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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 2002
Commission File Number 000-19235
SUMMIT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0892056
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
Post Office Box 1087
937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address, including zip code, of principal executive offices)
(864) 242-2265
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 31, 2002, 3,803,972 shares of $1.00 par value common stock were
outstanding.
SUMMIT FINANCIAL COPORATION
FORM 10-Q FOR QUARTER ENDED JUNE 30, 2002
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PART I. FINANCIAL INFORMATION
Item 1.
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001. . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income
Three months and six months ended June 30, 2002 and 2001 . . . . . . . . . . . . 4
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income
Six months ended June 30, 2002 and 2001. . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001. . . . . . . . . . . . . . . . . . . . . 6
Condensed Notes to Consolidated Financial Statements June 30, 2002. . . . . . . . . . 7
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3.
Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . . . . . . 24
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
June 30, December 31,
2002 2001
---------- --------------
ASSETS
Cash and due from banks. . . . . . . . . . . . . . . $ 8,812 $ 8,579
Interest-bearing bank balances . . . . . . . . . . . 4,644 945
Federal funds sold . . . . . . . . . . . . . . . . . 5,409 925
Investments available for sale . . . . . . . . . . . 45,396 47,400
Investment in Federal Home Loan Bank and other stock 2,083 1,733
Loans, net of unearned income and net of
allowance for loan losses of $3,026 and $2,937. . . 213,048 204,104
Premises and equipment, net. . . . . . . . . . . . . 4,298 4,447
Accrued interest receivable. . . . . . . . . . . . . 1,347 1,393
Other assets . . . . . . . . . . . . . . . . . . . . 3,734 3,571
---------- --------------
$ 288,771 $ 273,097
========== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand. . . . . . . . . . . . . $ 31,941 $ 29,372
Interest-bearing demand . . . . . . . . . . . . . . 21,605 21,807
Savings and money market. . . . . . . . . . . . . . 71,572 85,388
Time deposits, $100,000 and over. . . . . . . . . . 47,829 41,798
Other time deposits . . . . . . . . . . . . . . . . 55,477 40,413
---------- --------------
228,424 218,778
FHLB advances. . . . . . . . . . . . . . . . . . . . 31,600 26,900
Other short-term borrowings. . . . . . . . . . . . . - 500
Accrued interest payable . . . . . . . . . . . . . . 853 1,194
Other liabilities. . . . . . . . . . . . . . . . . . 1,614 1,124
---------- --------------
262,491 248,496
---------- --------------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000
shares authorized; issued and
outstanding 3,803,972 and 3,793,032 shares . . . . 3,804 3,793
Additional paid-in capital. . . . . . . . . . . . . 18,446 18,409
Retained earnings . . . . . . . . . . . . . . . . . 3,952 2,379
Accumulated other comprehensive income, net of tax. 198 203
Nonvested resticted stock . . . . . . . . . . . . . (120) (183)
---------- --------------
Total shareholders' equity. . . . . . . . . . . 26,280 24,601
---------- --------------
$ 288,771 $ 273,097
========== ==============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars, except per share data, in Thousands)
(Unaudited)
For the Quarters Ended For the Six Months Ended
June 30, June 30,
---------------------- ----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Interest Income:
Loans. . . . . . . . . . . . . . . . . . . . $ 3,765 $ 4,383 $ 7,533 $ 8,982
Taxable investment securities. . . . . . . . 445 435 907 835
Nontaxable investment securities . . . . . . 181 131 355 262
Federal funds sold . . . . . . . . . . . . . 20 66 41 219
Other. . . . . . . . . . . . . . . . . . . . 42 70 82 165
---------- ---------- ---------- ----------
4,453 5,085 8,918 10,463
---------- ---------- ---------- ----------
Interest Expense:
Deposits . . . . . . . . . . . . . . . . . . 1,147 2,287 2,357 4,795
Other. . . . . . . . . . . . . . . . . . . . 393 245 794 505
---------- ---------- ---------- ----------
