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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, 2001
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.
of incorporation or Employer
organization) Identification
No.)
P. O. Box 1087, 937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address of Principal Executive Offices, including zip code)
(864) 242-2265
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class: COMMON STOCK, $1.00 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
---------
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 12, 2002 was
approximately $34.2 million. For purposes of the foregoing calculation only,
all directors and executive officers of the Registrant have been deemed
affiliates.
As of March 12, 2002, there were 3,796,395 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 2002 Annual
Meeting of Shareholders is incorporated by reference in Part III.
CROSS REFERENCE INDEX
PART I
Item 1 - Business: . . . . . . . . . . . . . . . . . . . . . . . . . 2
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Summit National Bank. . . . . . . . . . . . . . . . . . . . . . . 3
Summit Investment Services, Inc.. . . . . . . . . . . . . . . . . 3
Freedom Finance, Inc. . . . . . . . . . . . . . . . . . . . . . . 3
Territory Served and Competition. . . . . . . . . . . . . . . . . 3
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . . . 4
Impact of Inflation . . . . . . . . . . . . . . . . . . . . . . . 5
Supervision and Regulation. . . . . . . . . . . . . . . . . . . . 5
Item 2 - Properties. . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3 - Legal Procedings. . . . . . . . . . . . . . . . . . . . . . 11
Item 4 - Submission of Matters to a Vote
of Security Holders. . . . . . . . . . . . . . . . . . . . . . . . . 12
PART II
Item 5 - Market for the Registrant's Common Stock
and Related Shareholder Matters . . . . . . . . . . . . . . . . . . 12
Item 6 - Selected Financial Data . . . . . . . . . . . . . . . . . . 13
Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . . . . 14
Item 7a - Quantitative and Qualitative Disclosures About Market Risk 34
Item 8 - Financial Statements and Supplementary Data . . . . . . . . 35
Item 9 - Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure . . . . . . . . . 56
PART III
Item 10 - Directors and Executive Officers of the Registrant . . . . 56
Item 11 - Executive Compensation . . . . . . . . . . . . . . . . . . 56
Item 12 - Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . . . . . . . . 56
Item 13 - Certain Relationships and Related Transactions . . . . . . 56
PART IV
Item 14 - Exhibits, Financial Statement Schedules
and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . 57
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
THE COMPANY
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 has no foreign operations.
The principal role of the Company is to supervise and coordinate the
activities of its subsidiaries and to provide then with capital and services of
various kinds. The Company derives substantially all of its income from
management fees for services performed, interest on advances and loans, and
other intercompany payments as appropriate from the subsidiaries. The Company
conducts its business from four banking offices and eleven consumer finance
offices throughout South Carolina.
At December 31, 2001, the Company had total assets of $ 273.1 million,
total deposits of $218.8 million, gross loans, net of unearned income, of $207.0
million and shareholders' equity of $24.6 million. This compares with total
assets of $249.8 million, total deposits of $209.2 million, loans of $180.5
million and shareholders' equity of $21.5 million at December 31, 2000. The
operating results and key financial measures of the Company and its subsidiaries
are discussed more fully in "Management's Discussion and Analysis of Financial
Condition and Results of Operations", included in this report under Item 7.
SUMMIT NATIONAL BANK
Summit National Bank, headquartered in Greenville, South Carolina,
commenced operations in July 1990. 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 four
full-service branch locations in Greenville and Spartanburg, 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.
The Bank also offers a full range of short to intermediate-term, secured
and unsecured commercial and personal loans for business, real estate, home
improvement, automobiles, 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.
SUMMIT INVESTMENT SERVICES, INC.
Summit Investment Services, Inc. commenced operations in November 1997. It
provides a full range of nondeposit investment products including annuities and
mutual funds, full and discount brokerage services, and financial management
services. Summit Investment Services has offices in Greenville and Spartanburg,
South Carolina.
FREEDOM FINANCE, INC.
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.
TERRITORY SERVED AND COMPETITION
THE BANK: Summit National Bank and its subsidiary, Summit Investment
Services, Inc., are located in the Upstate of South Carolina, with offices in
Greenville and Spartanburg. The extended market area encompasses Greenville and
Spartanburg Counties, with the principal market area being the urban areas of
these counties. The Upstate of South Carolina is a highly competitive
commercial banking market in which all of the largest banks in the region 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 and range 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 may have substantially greater resources and
lending abilities than the Bank due to their size 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 four 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 11
locations throughout 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 regulated 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, 2001, the Company and its subsidiaries employed a total
of 84 full-time equivalent employees.
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.
As a result, interest rates generally have a more significant impact on the
performance of a financial institution that the effects of general levels of
inflation. The Company believes that the effects of inflation are generally
manageable through asset-liability management.
SUPERVISION AND REGULATION
The business in which the Company and its subsidiaries are engaged is
subject to extensive supervision, regulation and examination by various bank
regulatory authorities and other governmental agencies in the state where the
Company and its subsidiaries operate. The supervision, regulation and
examination to which the Company and its subsidiaries are subject are intended
primarily for the protection of depositors or are aimed at carrying out broad
public policy goals, rather than for the protection of security holders.
Several of the more significant regulatory provisions applicable to banks
and bank holding companies to which the Company and its subsidiaries are subject
are discussed below, along with certain regulatory matters concerning the
Company and its subsidiaries. To the extent that the following information
describes statutory or regulatory provisions, it is qualified in its entirety by
reference to the particular statutory provisions. Any change in applicable law
or regulation may have a material effect on the business and prospects of the
Company and its subsidiaries.
REGULATORY AGENCIES
Financial Holding Company: The Company elected to become a financial
holding company on March 23, 2000 and continues to be subject to regulation
under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and to
inspection, examination and supervision by 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.
Subsidiary Bank: The Company's national bank subsidiary, Summit National
Bank (the "Bank"), is subject to regulation and examination primarily by the
Office of the Comptroller of Currency (the "OCC") and secondarily by the Federal
Reserve and the FDIC. The Bank is subject to various statutory requirements,
supervision and regulation promulgated and enforced by the OCC. 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.
Nonbank Subsidiary: The Company's nonbank subsidiary is subject to
regulation by the Federal Reserve and other applicable state agencies.
THE COMPANY
Financial and Bank Holding Company Activities:
- ---------------------------------------------------
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 (1) financial in nature, (2)
incidental to any such financial activity, or (3) complementary to any such
financial activity and does not pose a substantial risk to the safety or
soundness of depository institutions or the financial system generally. The GLB
Act specifies certain activities that are deemed to be financial in nature,
including lending, exchanging, transferring, investing for others, or
safeguarding money or securities; underwriting and selling insurance; providing
financial, investment, or economic advisory services; underwriting, dealing in
or making a market in, securities; merchant banking, and any activity currently
permitted for bank holding companies by the Federal Reserve Board under section
4(c)(8) of the Bank Holding Company Act. The GLB Act does not authorize banks
or their affiliates to engage in commercial activities that are not financial in
nature. A bank holding company may elect to be treated as a financial holding
company only if all depository institution subsidiaries of the holding company
are well capitalized, well managed and have at least a satisfactory rating under
the Community Reinvestment Act.
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.
Control Acquisitions:
- ----------------------
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. The Change in Bank Control Act prohibits a person
or group of persons from acquiring "control" of a bank holding company, unless
the Federal Reserve Board has been notified and has not objected to the
transaction. Under a rebuttable presumption established by the Federal Reserve
Board, the acquisition of 10% or more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the
Exchange Act, such as the Company, would, under the circumstances set forth in
the presumption, constitute acquisition of control of the bank holding company.
Liability for Banking Subsidiaries
- -------------------------------------
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. This support may be required at times when the bank holding
company may not have the resources to provide it. In the event of a bank holding
company's bankruptcy, any commitment by the bank holding company to a U.S.
federal bank regulatory agency to maintain the capital of a subsidiary bank
would be assumed by the bankruptcy trustee and entitled to priority of payment.
If a default occurred with respect to a bank, any capital loans to the bank from
its parent holding company would be subordinate in right of payment to payment
of the bank's depositors and certain of its other obligations.
FDICIA
- ------
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.
Interstate Banking and Branching
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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.
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.
Affiliate Transactions
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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
General
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The OCC is responsible for overseeing the affairs of all national banks and
periodically examines national banks to determine their compliance with law and
regulations. The OCC 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 OCC 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.
National banks are authorized by the GLB Act to engage, through "financial
subsidiaries," in any activity that is permissible for a financial holding
company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve Board, determines is
financial in nature or incidental to any such financial activity, except (1)
insurance underwriting, (2) real estate development or real estate investment
activities (unless otherwise permitted by law), (3) insurance company portfolio
investments and (4) merchant banking. The authority of a national bank to
invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well managed
and well capitalized (after deducting from the bank's capital outstanding
investments in financial subsidiaries).
Community Reinvestment Act
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Summit National Bank is subject to the requirements of 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.
Federal Home Loan Bank Membership
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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 are generally
made on a secured basis. Collateral on secured advances may be in the form of
first mortgages on 1-4 family real estate or commercial 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.
Deposit Insurance Assessments
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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 deposit insurance assessment
to maintain the Bank Insurance Fund 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.
Prompt Corrective Action
- --------------------------
Pursuant to the authority granted under FDICIA, U.S. bank regulatory
agencies were empowered to take prompt corrective action to resolve problems of
insured depository institutions and impose progressively more restrictive
constraints on the operations, management and capital. The extent of these
powers depends upon whether the institution is "well capitalized", "adequately
capitalized", "under capitalized", "significantly undercapitalized", or
"critically undercapitalized". Under uniform regulations defining such capital
levels issued by each of the federal banking agencies, a bank is considered
"well capitalized" if it has (1) a total risk-based capital ratio of 10% or
greater; (2) a Tier I risk-based capital ratio of 6% or greater; (3) a leverage
ratio of 5% or greater; and (4) is not subject to any order or written directive
to meet and maintain a specific capital level for any capital measure.
Unless a banking institution is well capitalized, it is subject to
restrictions on certain aspects of its operations. An undercapitalized banking
institution must develop a capital restoration plan and its parent bank holding
company must guarantee the bank's compliance with the plan up to the lesser of
5% of the bank's assets at the time it became undercapitalized and the amount
needed to comply with the plan. As of December 31, 2001, the Company's bank
subsidiary was well capitalized, based on the prompt corrective action
guidelines. It should be noted, however, that a bank's capital category is
determined solely for the purpose of applying the OCC's prompt corrective action
regulations and that the capital category may not constitute an accurate
representation of the bank's overall financial condition or prospects.
Brokered Deposits
- ------------------
Current federal law regulates the acceptance of brokered deposits by
insured depository institutions to permit only "well capitalized" depository
institutions to accept brokered deposits without prior regulatory approval.
Consumer Privacy
- -----------------
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 GLB Act also contains a number of other provisions that will affect the
Company's operations and the operations of all financial institutions. One of
the new provisions, which became effective on July 1, 2000, relates to the
financial privacy of consumers. Federal banking regulators issued final
regulations in November 2000 related to consumer privacy which limit the ability
of banks and other financial entities to disclose non-public information about
consumers to non-affiliated entities. These limitations will require more
disclosure to consumers, and in some circumstances, to require consent by the
consumer before information is allowed to be provided to a third party.
Other Regulations
- ------------------
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 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, 2001,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject. At December 31, 2001 and 2000, the Bank is categorized as
"well capitalized" under the regulatory framework for prompt corrective action
as described above. 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, 2001 and 2000 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 OCC 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, 2001, no cash dividends have
been declared or paid by the Bank. At December 31, 2001, the Bank had available
retained earnings of $12.5 million.
FUTURE LEGISLATION
Changes to the laws and regulations in the state where the Company and its
subsidiaries do business can affect the operating environment of financial and
bank holding companies and their subsidiaries in substantial and unpredictable
ways. The Company cannot accurately predict whether legislation will ultimately
be enacted, and, if enacted, the ultimate effect that it, or implementing
regulations, would have upon its or its subsidiaries' financial condition or
results of operations.
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 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. During 2000, the Bank purchased a 1.1 acre
land parcel for construction of a fourth branch in Spartanburg, South Carolina.
The branch facility was completed in May 2001 and totals approximately 7,500
square feet.
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, 2001.
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 12, 2002 there
were approximately 390 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.
QUARTERLY COMMON STOCK SUMMARY
2001 2000
----------------------------------- ------------------------------------
4Q 3Q 2Q 1Q 4Q 3Q 2Q 1Q
------- ------- ------- -------- -------- ------- ------- --------
Stock Price ranges: (1)
High. . . . . . . . . . $ 11.75 $ 10.00 $ 9.90 $ 10.00 $ 9.98 $ 9.75 $ 9.75 $ 11.11
Low . . . . . . . . . . $ 9.13 $ 9.19 $ 9.05 $ 8.57 $ 8.39 $ 8.16 $ 8.16 $ 7.93
Close . . . . . . . . . $ 10.00 $ 9.52 $ 9.43 $ 10.00 $ 8.81 $ 9.07 $ 9.07 $ 9.18
Volume Traded . . . . . 53,172 24,640 38,760 106,452 105,706 93,009 35,791 159,109
(1) - Share data has been restated to reflect all 5% stock dividends issued.
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.
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.
