - The Company reports stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board Opinion
("APB") 25, "Accounting for Stock Issued to Employees", which measures
compensation expense as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock. SFAS 123, "Accounting for Stock-Based Compensation",
encourages but does not require companies to record compensation cost for
stock-based compensation plans at fair value. The Company follows the
disclosure-only provisions of SFAS 123.
PER SHARE DATA - Earnings per share ("EPS") are computed in accordance with
SFAS 128, "Earnings per Share." SFAS 128 requires companies to report basic and
diluted EPS. Basic EPS includes no dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Shares of restricted stock that are unvested are
not included in weighted average shares outstanding. Diluted EPS reflects the
potential dilution of securities that could occur if the Company's dilutive
stock options were exercised. Weighted average share and per share data have
been restated to reflect the August 1998 two-for-one stock split and all 5%
stock distributions.
REPORTING COMPREHENSIVE INCOME - As of January 1, 1998, the Company adopted
SFAS 130, "Reporting Comprehensive Income." SFAS 130 requires that all items
that are required to be recognized under accounting standards as comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The disclosure requirements of SFAS
130 have been included in the Company's consolidated statements of shareholders'
equity and comprehensive income.
INCOME TAXES - Income taxes are accounted for in accordance with SFAS 109,
"Accounting for Income Taxes". Under the asset and liability method of SFAS
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. Valuation allowances are
established to reduce deferred tax assets if it is determined to be "more likely
than not" that all or some portion of the potential deferred tax asset will not
be realized.
RECLASSIFICATIONS - Certain amounts in the 1998 and 1997 consolidated
financial statements have been reclassified to conform with the 1999
presentations. These reclassifications had no impact on shareholders' equity or
net income as previously reported.
NOTE 2 - STATEMENT OF CASH FLOWS
For the purpose of reporting cash flows, cash includes currency and coin,
cash items in process of collection and due from banks. Included in cash and
cash equivalents are federal funds sold and overnight investments. The Company
considers the amounts included in the balance sheet line items, "Cash and due
from banks", "Interest-bearing bank balances" and "Federal funds sold" to be
cash and cash equivalents. These accounts totaled $9,821,000 and $6,400,000 at
December 31, 1999 and 1998, respectively.
The following summarizes supplemental cash flow data for the years ended
December 31:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998 1997
- ----------------------------------- ------- ------ ------
<S> <C> <C> <C>
Interest paid $6,548 $7,120 $5,857
Income taxes paid 1,162 870 1,065
Change in fair value of investment
securities, net of income taxes (876) 223 90
</TABLE>
NOTE 3 - RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company's banking subsidiary is required to maintain average reserve
balances with the Federal Reserve Bank based upon a percentage of deposits. The
amount of the required reserve balance at December 31, 1999 and 1998 was
$834,000 and $543,000, respectively.
NOTE 4 - INVESTMENT SECURITIES
The aggregate amortized cost, fair value, and gross unrealized gains and
losses of investment securities available for sale at December 31 were as
follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998
- ---------------------- ----------------------------------------- ----------------------------------------
Gross Unrealized Gross Unrealized
Amortized --------------------- Fair Amortized --------------------- Fair
Cost Gains Losses Value Cost Gains Losses Value
---------- ----------- -------- ------- ---------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. treasury $ 489 $ 6 $ - $ 495 $ 1,250 $ 3 $ - $ 1,253
U.S. government agencies 12,483 - (165) 12,318 9,819 123 (3) 9,939
Mortgage-backed 3,573 - (36) 3,537 5,404 31 (14) 5,421
States and municipal 10,829 3 (716) 10,116 10,124 370 (5) 10,489
---------- ----------- -------- ------- ---------- ----------- -------- -------
$ 27,374 $ 9 ($917) $26,466 $ 26,597 $ 527 ($22) $27,102
========== =========== ======== ======= ========== =========== ======== =======
</TABLE>
The amortized cost and estimated fair value of investment securities
available for sale at December 31, 1999, by contractual maturity, are shown in
the following table. Expected maturities may differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
prepayment penalties. Fair value of securities was determined using quoted
market prices.
<TABLE>
<CAPTION>
Amortized Fair
(dollars in thousands) Cost Value
- ---------------------------------------- ---------- -------
<S> <C> <C>
Due in one year or less $ 668 $ 671
Due after one year, through five years 10,494 10,396
Due after five years, through ten years 4,989 4,889
Due after ten years 11,223 10,510
---------- -------
$ 27,374 $26,466
========== =======
</TABLE>
The change in the unrealized gain on securities available for sale, net of
taxes, recorded in shareholders' equity for the year ended December 31, 1999 was
($876,000). Investment securities with an approximate book value of $13,045,000
and $8,589,000 at December 31, 1999 and 1998, respectively, were pledged to
secure public deposits and for other purposes as required or permitted by law.
Estimated fair values of securities pledged were $12,717,000 and $8,734,000 at
December 31, 1999 and 1998, respectively. There were no gross unrealized losses
on sales of securities in any year presented. There were no securities
classified as "Held to Maturity" in any year presented.
NOTE 5 - INVESTMENTS REQUIRED BY LAW
Summit National Bank, as a member of the Federal Reserve Bank ("FRB") and
the Federal Home Loan Bank of Atlanta ("FHLB"), is required to own capital stock
in these organizations. The Bank's equity investments required by law are
included in the accompanying consolidated balance sheets in "Other assets". The
amount of stock owned is based on the Bank's capital levels in the case of the
FRB and totaled $255,000 at December 31, 1999 and 1998. The amount of FHLB
stock owned is determined based on the Bank's balances of residential mortgages
and advances from the FHLB and totaled $550,000 and $479,000 at December 31,
1999 and 1998, respectively. No ready market exists for these stocks and they
have no quoted market value. However, redemption of these stocks has
historically been at par value. Accordingly, the carrying amounts are deemed to
be a reasonable estimate of fair value.
NOTE 6 - LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of loans by classification at December 31 is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998
- ----------------------------------------- --------- ---------
<S> <C> <C>
Commercial and industrial $ 26,217 $ 24,100
Commercial secured by real estate 55,647 48,527
Real estate - residential mortgages 47,366 42,832
Real estate - construction 10,135 6,463
Installment and other consumer loans 5,402 5,656
Consumer finance, net of unearned income 3,183 2,881
Other loans and overdrafts 220 210
--------- ---------
148,170 130,669
Less - allowance for loan losses (2,163) (1,827)
--------- ---------
$146,007 $128,842
========= =========
</TABLE>
Unearned income on consumer finance loans totaled $939,000 and $808,000 at
December 31, 1999 and 1998, respectively. One loan totaling $147,000 was on
nonaccrual at December 31, 1999. Foregone interest income on the nonaccrual
loan was approximately $4,000 during 1999 while interest income recognized on
this loan was approximately $17,000 during the year. This nonaccrual loan was
not considered impaired at December 31, 1999. There were no loans on nonaccrual
at December 31, 1998. Loans past due in excess of 90 days amounted to
approximately $130,000 and $483,000 at December 31, 1999 and 1998, respectively.
There were no foreclosed loans or other real estate owned in any year presented.
There were no impaired loans at or for the years ended December 31, 1999 or
1998.
Changes in the allowance for loan losses for the years ended December 31
were as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998 1997
- ----------------------------------------------- ------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year $1,827 $1,728 $1,487
Provision for losses 445 290 392
Loans charged-off (417) (408) (428)
Recoveries of loans previously charged-off 308 217 251
Allocation for purchased loans - - 26
_______ _______ _______
Balance, end of year $2,163 $1,827 $1,728
======= ======= =======
</TABLE>
The Company makes loans to individuals and small- to mid-sized businesses
for various personal and commercial purposes primarily in the Upstate of South
Carolina. The Company has a diversified loan portfolio and the Company's loan
portfolio is not dependent upon any specific economic segment. The Company
regularly monitors its credit concentrations based on loan purpose, industry,
and customer base. As of December 31, 1999, there were no material
concentrations of credit risk within the Company's loan portfolio.
Directors, executive officers, and associates of such persons are customers
of and have transactions with the Company's bank subsidiary in the ordinary
course of business. Included in such transactions are outstanding loans and
commitments, all of which are made under substantially the same credit terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than the
normal risk of collectibility. The aggregate dollar amount of these outstanding
loans was approximately $5,200,000 and $5,515,000 at December 31, 1999 and 1998,
respectively. During 1999, new loans and advances on lines of credit of
approximately $2,358,000 were made, and payments on these loans and lines
totaled approximately $2,673,000. At December 31, 1999, there were commitments
to extend additional credit to related parties in the amount of approximately
$3,300,000.
Under current Federal Reserve regulations, the Bank is limited in the
amount it may loan to the Company, the Finance Company, or other affiliates.
Loans made by the Bank to a single affiliate may not exceed 10%, and loans to
all affiliates may not exceed 20% of the Bank's capital, surplus and undivided
profits, after adding back the allowance for loan losses. Based on these
limitations, approximately $3.5 million was available for loans to the Company
and the Finance Company at December 31, 1999. Certain collateral restrictions
also apply to loans from the Bank to its affiliates.
NOTE 7 - PREMISES, EQUIPMENT AND LEASES
A summary of premises and equipment at December 31 is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998
- -------------------------------- -------- --------
<S> <C> <C>
Land $ 483 $ 483
Building 1,255 1,252
Leasehold improvements 839 825
Computer and office equipment 1,559 1,372
Furniture and fixtures 625 612
Vehicles 94 91
-------- --------
4,855 4,635
Less - accumulated depreciation (1,965) (1,534)
-------- --------
$ 2,890 $ 3,101
======== ========
</TABLE>
Depreciation expense charged to operations totaled $496,000, $403,000, and
$487,000 in 1999, 1998 and 1997, respectively.