1,540 2,532 3,151 5,300
---------- ---------- ---------- ----------
Net interest income. . . . . . . . . . . 2,913 2,553 5,767 5,163
Provision for loan losses . . . . . . . . . . 225 209 350 337
---------- ---------- ---------- ----------
Net interest income after
provision for loan losses . . . . . . . 2,688 2,344 5,417 4,826
---------- ---------- ---------- ----------
Noninterest income:
Service charges and fees on deposit accounts 144 103 271 202
Credit card service fees and income. . . . . 125 120 237 225
Insurance commission fee income. . . . . . . 141 129 360 249
Gain on sale of securities . . . . . . . . . 30 78 45 90
Other income . . . . . . . . . . . . . . . . 222 259 431 506
---------- ---------- ---------- ----------
662 689 1,344 1,272
---------- ---------- ---------- ----------
Noninterest expenses:
Salaries, wages and benefits . . . . . . . . 1,334 1,207 2,701 2,432
Occupancy. . . . . . . . . . . . . . . . . . 160 171 319 339
Furniture, fixtures and equipment. . . . . . 166 174 349 342
Other expenses . . . . . . . . . . . . . . . 518 490 1,082 1,008
---------- ---------- ---------- ----------
2,178 2,042 4,451 4,121
---------- ---------- ---------- ----------
Income before income taxes. . . . . . . . . . 1,172 991 2,310 1,977
Provision for income taxes. . . . . . . . . . 372 317 737 641
---------- ---------- ---------- ----------
Net income. . . . . . . . . . . . . . . . . . $ 800 $ 674 $ 1,573 $ 1,336
========== ========== ========== ==========
Net income per share:
Basic. . . . . . . . . . . . . . . . . . . $ .21 $ .18 $ .42 $ .36
Diluted. . . . . . . . . . . . . . . . . . $ .19 $ .16 $ .37 $ .32
Average shares outstanding:
Basic. . . . . . . . . . . . . . . . . . . 3,783,000 3,741,000 3,779,000 3,747,000
Diluted. . . . . . . . . . . . . . . . . . 4,323,000 4,109,000 4,261,000 4,112,000
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Dollars in Thousands)
(Unaudited)
Accumulated
other
Additional comprehensive Nonvested Total
Common paid-in Retained (loss) restricted shareholders'
stock capital earnings income, net stock equity
-------- ------------ --------- --------------- ----------- ---------------
Balance at December 31, 2000. . . . $ 3,598 $ 16,803 $ 1,425 $ 32 ($330) $ 21,528
Net income for the six months
ended June 30, 2001. . . . . . . . - - 1,336 - - 1,336
Other comprehensive income:
Unrealized gain on securities:
Unrealized holding gains arising
during the period, net
of tax of $97 . . . . . . . . . . - - - 168 - -
Less: reclassification adjustment
for gains included in net
income, net of tax of $31 . . . . - - - (59) - -
---------------
Other comprehensive income . . . . - - - 109 - 109
--------------- ---------------
Comprehensive income. . . . . . . . - - - - - 1,445
---------------
Forfeiture of common stock issued
pursuant to restricted stock plan. (2) (19) - - 21 -
Amortization of deferred
compensation on restricted stock . - - - - 62 62
-------- ------------ --------- --------------- ----------- ---------------
Balance at June 30, 2001. . . . . . $ 3,596 $ 16,784 $ 2,761 $ 141 ($247) $ 23,035
======== ============ ========= =============== =========== ===============
Balance at December 31, 2001. . . . $ 3,793 $ 18,409 $ 2,379 $ 203 ($183) $ 24,601
Net income for the six months
ended June 30, 2002. . . . . . . . - - 1,573 - - 1,573
Other comprehensive loss:
Unrealized gain on securities:
Unrealized holding gains arising
during the period, net
of tax of $13 . . . . . . . . . . - - - 23 - -
Less: reclassification adjustment
for gains included in net
income, net of tax of ($17) . . . - - - (28) - -
---------------
Other comprehensive loss . . . . . - - - (5) - (5)
--------------- ---------------
Comprehensive income. . . . . . . . - - - - - 1,568
---------------
Stock options exercised . . . . . . 11 37 - - - 48
Amortization of deferred
compensation on restricted stock . - - - - 63 63
-------- ------------ --------- --------------- ----------- ---------------
Balance at June 30, 2002. . . . . . $ 3,804 $ 18,446 $ 3,952 $ 198 ($120) $ 26,280
======== ============ ========= =============== =========== ===============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the Six Months Ended
June 30,
--------------------
2002 2001
--------- ---------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,573 $ 1,336