SELECTED CONSOLIDATED FINANCIAL AND OTHER
(All Dollar Amounts In Thousands, Except Per Share Data)
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
INCOME STATEMENT DATA
Net interest income . . . . . . . . $ 10,398 $ 10,023 $ 8,749 $ 7,614 $ 6,977
Provision for loan losses . . . . . 725 654 445 290 392
Other income. . . . . . . . . . . . 2,582 1,846 1,560 1,408 1,035
Other expenses. . . . . . . . . . . 8,259 7,356 6,520 5,826 5,150
Provision for income taxes. . . . . 1,280 1,204 936 1,011 895
Net income. . . . . . . . . . . . . 2,716 2,655 2,408 1,895 1,575
PER SHARE DATA: (1)
Basic net income. . . . . . . . . . $ 0.72 $ 0.71 $ 0.69 $ 0.55 $ 0.46
Diluted net income. . . . . . . . . 0.66 0.65 0.59 0.46 0.42
Book value per share. . . . . . . . 6.49 5.70 4.91 4.47 3.83
Closing market price per share. . . 10.00 8.81 10.89 12.52 10.19
BALANCE SHEET DATA (YEAR END)
Total assets. . . . . . . . . . . . $273,097 $249,835 $191,229 $170,485 $160,279
Loans, net of unearned income . . . 207,041 180,521 148,170 130,669 118,755
Allowance for loan losses . . . . . 2,937 2,560 2,163 1,827 1,728
Total earning assets. . . . . . . . 258,044 236,145 181,443 159,586 151,300
Deposits. . . . . . . . . . . . . . 218,778 209,191 157,996 140,243 140,928
Long-term debt. . . . . . . . . . . 21,300 13,000 7,000 5,000 -
Shareholders' equity. . . . . . . . 24,601 21,528 17,591 15,674 13,369
BALANCE SHEET DATA (AVERAGES)
Total assets. . . . . . . . . . . . $263,695 $212,177 $180,141 $166,432 $149,662
Loans, net of unearned income . . . 195,573 159,711 138,989 120,488 110,812
Total earning assets. . . . . . . . 249,152 201,151 169,674 158,048 142,561
Deposits. . . . . . . . . . . . . . 217,262 175,370 151,672 143,399 131,249
Shareholders' equity. . . . . . . . 23,193 19,562 16,671 14,424 12,500
FINANCIAL RATIOS
Return on average assets. . . . . . 1.03% 1.25% 1.34% 1.14% 1.05%
Return on average equity. . . . . . 11.71% 13.57% 14.45% 13.14% 12.60%
Net interest margin . . . . . . . . 4.29% 5.11% 5.31% 4.95% 4.94%
Tier 1 risk-based capital . . . . . 11.16% 10.96% 11.26% 10.91% 10.43%
Total risk-based capital. . . . . . 12.41% 12.21% 12.51% 12.16% 11.68%
ASSET QUALITY RATIOS
Allowance for loan losses to loans. 1.42% 1.42% 1.46% 1.40% 1.46%
Net charge-offs to average loans. . .18% .16% .08% .16% .16%
Nonperforming assets. . . . . . . . $ 1,180 $ 218 $ 147 - -
(1) All per share data has been restated to reflect all 5% stock dividends issued.
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 contains 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 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" or "Summit Financial") is a
financial institution holding company headquartered in Greenville, South
Carolina. The Company offers a broad range of financial services through its
wholly-owned subsidiary, Summit National Bank (the "Bank," or "Summit"). The
Bank is a nationally chartered commercial bank which operates principally in the
Upstate of South Carolina. The Bank received its charter and commenced
operations in July 1990. In 1997, the Bank incorporated Summit Investment
Services, Inc. as a wholly-owned subsidiary to provide a wider range of
investment products and financial planning services. The Bank currently has
four full service offices in Greenville and Spartanburg, South Carolina. Summit
provides a full range of banking services to individuals and businesses,
including the taking of time and demand deposits, making loans, and offering
nondeposit investment services. The Bank emphasizes close personal contact with
its customers and strives to provide a consistently high level of service to
both individual and corporate customers.
Freedom Finance, Inc. (the "Finance Company" or "Freedom,") is a
wholly-owned subsidiary of the Company which is operating as a consumer finance
company headquartered in Greenville, South Carolina. The Finance Company
primarily makes and services installment loans to individuals with loan
principal amounts generally not exceeding $2,000 and with maturities ranging
from three to 18 months. Freedom operates 11 branches throughout South
Carolina.
INCOME STATEMENT REVIEW
GENERAL
The Company reported another year of increased earnings in 2001 which were
up 2% from 2000. Net income totaled $2.716 million, or $0.66 diluted earnings
per share, in 2001 compared with $2.655 million, or $0.65 diluted earnings per
share, in 2000 and $2.408 million, or $0.59 diluted earnings per share, for
1999. The improvement in net income and earnings per share between 2000 and
2001 resulted primarily from the growth in earning assets, offset by declines in
net interest margin. Increases in other income also contributed to the higher
net income in 2001, offset somewhat by increases in other expenses.
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 net interest
income 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 2001, the Company recorded net interest income of $10.4 million, a
4% increase from the 2000 net interest income of $10.0 million. This is
compared to net interest income of $8.7 million for 1999. The increase in net
interest income in 2001 is directly related to the increase in the average
earning assets and interest-bearing liability volume of the Bank of 24% and 25%,
respectively, offset by the 82 basis point decrease in net interest margin
during the year. Net interest income increased in 2000 primarily as a result of
the higher average loan and interest-bearing deposit volume of the Bank which
was up from 1999 by 19% and 18%, respectively, offset somewhat by the 20 basis
point decrease in net interest margin during 2000.
For the year ended December 31, 2001, the Company's net interest margin was
4.29%, compared to 5.11% in 2000 and 5.31% for 1999. The net interest margin is
calculated as net interest income divided by average earning assets. The margin
for 2001 decreased 82 basis points from the prior year due primarily to the
rapid and dramatic short-term interest rate reductions throughout 2001. During
2001, the interest yield on assets decreased more rapidly than the interest cost
on liabilities supporting those assets. The margins between 1999 and 2000
decreased 20 basis points due primarily to the higher cost of funds related to
the general rise in interest rates during 2000 and promotions offered on
certificates of deposit ("CDs") during the year.
NET INTEREST INCOME ANALYSIS
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, 2001.
Tabular presentation of all average statistical data is based on daily averages.
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
(DOLLARS IN THOUSANDS)
Average 2001 2000 1999
-------------------------- -------------------------- --------
Yield/Rate Average Income/ Yield/ Average Income/ Yield/ Average
12/31/01 Balance Expense Rate Balance Expense Rate Balance
----------- -------- -------- ------- -------- -------- ------- --------
ASSETS
Earning Assets:
Loans (net of unearned income) (1) . . . . 7.26% $195,573 $ 17,293 8.84% $159,711 $ 16,882 10.57% $138,989
Investment securities (taxable) (2). . . . 5.91% 28,940 1,751 6.05% 18,405 1,187 6.45% 16,038
Investment securities 568 10,276
(non-taxable) (2) (3). . . . . . . . . . . 7.50% 11,292 7.62% 515 7.59% 10,113
Investment in stock (4). . . . . . . . . . 5.39% 1,485 96 6.46% 1,221 87 7.13% 888
Federal funds sold . . . . . . . . . . . . 1.80% 7,808 318 4.07% 8,790 563 6.41% 2,015
Interest-bearing bank balances . . . . . . 2.00% 4,054 179 4.42% 2,748 183 6.66% 1,631
----------- -------- -------- ------- -------- -------- ------- --------
Total earning assets. . . . . . . . . 6.91% 249,152 $ 20,205 8.23% 201,151 $ 19,417 9.78% 169,674
=========== ======== ======= ======== =======
Non-earning assets 14,543 11,026 10,467
-------- -------- --------
Total average assets $263,695 $212,177 $180,141
======== ======== ========
LIABILITIES & SHAREHOLDERS'
EQUITY
Liabilities:
Interest-bearing deposits:
Interest checking. . . . . . . . . . . . 1.16% $ 17,475 329 1.88% $ 12,168 $ 382 3.14% $ 10,409
Savings. . . . . . . . . . . . . . . . . .75% 1,848 26 1.40% 1,834 44 2.40% 1,758
Money market accounts. . . . . . . . . . 2.14% 76,665 2,754 3.59% 57,369 2,968 5.17% 55,667
Time deposits greater than $100M . . . . 4.37% 47,705 2,737 5.74% 37,176 2,315 6.23% 20,869
Other time deposits. . . . . . . . . . . 4.61% 47,020 2,782 5.92% 45,077 2,754 6.11% 43,765
----------- -------- -------- ------- -------- -------- ------- --------
Total interest-bearing deposits . . . 3.04% 190,713 8,628 4.52% 153,624 8,463 5.51% 132,468
Federal funds purchased
and repurchase agreements . . . . . . . . 2.14% 58 2 3.72% 254 16 6.30% 909
Other short-term borrowings. . . . . . . . 4.31% 500 31 6.22% 500 37 7.41% 510
FHLB advances. . . . . . . . . . . . . . . 5.35% 19,891 1,146 5.76% 14,131 878 6.21% 8,530
----------- -------- -------- ------- -------- -------- ------- --------
Total interest-bearing liabilities. . 3.30% 211,162 9,807 4.64% 168,509 $ 9,394 5.57% 142,417
=========== ======== ======= ======== =======
Noninterest bearing liabilities:
Noninterest bearing deposits 26,549 21,746 19,204
Other noninterest bearing liabilities 2,791 2,360 1,849
-------- -------- --------
Total liabilities 240,502 192,615 163,470
Shareholders' equity 23,193 19,562 16,671
-------- -------- --------
Total average liabilities and equity $263,695 $212,177 $180,141
======== ======== ========
Net interest margin (5) $ 10,398 4.29% $ 10,023 5.11%
======== ======= ======== =======
Interest rate spread (6) 3.59% 4.21%
======= =======
1999
-----------------
Income/ Yield/
Expense Rate
-------- -------
ASSETS
Earning Assets:
Loans (net of unearned income) (1) . . . . $ 13,676 9.84%
Investment securities (taxable) (2). . . . 951 5.93%
Investment securities
(non-taxable) (2) (3). . . . . . . . . . . 500 7.50%
Investment in stock (4). . . . . . . . . . 61 6.87%
Federal funds sold . . . . . . . . . . . . 102 5.06%
Interest-bearing bank balances . . . . . . 87 5.33%
-------- -------
Total earning assets. . . . . . . . . $ 15,377 9.21%
======== =======
Non-earning assets
Total average assets
LIABILITIES & SHAREHOLDERS'
EQUITY
Liabilities:
Interest-bearing deposits:
Interest checking. . . . . . . . . . . . $ 251 2.41%
Savings. . . . . . . . . . . . . . . . . 43 2.45%
Money market accounts. . . . . . . . . . 2,450 4.40%
Time deposits greater than $100M . . . . 1,074 5.15%
Other time deposits. . . . . . . . . . . 2,268 5.18%
-------- -------
Total interest-bearing deposits . . . 6,086 4.59%
Federal funds purchased
and repurchase agreements . . . . . . . . 46 5.02%
Other short-term borrowings. . . . . . . . 33 6.50%
FHLB advances. . . . . . . . . . . . . . . 463 5.42%
-------- -------
Total interest-bearing liabilities. . $ 6,628 4.65%
======== =======
Noninterest bearing liabilities:
Noninterest bearing deposits
Other noninterest bearing liabilities
Total liabilities
Shareholders' equity
Total average liabilities and equity
Net interest margin (5). . . . . . . . . . $ 8,749 5.31%
======== =======
Interest rate spread (6) 4.56%
=======
(1) Average loans are stated net of unearned income and include non-accrual loans. Interest recognized on non-accrual
loans has been included in interest income.
(2) Average yield on investment securities is computed using historical cost balances; the yield information does not
give effect to changes in fair value that are reflected as a component of shareholders' equity.
(3) Yields on nontaxable investment securities have been adjusted to a tax equivalent basis assuming a 34% Federal
tax rate.
(4) Includes investments in stock of Federal Reserve Bank, Federal Home Loan Bank, and other equities.
(5) 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.
(6) Interest rate spread is the difference between the average yield on interest-earning assets and the average rate on
interest-bearing liabilities.
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 (1) volume of
interest-earning assets and interest-bearing liabilities (changes in volume
times old rate); (2) changes in yields and rates (changes in rate times old
volume); and (3) changes in rate-volume (changes in rate times changes in
volume).
VOLUME AND RATE VARIANCE ANALYSIS
(DOLLARS IN THOUSANDS)
2000 - 2001 1999 - 2000
------------------------------------- ----------------------------------
CHANGE RELATED TO CHANGE RELATED TO
---------------------------- TOTAL ------------------------- TOTAL
Rate/ CHANGE Rate/ CHANGE
Volume Rate Volume IN NII Volume Rate Volume IN NII
-------- --------- -------- ------- ------- ------- ------- -------
EARNING ASSETS:
Loans (net of unearned income). . . . $ 3,791 ($2,760) ($620) $ 411 $ 2,039 $1,016 $ 151 $3,206
Investment securities (taxable) . . . 679 (73) (42) 564 140 83 13 236
Investment securities (non-taxable) . 50 3 0 53 8 6 1 15
Investment in stock . . . . . . . . . 19 (8) (2) 9 23 2 1 26
Federal funds sold. . . . . . . . . . (63) (205) 23 (245) 343 27 91 461
Interest-bearing bank balances. . . . 87 (62) (29) (4) 60 22 14 96
-------- --------- -------- ------ -------- ------- -------- -------
Total interest income. . . . . . 4,563 (3,105) (670) 788 2,613 1,156 271 4,040
-------- --------- -------- ------ -------- ------- -------- -------
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest checking . . . . . . . . . 167 (153) (67) (53) 42 76 13 131
Savings . . . . . . . . . . . . . . 0 (18) 0 (18) 2 (1) 0 1
Money market accounts . . . . . . . 998 (907) (305) (214) 75 430 13 518
Time deposits greater than $100M. . 656 (182) (52) 422 839 226 176 1,241
Other time deposits . . . . . . . . 119 (87) (4) 28 68 406 12 486
-------- --------- -------- ------ -------- ------- -------- -------
Total interest-bearing deposits. 1,940 (1,347) (428) 165 1,026 1,137 214 2,377
Federal funds purchased . . . . . . . (12) (7) 5 (14) (33) 11 (8) (30)
Other short-term borrowings . . . . . 0 (6) 0 (6) (1) 5 0 4
FHLB advances . . . . . . . . . . . . 358 (64) (26) 268 304 67 44 415
-------- --------- -------- ------ -------- ------- -------- -------
Total interest expense . . . . . 2,286 (1,424) (449) 413 1,296 1,220 250 2,766
-------- --------- -------- ------ -------- ------- -------- -------
NET INTEREST DIFFERENTIAL . . . . . . $ 2,277 $ (1,681) $ (221) $ 375 $ 1,317 ($64) $ 21 $1,274
======== ========= ======== ====== ======== ======= ======== =======
INTEREST INCOME
Interest income for 2001 was $20.2 million, which was an increase of
$788,000, or 4%, over the $19.4 million for 2000. Interest income for 1999 was
$15.4 million. The increases each year are primarily a result of the higher
levels of earning assets which averaged $249.2 million, $201.2 million and
$169.7 million in 2001, 2000 and 1999, respectively. Changes in average yield
on earning assets also affect the interest income reported each year. The
average yield, on a fully tax equivalent basis, increased from 9.21% in 1999 to
9.78% in 2000, and decreased to 8.23% in 2001 due primarily to fluctuations in
the general interest rate environment during the three year period.
The majority of the increase in average earning assets between 1999 and
2000 and between 2000 and 2001 was in loans, the Company's highest yielding
assets, which accounted for 79% of average earning assets for 2001.