The Company leases branch facilities for both the Bank and the Finance
Company. These leases have initial terms of from two to ten years and various
renewal options under substantially the same terms with certain rate
escalations. Rent expense charged to operations totaled $271,000, $226,000,
and $204,000, respectively, for the years ended December 31, 1999, 1998, and
1997. The annual minimum rental commitments under the terms of the Company's
noncancellable leases at December 31, 1999 are as follows: (dollars in
thousands)
<TABLE>
<CAPTION>
<S> <C>
2000 $ 269
2001 239
2002 222
2003 225
2004 197
Thereafter 55
------
$1,207
======
</TABLE>
NOTE 8 - DEPOSITS
The scheduled maturities of time deposits subsequent to December 31, 1999
are as follows: (dollars in thousands)
<TABLE>
<CAPTION>
<S> <C>
2000 $64,862
2001 3,401
2002 742
2003 42
2004 124
Thereafter 84
-------
$69,255
=======
</TABLE>
The remaining maturity of time deposits in denominations in excess of
$100,000 is $9,731,000 in three months or less; $6,589,000 in over three through
six months; $11,032,000 in over six through twelve months; and $1,107,000 in
over twelve months.
NOTE 9 - BORROWED FUNDS
Federal funds purchased represent unsecured overnight borrowings from other
financial institutions by the Bank. These borrowings bear interest at the
prevailing market rate for federal funds purchased. Average interest rates on
federal funds purchased were 5.02% and 5.40% for the years ended December 31,
1999 and 1998, respectively. There were no federal funds purchased during 1997.
Other short-term borrowings consist of term loan agreements with unrelated
individuals which have initial maturities of less than one year. These term
loans are unsecured and bear interest at fixed rates. The weighted-average
interest rate on short-term borrowings outstanding at each year end was 6.50%
and 6.91% at December 31, 1999 and 1998, respectively.
Repurchase agreements represent short-term borrowings by the Bank with
overnight maturities which rollover under a continuing contract. Repurchase
agreements are collateralized by securities of U.S. government agencies or by
obligations of state and political subdivisions. All pledged collateral is held
by a third-party safekeeper. Pledged securities for repurchase agreements at
December 31, 1998 had a book value of $1,073,000 and a fair value of $1,099,000.
There were no repurchase agreements outstanding during 1999.
The following is a summary of information related to the outstanding
repurchase agreements for each of the years ended December 31:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997
- ------------------------------- ------ ------
<S> <C> <C>
Average outstanding $ 823 $ 789
Maximum at any month-end $ 846 $ 803
Weighted-average interest rate 4.85% 5.42%
</TABLE>
The components of other interest expense for each of the years ended
December 31 presented in the accompanying consolidated statements of income is
as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998 1997
- ---------------------------- ----- ----- -----
<S> <C> <C> <C>
Federal funds purchased $ 46 $ 2 $ -
Repurchase agreements - 41 42
Other short-term borrowings 33 72 52
------ ----- -----
$ 79 $ 115 $ 94
===== ===== =====
</TABLE>
NOTE 10 - FHLB ADVANCES
FHLB advances represent borrowings from the FHLB of Atlanta by the Bank
pursuant to a line of credit collateralized by a blanket lien on qualifying
loans secured by first mortgages on 1-4 family residences. These advances have
various maturity dates with interest payable monthly on maturities of one year
or less and interest payable quarterly on maturities over one year. Total loans
of the Bank pledged to the FHLB for advances at December 31, 1999 were
approximately $31 million.
At December 31, 1999 FHLB advances were at fixed interest rates ranging
from 5.01% to 5.77% with initial maturities from one to ten years. Interest
rates ranged from 5.40% to 5.77% during 1998. The weighted-average interest
rate on FHLB advances outstanding at December 31, 1999 and 1998 was 5.32% and
5.63%, respectively. At December 31, 1999, advances totaling $7 million were
subject to one-time call features at the option of the FHLB with call dates
ranging from April 2000 to June 2003. Scheduled maturities of FHLB advances
subsequent to December 31, 1999 are $2,000,000 in 2000; $3,000,000 in 2003;
$3,000,000 in 2004; and $1,000,000 thereafter.
NOTE 11 - UNUSED LINES OF CREDIT
At December 31, 1999, the Bank had available credit of approximately
$19,000,000 with the FHLB. Borrowings under this arrangement can be made with
various terms and repayment schedules and with fixed or variable rates of
interest. Advances under this line would be secured by the existing blanket
lien on qualifying loans secured by first mortgages on 1-4 family residences.
At December 31, 1999, the Bank had short-term lines of credit to purchase
unsecured federal funds from unrelated banks with available balances totaling
$11,300,000. The interest rate on any borrowings under these lines would be the
prevailing market rate for federal funds purchased. These lines are available
to be outstanding up to ten consecutive days for general corporate purposes of
the Bank and have specified repayment deadlines after disbursement of funds.
All of the lenders have reserved the right to withdraw these lines at their
option.
The Company has a line of credit arrangement with a commercial bank for the
purpose of funding the loan receivables of the Finance Company. The line, which
is for a total of $2.5 million, is secured by the common stock of the Bank and
bears interest at the prime lending rate less 50 basis points. The line
requires quarterly interest payments and matures in October 2001. Under the
terms of the line, the Company is required to meet certain covenants, including
minimum capital levels and other performance ratios. The Company believes it is
in compliance with these covenants. There was no outstanding balance on the
line at December 31, 1999 or 1998.
NOTE 12 - INCOME TAXES
The provision for income taxes for the years ended December 31 is as
follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998 1997
- ---------------------- ------- ------- -----
<S> <C> <C> <C>
Current:
Federal $1,023 $1,061 $ 798
State 92 90 74
------- ------- -----
1,115 1,151 872
------- ------- -----
Deferred:
Federal (179) (140) 23
State - - -
------- ------- -----
(179) (140) 23
------- ------- -----
Total tax provision $ 936 $1,011 $ 895
======= ======= =====
</TABLE>
Income taxes are different than tax expense computed by applying the
statutory federal tax rate of 34% to income before income taxes. The reasons
for the differences for years ended December 31 are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998 1997
- ---------------------------------- ------- ------- ------
<S> <C> <C> <C>
Tax expense at statutory rate $1,137 $ 988 $ 840
State tax, net of federal benefit 61 59 49
Change in valuation allowance for
deferred tax assets (13) (10) (3)
Effect of tax exempt interest (192) (75) (37)
Other, net (57) 49 46
------- ------- ------
Total $ 936 $1,011 $ 895
======= ======= ======
</TABLE>
The sources and tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
December 31 were as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998
- --------------------------------------------------------- ------- ------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses deferred for tax purposes $ 700 $ 586
Book depreciation and amortization in excess of tax 90 71
Unrealized net losses on securities available for sale 345 -
Other 33 34
------- ------
Gross deferred tax assets 1,168 691
Less: valuation allowance (2) (15)
------- ------
Net deferred tax assets 1,166 676
------- ------
Deferred tax liabilities:
Net deferred loan costs (15) (22)
Unrealized net gains on securities available for sale - (192)
Compensation expense deferred for financial reporting (82) (109)
------- ------
Gross deferred tax liabilities (97) (323)
------- ------
Net deferred tax asset $1,069 $ 353
======= ======
</TABLE>
The net deferred tax asset is included in "Other assets" in the
accompanying consolidated balance sheets. A portion of the change in the net
deferred tax asset relates to unrealized gains and losses on securities
available for sale. A current period deferred tax benefit of $537,000 has been
recorded directly to shareholders' equity. The balance of the change in the net
deferred tax asset results from the current period deferred tax benefit of
$179,000. The valuation allowance for deferred income taxes relates to the
state loss carryforwards which may not be ultimately realized to reduce taxes of
the Company. The decreases in the valuation allowance for each of the years
ended December 31, 1999 and 1998 were based on actual earnings of the Company
for those years. In management's opinion, it is more likely than not that the
results of future operations will generate sufficient income to realize the net
deferred tax asset.
NOTE 13 - CAPITAL STOCK AND PER SHARE INFORMATION
On November 29, 1999, the Company issued a 5% stock dividend. The dividend
was issued to all shareholders of record on November 15, 1999 and resulted in
the issuance of 153,822 shares of common stock of the Company. All average
share and per share data have been restated to reflect the stock dividend as of
the earliest period presented.
As of December 31, 1999, there were 293,802 common shares reserved for
issuance under stock compensation benefit plans.
The following is a reconciliation of the denominators of the basic and
diluted per share computations for net income. There was no required adjustment
to the numerator from the net income reported on the accompanying statements of
income.
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- ---------------------- ----------------------
Basic Diluted Basic Diluted Basic Diluted
<S> <C> <C> <C> <C> <C> <C>
Net income $2,408,000 $2,408,000 $1,895,000 $1,895,000 $1,575,000 $1,575,000
---------- ---------- ---------- ---------- ---------- ----------
Average shares outstanding 3,175,672 3,175,672 3,137,981 3,137,981 3,115,238 3,115,238
Effective of dilutive securities:
Stock options - 517,920 - 579,610 - 327,718
Unvested restricted stock - 33,340 - 44,453 - -
---------- ---------- ---------- ---------- ---------- ----------
3,175,672 3,726,932 3,137,981 3,762,044 3,115,238 3,442,956
---------- ---------- ---------- ---------- ---------- ----------
Per share amount $ 0.76 $ 0.65 $ 0.60 $ 0.50 $ 0.50 $ 0.46
========== ========== ========== ========== ========== ==========
</TABLE>
NOTE 14 - REGULATORY CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's and
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The Company and the Bank are required to maintain minimum amounts and
ratios of total risk-based capital, Tier I capital, and Tier I leverage capital
as set forth in the table following. Management believes, as of December 31,
1999, that the Company and the Bank meet all capital adequacy requirements to
which they are subject. At December 31, 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 and ratios at December 31, 1999 and 1998 as well as the minimum
calculated amounts for each regulatory defined category.
<TABLE>
<CAPTION>
To Be
For Capital Categorized
Adequacy "Well
(dollars in thousands) Actual Purposes Capitalized"
- ------------------------ --------------- --------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999
The Company
- --------------------------------------
Total capital to risk-weighted assets $19,955 12.51% $12,765 8.00% N.A.
Tier 1 capital to risk-weighted assets $17,960 11.26% $ 6,383 4.00% N.A.
Tier 1 capital to average assets $17,960 9.97% $ 7,206 4.00% N.A.