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses . . . . . . . . . . . . . . . . 350 337
Depreciation and amortization . . . . . . . . . . . . . . 260 240
Gain on sale of equipment and vehicles. . . . . . . . . . - (28)
Gain on sale securities available for sale. . . . . . . . (45) (90)
Net amortization of net premium on investments. . . . . . 86 54
Amortization of deferred compensation on restricted stock 63 62
Decrease in other assets. . . . . . . . . . . . . . . . . 26 183
Increase (decrease) in other liabilities. . . . . . . . . 149 (20)
Deferred income taxes . . . . . . . . . . . . . . . . . . (139) (81)
--------- ---------
Net cash provided by operating activities . . . . . . . . . . 2,323 1,993
--------- ---------
Cash flows from investing activities:
Purchases of securities available for sale. . . . . . . . . (10,873) (12,844)
Proceeds from maturities of securities available for sale . 4,898 4,165
Proceeds from sales of securities available for sale. . . . 7,929 3,046
Purchases of investments in FHLB and other stock. . . . . . (350) -
Net increase in loans . . . . . . . . . . . . . . . . . . . (9,294) (22,015)
Purchases of premises and equipment . . . . . . . . . . . . (111) (1,330)
Proceeds from sale of equipment and vehicles. . . . . . . . - 57
--------- ---------
Net cash used in investing activities . . . . . . . . . . . . (7,801) (28,921)
--------- ---------
Cash flows from financing activities:
Net increase in deposit accounts. . . . . . . . . . . . . . 9,646 5,317
Net decrease in other short-term borrowings . . . . . . . . (500) -
Proceeds from FHLB advances . . . . . . . . . . . . . . . . 11,000 10,000
Repayments of FHLB advances . . . . . . . . . . . . . . . . (6,300) (6,000)
Proceeds from employee stock options exercised. . . . . . . 48 -
--------- ---------
Net cash provided by financing activities . . . . . . . . . . 13,894 9,317
--------- ---------
Net increase (decrease) in cash and cash equivalents. . . . . 8,416 (17,611)
Cash and cash equivalents, beginning of period. . . . . . . . 10,449 29,395
--------- ---------
Cash and cash equivalents, end of period. . . . . . . . . . . $ 18,865 $ 11,784
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest. . . . . . . . . . . $ 3,492 $ 5,415
Cash paid during the period for income taxes. . . . . . . . . $ 687 $ 663
Change in fair market value of investment securities
available for sale, net of income taxes. . . . . . . . . . . ($5) $ 109
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMIT FINANCIAL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
NOTE 1 - BASIS OF PRESENTATION:
Summit Financial Corporation (the "Company"), a South Carolina corporation,
is the parent holding company for Summit National Bank (the "Bank"), a
nationally chartered bank, and Freedom Finance, Inc. (the "Finance Company"), a
consumer finance company.
Through its bank subsidiary, which commenced operations in July 1990, the
Company provides a full range of banking services, including the taking of
demand and time deposits and the making of commercial and consumer loans. The
Bank currently has four full service branch locations in Greenville and
Spartanburg, South Carolina. In 1997, the Bank incorporated Summit Investment
Services, Inc. as a wholly-owned subsidiary to offer nondeposit products and
financial management services. The Finance Company commenced operations in
November 1994 and makes and services small installment loans to individuals from
its eleven offices throughout South Carolina.
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation. The unaudited consolidated
financial statements of the Company at June 30, 2002 and for the three month and
six month periods ended June 30, 2002 and 2001 were prepared in accordance with
the instructions for Form 10-Q. In the opinion of management, all adjustments
(consisting only of items of a normal recurring nature) necessary for a fair
presentation of the financial position at June 30, 2002, and the results of
operations and cash flows for the periods ended June 30, 2002 and 2001 have been
included. The results for the three month or six month periods ended June 30,
2002 are not necessarily indicative of the results that may be expected for the
full year or any other interim period.