Consolidated loans averaged $195.6 million in 2001 with an average yield of
8.84%, compared to $159.7 million in 2000 with an average yield of 10.57%, and
$139.0 million in 1999 with an average yield of 9.84%. In excess of 60% of the
Company's loan portfolio adjusts immediately with changes in the prime lending
rate. The prime rate increased from an average of 8.00% in 1999 to average
9.23% in 2000 resulting in increases in the average yield on loans in 2000. The
average loan rate dropped in 2001 as compared to the prior year as a direct
result of the 232 basis point decline in the average prime rate to 6.91% for the
year. The higher level of average loans each year, combined with the effect of
fluctuations in average yield, resulted in increases in interest income on loans
of $3.2 million, or 23%, between 1999 and 2000 and $400,000, or 2%, between 2000
and 2001.
The second largest component of earning assets is the Company's investment
portfolio which averaged $40.2 million yielding 6.49% in 2001. This is compared
to average securities of $28.7 million in 2000 yielding 6.86%, and $26.3 million
yielding 6.50% for 1999. The fluctuations in the average yield of the
investment portfolio each year is related to the timing, maturity distribution
and types of securities purchased, called and matured, combined with
fluctuations in the general interest rate environment. The increase in average
securities, offset somewhat by the 37 basis point decrease in average rate,
resulted in an increase in interest income on investments of $617,000, or 36%,
between 2000 and 2001. Higher levels of average investments, combined with a
higher average rate, resulted in an increase in interest income on investments
of $251,000, or 17%, between 1999 and 2000.
INTEREST EXPENSE
The Company's interest expense for 2001 was $9.8 million, compared to $9.4
million for 2000 and $6.6 million for 1999. The 4% increase in interest expense
in 2001 was related to the 25% increase in average interest-bearing liabilities,
offset by the 93 basis point decrease in the cost of funds. The increase in the
interest expense in 2000 from 1999 was a result of the 18% increase in average
interest-bearing liabilities combined with the 92 basis point increase in the
cost of funds. The lower average cost of funds in 2001 was a direct result of
the declining interest rates throughout the year combined with the maturity of
CDs renewed at lower current market rates. Interest-bearing liabilities
averaged $211.2 million in 2001 with an average rate of 4.64%, compared to
$168.5 million in 2000 with an average rate of 5.57%, and an average of $142.4
million with an average rate of 4.65% during 1999.
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, 2001, 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 2001 of $32.5 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 60%
of the loan portfolio moves immediately on a one-to-one ratio with a change in
the prime rate, while the deposit accounts do not increase or decrease as much
relative to a prime rate movement.
The following table presents a measure, in a number of time frames, of the
interest sensitivity gap by subtracting interest-sensitive liabilities from
interest-sensitive assets.
INTEREST SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
As of December 31, 2001
Assets and Liabilities Repricing Within
--------------------------------------------------
3 Months 4 to 12 1 to 5 Over 5
or Less Months Years Years Total
--------- ---------- ------- ------- --------
Interest-earning assets:
Loans (net of unearned income) . . . $ 141,447 $ 9,623 $55,318 $ 653 $207,041
Investments (1) . . . . . . . . . . - - 9,073 40,060 49,133
Federal funds sold . . . . . . . . . 925 - - - 925
Interest-bearing bank balances . . . 945 - - - 945
--------- ---------- ------- ------- --------
Total . . . . . . . . . . . . . . 143,317 9,623 64,391 40,713 258,044
--------- ---------- ------- ------- --------
Interest-bearing liabilities:
Demand deposits (2) . . . . . . . . 107,195 - - - 107,195
Time deposits greater than $100M . . 18,803 19,091 3,904 - 41,798
Other time deposits. . . . . . . . . 11,577 22,688 6,148 - 40,413
Federal funds purchased,
FHLB advances, and
other borrowings . . . . . . . . . . 500 5,600 18,300 3,000 27,400
--------- ---------- ------- ------- --------
Total . . . . . . . . . . . . . . 138,075 47,379 28,352 3,000 216,806
--------- ---------- ------- ------- --------
Period interest-sensitivity gap. . . $ 5,242 ($37,756) $36,039 $37,713 $ 41,238
========= ========== ======= ======= ========
Cumulative interest-sensitivity gap. $ 5,242 ($32,514) $ 3,525 $41,238
========= ========== ======= =======
(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.
At December 31, 2001, approximately 59% of the Company's interest-earning
assets reprice or mature within one year, as compared to approximately 86%
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 in the short-term if interest rates rise and will
decrease in the short-term if interest rates decline.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $725,000 in 2001, $654,000 in 2000, and
$445,000 in 1999. The change in the provision each year is primarily related to
the level of net originations in each year as follows: $26.9 million in 2001,
$32.6 million in 2000, and $17.6 million in 1999. As discussed further below
under the "Allowance for Loan Losses" section, other factors influencing the
amount charged to the provision each year include (1) trends in and the total
amount of past due, classified and nonperforming loans, (2) concentrations of
credit risk in the loan portfolio, (3) local and national economic conditions
and anticipated trends, and (4) the total outstanding loans and charge-off
activity of the Finance Company which have higher inherent risk than do loans of
the Bank. Thus, contributing to the higher provision in 2001 was the increase
in nonperforming assets from 0.19% of gross loans at December 31, 2000 to 0.64%
of gross loans at the 2001 year end, as well as the general economic uncertainty
throughout 2001. Estimates charged to the provision for loan losses are based
on management's judgment as to the amount required to cover probable losses in
the loan portfolio and are adjusted as necessary.
NONINTEREST INCOME AND EXPENSES
Noninterest income increased $736,000, or 40%, in 2001, to $2.6 million
from $1.8 million in 2000 and $1.6 million in 1999. Insurance commission fee
income rose 44% to $485,000 in 2001 from $337,000 in 2000 and $254,000 in 1999,
primarily related to the volume of annuity product sales made by the Bank's
nondeposit investment sales subsidiary. Credit card fees and income rose 22% to
$457,000 in 2001 from $376,000 in 2000 and $338,000 in 1999. These increases
are 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 17% in 2001 to $430,000 from
$369,000 in 2000 and $247,000 in 1999, 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 each year. The higher level of gain on
sales of investment securities totaling $257,000 for 2001 is related to the
increase in volume of investment sales from the Company's available for sale
investment portfolio during the year.
Increases in the line item, "other income", which was up $201,000 or 27% in
2001 and $53,000 in 2000, is primarily related to the higher level of mortgage
and other loan referrals and loan late fees which increased $186,000 in 2001 and
decreased $43,000 between 1999 and 2000; and the higher level of mutual fund and
brokerage activity in the Bank's nondeposit financial services subsidiary which
resulted in higher income of $35,000 in 2001 and $58,000 in 2000. Other
fluctuations are related to the level of activity and transactions of the Bank
generating other income in the normal course of business.
Total noninterest expenses were $8.3 million in 2001, $7.4 million in 2000,
and $6.5 million in 1999. 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 second quarter of 2000. The most
significant item included in noninterest expenses is salaries, wages and
benefits which amounted to $4.8 million in 2001, $4.3 million in 2000, and $3.5
million in 1999. The increase of $536,000 or 13% in 2001 was a result of (1)
normal annual raises and replacement of staff; (2) a full year in 2001 of new
branch staff, including three officers, added in September 2000; and (3)
increases in benefit plan costs including group health insurance premiums and
401K deferral matches related to higher salaries. The increase of $780,000 in
2000 was a result of (1) normal annual raises; (2) increases in bonuses and
incentive plan calculations and payments; and (3) additional branch staff added
primarily related to the new branch location during 2000.
Occupancy and furniture, fixtures, and equipment expenses increased
$26,000, or 2%, to $1.319 million in 2001 from $1.293 million in 2000 and
increased $82,000 from $1.211 million in 1999. Increases each year are related
primarily to the expenses associated with new branch facilities. Increases in
2001 are somewhat offset by lower expense on fully depreciated assets.
Included in the line item "other expenses", which increased $341,000, or
19%, between 2000 and 2001 and decreased $26,000, or 1%, between 1999 and 2000,
are charges for advertising and public relations; insurance claims and premiums;
printing and office support; credit card expenses; legal and professional
services; and other branch and customer related expenses. A majority of these
items are related directly to the normal operations of the Bank and fluctuate in
relation to the increase in assets, the higher level of transaction volume, and
the larger number of customer accounts. The most significant increases in 2001
relate to higher advertising for the new branch opening ($54,000), higher volume
of transactions and deconversion fee on the credit card portfolio ($93,000),
increases in legal and consultant expenses related to loan collections and
security audits ($95,000), and higher branch related expenses due to a full year
with an additional facility ($40,000). The reduction in 2000 is primarily
related to the Bank's expenses returning to a normal level after additional
expenses were incurred in 1999 related to higher repossession and collection
costs; advertising expenses associated with marketing new internet banking
products; and Y2K preparation expenses.
INCOME TAXES
The Company recorded an income tax provision of $1.3 million, $1.2 million,
and $936,000 in 2001, 2000, and 1999, respectively. The effective tax rate in
each year was 32%, 31%, and 28%, respectively. The change in effective rate
each year is primarily related to fluctuations in the level of tax-free
municipal investments.
QUARTERLY OPERATING RESULTS
The following summarizes selected quarterly operating results for the
quarters ended in 2001 and 2000.
2001 2000
---------------------------------------------- --------------------------------------------
(dollars in thousands, except per FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
share data) QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Interest income. . . . . . . . . . $ 5,378 $ 5,085 $ 5,071 $ 4,671 $ 4,281 $ 4,498 $ 5,140 $ 5,498
Interest expense . . . . . . . . . 2,768 2,532 2,469 2,038 1,877 2,059 2,634 2,824
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income. . . . . . . . 2,610 2,553 2,602 2,633 2,404 2,439 2,506 2,674
Provision for loan losses. . . . . 128 209 148 240 93 105 119 337
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses. . . . 2,482 2,344 2,454 2,393 2,311 2,334 2,387 2,337
Noninterest income . . . . . . . . 583 689 650 660 402 433 430 581
Noninterest expenses . . . . . . . 2,079 2,042 2,085 2,053 1,753 1,801 1,824 1,978
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income taxes . . . . 986 991 1,019 1,000 960 966 993 940
Income taxes . . . . . . . . . . . 324 317 329 310 308 297 309 290
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . $ 662 $ 674 $ 690 $ 690 $ 652 $ 669 $ 684 $ 650
========== ========== ========== ========== ========== ========== ========== ==========
NET INCOME PER SHARE:
Basic . . . . . . . . . . . . . $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.18 $ 0.17
Diluted . . . . . . . . . . . . $ 0.16 $ 0.16 $ 0.17 $ 0.17 $ 0.16 $ 0.16 $ 0.17 $ 0.16
AVERAGE COMMON SHARES
OUTSTANDING:
Basic . . . . . . . . . . . . . 3,743,000 3,741,000 3,741,000 3,770,000 3,657,000 3,699,000 3,721,000 3,739,000
Diluted . . . . . . . . . . . . 4,105,000 4,109,000 4,118,000 4,173,000 4,083,000 4,045,000 4,048,000 4,072,000
BALANCE SHEET REVIEW
INVESTMENT SECURITIES
At December 31, 2001, the Company's total investment portfolio had a fair
value of $47.4 million, which is an increase of 46% from the $32.4 million
invested as of the end of 2000. The investment portfolio consists primarily of
securities of United States government agencies, mortgage-backed securities, and
state and municipal obligations. The Company has no trading account securities.
At the 2001 year end, the portfolio had a weighted average life of approximately
7.4 years and an average duration of 5.4 years. Investment securities averaged
$40.2 million yielding 6.49% in 2001, compared to the 2000 average of $28.7
million yielding 6.86%. Securities are the second largest earning asset of the
Company at 16% and 14% of average earning assets for 2001 and 2000,
respectively.
The Company's portfolio of investment securities consists primarily of U.S.
government agencies, mortgage-backed securities, and state and municipal
securities. The investment portfolio is designed to enhance liquidity while
providing acceptable rates of return. The following table sets forth the
amortized cost and the fair value of the investment securities of the Company at
December 31, 2001, 2000, and 1999. 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".
SECURITY PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
2001 2000 1999
------------------- ------------------- -------------------
Amortized Fair Amortized Fair Amortized Fair
Available for Sale:. . . . . . . . Cost Value Cost Value Cost Value
---------- ------- ---------- ------- ---------- -------
U.S. Treasury. . . . . . - - - - $ 489 $ 495
U.S. government agencies $ 11,103 $11,214 $ 17,167 $17,241 12,483 12,318
Mortgage-backed. . . . . 21,716 21,660 5,642 5,666 3,573 3,537
State and municipal. . . 14,253 14,526 9,584 9,538 10,829 10,116
---------- ------- ---------- ------- ---------- -------
$ 47,072 $47,400 $ 32,393 $32,445 $ 27,374 $26,466
========== ======= ========== ======= ========== =======
The Company also maintains certain investments in stock as required to be
owned by the Bank as follows:
2001 2000 1999
------ ------ -----
Federal Reserve Bank stock. . . . . . . $ 255 $ 255 $ 255
Federal Home Loan Bank of Atlanta stock 1,345 1,000 550
Bankers Bank of Atlanta stock . . . . . 133 133 133
------ ------ -----
$1,733 $1,388 $ 938
====== ====== =====
The amount of Federal Reserve Bank stock owned is based on the Bank's
capital levels. The amount of Federal Home Loan Bank ("FHLB") stock owned is
determined based on the Bank's balances of residential and commercial real
estate mortgages and the level of advances from the FHLB. 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.
The following table indicates the estimated fair value of each investment
security category by maturity as of December 31, 2001. The weighted average
yield for each range of maturities at December 31, 2001 is also shown. All
securities are classified as "Available for Sale" as defined in SFAS No. 115.
SECURITY PORTFOLIO MATURITY SCHEDULE
(DOLLARS IN THOUSANDS)
After 1, and After 5, and
Within 1 Year Within 5 Years Within 10 Years After 10 Years Total
--------------- ---------------- ----------------- ------------------ ------------------
Weighted Weighted Weighted Weighted Weighted
Fair Average Fair Average Fair Average Fair Average Fair Average
Value Yield Value Yield Value Yield Value Yield Value Yield
----- -------- ------ --------- ------ --------- ------- --------- ------- ---------
U. S. Government agencies. - - $6,986 5.94% $4,228 5.68% - - $11,214 5.84%
Mortgage-backed. . . . . . - - - - 3,294 5.49% 18,366 6.02% 21,660 5.94%
State and municipal (1). . - - - - 708 7.15% 13,818 7.52% 14,526 7.50%
----- -------- ------ --------- ------ --------- ------- --------- ------- ---------
Total . . . . . . . . - - $6,986 5.94% $8,230 5.73% $32,184 6.65% $47,400 6.39%
===== ======== ====== ========= ====== ========= ======= ========= ======= =========
(1) - Yields have been adjusted to a tax equivalent basis assuming a 34% Federal tax rate.