The Bank
- --------------------------------------
Total capital to risk-weighted assets $17,907 11.37% $12,596 8.00% $15,745 10.00%
Tier 1 capital to risk-weighted assets $15,995 10.16% $ 6,298 4.00% $ 9,447 6.00%
Tier 1 capital to average assets $15,995 9.00% $ 7,111 4.00% $ 8,890 5.00%
AS OF DECEMBER 31, 1998
The Company
- --------------------------------------
Total capital to risk-weighted assets $16,846 12.16% $11,083 8.00% N.A.
Tier 1 capital to risk-weighted assets $15,114 10.91% $ 5,541 4.00% N.A.
Tier 1 capital to average assets $15,114 9.08% $ 6,657 4.00% N.A.
The Bank
- --------------------------------------
Total capital to risk-weighted assets $15,126 11.12% $10,878 8.00% $13,597 10.00%
Tier 1 capital to risk-weighted assets $13,520 9.94% $ 5,438 4.00% $ 8,158 6.00%
Tier 1 capital to average assets $13,520 8.25% $ 6,556 4.00% $ 8,196 5.00%
</TABLE>
The ability of the Company to pay cash dividends is dependent upon
receiving cash in the form of dividends from the Bank. The dividends that may
be paid by the Bank to the Company are subject to legal limitations and
regulatory capital requirements. The approval of the Comptroller of the
Currency is required if the total of all dividends declared by a national bank
in any calendar year exceeds the Bank's net profits (as defined by the
Comptroller) for that year combined with its retained net profits (as defined by
the Comptroller) for the two preceding calendar years. As of December 31, 1999,
no cash dividends have been declared or paid by the Bank and the Bank had
available retained earnings of $7.5 million.
NOTE 15 - OTHER INCOME AND OTHER EXPENSES
The components of other operating income for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998 1997
- ------------------------------------ ----- ----- -----
<S> <C> <C> <C>
Late charges and other loan fees $ 235 $ 215 $ 180
Nondeposit product sales commission 148 177 104
Other 316 228 116
----- ----- -----
$ 699 $ 620 $ 400
===== ===== =====
</TABLE>
The components of other operating expenses for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998 1997
- ---------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Advertising and public relations $ 251 $ 200 $ 256
Stationary, printing and office support 314 324 317
Credit card service expense 277 231 194
Legal and professional fees 311 239 203
Amortization of intangibles 157 157 154
Other 500 469 410
------ ------ ------
$1,810 $1,620 $1,534
====== ====== ======
</TABLE>
NOTE 16 - STOCK COMPENSATION PLANS
The Company has a Restricted Stock Plan for awards to certain key
employees. Under the Restricted Stock Plan, the Company may grant common stock
to its employees for up to 268,018 shares. All shares granted under the
Restricted Stock Plan are subject to restrictions as to continuous employment
for a specified time period following the date of grant. During this period,
the holder is entitled to full voting rights and dividends. The restrictions as
to transferability of shares granted under this plan vest over a period of 5
years at a rate of 20% on each anniversary date of the grant. At December 31,
1999, there were 55,566 shares of restricted stock outstanding. Deferred
compensation representing the difference between the fair market value of the
stock at the date of grant and the cash paid for the stock is amortized over a
five-year vesting period as the restrictions lapse. Included in the
accompanying consolidated statements of income under the caption "Salaries,
wages and benefits" is $101,000 of amortized deferred compensation for each of
the years ended December 31, 1999 and 1998.
The Company has two Incentive Stock Option Plans (one approved in 1989 and
one in 1999) and a Non-Employee Stock Option Plan (collectively referred to as
stock-based option plans). Under the Incentive Stock Option Plans, options are
periodically granted to employees at a price not less than the fair market value
of the shares at the date of grant. Options granted are exercisable for a
period of ten years from the date of grant and become exercisable at a rate of
20% each year on the first five anniversaries of the date of grant. The
Incentive Stock Option Plans authorize the granting of stock options up to a
maximum of 912,307 shares of common stock. At December 31, 1999, 208,700 option
shares were available to be granted under these plans.
Under the Non-Employee Stock Option Plan, options have been granted, at a
price not less than the fair market value of the shares at the date of grant, to
eligible non-employee directors as a retainer for their services as directors.
Options granted are exercisable for a period of ten years from the date of
grant. Options granted on January 1, 1995 became exercisable one year after the
date of grant. Options granted on January 1, 1996 become exercisable over a
period of nine years at a rate of 11.1% on each of the first nine anniversaries
of the date of grant. The Non-Employee Stock Option Plan authorizes the
granting of stock options up to a maximum of 335,024 shares of common stock. At
December 31, 1999, 16,591 option shares were available to be granted under this
plan.
The following is a summary of the activity under the stock-based option
plans for the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 973,027 $ 5.55 957,435 $ 5.12 937,582 $ 4.95
Granted 16,080 $ 13.40 50,800 $ 14.10 60,427 $ 6.83
Canceled (27,971) $ 7.53 (16,126) $ 8.14 (13,443) $ 6.23
Exercised (53,323) $ 3.84 (19,082) $ 4.70 (27,131) $ 2.68
-------- --------- ------- --------- ------- ---------
Outstanding, December 31 907,813 $ 5.73 973,027 $ 5.55 957,435 $ 5.12
======== ========= ======== ========= ======== =========
Exercisable, December 31 599,527 $ 4.87 497,832 $ 4.35 429,553 $ 4.10
======== ========= ======== ========= ======== =========
</TABLE>
The following table summarizes information about stock options outstanding
under the stock-based option plans at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- -------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Exercise Options Contractual Exercise Options Exercise
Prices: Outstanding Life Price Exercisable Price
- ------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
2.37 - $3.05 150,732 1.2 years $ 2.63 150,732 $ 2.63
3.64 - $4.38 176,062 4.8 years $ 4.36 176,062 $ 4.36
5.88 291,265 6.0 years $ 5.88 134,092 $ 5.88
6.38 - $6.48 224,832 7.0 years $ 6.48 127,021 $ 6.48
8.75 - $13.83 23,252 8.9 years $ 11.22 4,410 $ 9.49
14.51 - $14.76 41,670 8.4 years $ 14.55 7,210 $ 14.51
-------- --------- --------- -------- ---------
2.37 - $14.76 907,813 5.4 years $ 5.73 599,527 $ 4.87
======== ========= ========= ======== =========
</TABLE>
The Company follows APB 25 to account for its stock-based option plans.
Accordingly, no compensation cost has been recognized for the stock-based option
plans. Had compensation cost for the Company's incentive and non-employee stock
option plans been determined based on the fair value at the grant date for
awards in 1999, 1998, and 1997 consistent with the provisions of SFAS 123, the
Company's net earnings and diluted earnings per share would have been reduced to
the proforma amounts as follows:
<TABLE>
<CAPTION>
(dollars, except per share, in thousands) 1999 1998 1997
- ----------------------------------------- ------ ------ ------
<S> <C> <C> <C>
Net income - as reported $2,408 $1,895 $1,575
Net income - proforma $2,167 $1,705 $1,436
Diluted earnings per share - as reported $ 0.65 $ 0.50 $ 0.46
Diluted earnings per share - proforma $ 0.58 $ 0.45 $ 0.42
</TABLE>
The weighted-average fair value per share of options granted in 1999 and
1998 amounted to $7.64 and $8.34, respectively. Fair values were estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions used for grants: expected volatility of 79.5%, 49.1%, and
26.5% for 1999, 1998 and 1997, respectively; risk-free interest rate of 6.00%,
4.54%, and 5.70% for 1999, 1998, and 1997, respectively; and expected lives of
the options of 4.6 years, 7.5 years, and 6 years for 1999, 1998, and 1997.
There were no cash dividends in any year.
NOTE 17 - EMPLOYEE BENEFIT PLANS
The Company maintains an employee benefit plan for all eligible employees
of the Company and its subsidiaries under the provisions of Internal Revenue
Code Section 401K. The Summit Retirement Savings Plan (the "Plan") allows for
employee contributions and, upon annual approval of the Board of Directors, the
Company matches employee contributions from one percent to a maximum of six
percent of deferred compensation. The matching contributions as a percent of
deferred compensation were 6% for 1999 and 1998, and 4% for 1997. A total of
$113,000, $106,000, and $61,000, respectively, in 1999, 1998, and 1997 was
charged to operations for the Company's matching contribution. Employees are
immediately vested in their contributions to the Plan and become fully vested in
the employer matching contribution after five years of service.
During 1998, Summit National Bank entered into salary continuation
agreements with several key management employees, all of whom are officers.
Under the agreements, the Bank is obligated to provide for each such employee or
his beneficiaries, during a period of 20 years after the employee's death,
disability, or retirement, annual benefits ranging from $38,000 to $113,000.
The estimated present value of future benefits to be paid is being accrued over
the period from the effective date of the agreements until the expected
retirement dates of the participants. The expense incurred and amount accrued
for this nonqualified salary continuation plan, which is an unfunded plan, for
the years ended December 31, 1999 and 1998 amounted to $52,000 and $49,000,
respectfully. To partially finance benefits under this plan, the Bank purchased
and is the beneficiary of life insurance policies. Proceeds from the insurance
policies are payable to the Company upon the death of the participant. The cash
surrender value of these policies included in the accompanying consolidated
balance sheets in "Other assets" was $1,831,000 and $1,754,000 at December 31,
1999 and 1998, respectively.
NOTE 18 - CONTINGENT LIABILITIES
In the normal course of business, the Company and its subsidiaries are
periodically subject to various pending or threatened lawsuits in which claims
for monetary damages may be asserted. In the opinion of the Company's
management, after consultation with legal counsel, none of this litigation
should have a material adverse effect on the Company's financial position.
NOTE 19 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit and involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet. The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amounts of those
instruments.
The Company uses the same credit and collateral policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by
the Company upon extension of credit is based on management's credit evaluation.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
At December 31, 1999 the Company's commitments to extend additional credit,
including obligations under the Company's revolving credit card program, totaled
approximately $46,908,000, of which approximately $5,870,000 represents
commitments to extend credit at fixed rates of interest. Commitments to extend
credit at fixed rates expose the Company to some degree of interest rate risk.
Included in the Company's total commitments are standby letters of credit.