The consolidated financial statements are prepared in conformity with
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, the estimates affect the reported income and
expense during the reporting period. Actual results could differ from these
estimates and assumptions.
These consolidated financial statements do not include all disclosures
required by GAAP and should be read in conjunction with the Company's audited
consolidated financial statements and related notes for the year ended December
31, 2001 included in the Company's 2001 Annual Report on Form 10-K.
NOTE 2 - CASH FLOW INFORMATION:
For the purposes of reporting cash flows, cash includes currency and
coin, cash items in process of collection and due from banks. Included in cash
and cash equivalents are federal funds sold and overnight investments. The
Company considers the amounts included in the balance sheet line items, "Cash
and due from banks", "Interest-bearing bank balances" and "Federal funds sold"
to be cash and cash equivalents. These accounts totaled $18,865,000 and
$11,784,000 at June 30, 2002 and 2001, respectively.
NOTE 3 - NONPERFORMING ASSETS:
Loans past due in excess of 90 days and still accruing interest amounted to
approximately $90,000 and $153,000 at June 30, 2002 and December 31, 2001,
respectively. At June 30, 2002 and December 31, 2001 the Company had
approximately $213,000 and $1.2 million, respectively, in non-accrual loans.
There were no impaired loans at June 30, 2002. Approximately $1.0 million of
the non-accrual loans at December 31, 2001 was considered to be impaired under
Statement of Financial Accounting Standards 114. The average balance of
impaired loans was $1,099,000 for the year ended December 31, 2001 and there was
no impairment allowance required at that date. Interest income recognized on
impaired loans during 2001 was approximately $35,000. There was no other real
estate owned at June 30, 2002 or December 31, 2001.
NOTE 4 - PER SHARE INFORMATION:
The following is a reconciliation of the denominators of the basic and
diluted per share computations for net income for the quarter and the six months
ended June 30, 2002 and 2001. There is no required reconciliation of the
numerator from the net income reported on the accompanying statements of income.
All average share and per share data have been restated to reflect all stock
dividends as of the earliest period presented. (All numbers, except per share
data, in thousands).
For the Quarters Ended June 30,
2002 2002 2001 2001
---------- ---------- ---------- ----------
BASIC DILUTED BASIC DILUTED
---------- ---------- ---------- ----------
Net Income . . . . . . . . . . $ 800,000 $ 800,000 $ 674,000 $ 674,000
---------- ---------- ---------- ----------
Average shares outstanding . . 3,782,584 3,782,584 3,740,940 3,740,940
Effect of Dilutive Securities:
Stock options. . . . . . . - 519,850 - 333,136
Unvested restricted stock. - 20,190 - 35,089
---------- ---------- ---------- ----------
3,782,584 4,322,624 3,740,940 4,109,165
---------- ---------- ---------- ----------
Per-share amount . . . . . . . $ 0.21 $ 0.19 $ 0.18 $ 0.16
========== ========== ========== ==========
For the Six Months Ended June 30,
2002 2002 2001 2001
---------- ---------- ---------- ----------
BASIC DILUTED BASIC DILUTED
---------- ---------- ---------- ----------
Net Income . . . . . . . . . . $1,573,000 $1,573,000 $1,336,000 $1,336,000
---------- ---------- ---------- ----------
Average shares outstanding . . 3,778,997 3,778,997 3,746,863 3,746,863
Effect of Dilutive Securities:
Stock options. . . . . . . - 462,121 - 330,142
Unvested restricted stock. - 20,190 - 35,089
---------- ---------- ---------- ----------
3,778,997 4,261,308 3,746,863 4,112,094
---------- ---------- ---------- ----------
Per-share amount . . . . . . . $ 0.42 $ 0.37 $ 0.36 $ 0.32
========== ========== ========== ==========
NOTE 5 - SEGMENT INFORMATION:
The Company reports information about its operating segments in accordance
with SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information". Summit Financial Corporation is the parent holding company for
Summit National Bank ("Bank"), a nationally chartered bank, and Freedom Finance,
Inc. ("Finance"), a consumer finance company. The Company considers the Bank
and the Finance Company separate business segments.