The weighted average yields shown in the previous table are calculated
using historical cost balances and effective yields for the scheduled maturity
of each security. The yield calculations do not give effect to changes in fair
value that are reflected as a component of shareholders' equity. 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, 2001 were classified as "available for sale" and recorded on the
Company's balance sheet at estimated fair value.
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, 2001, 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, 2001, the Company had gross loans outstanding, net of
unearned income, of $207.0 million which represents an increase of $26.5
million, or 15%, from the 2000 outstanding loans of $180.5 million. Outstanding
loans represent the largest component of earning assets at 79% of average
earning assets for both 2001 and 2000. Gross loans were 76% and 72%,
respectively, of total assets at December 31, 2001 and 2000. The 15% increase
in loans between 2000 and 2001 is attributable to internal growth and the Bank's
expansion into a new market during 2000 as the Company did not purchase any
loans during the year. Freedom's outstanding loans, net of unearned income,
totaled $3.6 million, or 1.7% of consolidated loans, at December 31, 2001. This
is compared to $3.5 million, or 1.9% of consolidated loans, at December 31,
2000.
For 2001, the Company's loans averaged $195.6 million with a yield of
8.84%. This is compared to $159.7 million average loans with a yield of 10.57%
in 2000. The decrease in the loan yield is a direct result of the rapid and
dramatic short-term interest rate reductions experienced throughout 2001 as a
majority of the Bank's loans adjust immediately with movements in the prime
lending rate. 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 loan portfolio is the Company's principal earning asset. The following
table shows the composition of the loan portfolio at December 31 for each year
presented.
LOAN PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
2001 2000 1999 1998
------------------- ------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
--------- -------- --------- -------- --------- -------- --------- --------
Commercial and industrial. . . . . . . . $ 35,737 17.3% $ 31,995 17.7% $ 26,217 17.7% $ 24,100 18.4%
Real estate - commercial . . . . . . . . 70,036 33.8% 62,709 34.7% 55,647 37.6% 48,527 37.1%
Real estate - residential. . . . . . . . 64,239 31.0% 52,287 29.0% 47,366 32.0% 42,832 32.8%
Construction, development. . . . . . . . 26,672 12.9% 23,232 12.9% 10,135 6.9% 6,463 5.0%
Installment and other consumer loans . . 6,301 3.1% 6,540 3.6% 5,402 3.6% 5,656 4.3%
Consumer finance, net of unearned income 3,606 1.7% 3,542 2.0% 3,183 2.1% 2,881 2.2%
Other loans, including overdrafts. . . . 450 0.2% 216 0.1% 220 0.1% 210 0.2%
--------- -------- --------- ------- --------- -------- --------- --------
207,041 100% 180,521 100% 148,170 100% 130,669 100%
Less - Allowance for loan losses . . . . (2,937) (2,560) (2,163) (1,827)
--------- --------- --------- ---------
Net loans. . . . . . . . . . . . . . . . $204,104 $177,961 $146,007 $128,842
========= ========= ========= =========
1997
-------------------
Amount Percent
--------- --------
Commercial and industrial. . . . . . . . $ 25,313 21.3%
Real estate - commercial . . . . . . . . 41,172 34.7%
Real estate - residential. . . . . . . . 37,683 31.7%
Construction, development. . . . . . . . 3,685 3.1%
Installment and other consumer loans . . 7,819 6.6%
Consumer finance, net of unearned income 2,792 2.4%
Other loans, including overdrafts. . . . 291 0.2%
--------- --------
118,755 100%
Less - Allowance for loan losses . . . . (1,728)
---------
Net loans. . . . . . . . . . . . . . . . $117,027
=========
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, 2001, there were no material
concentrations of credit risk within the Company's loan portfolio.
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 generally 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, 2001, the Company had no foreign
loans.
A significant portion of the installment and other consumer loans are
secured by automobiles and other personal assets. Consumer finance loans are
those originated by the Company's consumer finance subsidiary, Freedom Finance,
IncThese loans generally carry a higher risk of nonpayment than do the other
categories of loans, but the increased risk is substantially offset by the
smaller amounts of such loans and the higher rates charged thereon, as well as a
higher allocation of the allowance for loan losses related to Freedom's loan
portfolio.
LOAN MATURITY AND INTEREST SENSITIVITY
The following table shows the maturity distribution and interest
sensitivity of the Company's loan portfolio at December 31, 2001.
LOAN PORTFOLIO MATURITY SCHEDULE
(DOLLARS IN THOUSANDS)
Over 1,
1 Year Less Than Over
or Less 5 Years 5 Years Total
-------- ---------- -------- --------
MATURITY DISTRIBUTION:
Commercial and industrial. . . . . . . . $ 24,365 $ 11,215 $ 157 $ 35,737
Real estate - commercial . . . . . . . . 19,722 49,236 1,078 70,036
Real estate - residential. . . . . . . . 18,549 33,240 12,450 64,239
Construction, development. . . . . . . . 17,927 8,745 0 26,672
Installment and other consumer loans . . 3,382 2,919 0 6,301
Consumer finance, net of unearned income 3,606 0 0 3,606
Other loans, including overdrafts. . . . 450 0 0 450
-------- ---------- -------- --------
Total. . . . . . . . . . . . . . . . . . $ 88,001 $ 105,355 $ 13,685 $207,041
======== ========== ======== ========
INTEREST SENSITIVITY:
Total of loans with:
Predetermined interest rates . . . . . . $ 72,275 $ 49,696 $ 13,385 $135,356
Floating interest rates. . . . . . . . . 15,726 55,659 300 71,685
-------- ---------- -------- --------
Total. . . . . . . . . . . . . . . . . . $ 88,001 $ 105,355 $ 13,685 $207,041
======== ========== ======== ========
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through charges in the form of
a provision for loan losses based on management's periodic evaluation of the
loan portfolio. Loan losses and recoveries are charged or credited directly to
the allowance. The amount of the allowance reflects management's opinion of an
adequate level to absorb probable losses inherent in the loan portfolio at
December 31, 2001. The amount charged to the provision and the level of the
allowance is based on management's judgment and is dependent upon growth in the
loan portfolio, the total amount of past due loans and nonperforming loans,
known loan deteriorations, and 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. The
Company considers its policies regarding the allowance for loan losses to be its
most critical accounting policy due to the significant degree of management
judgment involved.
Management maintains an allowance for loan losses which it believes
adequate to cover probable losses in the loan portfolio. 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, events, and other factors affecting loans
which are believed to be reasonable, but which may or may not prove valid.
While it is the Company's policy to provide for the 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 judgment 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 by various regulatory agencies through
their periodic examinations of the Company's subsidiaries. Such examination
could result in required changes to the allowance for loan losses. No
adjustment 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.
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 credit 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 incorporates
management's current judgments about the credit quality of the loan portfolio
through a disciplined and consistently applied process. The methodology
includes segmentation of the loan portfolio into reasonable components for
calculation of the most accurate possible reserve. The loan portfolio is
grouped into commercial real estate, residential mortgages, construction,
commercial and industrial, and consumer loans. The loan segments are further
grouped into performing loans, past due loans, nonaccrual loans, internally
classified loans and loans considered impaired. Appropriate reserve estimates
are determined for each segment based on a review of individual loans,
application of historical loss factors for each segment, and adjustment factors
applied as considered necessary. The adjustment factors are applied
consistently and are quantified for consideration of national and local economic
conditions, exposure to concentrations that may exist in the portfolio, impact
of off-balance sheet risk, alterations of lending policies and procedures,
changes in trends of past due loans, problem loans and charge-offs, variations
in the nature and volume of the loan portfolio, modification of director
oversight, entry into new markets, and other factors which may impact the
current credit quality of the loan portfolio.
The allowance for loan losses totaled $2.9 million, or 1.42% of total
loans, at the end of 2001. This is compared to a $2.6 million allowance, or
1.42% of total loans, at December 31, 2000. For the year ended December 31,
2001, the Company reported net charge-offs of $348,000, or 0.18% of consolidated
average loans. This is compared to consolidated net charge-offs of $257,000, or
0.16% of average loans, for the year ended December 31, 2000.
The table below presents an allocation of the allowance for loan losses for
each of the years ended December 31 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.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
2001 2000 1999 1998
------------------------ ------------------------ ---------------------- -----------------------
Percent of Percent of Percent of Percent of
Allowance Loans in Allowance Loans in Allowance Loans in Allowance Loans in
Break-down Category Break-down Category Break-down Category Break-down Category
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Commercial . . . . . . . $ 1,365 51.1% $ 1,011 52.4% $ 879 55.3% $ 771 55.5%
Residential real estate. 746 31.0% 741 29.0% 692 32.0% 599 32.8%
Construction . . . . . . 375 12.9% 330 12.9% 148 6.9% 90 5.0%
Installment, consumer
finance, and other loans 440 5.0% 337 5.7% 331 5.8% 275 6.7%
Unallocated. . . . . . . 11 141 113 92
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$ 2,937 100% $ 2,560 100% $ 2,163 100% $ 1,827 100%
=========== =========== =========== =========== =========== =========== =========== ===========
1997
-----------------------
Percent of
Allowance Loans in
Break-down Category
----------- -----------
Commercial . . . . . . . $ 662 56.0%
Residential real estate. 548 31.7%
Construction . . . . . . 54 3.1%
Installment, consumer
finance, and other loans 253 9.2%
Unallocated. . . . . . . 211
----------- -----------
$ 1,728 100%
=========== ===========
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"). Loans past due 90
days and greater totaled $153,000, or 0.07% of gross loans, at December 31, 2001
compared to $122,000, or 0.07% of gross loans, at December 31, 2000. Loans on
non-accrual totaled $1,180,000 and $218,000, respectively, at December 31, 2001
and 2000. Generally, loans of the Bank are placed on non-accrual 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
non-accrual, but are charged-off when such become 150 days contractually past
due or earlier if the loan is deemed uncollectible. At December 31, 2001, loans
considered to be impaired under Statement of Financial Accounting Standards 114
totaled $1.0 million, which is included in the total non-accrual loans.
Impaired loans at December 31, 2000 totaled $1.5 million, which included the
$218,000 of non-accrual loans. At December 31, 2001 and 2000, the Bank held no
other real estate owned acquired in partial or total satisfaction of problem
loans.
The following table summarizes the nonperforming assets at December 31 for
each year presented.
NONPERFORMING ASSETS
(DOLLARS IN THOUSANDS)
2001 2000 1999 1998 1997
------- ------ ------ ------ ------
Non-accrual loans . . . . . . . . . $1,180 $ 218 $ 147 $ 0 $ 0
Loans past due 90 days or more. . . 153 122 130 483 82
Troubled debt restructurings. . . . 0 0 0 0 0
Other real estate owned . . . . . . 0 0 0 0 0
------- ------ ------ ------ ------
Total nonperforming assets. . . . . $1,333 $ 340 $ 277 $ 483 $ 82
======= ====== ====== ====== ======
Nonperforming assets to total loans .64% .19% .19% .36% .07%
======= ====== ====== ====== ======
At December 31, 2001, the carrying value of loans that are considered to be
impaired under SFAS 114 totaled $1,045,000, which was included in the total
non-accrual loans. At December 31, 2000, the carrying value of loans that are
considered to be impaired under SFAS 114 totaled $1,462,000, which includes the
$218,000 non-accrual loan. There were no impaired loans at December 31 for any
other year presented. The average balance of impaired loans was $1,099,000 and
$1,457,000 for the year ended December 31, 2001 and 2000, respectively. There
was no impairment allowance required at either year end.
The amount of foregone interest income that would have been recorded on
non-accrual loans had these loans performed according to their contractual terms
amounted to approximately $62,000 and $6,000 during 2001 and 2000, respectively.
Interest income recognized on non-accrual and impaired loans was approximately
$35,000 and $158,000 during 2001 and 2000, respectively.
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, 2001 determined to be
potential problem loans based upon management's internal designations, was $15.1
million or 7.4% of the loan portfolio at year end, compared to $7.9 million or
4.4% of the loan portfolio at December 31, 2000. The amount of potential
problem loans at December 31, 2001 does not represent management's estimate of
potential losses since the majority of such loans are considered adequately
secured by real estate or other collateral. The increase in the amount of
classified loans in 2001 is primarily related to the deterioration of general
economic conditions during 2001 and management's proactive approach to more
closely monitor credits. Management believes that the allowance for loan losses
as of December 31, 2001 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
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.
LOAN LOSS EXPERIENCE
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.
SUMMARY OF LOAN LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
2001 2000 1999 1998 1997
Balance at beginning of period $2,560 $2,163 $1,827 $1,728 $1,487
------- ------- ------- ------- -------
Charge-offs:
Commercial & industrial . . 130 125 74 26 40
Installment & consumer. . . 358 309 343 382 388
------- ------- ------- ------- -------
488 434 417 408 428
------- ------- ------- ------- -------
Recoveries:
Commercial & industrial . . 31 50 51 25 55
Installment & consumer. . . 109 127 257 192 196
------- ------- ------- ------- -------
140 177 308 217 251
------- ------- ------- ------- -------
Net charge-offs. . . . . . . . (348) (257) (109) (191) (177)
Provision charged to expense . 725 654 445 290 392
Allocation for purchased loans 0 0 0 0 26
------- ------- ------- ------- -------
Balance at end of period . . . $2,937 $2,560 $2,163 $1,827 $1,728
======= ======= ======= ======= =======
Ratio of net charge-offs to
average loans . . . . . . . . .18% .16% .08% .16% .16%
======= ======= ======= ======= =======
Ratio of allowance for loan
losses to gross loans . . . . 1.42% 1.42% 1.46% 1.40% 1.46%
======= ======= ======= ======= =======
Ratio of net charge-offs to
allowance for loan losses . . 11.85% 10.04% 5.04% 10.45% 10.24%
======= ======= ======= ======= =======
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'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 19%
and 22%, respectively, of total deposits at December 31, 2001 and 2000. The
Company has no brokered deposits. At December 31, 2001, the Company had no
foreign deposits.