Letters of credit are commitments issued by the Company to guarantee the
performance of a customer to a third party and totaled $4,829,000 at December
31, 1999. The credit risk involved in the underwriting of letters of credit is
essentially the same as that involved in extending loan facilities to customers.
NOTE 20 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosure of fair value information, whether or not recognized in the statement
of financial position, when it is practicable to estimate fair value. SFAS 107
defines a financial instrument as cash, evidence of an ownership interest in an
entity, or contractual obligations which require the exchange of cash or other
financial instruments. Certain items are specifically excluded from the
disclosure requirements, including the Company's common stock, premises and
equipment, and other assets and liabilities.
Fair value approximates book value for the following financial instruments
due to the short-term nature of the instrument: cash and due from banks,
interest-bearing deposits in banks, federal funds sold, federal funds purchased,
repurchase agreements, short-term FHLB advances, and other short-term
borrowings. Fair value of investment securities is estimated based on quoted
market prices where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Fair value for variable rate loans that reprice frequently and for loans
that mature in less that one year is based on the carrying value, reduced by an
estimate of credit losses inherent in the portfolio. Fair value of fixed rate
real estate, consumer, commercial and other loans maturing after one year is
based on the discounted present value of the estimated future cash flows,
reduced by an estimate of credit losses inherent in the portfolio. Discount
rates used in these computations approximate the rates currently offered for
similar loans of comparable terms and credit quality.
Fair value for demand deposit accounts and variable rate interest-bearing
accounts with no fixed maturity date is equal to the carrying value.
Certificate of deposit accounts maturing during 2000 are valued at their
carrying value. Certificate of deposit accounts maturing after 2000 are
estimated by discounting cash flows from expected maturities using current
interest rates on similar instruments. Fair value for long-term FHLB advances
is based on discounted cash flows using the current market rate.
The estimated fair market value of commitments to extend credit and standby
letters of credit are equal to their carrying value as the majority of these
off-balance sheet instruments have relatively short terms to maturity and are
written with variable rates of interest.
The Company has used management's best estimate of fair values based on the
above assumptions. Thus, the fair values presented may not be the amounts which
could be realized in an immediate sale or settlement of the instrument. In
addition, any income tax or other expenses which would be incurred in an actual
sale or settlement are not taken into consideration in the fair values
presented.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998
- ---------------------- --------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 3,952 $ 3,952 $ 5,377 $ 5,377
Interest-bearing bank balances 4,399 4,399 623 623
Federal funds sold 1,470 1,470 400 400
Investment securities available for sale 26,466 26,466 27,102 27,102
Loans, net 146,007 143,840 128,842 133,856
Financial Liabilities:
Deposits 157,996 158,646 140,243 139,905
Federal funds purchased and
repurchase agreements 4,000 4,000 3,566 3,566
Other short-term borrowings 500 500 820 820
FHLB advances 9,000 9,100 8,000 7,884
</TABLE>
NOTE 21 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Consolidated quarterly operating data for the years ended December 31 is
summarized as follows (per share data has been restated to reflect the stock
split and all distributions issued):
<TABLE>
<CAPTION>
(dollars in thousands, except
per share data) 1999 1998
- ---------------- ----------------------------------------- ----------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $ 3,565 $ 3,690 $ 3,991 $ 4,131 $ 3,550 $ 3,588 $ 3,691 $ 3,587
Interest expense (1,520) (1,584) (1,737) (1,787) (1,687) (1,732) (1,747) (1,636)
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income 2,045 2,106 2,254 2,344 1,863 1,856 1,944 1,951
Provision for loan losses (81) (129) (108) (127) (50) (51) (40) (149)
--------- --------- --------- --------- --------- --------- --------- ---------
Net interest income after
provision for loan losses 1,964 1,977 2,146 2,217 1,813 1,805 1,904 1,802
Noninterest income 394 390 369 407 383 384 339 302
Noninterest expenses (1,563) (1,550) (1,661) (1,746) (1,545) (1,465) (1,459) (1,357)
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes 795 817 854 878 651 724 784 747
Income taxes (228) (235) (237) (236) (236) (269) (284) (222)
--------- --------- --------- --------- --------- --------- --------- ---------
Net income 567 582 617 642 415 455 500 525
Unrealized net holding (loss)
gain on securities, net of taxes
and reclassification of gains in
net income (190) (312) (218) (156) 38 7 163 15
--------- --------- --------- --------- --------- --------- --------- ---------
Comprehensive income $ 377 $ 270 $ 399 $ 486 $ 453 $ 462 $ 663 $ 540
========= ========= ========= ========= ========= ========= ========= =========
NET INCOME PER SHARE:
Basic $ 0.18 $ 0.19 $ 0.19 $ 0.20 $ 0.13 $ 0.14 $ 0.16 $ 0.17
Diluted $ 0.15 $ 0.16 $ 0.17 $ 0.17 $ 0.11 $ 0.12 $ 0.13 $ 0.14
AVERAGE COMMON SHARES
OUTSTANDING:
Basic 3,163 3,167 3,171 3,197 3,131 3,136 3,139 3,144
Diluted 3,771 3,775 3,722 3,726 3,731 3,784 3,786 3,769
</TABLE>
NOTE 22 - SEGMENT INFORMATION
The Company reports information about its operating segments in accordance
with SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information". Summit Financial Corporation is the parent holding company for
Summit National Bank ("Bank"), a nationally chartered bank, and Freedom Finance,
Inc. ("Finance"), a consumer finance company. Through its bank subsidiary,
which commenced operations in July 1990, the Company provides a full range of
banking services, including offering demand and time deposits, commercial and
consumer loans, and nondeposit investment services. The Bank currently has
three full-service branches in Greenville, South Carolina. The Finance Company
commenced operations in November 1994 and makes and services small, short-term
installment loans and related credit insurance products to individuals from its
eleven offices throughout South Carolina. The Company considers the Bank and the
Finance Company separate business segments. Financial performance for each
segment is detailed in the following tables. Included in the "Corporate" column
are amounts for general corporate activities and eliminations of intersegment
transactions.
<TABLE>
<CAPTION>
(dollars in thousands) Bank Finance Corporate Total
- --------------------------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C>
AT AND FOR THE YEAR ENDED
DECEMBER 31, 1999
Interest income $ 13,761 $ 1,713 ($97) $ 15,377
Interest expense (6,594) (284) 250 (6,628)
--------- --------- ----------- ---------
Net interest income 7,167 1,429 153 8,749
Provision for loan losses (265) (180) - (445)
Noninterest income 1,262 346 (48) 1,560
Noninterest expenses (4,998) (1,512) (10) (6,520)
--------- --------- ----------- ---------
Income before income taxes 3,166 83 95 3,344
Income taxes (874) (29) (33) (936)
--------- --------- ----------- ---------
Net income $ 2,292 $ 54 $ 62 $ 2,408
========= ========= =========== =========
Net loans $144,285 $ 2,932 ($1,210) $146,007
========= ========= =========== =========
Total assets $188,769 $ 3,748 ($1,288) $191,229
========= ========= =========== =========
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) Bank Finance Corporate Total
- --------------------------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C>
AT AND FOR THE YEAR ENDED
DECEMBER 31, 1998
Interest income $ 12,912 $ 1,577 ($73) $ 14,416
Interest expense (6,731) (286) 215 (6,802)
--------- --------- ----------- ---------
Net interest income 6,181 1,291 142 7,614
Provision for loan losses (146) (144) - (290)
Noninterest income 1,156 300 (48) 1,408
Noninterest expenses (4,260) (1,550) (16) (5,826)
--------- --------- ----------- ---------
Income before income taxes 2,931 (103) 78 2,906
Income taxes (1,020) 35 (26) (1,011)
--------- --------- ----------- ---------
Net income $ 1,911 ($68) $ 52 $ 1,895
========= ========= =========== =========
Net loans $127,327 $ 2,660 ($1,145) $128,842
========= ========= =========== =========
Total assets $168,072 $ 3,634 ($1,221) $170,485
========= ========= =========== =========
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) Bank Finance Corporate Total
- --------------------------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C>
AT AND FOR THE YEAR ENDED
DECEMBER 31, 1997
Interest income $ 11,858 $ 1,614 ($91) $ 13,381
Interest expense (6,352) (304) 252 (6,404)
--------- --------- ----------- ---------
Net interest income 5,506 1,310 161 6,977
Provision for loan losses (216) (176) - (392)
Noninterest income 780 303 (48) 1,035
Noninterest expenses (3,589) (1,569) 8 (5,150)
--------- --------- ----------- ---------
Income before income taxes 2,481 (132) 121 2,470
Income taxes (900) 45 (40) (895)
--------- --------- ----------- ---------
Net income $ 1,581 ($87) $ 81 $ 1,575
========= ========= =========== =========
Net loans $115,548 $ 2,579 ($1,100) $117,027
========= ========= =========== =========
Total assets $157,701 $ 3,698 ($1,120) $160,279
========= ========= =========== =========
</TABLE>
NOTE 23 - PARENT COMPANY FINANCIAL INFORMATION
The following is condensed financial information of Summit Financial
Corporation (parent company only) at December 31, 1999 and 1998 and for the
years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONDENSED BALANCE SHEETS
December 31,
----------------
(dollars in thousands) 1999 1998
- ------------------------------------- ------- --------
<S> <C> <C>
ASSETS
Cash $ 267 $ 154
Investment in bank subsidiary 15,432 14,016
Investment in nonbank subsidiary 53 (1)
Due from subsidiaries 1,879 1,864
Other assets - 2
------- --------
$17,631 $16,035
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accruals and other liabilities $ 40 $ 38
Due to subsidiaries - 3
Other borrowings - 320
Shareholders' equity 17,591 15,674
------- --------
$17,631 $16,035
======= ========
</TABLE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONDENSED STATEMENTS OF INCOME
For the Years Ended December 31,
--------------------------------
(dollars in thousands) 1999 1998 1997
- ----------------------------------- ------- ------- -------
<S> <C> <C> <C>
Interest income $ 153 $ 176 $ 175
Interest expense (1) (33) (13)