Financial performance for each segment is detailed in the following tables.
Included in the "Corporate" column are amounts for general corporate activities
and eliminations of intersegment transactions.
For the quarter ended At and for the six months ended
June 30, 2002 June 30,2002
------------------------------------ -----------------------------------------
Bank Finance Corporate Total Bank Finance Corporate Total
------ -------- ----------- ------ -------- -------- ----------- --------
Interest income . . . . . $4,001 $ 460 ($8) $4,453 $ 7,951 $ 980 ($13) $ 8,918
Interest expense. . . . . 1,537 46 (43) 1,540 3,143 91 (83) 3,151
------ -------- ----------- ------ -------- -------- ----------- --------
Net interest income . . . 2,464 414 35 2,913 4,808 889 70 5,767
Provision for loan losses 145 80 - 225 195 155 - 350
Other income. . . . . . . 600 77 (15) 662 1,206 168 (30) 1,344
Other expenses. . . . . . 1,834 339 5 2,178 3,736 708 7 4,451
------ -------- ----------- ------ -------- -------- ----------- --------
Income before taxes . . . 1,085 72 15 1,172 2,083 194 33 2,310
Income taxes. . . . . . . 340 27 5 372 653 72 12 737
------ -------- ----------- ------ -------- -------- ----------- --------
Net income. . . . . . . . $ 745 $ 45 $ 10 $ 800 $ 1,430 $ 122 $ 21 $ 1,573
====== ======== =========== ====== ======== ======== =========== ========
Net loans $210,986 $ 3,228 ($1,166) $213,048
======== ======== =========== ========
Total assets $285,405 $ 3,816 ($450) $288,771
======== ======== =========== ========
For the quarter ended At and for the six months ended
June 30, 2001 June 30,2001
------------------------------------ -----------------------------------------
Bank Finance Corporate Total Bank Finance Corporate Total
------ -------- ----------- ------ -------- -------- ----------- --------
Interest income . . . . . $4,672 $ 427 ($14) $5,085 $ 9,593 $ 904 ($34) $ 10,463
Interest expense. . . . . 2,523 70 (61) 2,532 5,282 149 (131) 5,300
------ -------- ----------- ------ -------- -------- ----------- --------
Net interest income . . . 2,149 357 47 2,553 4,311 755 97 5,163
Provision for loan losses 155 54 - 209 250 87 - 337
Other income. . . . . . . 618 83 (12) 689 1,123 173 (24) 1,272
Other expenses. . . . . . 1,677 363 2 2,042 3,381 734 6 4,121
------ -------- ----------- ------ -------- -------- ----------- --------
Income before taxes . . . 935 23 33 991 1,803 107 67 1,977
Income taxes. . . . . . . 299 8 10 317 576 42 23 641
------ -------- ----------- ------ -------- -------- ----------- --------
Net income. . . . . . . . $ 636 $ 15 $ 23 $ 674 $ 1,227 $ 65 $ 44 $ 1,336
====== ======== =========== ====== ======== ======== =========== ========
Net loans $197,283 $ 3,160 ($804) $199,639
======== ======== =========== ========
Total assets $257,680 $ 3,809 ($870) $260,619
======== ======== =========== ========
SUMMIT FINANCIAL CORPORATION
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements and related notes and with the statistical
information and financial data appearing in this report as well as the Annual
Report of Summit Financial Corporation (the "Company") on Form 10K for the year
ended December 31, 2001. Results of operations for the three month and six
month periods ended June 30, 2002 are not necessarily indicative of results to
be attained for any other period.
FORWARD-LOOKING STATEMENTS
This report may contain certain "forward-looking statements", within the
meaning of Section 27A of the Securities Exchange Act of l934, as amended, that
represent the Company's expectations or beliefs concerning future events. Such
forward-looking statements are about matters that are inherently subject to
certain risks, uncertainties, and assumptions. Factors that could influence the
matters discussed in certain forward-looking statements include the relative
levels of market interest rates, loan prepayments and deposit decline rates, the
timing and amount of revenues that may be recognized by the Company,
continuation of current revenue, expense and charge-off trends, legal and
regulatory changes, and general changes in the economy. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those expected or projected.