During 2001, interest-bearing liabilities averaged $211.2 million with an
average rate of 4.64% compared to $168.5 million with an average rate of 5.57%
in 2000. The decrease in the average rate reflects the general decreasing rate
environment experienced throughout 2001 and the repricing of maturing time
deposits with higher rates to lower current market rates. In pricing deposits,
the Company considers its liquidity needs, the anticipated direction and levels
of interest rates and local market conditions. At December 31, 2001,
interest-bearing deposits comprised approximately 87% of total deposits and 87%
of total interest-bearing liabilities. The remainder of interest-bearing
liabilities consists principally of Federal Home Loan Bank advances.
The Company uses its deposit base as a primary source with which to fund
earning assets. Deposits increased 5% from $209.2 million at December 31, 2000
to $218.8 million as of year end 2001. The increase was primarily in the money
market accounts and interest-bearing demand accounts, which were somewhat offset
with decreases in time deposit accounts. Noninterest-bearing deposits averaged
12.2% of total deposits for the year 2001 compared to 12.4% in 2000.
The maturity distribution of certificates of deposit greater than or equal
to $100,000 as of December 31, 2001 is as follows (dollars in thousands):
3 months or less. . . . . . . $18,803
Greater than 3, but less than
or equal to 6 months. . . . . 11,047
Greater than 6, but less than
or equal to 12 months . . . . 8,044
Greater than 12 months. . . . 3,904
-------
$41,798
=======
CAPITAL RESOURCES
Total shareholders' equity amounted to $24.6 million, or 9.0% of total
assets, at December 31, 2001. This is compared to $21.5 million, or 8.6% of
total assets, at December 31, 2000. The $3.1 million increase in total
shareholders' equity resulted principally from retention of earnings, stock
issued pursuant to the Company's stock option plans, and the increase in
unrealized gain on investment securities available for sale. Book value per
share at December 31, 2001 and 2000 was $6.49 and $5.70, respectively. On
November 9, 2001, the Company issued its tenth consecutive 5% stock dividend to
shareholders of record as of October 29, 2001. This dividend resulted in the
issuance of approximately 181,000 shares of the Company's $1.00 par value common
stock. All weighted average share and per share data has been restated to
reflect all stock dividends.
To date, the capital needs of the Company have been met through the
retention of earnings, from the proceeds of its initial offering of common
stock, and from the proceeds of stock issued pursuant to the Company's stock
option plans. 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, 2001 and 2000. The Company and the Bank are subject to
various regulatory capital requirements administered by the federal banking
agencies. At December 31, 2001 and 2000, 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.
CAPITAL SUMMARY
---------------
THE COMPANY THE BANK
-------------------- --------------------
12/31/01 12/31/00 12/31/01 12/31/00
--------- --------- --------- ---------
Total risk-based capital. 12.41% 12.21% 11.00% 10.76%
Tier 1 risk-based capital 11.16% 10.96% 9.75% 9.56%
Leverage capital. . . . . 9.25% 10.13% 8.07% 8.82%
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, 2001, 2000, and 1999
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.
For the Year Ended December 31,
2001 2000 1999
------ ------ ------
Return on average assets . . . . . . . . . . 1.03% 1.25% 1.34%
Return on average shareholders' equity . . . 11.71% 13.57% 14.45%
Average shareholders' equity as a percent of
average assets . . . . . . . . . . . . . . 8.80% 9.22% 9.25%
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 other borrowings, extensions of credit, and for the
payment of operating expenses. Maintaining an adequate level of liquidity is
accomplished through a combination of liquid assets, assets 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 15% of average
assets (exclusive of cash flows on loans) for each of the years ended December
31, 2001 and 2000. 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 ("FHLB"), purchasing federal funds from other
financial institutions, lines of credit through the Federal Reserve Bank, and
increasing deposits by raising rates paid. At December 31, 2001, based on
eligible collateral available, the Bank had additional available credit of
approximately $27 million from the FHLB. Further, the Bank had short-term lines
of credit to purchase unsecured federal funds from unrelated correspondent banks
with available balances of $15.5 million at December 31, 2001.
Summit Financial, the parent holding company, has limited liquidity needs.
The Company requires liquidity to pay limited operating expenses and to provide
funding to its consumer finance subsidiary, Freedom Finance. Summit Financial
has approximately $3.2 million in available liquidity remaining from its initial
public offering and the retention of earnings. A total of $2.2 million of this
liquidity was advanced to the Finance Company, in the form of an intercompany
loan, to fund its operations as of December 31, 2001. Additional sources of
liquidity for Summit Financial include borrowing funds from unrelated
correspondent banks, borrowing from individuals, and payments for management
fees and debt service which are made by the Company's subsidiary on a monthly
basis. Liquidity needs of Freedom Finance, primarily for the funding of loan
originations, 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.
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.
OFF-BALANCE SHEET COMMITMENTS
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, 2001 the Company's commitments to extend additional credit
totaled approximately $47.2 million, of which approximately $2.8 million
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 $4.8 million at
December 31, 2001. The credit risk involved in the underwriting of letters of
credit is essentially the same as that involved in extending loan facilities to
customers.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America 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 50% of the Company's interest-bearing liabilities at December 31,
2001 had been issued with fixed terms and can be repriced only at maturity.
During periods of declining interest rates, as experienced through 2001, the
Company's assets reprice faster than the supporting liabilities. This causes a
decrease in the short-term 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 the short-term in a rising rate environment.
ACCOUNTING, REPORTING AND REGULATORY MATTERS
Statement of Financial Accounting Standards ("SFAS") 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an Amendment of
FASB 133" establish accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and hedging activities. They require that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position, and measure those instruments at fair value. Changes in the fair
value of those derivatives will be reported in earnings or other comprehensive
income depending on the use of the derivative and whether the derivative
qualifies for hedge accounting. The Company adopted SFAS 133, as amended by
SFAS 138, on January 1, 2001. The adoption was not material to the Company's
consolidated financial statements.
SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities - a replacement of FASB No. 125", was issued in
September 2000. It revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures but carries over most of the provisions of SFAS 125 without
reconsideration. SFAS 140 is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after March 31, 2001. This
statement is effective for recognition and reclassification of collateral and
for disclosures related to securitization transactions and collateral for fiscal
years ending after December 15, 2000. The adoption of the provisions of SFAS
140 on April 1, 2001 did not have a material effect on the Company.
In July 2001, SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and
Other Intangible Assets" were issued. SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001. SFAS 141 also specifies criteria which intangible assets acquired in
a purchase method business combination must meet to be recognized and reported
apart from goodwill. SFAS 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS 142.
SFAS 142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of".
The Company was required to adopt the provisions of SFAS 141 immediately
and has adopted SFAS 142 effective January 1, 2002. SFAS 141 requires that upon
adoption of SFAS 142, the Company evaluate its existing intangible assets and
goodwill that were acquired in any prior purchase business combination and make
any necessary reclassifications in order to conform with the new criteria in
SFAS 141 for recognition apart from goodwill. Upon adoption of SFAS 142, the
Company was required to reassess the useful lives and residual values of all
intangible assets acquired, and make any necessary amortization period
adjustments by the end of the first interim period after adoption. In addition,
to the extent an intangible asset is identified as having an indefinite useful
life, the Company will be required to test the intangible asset for impairment
in accordance with the provisions of SFAS 142 within the first interim period.
Any impairment loss will be measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principles in the first
interim period.
In connection with SFAS 142's transitional goodwill impairment evaluation,
the statement requires the Company to perform an assessment of whether there is
an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and determine the
carrying value and the fair value of each reporting unit by assigning the assets
and liabilities, including the existing goodwill and intangible assets, to those
reporting units as of the date of adoption. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill to its carrying amount,
both of which would be measured as of the date of adoption. This second step is
required to be completed as soon as possible, but no later than the end of the
year of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Company's statement
of operations. Management does not anticipate that the adoption of the
provisions of SFAS 142 will have a material effect on the Company.
In August 2001, SFAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" was issued which addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS 144
supercedes SFAS 121, "Accounting for the Impaiment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of", it retains many of the fundamental
provisions of SFAS 121. The provisions of SFAS 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The Company will adopt SFAS 144 on
January 1, 2002 and does not anticipate any material effect on the Company.
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 or decrease 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, assumed interest rate changes as well as
assumed 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 in the short-term if interest rates rise and will decrease in the
short-term if interest rates decline.
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 reviewed periodically to provide insights related to static
repricing structure of assets and liabilities. At December 31, 2001, on a
cumulative basis through 12 months, rate-sensitive liabilities exceed
rate-sensitive assets, resulting in a 12 month period liability-sensitive
position of approximately $32.5 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 asset-sensitive over a 12 month period and the
entire repricing lives of the assets and liabilities. This is primarily due to
the fact that in excess of 60% of the loan portfolio moves immediately on a
one-to-one ratio with a change in the prime lending rate, while the deposit
rates 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 short-term increases in the net interest
income during periods of rising rates and short-term decreases in net interest
income when market rates decline.
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. At December 31, 2001, the Company's
estimated changes in NPV were within the limits established by the Board.
MARKET VALUE
OF PORTFOLIO
POLICY EQUITY PERCENT
CHANGE IN INTEREST RATES LIMIT (000S) CHANGE
- ------------------------ ------- -------------- --------
300 basis point rise . . 40.00% $ 21,480 12.69%
200 basis point rise . . 25.00% $ 22,369 9.07%
100 basis point rise . . 10.00% $ 23,457 4.65%
No change. . . . . . . . 0.00% $ 24,601 0.00%
100 basis point decline. 10.00% $ 25,228 2.55%
200 basis point decline. 25.00% $ 25,102 2.04%
300 basis point decline. 40.00% $ 24,864 1.07%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
December 31,
--------------------
2001 2000
--------- ---------
ASSETS
Cash and due from banks. . . . . . . . . . . . . . . $ 8,579 $ 7,604
Interest-bearing bank balances . . . . . . . . . . . 945 5,111
Federal funds sold . . . . . . . . . . . . . . . . . 925 16,680
Investment securities available for sale . . . . . . 47,400 32,445
Investment in Federal Home Loan Bank and other stock 1,733 1,388
Loans, net of unearned income and net of allowance
for loan losses of $2,937 and $2,560. . . . . . . . 204,104 177,961
Premises and equipment, net. . . . . . . . . . . . . 4,447 3,473
Accrued interest receivable. . . . . . . . . . . . . 1,393 1,691
Other assets . . . . . . . . . . . . . . . . . . . . 3,571 3,482
--------- ---------
$273,097 $249,835
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand. . . . . . . . . . . . . $ 29,372 $ 35,468
Interest-bearing demand . . . . . . . . . . . . . . 21,807 14,641
Savings and money market. . . . . . . . . . . . . . 85,388 63,821
Time deposits, $100,000 and over. . . . . . . . . . 41,798 46,523
Other time deposits . . . . . . . . . . . . . . . . 40,413 48,738
--------- ---------
218,778 209,191
Other short-term borrowings. . . . . . . . . . . . . 500 500
Federal Home Loan Bank advances. . . . . . . . . . . 26,900 16,000
Accrued interest payable . . . . . . . . . . . . . . 1,194 1,753
Other liabilities. . . . . . . . . . . . . . . . . . 1,124 863
--------- ---------
Total liabilities . . . . . . . . . . . . . . . 248,496 228,307
--------- ---------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000 shares
authorized; 3,793,032 and 3,598,318 shares
issued and outstanding . . . . . . . . . . . . . . 3,793 3,598
Additional paid-in capital. . . . . . . . . . . . . 18,409 16,803
Retained earnings . . . . . . . . . . . . . . . . . 2,379 1,425
Accumulated other comprehensive income, net of tax. 203 32
Nonvested restricted stock. . . . . . . . . . . . . (183) (330)
--------- ---------
Total shareholders' equity. . . . . . . . . . . 24,601 21,528
--------- ---------
$273,097 $249,835
========= =========
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, except Per Share Data)
For the Years Ended December 31,
----------------------------------
2001 2000 1999
---------- ---------- ----------
Interest Income:
Loans . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,293 $ 16,882 $ 13,676
Taxable securities. . . . . . . . . . . . . . . . . . . 1,751 1,187 951
Nontaxable securities . . . . . . . . . . . . . . . . . 568 515 500
Federal funds sold. . . . . . . . . . . . . . . . . . . 318 563 102
Other . . . . . . . . . . . . . . . . . . . . . . . . . 275 270 148
---------- ---------- ----------
20,205 19,417 15,377
---------- ---------- ----------
Interest Expense:
Deposits. . . . . . . . . . . . . . . . . . . . . . . . 8,628 8,463 6,086
Federal Home Loan Bank advances . . . . . . . . . . . . 1,146 878 463
Federal funds purchased . . . . . . . . . . . . . . . . 2 16 46
Other short-term borrowings . . . . . . . . . . . . . . 31 37 33
---------- ---------- ----------
9,807 9,394 6,628
---------- ---------- ----------
Net interest income . . . . . . . . . . . . . . . . 10,398 10,023 8,749
Provision for loan losses. . . . . . . . . . . . . . . . 725 654 445
---------- ---------- ----------
Net interest income after provision for loan losses 9,673 9,369 8,304
---------- ---------- ----------
Noninterest Income:
Service charges and fees on deposit accounts. . . . . . 430 369 247
Credit card fees and income . . . . . . . . . . . . . . 457 376 338
Insurance commission fee income . . . . . . . . . . . . 485 337 254
Gain on sale of investment securities . . . . . . . . . 257 12 22
Other income. . . . . . . . . . . . . . . . . . . . . . 953 752 699
---------- ---------- ----------
2,582 1,846 1,560
---------- ---------- ----------
Noninterest Expense:
Salaries, wages and benefits. . . . . . . . . . . . . . 4,815 4,279 3,499
Occupancy . . . . . . . . . . . . . . . . . . . . . . . 652 630 578
Furniture, fixtures and equipment . . . . . . . . . . . 667 663 633
Other expenses. . . . . . . . . . . . . . . . . . . . . 2,125 1,784 1,810