------- ------- -------
Net interest income 152 143 162
Noninterest expenses (57) (65) (40)
------- ------- -------
Net operating income 95 78 122
Equity in undistributed net income
of subsidiaries 2,346 1,843 1,493
------- ------- -------
Income before taxes 2,441 1,921 1,615
Income taxes (33) (26) (40)
------- ------- -------
Net income $2,408 $1,895 $1,575
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SUMMIT FINANCIAL CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------
(dollars in thousands) 1999 1998 1997
- ------------------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Operating activities:
Net income $ 2,408 $ 1,895 $ 1,575
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (2,346) (1,843) (1,493)
Decrease in other assets 2 1 -
Increase (decrease) in other liabilities 2 (9) 19
Amortization of deferred compensation 101 101 -
Deferred taxes - - 2
-------- -------- --------
Net cash provided by operating activities 167 145 103
-------- -------- --------
INVESTING ACTIVITIES:
Net (increase) decrease in due from subsidiary (15) 66 (129)
Net (decrease) increase in due to subsidiary (3) 3 -
Capital contribution to bank subsidiary - - (500)
Net cash (used) provided by investing activities (18) 69 (629)
-------- -------- --------
FINANCING ACTIVITIES:
Proceeds from notes payable - - 500
Repayments of notes payable (320) (180) (50)
Employee stock options exercised 286 88 72
Cash paid in lieu of fractional shares (2) (2) (5)
Net cash (used) provided by financing activities (36) (94) 517
-------- -------- --------
Net change in cash and cash equivalents 113 120 (9)
Balance, beginning of year 154 34 43
-------- -------- --------
Balance, end of year $ 267 $ 154 $ 34
======== ======== ========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Summit Financial Corporation
We have audited the accompanying consolidated balance sheets of Summit
Financial Corporation and subsidiaries (the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of income, shareholders'
equity and comprehensive income and cash flows for each of the years in the
three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Summit
Financial Corporation and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Greenville, South Carolina
January 18, 2000
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There has been no changes in or disagreements with accountants on
accounting and financial disclosure as defined by Item 304 of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is set forth in the definitive Proxy
Statement of the Company filed in connection with its 2000 Annual Meeting of the
Shareholders, which information is incorporated herein by reference as follows:
(a) Identification of Directors: Page 4 of the 2000 Proxy Statement
(b) Identification of Executive Officers: Page 7 of the 2000 Proxy
Statement
(c) Identification of Certain Significant Employees: NONE
(d) Family Relationships: NONE
(e) Business experience: Pages 5-7 of the 2000 Proxy Statement
(f) Involvement in Certain Legal Proceedings: NONE
(g) Promoters and Control Persons: NONE
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth in the definitive Proxy
Statement of the Company filed in connection with its 2000 Annual Meeting of
Shareholders, which information is incorporated herein by reference as follows:
(a) - (f) Executive Compensation tables: Pages 7-8 of the 2000 Proxy
Statement
(g) Compensation of Directors: Page 3 of the 2000 Proxy Statement
(h) Employment Contracts: Page 9 of the 2000 Proxy Statement
(i) Repricing of Options/SARs: NONE
(j) Compensation Committee Interlocks: Page 11 of the 2000 Proxy Statement
(k) Compensation Committee Report: Pages 10-11 of the 2000 Proxy Statement
(l) Performance Graph: Page 12 of the 2000 Proxy Statement
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the heading
"Election of Directors" on pages 4-5 in the definitive Proxy Statement of the
Company filed in connection with its 2000 Annual Meeting of Shareholders, which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the heading
"Compensation Committee Interlocks and Insider Participation" on page 11 and
"Certain Transactions" on page 14 in the definitive Proxy Statement of the
Company filed in connection with its 2000 Annual Meeting of Shareholders, which
information is incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES & REPORTS ON FORM 8-K
(a) List of documents filed as a part of this report:
1. Financial Statements:
The following consolidated financial statements and report of
independent auditors of the Company are included in Part I, Item 8 hereof:
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income For The Years Ended December 31,
1999, 1998, 1997
Consolidated Statements of Shareholders' Equity And Comprehensive
Income For The Years Ended December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows For The Years Ended December 31,
1999, 1998, 1997
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. Financial Statement Schedules:
All other consolidated financial statements or schedules have been omitted since
the required information is included in the consolidated financial statements or
notes thereto referenced in Item 14(a)1 above, or is not applicable or required.
3. Exhibits (numbered in accordance with Item 601 of Regulation S-K):
3.1 Articles of Incorporation, as amended (incorporated by reference to
exhibits filed with the Registrant's Registration Statement on Form S-1 Under
The Securities Act of 1933, as filed with the SEC on October 6, 1989, File No.
33-31466).
3.2 Bylaws, as amended (incorporated by reference to exhibits filed
with the Registrant's Registration Statement on Amendment No. 1 To Form S-1
Under The Securities Act of 1933, as filed with the SEC on December 7, 1989,
File No. 33-31466).
4. Form of Certificate for Common Stock (incorporated by reference to
exhibits filed with the Registrant's Registration Statement on Amendment No. 1
To Form S-1 Under The Securities Act of 1933, as filed with the SEC on December
7, 1989, File No. 33-31466).
10.1 Summit Financial Corporation Incentive Stock Plan (incorporated by
reference to exhibits filed with the Registrant's Registration Statement on Form
S-1 Under The Securities Act of 1933, as filed with the SEC on October 6, 1989,
File No. 33-31466).
10.2 Lease Agreement for Bank Site (incorporated by reference to
exhibits filed with the Registrant's Registration Statement on Form S-1 Under
The Securities Act of 1933, as filed with the SEC on October 6, 1989, File No.
33-31466).
10.3 Employment Agreement of J. Randolph Potter dated December 21, 1998
(incorporated by reference to exhibits filed with Summit Financial Corporation's
Annual Report to the Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1998, File No. 000-19235).
10.4 Employment Agreement of Blaise B. Bettendorf dated December 21,
1998 (incorporated by reference to exhibits filed with Summit Financial
Corporation's Annual Report to the Securities and Exchange Commission on Form
10-K for the year ended December 31, 1998, File No. 000-19235).
10.5 Summit Financial Corporation Restricted Stock Plan (incorporated
by reference to exhibits filed with Summit Financial Corporation's Annual Report
to the Securities and Exchange Commission on Form 10-K for the year ended
December 31, 1993, File No. 000-19235).
10.6 Summit Financial Corporation Non-Employee Stock Option Plan
(incorporated by reference to exhibits filed with Summit Financial Corporation's
Annual Report to the Securities and Exchange Commission on Form 10-K for the
year ended December 31, 1994, File No. 000-19235).
10.7 Employment Agreement of James B. Schwiers dated September 2, 1999.
10.8 Summit Financial Corporation 1999 Incentive Stock Plan.
21 Subsidiaries of Summit Financial Corporation:
Summit National Bank, a nationally chartered bank.
Freedom Finance, Inc., a consumer finance company.
23 Consent of KPMG LLP with regard to S-8 Registration Statements for
Summit Financial Corporation Restricted Stock Plan (as filed with the Securities
and Exchange Commission, "SEC", August 23, 1994, File No. 33-83538); Summit
Financial Corporation Incentive Stock Option Plan (as filed with the SEC July
19, 1995, File No. 33-94962); and Summit Financial Corporation 1995 Non-Employee
Stock Option Plan (as filed with the SEC July 19, 1995, File No. 33-94964).
27 Financial data schedule
NOTE: The exhibits listed above will be furnished to any security holder upon
written request to Ms. Blaise B. Bettendorf, Chief Financial Officer, Summit
Financial Corporation, Post Office Box 1087, Greenville, South Carolina 29602.
The Registrant will charge a fee of $.25 per page for photocopying such exhibit.
(b) No reports on Form 8-K were filed by the Registrant during the
fourth quarter of 1999.
(c) Exhibits required to be filed with this report, which have not been
previously filed as indicated in Item 14(a) above, are submitted as a separate
section of this report.
(d) Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Greenville, South Carolina, on the 20nd day of March, 2000.
SUMMIT FINANCIAL CORPORATION
/s/ J. Randolph Potter
---------------------------
Dated: March 20, 2000 J. Randolph Potter, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ J. Randolph Potter President, Chief Executive March 20, 2000
- --------------------------- Officer and Director
J. Randolph Potter
/s/ Blaise B. Bettendorf Senior Vice President March 20, 2000
- --------------------------- (Principal Financial and
Blaise B. Bettendorf Accounting Officer)
/s/ C. Vincent Brown Chairman March 20, 2000
- ---------------------------
C. Vincent Brown
/s/ John A. Kuhne Vice Chairman March 20, 2000
- ---------------------------
John A. Kuhne
/s/ David C. Poole Secretary March 20, 2000
- ---------------------------
David C. Poole
/s/ Ivan E. Block Director March 20, 2000
- ---------------------------
Ivan E. Block
/s/ J. Earle Furman, Jr. Director March 20, 2000
- ---------------------------
J. Earle Furman, Jr.
/s/ Charles S. Houser Director March 20, 2000
- ---------------------------
Charles S. Houser
/s/ John W. Houser Director March 20, 2000
- ---------------------------
John W. Houser
/s/ T. Wayne McDonald Director March 20, 2000
- ---------------------------
T. Wayne McDonald
/s/ Larry A. McKinney Director March 20, 2000
- ---------------------------
Larry A. McKinney
/s/ George O. Short, Jr. Director March 20, 2000
- ---------------------------
George O. Short, Jr.
</TABLE>
STATE OF SOUTH CAROLINA )
) EMPLOYMENT AGREEMENT
COUNTY OF GREENVILLE )
THIS EMPLOYMENT AGREEMENT, made and entered into this 2ND day of
September, 1999, by and between JAMES B. SCHWIERS, a resident of the State and
County aforesaid, hereinafter referred to as "Employee" and Summit Financial
Corporation, a corporation duly chartered pursuant to the laws of the State of
South Carolina, hereinafter referred to as "Employer".