---------- ---------- ----------
8,259 7,356 6,520
---------- ---------- ----------
Income before income taxes . . . . . . . . . . . . . . . 3,996 3,859 3,344
Income taxes . . . . . . . . . . . . . . . . . . . . . . 1,280 1,204 936
---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 2,716 $ 2,655 $ 2,408
========== ========== ==========
Net income per common share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.72 $ 0.71 $ 0.69
Diluted . . . . . . . . . . . . . . . . . . . . . . . . $ 0.66 $ 0.65 $ 0.59
Average shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . 3,749,000 3,716,000 3,501,000
Diluted . . . . . . . . . . . . . . . . . . . . . . . . 4,127,000 4,063,000 4,109,000
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(Dollars in Thousands)
Accumulated
Other
Additional Comprehensive Nonvested Total
Common paid-in Retained Income Restricted Shareholders'
stock capital earnings (loss), net stock equity
-------- ------------ ---------- --------------- ----------- ---------------
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 dividend. . . . . . 152 1,771 (1,923) - - -
Cash in lieu of fractional shares. . . . - - (2) - - (2)
-------- ------------ ---------- --------------- ----------- ---------------
Balance at December 31, 1999 . . . . . . 3,244 14,730 483 (563) (303) 17,591
Net income for the year ended
December 31, 2000. . . . . . . . . . . . - - 2,655 - - 2,655
Other comprehensive income:
Unrealized holding gains on
securities arising during the period,
net of taxes of $369 . . . . . . . . . . - - - 603 -
Less: reclassification adjustment
for gains included in net income,
net of tax of ($4) . . . . . . . . . . . - - - (8)
Other comprehensive income. . . . . . . - - - 595 - 595
--------------- ---------------
Comprehensive income . . . . . . . . . . - - - - - 3,250
---------------
Stock options exercised. . . . . . . . . 169 392 - - - 561
Issuance of common stock pursuant
to restricted stock plan . . . . . . . . 14 141 - - (155) -
Amortization of deferred compensation
on restricted stock. . . . . . . . . . . - - - - 128 128
Issuance of 5% stock dividend. . . . . . 171 1,540 (1,711) - - -
Cash in lieu of fractional shares. . . . - - (2) - - (2)
-------- ------------ ---------- --------------- ----------- ---------------
Balance at December 31, 2000 . . . . . . 3,598 16,803 1,425 32 (330) 21,528
Net income for the year ended
December 31, 2001. . . . . . . . . . . . - - 2,716 - - 2,716
Other comprehensive income:
Unrealized holding gains on
securities arising during the period,
net of taxes of $187 . . . . . . . . . . - - - 346 -
Less: reclassification adjustment
for gains included in net income,
net of tax of ($82). . . . . . . . . . . - - - (175)
Other comprehensive income. . . . . . . - - - 171 - 171
--------------- ---------------
Comprehensive income . . . . . . . . . . - - - - - 2,887
---------------
Stock options exercised. . . . . . . . . 16 47 - - - 63
Cancellation of restricted common stock. (2) (19) - - 21 -
Amortization of deferred compensation
on restricted stock. . . . . . . . . . . - - - - 126 126
Issuance of 5% stock dividend. . . . . . 181 1,578 (1,759) - - -
Cash in lieu of fractional shares. . . . - - (3) - - (3)
-------- ------------ ---------- --------------- ----------- ---------------
Balance at December 31, 2001 . . . . . . $ 3,793 $ 18,409 $ 2,379 $ 203 ($183) $ 24,601
======== ============ ========== =============== =========== ===============
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
For the Years Ended December 31,
--------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 2,716 $ 2,655 $ 2,408
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses. . . . . . . . . . . . . . . . 725 654 445
Depreciation . . . . . . . . . . . . . . . . . . . . . . 467 478 496
Net gain on sale and disposal of equipment and vehicles. (28) - (18)
Net gain on sale of investment securities. . . . . . . . (257) (12) (22)
Net amortization of net premium on investment securities 175 30 75
Amortization of deferred compensation on
restricted stock . . . . . . . . . . . . . . . . . . . . . . 126 128 101
Decrease (increase) in other assets. . . . . . . . . . . 309 (210) (335)
(Decrease) increase in other liabilities . . . . . . . . (298) 454 152
Deferred income taxes. . . . . . . . . . . . . . . . . . (205) (200) (179)
--------- --------- ---------
Net cash provided by operating activities . . . . . 3,730 3,977 3,123
--------- --------- ---------
Cash flows from investing activities:
Purchases of investment securities . . . . . . . . . . . . (38,533) (12,415) (7,483)
Proceeds from sales of investment securities . . . . . . . 12,695 5,400 1,021
Proceeds from maturities of investment securities. . . . . 11,241 1,977 5,632
Purchases of Federal Home Loan Bank and other stock. . . . (345) (450) (146)
Net increase in loans. . . . . . . . . . . . . . . . . . . (26,868) (32,608) (17,610)
Purchases of premises and equipment. . . . . . . . . . . . (1,470) (1,061) (315)
Proceeds from sale of equipment and vehicles . . . . . . . 57 - 49
--------- --------- ---------
Net cash used by investing activities . . . . . . . (43,223) (39,157) (18,852)
--------- --------- ---------
Cash flows from financing activities:
Net increase in deposit accounts . . . . . . . . . . . . . 9,587 51,195 17,753
Net (decrease) increase in federal funds
purchased and repurchase agreements. . . . . . . . . . . . . - (4,000) 433
Proceeds from Federal Home Loan Bank advances. . . . . . . 17,000 22,000 10,550
Repayments of Federal Home Loan Bank advances. . . . . . . (6,100) (15,000) (9,550)
Net repayments of other short-term borrowings. . . . . . . - - (320)
Proceeds from stock options exercised. . . . . . . . . . . 63 561 286
Cash paid in lieu of fractional shares . . . . . . . . . . (3) (2) (2)
--------- --------- ---------
Net cash provided by financing activities . . . . . 20,547 54,754 19,150
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents . . . . (18,946) 19,574 3,421
Cash and cash equivalents, beginning of year . . . . . . . . 29,395 9,821 6,400
--------- --------- ---------
Cash and cash equivalents, end of year . . . . . . . . . . . $ 10,449 $ 29,395 $ 9,821
========= ========= =========
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
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. Summit Investment Services,
Inc. is a wholly-owned subsidiary of the Bank which provides 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 accounting principles generally accepted in the United States of
America ("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 - Investment securities are accounted for in accordance
with Statement of Financial Accounting Standards ("SFAS") 115, "Accounting for
Certain Investments in Debt and Equity 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 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, and thereafter
according to the contractual terms of the agreement. 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 information available to make evaluations, future
adjustments to the allowance may be necessary if economic conditions differ 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 - As of January 1, 2002, the Company adopted SFAS 142,
"Goodwill and Other Intangible Assets". SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS 142. The Company's intangible assets consist of goodwill
resulting from the Finance Company's branch acquisitions and are included in
"Other assets" on the accompanying consolidated balance sheets. The balance of
goodwill at December 31, 2001 and 2000 was $183,000 and $340,000, respectively.
Prior to the adoption of SFAS 142, the Company recorded amortization of goodwill
of $157,000 for each of the years ended December 31, 2001, 2000, and 1999.
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 all 5% stock dividends.
REPORTING COMPREHENSIVE INCOME - The Company reports comprehensive income in
accordance with 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.
DISCLOSURES REGARDING SEGMENTS - SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information" establishes standards for the way that
public businesses report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company has
two reportable operating segments, Summit National Bank and Freedom Finance,
Inc.
FAIR VALUE OF FINANCIAL INSTRUMENTS - SFAS 107, "Disclosures about Fair Value
of Financial Instruments", requires disclosures about the fair value of all
financial instruments, whether or not recognized in the balance sheet, when it
is practicable to estimate fair value. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
through immediate settlement of the instrument. 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 financial instruments and all non-financial instruments
are specifically excluded from the disclosure requirements, including the
Company's common stock, premises and equipment, and other assets and
liabilities. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
RECLASSIFICATIONS - Certain amounts in the 2000 and 1999 consolidated
financial statements have been reclassified to conform with the 2001
presentations. These reclassifications had no impact on shareholders' equity or
net income as previously reported.
NOTE 2 - 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, 2001 and 2000 was
$1,259,000 and $850,000, respectively.
NOTE 3 - 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 $10,449,000 and $29,395,000
at December 31, 2001 and 2000, respectively. The following summarizes
supplemental cash flow data for the years ended December 31:
(dollars in thousands) 2001 2000 1999
- ----------------------------------- ------- ------ -------
Interest paid . . . . . . . . . . . $10,366 $8,773 $6,548
Income taxes paid . . . . . . . . . 1,445 1,419 1,162
Change in fair value of investment
securities, net of income taxes. . 171 595 (876)
NOTE 4 - INVESTMENT SECURITIES
All investment securities are classified as "Available for Sale" in each
year presented. There were no securities classified as "Held to Maturity" or
"Trading" in any year presented. The aggregate amortized cost, fair value, and
gross unrealized gains and losses of investment securities available for sale at
December 31 were as follows: (dollars in thousands)
2001 2000
----------------------------------------- ---------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED FAIR AMORTIZED UNREALIZED FAIR
-------------------- --------------------
COST GAINS LOSSES VALUE COST GAINS LOSSES VALUE
---------- ----------- ------- ------- ---------- ----------- ------- -------
U.S. government agencies . . . $ 11,103 $ 164 ($53) $11,214 $ 17,167 $ 114 ($40) $17,241
Mortgage-backed securities . . 21,716 110 (166) 21,660 5,642 33 (9) 5,666
State and municipal securities 14,253 336 (63) 14,526 9,584 126 (172) 9,538
---------- ----------- ------- ------- ---------- ----------- ------- -------
$ 47,072 $ 610 ($282) $47,400 $ 32,393 $ 273 ($221) $32,445
========== =========== ======= ======= ========== =========== ======= =======
The amortized cost and estimated fair value of investment securities
available for sale at December 31, 2001, 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.
AMORTIZED FAIR
(dollars in thousands) COST VALUE
- ---------------------------------------- ---------- -------
Due in one year or less. . . . . . . . . $ - $ -
Due after one year, through five years . 6,852 6,986
Due after five years, through ten years. 8,238 8,230
Due after ten years. . . . . . . . . . . 31,982 32,184
---------- -------
$ 47,072 $47,400
========== =======
The change in the unrealized gain on securities available for sale, net of
taxes, recorded in shareholders' equity for the year ended December 31, 2001 was
$171,000. Investment securities with an approximate book value of $20,667,000
and $15,987,000 at December 31, 2001 and 2000, respectively, were pledged to
secure public deposits and for other purposes as required or permitted by law.
Estimated fair values of securities pledged were $20,986,000 and $16,011,000 at
December 31, 2001 and 2000, respectively.
Information related to the sale of securities classified as available for sale
for each year is as follows:
(dollars in thousands) 2001 2000 1999
- ----------------------------------------- ------- ------ ------
Proceeds from sales of securities . . . . $12,695 $5,400 $1,021
Gross realized gains on securities sold . 261 49 22
Gross realized losses on securities sold. 4 37 -
NOTE 5 - INVESTMENTS IN STOCK
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 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, 2001
and 2000. The amount of FHLB stock owned is determined based on the Bank's
balances of residential mortgages and advances from the FHLB and totaled
$1,345,000 and $1,000,000 at December 31, 2001 and 2000, respectively. At
December 31, 2001 and 2000, the Bank also owns $133,000 of stock in a bankers
bank located in Atlanta, Georgia. 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:
(dollars in thousands) 2001 2000
- ----------------------------------------- --------- ---------
Commercial and industrial . . . . . . . . $ 35,737 $ 31,995
Commercial secured by real estate . . . . 70,036 62,709
Real estate - residential mortgages . . . 64,239 52,287
Real estate - construction. . . . . . . . 26,672 23,232
Installment and other consumer loans. . . 6,301 6,540
Consumer finance, net of unearned income
of $1,118 and $1,057 . . . . . . . . . . 3,606 3,542
Other loans and overdrafts. . . . . . . . 450 216
--------- ---------
207,041 180,521
Less - allowance for loan losses. . . . . (2,937) (2,560)
--------- ---------
$204,104 $177,961
========= =========
Nonperforming and impaired loans at December 31 are as follows:
(dollars in thousands) 2001 2000 1999
- ------------------------------------------------------ ------ ------ -----
Accruing loans, past due in excess of 90 days. . . . . $ 153 $ 122 $ 130
Accruing loans, considered impaired under SFAS 114 . . - 1,244 -
Non-accrual loans, not considered impaired . . . . . . 135 - 147
Non-accrual loans, considered impaired under SFAS 114. 1,045 218 -
The average balance of impaired loans was $1,099,000 and $1,457,000 for the
years ended December 31, 2001 and 2000, respectively, and there was no
impairment allowance required at either year end. The amount of foregone
interest income that would have been recorded had the non-accrual loans
performed according to their contractual terms amounted to approximately
$62,000, $6,000 and $4,000 during 2001, 2000 and 1999, respectively. Interest
income recognized on non-accrual and impaired loans was approximately $35,000,
$158,000 and $17,000 during 2001, 2000 and 1999, respectively. There were no
foreclosed loans or other real estate owned in any year presented.
Changes in the allowance for loan losses for the years ended December 31 were as
follows:
(dollars in thousands) 2001 2000 1999
- ----------------------------------------------- ------- ------- -------
Balance, beginning of year. . . . . . . . . . . $2,560 $2,163 $1,827
Provision for losses. . . . . . . . . . . . 725 654 445
Loans charged-off . . . . . . . . . . . . . (488) (434) (417)
Recoveries of loans previously charged-off. 140 177 308
------- ------- -------
Balance, end of year. . . . . . . . . . . . . . $2,937 $2,560 $2,163
======= ======= =======
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, 2001, 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. All loans to related parties were current and
performing in accordance with contractual terms at December 31, 2001. The
aggregate dollar amount of loans outstanding to related parties was
approximately $4,482,000 and $5,805,000 at December 31, 2001 and 2000,
respectively. During 2001, new loans and advances on lines of credit of
approximately $5,225,000 were made, and payments on these loans and lines
totaled approximately $6,548,000. At December 31, 2001, there were commitments
to extend additional credit to related parties in the amount of approximately
$2,198,000.
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 $4.7 million was available for loans to the Company
and the Finance Company at December 31, 2001. 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:
(dollars in thousands) 2001 2000
- ------------------------------------ -------- --------
Land . . . . . . . . . . . . . . . . $ 1,043 $ 1,043
Building and leasehold improvements. 3,333 2,118
Furniture, fixtures and equipment. . 2,718 2,387
Vehicles . . . . . . . . . . . . . . 191 161
Construction in progress . . . . . . - 207
-------- --------
7,285 5,916
Less - accumulated depreciation. . . (2,838) (2,443)
-------- --------
$ 4,447 $ 3,473
======== ========
Depreciation expense charged to operations totaled $467,000, $478,000, and
$496,000 in 2001, 2000, and 1999, 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 $299,000, $297,000, and $271,000, respectively, for the years
ended December 31, 2001, 2000, and 1999.
The annual minimum rental commitments under the terms of the Company's
noncancellable leases at December 31, 2001 are as follows: (dollars in
thousands)
2002 . . . $273
2003 . . . 264
2004 . . . 219
2005 . . . 53
2006 . . . 7
Thereafter -
----
$816
====
NOTE 8 - DEPOSITS
The scheduled maturities of time deposits subsequent to December 31, 2001 are as
follows: (dollars in thousands)
2002 . . . $72,057
2003 . . . 4,403
2004 . . . 2,479
2005 . . . 1,254
2006 . . . 1,916
Thereafter 102
-------
$82,211
=======
The remaining maturity of time deposits in denominations in excess of
$100,000 is $18,803,000 in three months or less; $11,047,000 in over three
through six months; $8,044,000 in over six through 12 months; and $3,904,000 in
over 12 months.
NOTE 9 - OTHER BORROWINGS
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 3.72%, 6.04%, and 5.02% for the years ended
December 31, 2001, 2000, and 1999 respectively. There were no outstanding
balances of federal funds purchased at December 31, 2001 or 2000. Average
balances were $58,000, $254,000, and $909,000 for 2001, 2000, and 1999,
respectively. The maximum balance of federal funds purchased at any time during
2001, 2000, and 1999 was $5.6 million, $5.5 million, and $12.5 million,
respectively. At December 31, 2001, the Bank had short-term lines of credit to
purchase unsecured federal funds from unrelated banks with available balances
totaling $15.5 million. These lines are generally 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.
Other short-term borrowings consist of a term loan agreement with an
unrelated individual that matures every six months and has been renewed in each
year presented. This term loan is unsecured and bears interest at a fixed rate.
The weighted average interest rate on short-term borrowings outstanding at
December 31, 2001, 2000 and 1999 was 6.22%, 7.41%, and 6.50%, respectively.
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 and commercial real
estate. These advances have various maturity dates, terms and repayment
schedules with fixed or variable rates of interest, payable monthly on
maturities of one year or less and payable quarterly on maturities over one
year.
Total qualifying loans of the Bank pledged to the FHLB for advances at
December 31, 2001 were approximately $87 million. The Bank has adopted the
policy of pledging excess collateral to facilitate future advances. At December
31, 2001, based on eligible collateral available, the Bank had additional
available credit of approximately $27 million from the FHLB.
At December 31, 2001 fixed rate FHLB advances ranged from 4.05% to 7.48%
with initial maturities from one to ten years. Variable rate advances based on
3 month LIBOR had a rate of 5.73% and 6.53%, respectively, at December 31, 2001
and 2000. Interest rates ranged from 5.01% to 7.48% at December 31, 2000. The
weighted-average interest rate on FHLB advances outstanding at December 31, 2001
and 2000 was 5.35% and 6.31%, respectively. At December 31, 2001, advances
totaling $12 million were subject to call features at the option of the FHLB
with call dates ranging from January 2002 to September 2006. Call provisions
are more likely to be exercised by the FHLB when rates rise. Scheduled
maturities of FHLB advances subsequent to December 31, 2001 are $5,600,000 in
2002; $8,600,000 in 2003; $4,600,000 in 2004; $1,600,000 in 2005; $3,500,000 in
2006 and $3,000,000 thereafter.
NOTE 11 - INCOME TAXES
The provision for income taxes for the years ended December 31 is as
follows:
(dollars in thousands) 2001 2000 1999
- ---------------------- ------- ------- -------
Current:
Federal. . . . . . . $1,356 $1,287 $1,023
State. . . . . . . . 129 117 92
------- ------- -------
1,485 1,404 1,115
------- ------- -------
Deferred:
Federal. . . . . . . (200) (172) (179)
State. . . . . . . . (5) (28) -
------- ------- -------
(205) (200) (179)
------- ------- -------
Total tax provision. . $1,280 $1,204 $ 936
======= ======= =======
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:
(dollars in thousands) 2001 2000 1999
- ---------------------------------- ------- ------- -------
Tax expense at statutory rate. . . $1,359 $1,312 $1,137
State tax, net of federal benefit. 82 59 61
Change in valuation allowance for
deferred tax assets . . . . . . . - (2) (13)
Effect of tax exempt interest. . . (168) (148) (192)
Other, net . . . . . . . . . . . . 7 (17) (57)
------- ------- -------
Total. . . . . . . . . . . . . . . $1,280 $1,204 $ 936
======= ======= =======
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:
(dollars in thousands) 2001 2000
- -------------------------------------------------------- ------- -------
Deferred tax assets:
Allowance for loan losses deferred for tax purposes. . $ 971 $ 842
Book depreciation and amortization in excess of tax. . 134 125
Other. . . . . . . . . . . . . . . . . . . . . . . . . 75 54
------- -------
Gross deferred tax assets. . . . . . . . . . . 1,180 1,021
Deferred tax liabilities:
Net deferred loan costs. . . . . . . . . . . . . . . . - (5)
Unrealized net gains on securities available for sale. (125) (20)
Compensation expense deferred for financial reporting. (51) (92)
------- -------
Gross deferred tax liabilities . . . . . . . . (176) (117)
------- -------
Net deferred tax asset . . . . . . . . . . . . . . . . . $1,004 $ 904
======= =======
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 for which a current period deferred tax expense of ($105,000)
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 $205,000. 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 and no valuation allowance is considered necessary at
December 31, 2001.
NOTE 12 - OTHER INCOME AND OTHER EXPENSES
The components of other operating income for the years ended December 31
are as follows:
(dollars in thousands) 2001 2000 1999
- ------------------------------------ ----- ----- -----
Late charges and other loan fees . . $ 295 $ 216 $ 235
Nondeposit product sales commission. 241 206 148
Other. . . . . . . . . . . . . . . . 417 330 316
----- ----- -----
$ 953 $ 752 $ 699
===== ===== =====
The components of other operating expenses for the years ended December 31
are as follows:
(dollars in thousands) 2001 2000 1999
- ---------------------------------------- ------ ------ ------
Advertising and public relations . . . . $ 230 $ 176 $ 251
Stationary, printing and office support. 386 364 314
Credit card service expense. . . . . . . 391 298 277
Legal and professional fees. . . . . . . 335 240 311
Amortization of intangibles. . . . . . . 157 157 157
Other. . . . . . . . . . . . . . . . . . 626 549 500
------ ------ ------
$2,125 $1,784 $1,810
====== ====== ======
NOTE 13 - CAPITAL STOCK AND PER SHARE INFORMATION
On November 9, 2001, the Company issued a 5% stock dividend. The dividend
was issued to all shareholders of record on October 29, 2001 and resulted in the
issuance of approximately 181,000 shares of common stock of the Company. All
average share and per share data have been retroactively restated to reflect the
stock dividend as of the earliest period presented.
As of December 31, 2001, there were approximately 830,000 common shares
reserved for issuance under stock compensation benefit plans, of which
approximately 261,000 were available for issuance.
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.
2001 2000 1999
---------------------- -------------------- ----------------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED
Net income . . . . . . . . . . $2,716,000 $2,716,000 $2,655,000 $2,655,000 $2,408,000 $2,408,000
---------- ---------- ---------- ---------- ---------- ----------
Average shares outstanding . . 3,749,032 3,749,032 3,715,930 3,715,930 3,501,284 3,501,284
Effect of dilutive securities:
Stock options . . . . . . . - 345,737 - 308,627 - 571,007
Unvested restricted stock . - 32,000 - 38,037 - 36,757
---------- ---------- ---------- ---------- ---------- ----------
3,749,032 4,126,769 3,715,930 4,062,594 3,501,284 4,109,048
---------- ---------- ---------- ---------- ---------- ----------
Per share amount . . . . . . . $ 0.72 $ 0.66 $ 0.71 $ 0.65 $ 0.69 $ 0.59
========== ========== ========== ========== ========== ==========
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,
2001, that the Company and the Bank meet all capital adequacy requirements to
which they are subject. At December 31, 2001 and 2000, 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 risk-based capital regulatory-defined
category.
The following table presents the Company's and the Bank's actual capital
amounts and ratios at December 31, 2001 and 2000 as well as the minimum
calculated amounts for each regulatory defined category.
FOR CAPITAL TO BE CATEGORIZED
ADEQUACY "WELL
(dollars in thousands) ACTUAL PURPOSES CAPITALIZED"
- ----------------------- -------------- -------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ------ ------- ------
AS OF DECEMBER 31, 2001
The Company
- --------------------------------------
Total capital to risk-weighted assets. $27,132 12.41% $17,497 8.00% N.A.
Tier 1 capital to risk-weighted assets $24,398 11.16% $ 8,749 4.00% N.A.
Tier 1 capital to average assets . . . $24,398 9.25% $10,548 4.00% N.A.
The Bank
- --------------------------------------
Total capital to risk-weighted assets. $23,727 11.00% $17,252 8.00% $21,565 10.00%
Tier 1 capital to risk-weighted assets $21,031 9.75% $ 8,626 4.00% $12,939 6.00%
Tier 1 capital to average assets . . . $21,031 8.07% $10,429 4.00% $13,037 5.00%
AS OF DECEMBER 31, 2000
The Company
- --------------------------------------
Total capital to risk-weighted assets. $23,937 12.21% $15,688 8.00% N.A.
Tier 1 capital to risk-weighted assets $21,486 10.96% $ 7,844 4.00% N.A.
Tier 1 capital to average assets . . . $21,486 10.13% $ 8,487 4.00% N.A.
The Bank
- --------------------------------------
Total capital to risk-weighted assets. $20,822 10.76% $15,474 8.00% $19,343 10.00%
Tier 1 capital to risk-weighted assets $18,490 9.56% $ 7,737 4.00% $11,606 6.00%
Tier 1 capital to average assets . . . $18,490 8.82% $ 8,387 4.00% $10,483 5.00%
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, 2001,
no cash dividends have been declared or paid by the Bank and the Bank had
available retained earnings of $12.5 million.
NOTE 15 - STOCK COMPENSATION PLANS
The Company has a Restricted Stock Plan for awards to certain key
employees. Under the Restricted Stock Plan, the Company may grant common stock
to its employees for up to approximately 295,000 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, 2001, there were 74,492 shares of restricted stock outstanding, of
which 32,000 shares were unvested. 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 the five-year vesting period as
the restrictions lapse. Included in the accompanying consolidated statements of
income under the caption "Salaries, wages and benefits" is $126,000, $128,000,
and $101,000 of amortized deferred compensation for the years ended December 31,
2001, 2000 and 1999, respectively.
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 authorized the granting of stock options up to a
maximum of approximately 1,006,000 shares of common stock, however, 840,000 of
these reserved shares are under the 1989 Plan which has expired. At December
31, 2001, approximately 7,300 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 in 1995 became exercisable one year after the date of
grant. Options granted in 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 approximately 369,000 shares of common stock. At December 31,
2001, approximately 33,000 option shares were available to be granted under this
plan.
All outstanding options and option activity for all stock-based option
plans have been retroactively restated to reflect the effects of all 5% stock
dividends issued.
A summary of the activity under the stock-based option plans for the year
ended December 31 is as follows:
2001 2000 1999
------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- --------- ---------- --------- ---------- ---------
Outstanding, January 1 . 936,006 $ 6.17 1,000,864 $ 5.19 1,072,762 $ 5.04
Granted. . . . . . . . . - - 151,924 $ 8.78 17,728 $ 12.15
Canceled . . . . . . . . (11,357) $ 9.73 (29,931) $ 7.35 (30,838) $ 6.83
Exercised. . . . . . . . (17,269) $ 3.15 (186,851) $ 2.87 (58,788) $ 3.49
-------- --------- --------- ---------- ---------- ---------
Outstanding, December 31 907,380 $ 6.18 936,006 $ 6.17 1,000,864 $ 5.19
======== ========= ========== ========= ========== =========
Exercisable, December 31 642,282 $ 5.62 537,634 $ 5.27 660,978 $ 4.42
======== ========= ========== ========= ========== =========
The following table summarizes information about stock options outstanding
under the stock-based option plans at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
RANGE OF EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES: OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ----------------- ----------- ----------- --------- ----------- ---------
2.15. . . . . . . 4,059 .1 years $ 2.15 4,059 $ 2.15
3.30 - $3.98. . 174,864 2.8 years $ 3.96 174,864 $ 3.96
5.33. . . . . . . 290,496 4.0 years $ 5.33 178,209 $ 5.33
5.78 - $5.88. . . 231,133 5.0 years $ 5.87 222,862 $ 5.87
7.93 - $8.62. . . 133,177 8.2 years $ 8.56 31,230 $ 8.47
9.52 - $11.56 . . 35,003 8.2 years $ 10.15 8,622 $ 10.41
13.16 - $13.39. . 38,648 6.4 years $ 13.19 22,436 $ 13.18
----------- ---------- ---------- ---------- --------
2.15 - $13.39. . 907,380 4.9 years $ 6.18 642,282 $ 5.62
=========== =========== ========= =========== =========
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 the years presented consistent with the provisions of SFAS 123, the
Company's net income and diluted earnings per share would have been reduced to
the proforma amounts as follows:
(dollars, except per share, in thousands) 2001 2000 1999
- ----------------------------------------- ------ ------ ------
Net income - as reported. . . . . . . . . $2,716 $2,655 $2,408
Net income - proforma . . . . . . . . . . $2,371 $2,398 $2,167
Diluted earnings per share - as reported. $ 0.66 $ 0.65 $ 0.59
Diluted earnings per share - proforma . . $ 0.57 $ 0.59 $ 0.52
There were no stock options granted during 2001. The weighted average fair
value per share of options granted in 2000, and 1999 amounted to $5.32 and
$7.64, 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 63.5% and 79.5% for 2000 and 1999, respectively;
risk-free interest rate of 4.95% and 6.00% for 2000 and 1999, respectively; and
expected lives of the options of 4.9 years and 4.6 years for 2000 and 1999,
respectively. There were no cash dividends in any year.
NOTE 16 - 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 or
results of operations.
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 each year 2001, 2000 and 1999. A total of
$157,000, $124,000, and $113,000, respectively, in 2001, 2000, and 1999 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 completion of six years of service, as
defined in the Plan.
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, 2001, 2000 and 1999 amounted to $62,000, $56,000
and $52,000, respectively. To partially finance benefits to be paid under this
plan, the Bank purchased, and is the beneficiary of, several 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
$2,012,000 and $1,919,000 at December 31, 2001 and 2000, respectively.