W I T N E S S E T H:
WHEREAS, the Employer is a corporation chartered under the laws of the
State of South Carolina and
WHEREAS, Employee is the Executive Vice President and Chief Operating
Officer of the banking operation which is a wholly-owned subsidiary of the
Employer; and
WHEREAS, the terms of this Agreement are subject to the approval by
the Board of Directors of the Employer;
NOW, THEREFORE, in consideration of the mutual promises of the parties
and the mutual benefits they will gain by the performance thereof, the parties
hereto agree as follows:
1. Employment. That the Employer, subject to the terms and
conditions hereof, does hereby agree to employ the Employee and the Employee
accepts such employment, from the date hereof and to continue therefrom until
terminated as hereinafter provided.
2. Duties. That the Employee is employed to act as Executive Vice
President/Chief Operating Officer of the banking entity, which is a wholly-owned
subsidiary of the Employer and to perform such other duties on behalf of the
Employer, as well as any subsidiary thereof, which will benefit the Employer.
3. Termination by Employee. That the Employee may terminate his
employment hereunder at any time after he has given ninety (90) days prior
written notice to the Employer, such notice to be accomplished by delivery of
such written termination to either the Chairman of the Board of Directors or
President (provided that the Employee is not serving in either capacity) of the
Employer.
4. Termination by Employer. That the Employer may terminate
immediately the Employee's employment hereunder at any time, with or without
cause, by giving written notice of such termination of employment to the
Employee.
5. Automatic Termination of Employee. That the employment of the
Employee shall be automatically terminated upon the earlier of any of the
following:
(a) The death of the Employee.
(b) The disability of the Employee so as to prevent the
Employee from adequately performing his duties contemplated hereunder (the
determination of any such disability shall be within the sole discretion of the
Board of Directors of the Employer). The Employee will be compensated at his
normal rate until the earlier of: (i) such time as he begins to receive benefits
from his disability insurance; or (ii) a period ending one hundred eighty (180)
days from such determination of disability.
6. Compensation. That for all of his duties hereunder, the Employee
shall receive compensation at the rate currently in place. However, anything to
the contrary notwithstanding, this compensation shall terminate immediately in
the event of termination of employment hereunder for any reason whatsoever
except for any payments which might be due the Employee under paragraph 5(b) or
by reason of the Employer enforcing its covenant not to compete set forth herein
below.
7. Covenant Not to Compete.
(a) That in the event the Employee voluntarily terminates his
employment with the Employer or any subsidiary of the Employer, that the
Employee agrees that he will not, directly or indirectly, own, manage, operate,
control, be employed by, participate in or be connected in any manner with the
ownership, management or operation of any business similar to that type of
business then conducted by the Employer or by any subsidiary for which the
Employee is then actively engaged for a period of twelve (12) months from the
date of such termination of employment and within the radius of twenty (20)
miles from where the Employee has his main office or five (5) miles from any
branch office, while he is performing his services hereunder. Further, that the
Employee acknowledges that this covenant not to compete with the Employer, or
such subsidiary, is NOT made under duress and that it is an essential part of
the Agreement, without which the Employer would not have engaged or continued
the services of the Employee. Further, the Employee acknowledges that this
covenant not to compete is for such good and valid consideration, the receipt of
which is hereby acknowledged and Employee agrees that in the event of a
threatened breach of his covenant under this Agreement, that any remedy at law
would be inadequate and Employer may seek injunctive relief, as well as damages.
b) That in the event that the Employer shall terminate the employment
of the Employee, without cause ("cause" is defined herein below), the Employer
agrees to pay the Employee one hundred (100%) percent of his regular monthly
salary (regular monthly salary shall be computed by dividing by twelve (12) the
Employee s W-2 cash salary and cash bonus income from the Employer for the
calendar year immediately preceding such termination of employment). Such
payment to begin on the last day of the first month following the termination of
employment and to continue for one (1) year from the date of termination of
employment. At Employer's sole option, and for the same monthly payment
amounts, this non-competition agreement may be continued up to a maximum of two
(2) years from the date of termination of employment; PROVIDED, HOWEVER, that
after one (1) year from the date of termination, Employer shall have the
absolute right, in its sole discretion, to terminate, at any time, this said
non-competition agreement by giving thirty (30) days prior written notice to the
Employee, mailed to the Employee s address designated in Item 8 hereof and this
covenant not to compete shall terminate thirty (30) days after the mailing of
such notice and the payments referred to herein above shall likewise
automatically terminate on said date, after which termination by the Employer,
no payments shall be payable as it is expressly acknowledged by both the
Employee and the Employer that Employer shall have no obligation whatsoever to
continue this covenant not to compete for any period of time beyond one (1) year
from the date of termination. Naturally, such notice of termination of such
payments by the Employer shall, at that time, release the Employee from his
obligation not to compete. Such non-compete shall prevent the Employee from,
directly or indirectly, owning, managing, operating, or being employed by,
participating in or being connected in any manner with the ownership, management
and operation of any business similar to that type of business then conducted by
the Employer or by any subsidiary for which the Employee is then actively
engaged for a period of twelve (12) months (24 months at Employer's sole
options) from the date of such termination of employment and within the radius
of twenty (20) miles from the office of the Employer, or five (5) miles from any
branch office, as the case may be, within which Employee has his main office
while he is performing his services hereunder. Further, that the Employee
acknowledges that this covenant not to compete with the Employer or such
subsidiary is NOT made under duress and that it is an essential part of this
Agreement, without which the Employer would not have engaged or continued the
services of the Employee. Further, the Employee acknowledges that this covenant
not to compete is for such good and valid consideration, the receipt of which is
hereby acknowledged and Employee agrees that in the event of a threatened breach
of his covenant under this Agreement, that any remedy at law would be inadequate
and Employer may seek injunctive relief, as well as damages.
(c) That in the event that the Employer shall terminate the employment
of the Employee for cause (with cause" being defined under this Agreement to
mean either: (i) willful failure of the Employee to substantially perform
prescribed duties other than a result of disability (the Employee shall be given
written notice of an alleged willful failure to substantially perform such
prescribed duties and shall have a period of thirty (30) days to correct such
willful failure to substantially perform such prescribed duties); or (ii) the
willful engaging in misconduct significantly detrimental to the Employer), the
Employer agrees to pay the Employee one hundred (100%) percent of his regular
monthly salary (regular monthly salary shall be computed by dividing by twelve
(12) the Employee's W-2 cash salary and cash bonus income from the Employer for
the calendar year immediately preceding such termination of employment) for a
period of one (1) month. Further, that in the event of such termination for
cause, the Employee agrees that he will not, directly or indirectly, own,
manage, operate, control, be employed by, participate in, or be connected in any
manner with the ownership, management or operation of any business similar to
that type of business then conducted by the Employer or by any subsidiary for
which the Employee is then actively engaged for a period of six (6) months from
the date of termination of employment and within a radius of twenty (20) miles
from where the employee has his main office, or five (5) miles from any branch
office, while he is performing the services hereunder. Further, that the
Employee acknowledges that this covenant not to compete with the Employer, or
such subsidiary, is NOT made under duress and that it is an essential part of
this Agreement, without which the Employer would not have engaged or continued
the services of the Employee. Further, the Employee acknowledges that this
covenant not to compete is for such good and valid consideration and Employee
agrees that in the event of a threatened breach of his covenant under this
Agreement, that any remedy at law would be inadequate and Employer may seek
injunctive relief, as well as damages.
(d) That in the event the Employee is terminated by the Employer after
a change in control (as hereinafter defined) or by the Employer during the
pendency of a potential change in control (other than for cause in either case)
or by the Employee for good reason (as hereinafter defined) after a change in
control, then the Employee is entitled to EITHER:
OPTION 1: a non-competition amount equal to three (3) times his annual base pay
amount, calculated as the average of the Employee s W-2 annual cash salary and
cash bonus income from the Employer over the five (5) most recent taxable years,
payable in three (3) equal annual installments without any interest due thereon,
the first installment being due within thirty (30) days from the date of such
termination and annually thereafter until paid in full; OR:
OPTION 2: a non-competition amount equal to one-and-one-half (1-1/2) times his
annual base pay amount, calculated as the average of the Employee s W-2 annual
cash salary and cash bonus income from the Employer over the five (5) most
recent taxable years, payable in two (2) equal annual installments without any
interest due thereon, the first installment being due within thirty (30) days
from the date of such termination and annually thereafter until paid in full.
Employee must select in writing to receive non-competition payments under
either OPTION 1 or OPTION 2 as defined above within 48 hours of such
termination. In addition, the Employee is entitled to continued life,
disability and medical insurance coverage for a period of twelve (12) months,
paid for by the Employer.
Said non-compete payments shall prevent the Employee from, directly or
indirectly, owning, managing, operating, or being employed by, participating in
or being connected in any manner with the ownership, management and operation of
any business similar to that type of business then conducted by the Employer or
by any subsidiary for which the Employer is then actively engaged for a period
of EITHER:
Assuming the Employee selects OPTION 1: 36 months from the date of such
termination of employment, OR:
Assuming the Employee selects OPTION 2: 18 months from the date of such
termination of employment.
Further, for either of the Options, said non-competition payments will
prevent the Employee's activities described above within the radius of twenty
(20) miles from the office of the Employer, or five (5) miles from any branch
office, as the case may be, within which Employer has his main office while he
is performing his services hereunder. The Employee acknowledges that this
covenant not to compete with the Employer or such subsidiary is NOT made under
duress and that it is an essential part of this Agreement. Further, the
Employee acknowledges that this covenant not to compete is for such good and
valid consideration, the receipt of which is hereby acknowledged. The Employer
and Employee acknowledge that any breach of this contract would cause damages to
the Employer, the value of which would be difficult to determine. For that
reason, the Employer and Employee hereby agree upon liquidated damages
specifying that the damages that the Employer would incur as a result of a
breach by the Employee would be determined based on the present value of the
stream of unpaid non-competition payments specified above. In addition, in the
event of a breach of the Employee s covenant under this Agreement, the Employer
may seek injunctive relief, as well as the liquidated damages set forth above.
A change in control occurs if: (i) any person or entity acting directly or
indirectly or through or in concert (other than persons who are presently on the
Board of Directors for the Employer) with one or more persons, acquires the
power, directly or indirectly, to vote twenty-five (25%) percent or more of any
class of voting securities of the Employer; or (ii) the Employer becomes a
subsidiary of another corporation or is merged or consolidated into another
corporation. A potential change in control occurs if: (i) the Employer has
entered into an agreement, the consummation of which would result in a change in
control; (ii) any person publicly announces his intention to take or to consider
taking actions which, if consummated, would constitute a change in control; or
(iii) any person becomes the beneficial owner, as defined under Securities and
Exchange Commission rules, directly or indirectly of the Employer s securities
which represent nine and one-half (9.5%) percent or more of the combined voting
power of the Employer's then outstanding securities entitled to elect directors;
or (iv) the Board of Directors adopts a resolution to the effect that a
potential change in control for purposes of the agreement has occurred. A
potential change in control remains pending for purposes of receiving payments
under the agreement until the earlier of the occurrence of a change in control
or a determination by the Board of Directors or a committee thereof (at any
time) that a change of control is not or was no longer reasonably expected to
occur.
Termination of employment because of disability, retirement or death,
or by the Employer for cause or by the Employee for any reason other than for
good reason, will not result in the full payment of benefits under the
provisions of paragraph 7(d) above. Cause" is defined under the agreement to
mean: (i) willful failure substantially to perform prescribed duties other than
as a result of disability; or (ii) the willful engaging in misconduct
significantly detrimental to the Employer. Good reason" for Employee to
terminate employment with the Employer occurs if: (i) duties are assigned that
are materially inconsistent with previous duties; (ii) duties and
responsibilities are substantially reduced; (iii) base compensation is reduced
not as part of an across-the-board reduction for such executives; (iv)
participation under compensation plans or arrangements generally made available
to persons at the Employee s level of responsibility at the Employer is denied
except as otherwise provided; (v) a successor fails to assume the agreement; or
(vi) termination is made without compliance with prescribed procedures.
8. Addresses. That, unless mutually amended in writing, any notices
required or permitted to be given under this Agreement shall be sufficient if in
writing and sent by registered mail to the following addresses:
FOR THE EMPLOYER:
Summit Financial Corporation
C/O J. Randolph Potter
P O Box 1087
Greenville, SC 29602
FOR THE EMPLOYEE:
James B. Schwiers
224 E. Augusta Place
Greenville, SC 29605
9. Vacation. That during the term of active employment hereunder,
the Employee shall be entitled to an annual paid vacation of three (3) weeks to
be taken at such reasonable time or times as allowed by the Board of Directors
of the Employer.
10. Employee Benefits. That the Employee shall be entitled, during the
term of active employment hereunder, to those employee benefits currently in
place for the Employee.
11. State Law. That this Agreement is made pursuant to the laws of
the State of South Carolina and shall be construed thereby.
12. Entire Agreement. That this Agreement constitutes the sole and
complete agreement between the Employer and the Employee and it is agreed that
no verbal or other statement, inducements or representations have been made to
or relied upon by the Employee and that no modification to this Agreement shall
be binding upon either party hereto unless in writing and signed by each party.
13. Binding Effect. That this Agreement is binding upon the parties
hereto, their successors, personal representatives, legal representatives, heirs
and assigns (however this Agreement shall not be assigned by the Employee unless
the Employer shall agree thereto in writing).
IN WITNESS WHEREOF, the parties hereto have signed and sealed this
Agreement on the date above first written.
IN THE PRESENCE OF: EMPLOYER:
SUMMIT FINANCIAL CORPORATION
/s/ Blaise B. Bettendorf By: /s/ J. Randolph Potter
Its: President
/s/ Karen Dye And: /s/ C. Vincent Brown
Its: Chairman
EMPLOYEE:
/s/ Blaise B. Bettendorf /s/ J. B. Schwiers
/s/ Karen Dye
SUMMIT FINANCIAL CORPORATION
1999 INCENTIVE STOCK OPTION PLAN
1. PURPOSE
The purpose of the Summit Financial Corporation 1999 Incentive Stock Option
Plan (the "1999 Plan") is to encourage and enable eligible officers and
employees of Summit Financial Corporation (the "Corporation") and its
subsidiaries to acquire proprietary interests in the Corporation through the
ownership of Common Stock of the Corporation. The Corporation believes that
officers and employees who participate in the Plan will have a closer
identification with the Corporation by virtue of their ability as stockholders
to participate in the Corporation's growth and earnings. The Plan also is
designed to provide motivation for participating officers and employees to
remain in the employ of and to give greater effort on behalf of the Corporation.
It is the intention of the Corporation that options granted under the Plan
qualify as "incentive stock options" ("ISOs") within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code") and the
regulations promulgated thereunder. Accordingly, the provisions of the Plan
shall be construed so as to extend and limit participation in a manner
consistent with the requirements of that section of the Code.
2. DEFINITIONS
The following words or terms shall have the following meanings:
(a) "Agreement" shall mean an incentive stock option agreement between the
Corporation and an Eligible Employee pursuant to the terms of this Plan.
(b) "Corporation" shall mean Summit Financial Corporation.
(c) "Committee" shall mean the committee appointed by the Board of Directors
to administer the Plan.
(d) "Common Stock", "Shares" or "Stock" shall mean the $1.00 par value
Common Stock of the Corporation.
(e) "Eligible Employee(s)" shall mean a person or persons regularly employed
by the Corporation or a subsidiary, including officers and other employees, but
excluding non-employee Directors.
(f) "Optionee" shall mean an Eligible Employee having a right to purchase
common Stock under an Agreement.
(g) "Option(s)" shall mean the right or rights granted to Eligible Employees
to purchase Common Stock under an offering made under the Plan.
(h) "Plan" shall mean this Summit Financial Corporation 1999 Incentive Stock
Option Plan.
(i) "Subsidiary" shall mean any corporation or association, if the
Corporation owns or controls, directly or indirectly, more than a majority of
the voting stock of such corporation or association.
(j) "Ten Percent Owner" shall mean an individual who, at the time an Option
is granted, owns directly or indirectly, more than ten (10%) percent of the
total combined voting power of all classes of stock of the Corporation or
otherwise is considered a Ten Percent Owner by reason of Section 424(d) of the
Code.
(k) "Retirement" shall mean at the normal retirement age of 65.
(l) "Nonqualified Deferred Compensation Plan" shall mean any plan or program
sponsored by the Corporation which provides for deferral of income by highly
compensated individuals who constitute a bonafide executive group under
Department of Labor regulations in effect at the time that the individual is
eligibile to participate in said plan or program.
3. EFFECTIVE DATE
The Effective Date of the Plan shall be the date the Plan is adopted by the
Board of Directors or the date the Plan is approved by the stockholders of the
Corporation, whichever is earlier. The Plan must be approved by the shareholders
within twelve (12) months of the effective date.
4. SHARES RESERVED FOR PLAN
The shares of the Corporation's Common Stock to be sold to Eligible
Employees under the Plan may, at the election of the Board of Directors, be
either treasury shares or shares originally issued for such purpose. The
maximum number of shares which shall be reserved and made available for sale
under the Plan shall be 215,000. If any Options granted under the Plan
terminate, expire or are otherwise surrendered without having been exercised in
full, the number of such Options shall be available again to be granted under
the Plan, subject to all provisions and limitations provided herein.
In the event of a subdivision or combination of the Corporation's shares
(including a stock dividend), the maximum number of shares that may thereafter
be issued and sold under the Plan and the number of shares under option will be
proportionately increased or decreased. In addition, the terms relating to the
price at which shares under option will be sold will be approximately adjusted,
and such other action will be taken as in the opinion of the Board of Directors
is appropriate under the circumstances. In case of a reclassification or other
change in the Corporation's shares, the Board of Directors also will make
appropriate adjustments.
5. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee. The Committee shall be
comprised of not less than two non-employee directors (as defined in Section
16b-3 of the Securities Exchange Act of 1934) appointed by the Board of
Directors of the Corporation from among its members. No member of the Board of
Directors shall be appointed or serve as a member of the Committee, and any such
appointment or service immediately and automatically shall terminate, in the
event that such person is, or becomes, an Eligible Employee (as described in
Section 2 of the Plan) or is otherwise disqualified by the provisions of Section
16b-3 of the Securities Exchange Act of 1934.
Within the limitations described herein, the Committee shall administer the
Plan; select the Eligible Employees to whom Options will be granted; determine
the number of shares to be optioned to each Eligible Employee; interpret,
construe and implement the provisions of the Plan; establish, amend, revoke
rules and regulations relating to the Plan and its administration; and to
correct any defect, supply any omission, or reconcile and inconsistency in the
Plan in a manner and to the extent deemed necessary, all or which determinations
and interpretations made by the Committee shall be conclusive and binding on all
Optionees and their legal representatives and beneficiaries.
The Committee shall select one of its members as Chairman and shall hold
its meetings at such time and places, and pursuant to such rules consistent with
the Plan, as it may determine. A majority of the members of the Committee shall
constitute a quorum, and the acts of a majority of the members present at any
meeting at which a quorum is present, or acts approved in writing by a majority
of the members of the Committee, shall be the acts of the Committee.
6. ELIGIBILITY
Options may be granted only to Eligible Employees.
7. DURATION OF THE PLAN
This Plan shall terminate on November 15, 2009, unless terminated sooner by
the Board of Directors. The Plan shall remain in effect until all shares
subject to, or which may become subject to, the Plan shall have been purchased
pursuant to Options granted under the Plan. No Options shall be granted
pursuant to this Plan after November 15, 2009.
8. OPTIONS GRANTS
It is intended that Options granted under the Plan shall be qualified
incentive stock options ("ISOs") under the provisions of Section 422 of the
Internal Revenue Code of 1986, as amended, and the regulations thereunder or
corresponding provisions of subsequent revenue laws and regulations in effect at
the time such Options are granted. Such Options shall be evidenced by stock
option agreements in such form and not inconsistent with this Plan as the
Committee and/or the full Board shall approve from time to time, which
agreements shall contain in substance, the following terms and conditions:
(a) Price. The purchase price for shares purchased under exercise of an
Option shall not be less than 100% of the Fair Market Value of the Stock on the
day the Option is granted, as defined below, and in no case less than the par
value of such stock. However, if an ISO is granted to a Ten Percent Owner, the
purchase price of the Stock covered by such ISO shall be not less than one
hundred ten (110%) percent of the Fair Market Value of the Stock on the day the
Option is granted. Any Option granted to a Ten Percent Owner must, by its terms,
be exercisable within five (5) years from the date it is granted.