NOTE 18 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit and involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheet. The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amounts of those
instruments.
The Company uses the same credit and collateral policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by
the Company upon extension of credit is based on management's credit evaluation.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without
being drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
At December 31, 2001 the Company's commitments to extend additional credit
totaled approximately $47,241,000, of which approximately $2,804,000 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 $4,798,000 at December
31, 2001. The credit risk involved in the underwriting of letters of credit is
essentially the same as that involved in extending loan facilities to customers.
NOTE 19 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of financial instruments in accordance
with SFAS 107, "Disclosures about Fair Value of Financial Instruments". Fair
value is assumed to approximate book value for the following financial
instruments due to the short-term nature of the instrument: cash and due from
banks, interest-bearing bank balances, federal funds sold, 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. 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.
Fair value for demand deposit accounts and variable rate interest-bearing
accounts is equal to the carrying value. Fair value of certificate of deposit
accounts are estimated by discounting cash flows from expected maturities using
current interest rates on similar instruments. Fair value for FHLB advances is
based on discounted cash flows using the current market rate.
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 as
of December 31 are as follows: (dollars in thousands)
2001 2000
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ----------- --------- -----------
FINANCIAL ASSETS:
Cash and due from banks. . . . . . . . . $ 8,579 $ 8,579 $ 7,604 $ 7,604
Interest-bearing bank balances . . . . . 945 945 5,111 5,111
Federal funds sold . . . . . . . . . . . 925 925 16,680 16,680
Investment securities available for sale 47,400 47,400 32,445 32,445
Loans, net . . . . . . . . . . . . . . . 204,104 216,977 177,961 172,234
FINANCIAL LIABILITIES:
Deposits . . . . . . . . . . . . . . . . 218,778 219,914 209,191 209,814
Other short-term borrowings. . . . . . . 500 500 500 500
FHLB advances. . . . . . . . . . . . . . 26,900 26,121 16,000 15,875
NOTE 20 - 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, the
Company provides a full range of banking services and nondeposit investment
services. The Finance Company makes and services small, short-term installment
loans and related credit insurance products to individuals. 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.
(dollars in thousands) BANK FINANCE CORPORATE TOTAL
- --------------------------- -------- --------- ----------- --------
AT AND FOR THE YEAR ENDED
DECEMBER 31, 2001
Interest income . . . . . . $ 18,439 $ 1,813 ($47) $ 20,205
Interest expense. . . . . . 9,776 266 (235) 9,807
-------- --------- ----------- --------
Net interest income . . . . 8,663 1,547 188 10,398
Provision for loan losses . 478 247 - 725
Noninterest income. . . . . 2,293 337 (48) 2,582
Noninterest expenses. . . . 6,763 1,482 14 8,259
-------- --------- ----------- --------
Income before income taxes. 3,715 155 126 3,996
Income taxes. . . . . . . . 1,174 60 46 1,280
-------- --------- ----------- --------
Net income. . . . . . . . . $ 2,541 $ 95 $ 80 $ 2,716
======== ========= =========== ========
Net loans . . . . . . . . . $201,682 $ 3,368 ($946) $204,104
======== ========= =========== ========
Total assets. . . . . . . . $269,570 $ 3,964 ($437) $273,097
======== ========= =========== ========
AT AND FOR THE YEAR ENDED
DECEMBER 31, 2000
Interest income . . . . . . $ 17,787 $ 1,744 ($114) $ 19,417
Interest expense. . . . . . 9,356 342 (304) 9,394
-------- --------- ----------- --------
Net interest income . . . . 8,431 1,402 190 10,023
Provision for loan losses . 495 159 - 654
Noninterest income. . . . . 1,562 332 (48) 1,846
Noninterest expenses. . . . 5,847 1,514 (5) 7,356
-------- --------- ----------- --------
Income before income taxes. 3,651 61 147 3,859
Income taxes. . . . . . . . 1,155 (6) 55 1,204
-------- --------- ----------- --------
Net income. . . . . . . . . $ 2,496 $ 67 $ 92 $ 2,655
======== ========= =========== ========
Net loans . . . . . . . . . $176,088 $ 3,314 ($1,441) $177,961
======== ========= =========== ========
Total assets. . . . . . . . $247,360 $ 4,000 ($1,525) $249,835
======== ========= =========== ========
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
======== ========= =========== ========
NOTE 21 - PARENT COMPANY FINANCIAL INFORMATION
The following is condensed financial information of Summit Financial
Corporation (parent company only) at December 31, 2001 and 2000 and for the
years ended December 31, 2001, 2000, and 1999.
SUMMIT FINANCIAL CORPORATION
CONDENSED BALANCE SHEETS
DECEMBER 31,
(dollars in thousands) 2001 2000
- ------------------------------------- ------- -------
ASSETS
Cash. . . . . . . . . . . . . . . . . $ 331 $ 1,053
Interest-bearing deposits . . . . . . 613 -
Investment in bank subsidiary . . . . 21,234 18,522
Investment in nonbank subsidiary. . . 215 120
Due from subsidiaries . . . . . . . . 2,243 1,860
Other assets. . . . . . . . . . . . . 2 -
------- -------
$24,638 $21,555
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accruals and other liabilities. . . . $ 35 $ 27
Due to subsidiaries . . . . . . . . . 2 -
Shareholders' equity. . . . . . . . . 24,601 21,528
------- -------
$24,638 $21,555
======= =======
SUMMIT FINANCIAL CORPORATION
CONDENSED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
(dollars in thousands) 2001 2000 1999
- ----------------------------------- ------ ------ ------
Interest income . . . . . . . . . . $ 188 $ 191 $ 153
Interest expense. . . . . . . . . . - - 1
------ ------ ------
Net interest income . . . . . . . . 188 191 152
Noninterest expenses. . . . . . . . 62 43 57
------ ------ ------
Net operating income. . . . . . . . 126 148 95
Equity in undistributed net income
of subsidiaries. . . . . . . . . . 2,636 2,562 2,346
------ ------ ------
Income before taxes . . . . . . . . 2,762 2,710 2,441
Income taxes. . . . . . . . . . . . 46 55 33
------ ------ ------
Net income. . . . . . . . . . . . . $2,716 $2,655 $2,408
====== ====== ======
SUMMIT FINANCIAL CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(dollars in thousands) 2001 2000 1999
- ------------------------------------------------------ -------- -------- --------
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 2,716 $ 2,655 $ 2,408
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries . . (2,636) (2,562) (2,346)
(Increase) decrease in other assets. . . . . . . . . . (2) - 2
Increase (decrease) in other liabilities . . . . . . . 8 (13) 2
Amortization of deferred compensation. . . . . . . . . 126 128 101
-------- -------- --------
Net cash provided by operating activities . . . . 212 208 167
-------- -------- --------
INVESTING ACTIVITIES:
Net (increase) decrease in due from subsidiary . . . . (383) 19 (15)
Net increase (decrease) in due to subsidiary . . . . . 2 - (3)
-------- -------- --------
Net cash (used) provided by investing activities. (381) 19 (18)
-------- -------- --------
FINANCING ACTIVITIES:
Repayments of notes payable. . . . . . . . . . . . . . - - (320)
Employee stock options exercised . . . . . . . . . . . 63 561 286
Cash paid in lieu of fractional shares . . . . . . . . (3) (2) (2)
-------- -------- --------
Net cash provided (used) by financing activities. 60 559 (36)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents . (109) 786 113
Balance, beginning of year . . . . . . . . . . . . . . 1,053 267 154
-------- ------- ---------
Balance, end of year . . . . . . . . . . . . . . . . . $ 944 $ 1,053 $ 267
======== ======== ========
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, 2001
and 2000, 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, 2001. 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 auditing standards generally
accepted in the United States of America. 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, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Greenville, South Carolina
January 18, 2002
MANAGEMENT'S REPORT
The management of Summit Financial Corporation is responsible for the
preparation and integrity of the consolidated financial statements and other
information presented in this annual report. The consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America and include amounts based on
management's estimates and judgement with respect to certain events and
transactions.
Management is responsible for maintaining a system of internal control.
The purpose of the system is to provide reasonable assurance that transactions
are recorded in accordance with management's authorization, that assets are
safeguarded against loss or unauthorized use, and that underlying financial
records support the preparation of financial statements. The system includes
the communication of written policies and procedures, selection of qualified
personnel, appropriate segregation of responsibilities, and the ongoing internal
audit function.
The Board of Directors meets periodically with Company management, the
internal auditor, and the independent auditors, KPMG LLP, to review matters
relative to the quality of financial reporting, internal control, and the
nature, extent and results of the audit efforts.
The independent auditors conduct an annual audit to enable them to express
an opinion on the Company's consolidated financial statements. In connection
with the audit, the independent auditors consider the Company's internal control
to the extent they consider necessary to determine the nature, timing, and
extent of their auditing procedures.
/s/ J. Randolph Potter /s/ Blaise B. Bettendorf
J. Randolph Potter Blaise B. Bettendorf
President and Chief Executive Officer Senior Vice President and
Chief Financial Officer
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 under the headings
"Election of Directors", "Executive Officers and Compensation" and "Section
16(a) Beneficial Ownership Reporting Compliance" in the definitive Proxy
Statement of the Company filed in connection with its 2002 Annual Meeting of the
Shareholders, which information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the headings
"Directors' Compensation", "Executive Officers and Compensation", "Compensation
Committee Report", and "Stock Performance Graph" in the definitive Proxy
Statement of the Company filed in connection with its 2002 Annual Meeting of
Shareholders, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the headings
"Stock Ownership" and "Election of Directors" in the definitive Proxy Statement
of the Company filed in connection with its 2002 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" and "Transactions
with Management" in the definitive Proxy Statement of the Company filed in
connection with its 2002 Annual Meeting of Shareholders, which information is
incorporated herein by reference.
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, 2001 and 2000
Consolidated Statements of Income For The Years Ended December 31,
2001, 2000, and 1999
Consolidated Statements of Shareholders' Equity And Comprehensive
Income For The Years Ended December 31, 2001, 2000, and 1999
Consolidated Statements of Cash Flows For The Years Ended December 31,
2001, 2000, and 1999
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
Exhibit 3.1 filed with the Registrant's Registration Statement on Form S-1 Under
The Securities Act of 1933, File No. 33-31466).
3.2 Bylaws, as amended (incorporated by reference to Exhibit 3.2 filed
with the Registrant's Registration Statement on Amendment No. 1 To Form S-1
Under The Securities Act of 1933, File No. 33-31466).
4. Form of Certificate for Common Stock (incorporated by reference to
Exhibit 4 filed with the Registrant's Registration Statement on Amendment No. 1
To Form S-1 Under The Securities Act of 1933, File No. 33-31466).
10.1 Summit Financial Corporation Incentive Stock Plan (incorporated by
reference to Exhibit 10.1 filed with the Registrant's Registration Statement on
Form S-1 Under The Securities Act of 1933, File No. 33-31466).
10.2 Lease Agreement for North Pleasantburg Drive Bank Site
(incorporated by reference to Exhibit 10.2 filed with the Registrant's
Registration Statement on Form S-1 Under The Securities Act of 1933, File No.
33-31466).
10.3 Employment Agreement of J. Randolph Potter dated December 21, 1998
(incorporated by reference to Exhibit 10.3 filed with the Registrant's Annual
Report 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 Exhibit 10.4 filed with the Registrant's
Annual Report 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 Exhibit 10.5 filed with the Registrant's Annual Report 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 Exhibit 10.6 filed with the Registrant's Annual
Report 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
(incorporated by reference to Exhibit 10.7 filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999, File No. 000-19235).
10.8 Summit Financial Corporation 1999 Incentive Stock Plan (incorporated by
reference to Exhibit 10.8 filed the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1999, File No. 000-19235).
10.9 Employment Agreement of James G. Bagnal dated April 20, 2000
(incorporated by reference to Exhibit 10.9 filed with the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2000, File No. 000-19235).
10.10 Lease Agreement for East North Street Bank Site (incorporated by
reference to Exhibit 10.10 filed with the Registrant's Annual Report on Form
10-K for the year ended December 31, 2000, File No. 000-19235)
10.11 Salary Continuation Agreement of J. Randolph Potter dated September 9,
1998 (incorporated by reference to Exhibit 10.11 filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000, File No.
000-19235) .
10.12 Salary Continuation Agreement of Blaise B. Bettendorf dated September
9, 1998 (incorporated by reference to Exhibit 10.12 filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000, File No.
000-19235).
10.13 Salary Continuation Agreement of James B. Schwiers dated September 9,
1998 (incorporated by reference to Exhibit 10.13 filed with the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2000, File No.
000-19235).
21 Subsidiaries of Summit Financial Corporation:
Summit National Bank, a nationally chartered bank, incorporated
in South Carolina
Summit Investment Services, Inc., a subsidiary of Summit National
Bank, incorporated in South Carolina
Freedom Finance, Inc., a consumer finance company, incorporated
in South Carolina
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).
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 $.50 per page for photocopying such exhibit.
(b) No reports on Form 8-K were filed by the Registrant during the
fourth quarter of 2001.
(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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Greenville, South Carolina, on the 18th day of March, 2002.
SUMMIT FINANCIAL CORPORATION
/s/ J. Randolph Potter
---------------------------
Dated: March 18, 2002 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.
SIGNATURE TITLE DATE
/s/ J. Randolph Potter . President, Chief Executive March 18, 2002
- --------------------------
J. Randolph Potter . . . . Officer and Director
/s/ Blaise B. Bettendorf Senior Vice President March 18, 2002
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Blaise B. Bettendorf . . . (Principal Financial and
Accounting Officer)
/s/ C. Vincent Brown . . Chairman March 18, 2002
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C. Vincent Brown
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John A. Kuhne
/s/ David C. Poole . . . Secretary March 18, 2002
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David C. Poole
/s/ James G. Bagnal, III Director March 18, 2002
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James G. Bagnal, III
/s/ Ivan E. Block. . . . Director March 18, 2002
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Ivan E. Block
/s/ J. Earle Furman, Jr. Director March 18, 2002
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J. Earle Furman, Jr.
/s/ John W. Houser. . . . Director March 18, 2002
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John W. Houser
/s/ T. Wayne McDonald . . Director March 18, 2002
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T. Wayne McDonald
/s/ Allen H. McIntyre . . Director March 18, 2002
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T. Wayne McDonald
/s/ Larry A. McKinney. . Director March 18, 2002
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Larry A. McKinney
/s/ James B. Schwiers. . Director March 18, 2002
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James B. Schwiers