For purposes of the Plan, "Fair Market Value" shall be the closing quoted
selling price of the Stock as reported by NASDAQ on the grant date. In the
event that the Stock is not publicly traded, or a published quoted is not
otherwise available, the Fair Market Value shall be the amount determined by the
Committee in good faith.
(b) Number of Shares. The Agreement shall specify the number of shares
which the Optionee may purchase under such Option.
(c) Rights as a Shareholder. An Optionee shall have no rights as a
shareholder with respect to any shares covered by an Option until the date of
issuance of the stock certificate to the Optionee for such shares. Except as
otherwise expressly provided in the Plan, no adjustments shall be made for cash
dividends or other rights for which the record date is prior to the date such
stock certificate is issued. Options will be appropriately adjusted for all
stock distributions or dividends as discussed in Section 4 of the Plan.
(d) Limitation on Grants. The aggregate fair market value (determined at
the time the Option is granted) of the shares with respect to which ISOs are
exercisable for the first time by an Optionee during any calendar year (under
all incentive stock option plans of the Corporation) shall not exceed $100,000
or such other amount as may be specified in Section 422(d) of the Code. To the
extent that any Options granted fail to comply with the limitations set forth in
this subparagraph, such Options shall be treated as non-qualified options as
defined by the Code.
9. OPTION EXERCISES
(a) Exercise of Options. Options hereunder may be exercised by an Optionee
on a cumulative basis up to a maximum of twenty (20%) percent of the shares
subject to Option on each of the first five (5) anniversaries of the grant of
such option, but in no event later than ten (10) years from the date of grant of
the Option or within sixty (60) days from date of such written notice to an
Optionee as referred to in Section 11(c) of the Plan. Options may be exercised
in whole or in part upon giving written notice to the Corporation stating the
number of shares and Option price for which the Option is being exercised.
(b) Medium and Time of Payment. Stock purchased pursuant to an Agreement
shall be paid for in full at the time of purchase evidenced by the written
request discussed in 9(a) above. Payment of the purchase price shall be made
(1) in cash; (2) in whole or in part through the surrender of previously owned
(i.e. held by the Optionee in excess of 6 months) shares of Stock at their Fair
Market Value on the exercise date; or (3) by a cash equivalent acceptable to the
Corporation and approved by the Committee. Upon receipt of payment, the
Corporation shall, without transfer or issue tax, deliver to the Optionee a
certificate or certificates for such shares. Additional or different procedures
or requirements for the exercise of Options may be established from time to time
as directed by the Committee.
10. DURATION OF OPTIONS
(a) Termination of Employment or Service - General. Unless otherwise
determined by the Committee, upon the termination of an Optionee's employment or
other service for any reason other than retirement, disability, or death, the
Optionee may exercise only those ISOs that were immediately exercisable by the
Optionee at the date of such termination and only for a period of 30 days
following the date of such termination.
(b) Termination of Employment - Retirement. Unless otherwise determined by
the Committee, in the event of an Optionee's Retirement (as defined), the
Optionee may exercise only those ISOs that were immediately exercisable by the
Optionee at the date of such termination and only for a period of 3 months
following the date of such termination of employment.
(c) Termination of Employment - Disability or Death. Unless otherwise
determined by the Committee, in the event that an Optionee ceases to be an
employee of the Corporation or any of its subsidiaries for reasons of disability
(in the sole determination of the Committee) or death, all ISOs held by such
Optionee shall immediately become exercisable. In the event of disability, the
Optionee shall have a period of three (3) months from the date of termination of
employment in which to exercise the Options. In the event of the death, the
Option shall be exercisable by his or her legal representative, heirs or
legatees within a period of twelve (12) months from the date on which the
Optionee died.
(d) Despite provisions made above, in no event shall any Option be
exercisable after ten (10) years from the date the Option was granted.
11. MISCELLANEOUS OPTION PROVISIONS
(a) Nonassignability of Option.No Option shall be assignable or transferable
by the Optionee except by will or by the laws of descent and distribution.
During the lifetime of the Optionee, the Option shall be exercisable only by him
or her.
(b) Continuance of Employment. Nothing contained in the Plan or in any
Options granted under the Plan shall confer upon the Optionee any rights with
respect to the continuation of employment by the Company or interfere in any way
with the right of the Company (subject to the terms of any separate employment
agreement to the contrary) at any time to terminate such employment or to
increase or decrease the compensation of the Optionee from the rate in existence
at the time of the granting of any Option.
(c) Change of Control. Upon a Change in Control of the Corporation (as
defined below), all the outstanding Options shall become 100% vested and
exercisable as of the effective date of the Change in Control. Exercise must be
made within 60 days from the written notice to the Optionee of such change in
control. If, in connection with or as a consequence of a Change in Control, the
Company is merged into or consolidated with another corporation, if the Company
becomes a subsidiary of another corporation or if the Company sells or otherwise
disposes of substantially all of its assets to another corporation, then unless
provisions are made in connection with such transactions for the continuance of
the Plan and/or the assumption or substitution of then outstanding Options with
new options covering the stock of the successor corporation, or parent or
subsidiary thereof, with appropriate adjustments as to the number and kind of
shares and prices, such Options shall be canceled as of the effective date of
the merger, consolidation, or sale and the Optionee shall be paid in cash an
amount equal to the difference between the Fair Market Value of the Stock
subject to the Options on the effective date of such corporate event and the
exercise price of the Options.
For purposes of this Plan, a "Change in Control" shall mean an event deemed
to occur if and when (a) an offeror other than the Company purchases shares of
the stock of the Company pursuant to a tender or exchange offer for such shares,
(b) any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Exchange Act) is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing twenty-five percent (25%) or more of the
combined voting power of the Company's then outstanding securities, (c) the
membership of the board of directors of the Company changes as the result of a
contested election, such that individuals who were directors at the beginning of
any twenty-four (24) month period (whether commencing before or after the date
of adoption of this Plan) do not constitute a majority of the Board at the end
of such period, or (d) a plan of reorganization, merger, consolidation, sale of
all or substantially all the assets of the Company or similar transaction occurs
or is effectuated in which the Company is not the resulting entity; provided,
however, that such an event listed above will be deemed to have occurred or to
have been effectuated upon the receipt of all required federal regulatory
approvals not including the lapse of any statutory waiting periods.
(d) General Provision Applicable to Nonqualified Options. In the event
that, pursuant to the provisions of section 8(d) above, any option that shall be
so impacted shall, notwithstanding any provisions of this Plan to the contrary,
be subject to the provisions of this paragraph. In the event that the
Corporation shall have in effect a Nonqualified Deferred Compensation Plan (as
defined) at the time of exercise of any option so effected by section 8(b), the
Optionee shall be provided proper forms on a timely basis to properly elect
deferral of any stock option gain that may have otherwise been recognized for
tax purposes.
(e) General Restrictions. Each Option shall be subject to the requirement
that if at any time the Board of Directors shall determine, in its discretion,
that the listing, registration or qualification of the Shares subject to such
Option upon any securities exchange or under any state or federal law, or the
consent or approval of any government regulatory body, is necessary or desirable
as a condition of, or in connection with, the granting of such Option or the
issue or purchase of shares thereunder, such Option may not be exercised in
whole or in part unless such listing, registration, qualification, consent or
approval shall have been affected or obtained free of any conditions not
acceptable to the Board of Directors.
12. AMENDMENT AND TERMINATION OF THE PLAN
The Plan may at any time or from time to time be terminated, modified or
amended by the affirmative vote of not less than a majority of the votes
entitled to be case thereon by the Corporation's shareholders. The Board of
Directors may at any time and from time to time, terminate, modify or amend the
Plan in any respect, except that without shareholder approval the Board of
Directors may not (i) increase the maximum number of shares for which Options
may be granted under the Plan either in the aggregate (other than increases due
to changes in capitalization as referred to in Section 4 hereof), or (ii) reduce
the option price or waiting period under Section 422 of the Internal Revenue
Code (except as otherwise expressly provided in the Plan in the case of a change
of control of the Company as referred to in Section 11(c) hereof), or (iii)
extend the period during which Options may be granted or exercised, or (iv)
change the class of employees eligible for incentive stock options under Section
6 hereof, or (v) otherwise materially modify the requirements as to eligibility
for participation in the Plan, or (vi) otherwise materially increase the benefit
accruing to participants under the Plan. The termination or any modification or
amendment of the Plan shall not, without the consent of an Optionee, affect his
or her rights under an Option or right previously granted to him or her. With
the consent of the Optionee affected, the Committee may amend outstanding option
Agreements in a manner not inconsistent with the Plan. Without employee consent,
the Board of Directors may at any time and from time to time, modify or amend
outstanding option Agreements in such respects as it shall deem necessary in
order that Options granted hereunder shall comply with the appropriate
provisions of the Internal Revenue Code of 1986, as amended, and regulations
thereunder which are in effect from time to time respecting qualified incentive
stock options.
13. BINDING EFFECT
All decisions of the Board of Directors or the Committee involving the
implementation, administration or operation of the Plan or any offering under
the Plan shall be binding on the Corporation, all Eligible Employees
participating in the Plan, and on all persons eligible or who become eligible to
participate in the Plan.
APPROVED this 15th day of November 1999,
BY: WITNESS:
/s/ C. Vincent Brown J. Randolph Potter
Blaise B. Bettendorf
C. Vincent Brown, Chairman
Independent Auditors' Consent
-----------------------------
The Board of Directors
Summit Financial Corporation
We consent to incorporation by reference in the registration statements on Form
S-8 (No. 33-83538, 33-94962, and 33-94964) of Summit Financial Corporation of
our report dated January 18, 2000, relating to the consolidated balance sheets
of Summit Financial Corporation and subsidiaries (the "Company") as of December
31, 1999 and 1998, and the related consolidated statements of income,
shareholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 1999, which report appears in
the December 31, 1999 Annual Report on Form 10-K of the Company.
/s/ KPMG LLP
Greenville, South Carolina
March 22, 2000
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