These forward-looking statements speak only as of the date of the document. The
Company assumes no obligation to update any forward-looking statements. Because
of the risks and uncertainties inherent in forward-looking statements, readers
are cautioned not to place undue reliance on them.
OVERVIEW
Summit Financial Corporation is a financial institution holding company
headquartered in Greenville, South Carolina. The Company offers a broad range
of financial services through its wholly-owned subsidiary, Summit National Bank
(the "Bank," or "Summit"). The Bank is a nationally chartered commercial bank
which operates principally in the Upstate of South Carolina. The Bank received
its charter and commenced operations in July 1990. In 1997, the Bank
incorporated Summit Investment Services, Inc. as a wholly-owned subsidiary to
provide a wider range of investment products and financial planning services.
The Bank currently has four full service offices in Greenville and Spartanburg,
South Carolina. Summit provides a full range of banking services to individuals
and businesses, including the taking of time and demand deposits, making loans,
and offering nondeposit investment services. The Bank emphasizes close personal
contact with its customers and strives to provide a consistently high level of
service to both individual and corporate customers.
Freedom Finance, Inc. (the "Finance Company" or "Freedom,") is a
wholly-owned subsidiary of the Company which is operating as a consumer finance
company headquartered in Greenville, South Carolina. The Finance Company
primarily makes and services installment loans to individuals with loan
principal amounts generally not exceeding $2,000 and with maturities ranging
from three to eighteen months. Freedom operates eleven branches throughout
South Carolina.
During the quarter ended June 30, 2002, the Company's net income totaled
$800,000 or $.19 per diluted share. This is compared to net income of $674,000
or $.16 per diluted share for the same quarterly period of 2001. For the first
six months of 2002, the Company reported net income of $1,573,000 or $0.37 per
diluted share, an improvement of approximately $237,000 or 18% from the net
income for the first six months of 2001 of $1,336,000 or $0.32 per diluted
share.
BALANCE SHEET ACTIVITY
Total assets increased $15.7 million or 6% from December 31, 2001 to June
30, 2002. Deposits increased approximately $9.6 million or 4% during the
period. A majority of the increase in deposits was in time deposits, which
increased $21.1 million related primarily to promotional offerings during the
period. This increase was partially offset by decreases in the money market
deposit category of $13.8 million. Gross loan growth of $9.0 million (4%) was
funded by the increase in deposits. Increases in FHLB advances of $4.7 million
funded increases in liquidity, primarily in federal funds sold which was $4.5
million higher at June 30, 3002 than at year end.
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 June
30, 2002. 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 $3.0 million, or 1.40% of total
loans, at June 30, 2002. This is compared to an allowance of $2.9 million, or
1.42% of total loans, at December 31, 2001. For the quarter ended June 30,
2002, the Company reported net charge-offs of $195,000, or 0.37% (annualized) of
average loans. This is compared to net charge-offs of $104,000, or 0.22%
(annualized) of average loans, for the comparable quarter of 2001.
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. Loans past due 90 days and
greater totaled $90,000, or 0.04% of gross loans, at June 30, 2002 compared to
$153,000, or 0.07% of gross loans, at December 31, 2001. Loans on non-accrual
totaled $213,000 and $1.2 million at June 30, 2002 and December 31, 2001,
respectively. 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.
There were no loans considered to be impaired under Statement of Financial
Accounting Standards 114 and no other real estate owned acquired in partial or
total satisfaction of problem loans ("OREO") at June 30, 2002. Impaired loans,
which were on non-accrual status, at December 31, 2001, totaled $1.0 million.
There was no OREO at December 31, 2001.
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 determined to be potential problem loans based upon
management's internal designations at June 30, 2002 and December 31, 2001, was
$2.9 million or 1.4% of the total loans outstanding and $2.5 million or 1.2% of
the loan portfolio, respectively. The amount of potential problem loans at June
30, 2002 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. Management believes that the allowance for loan losses as of June
30, 2002 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.
RESULTS OF OPERATIONS - COMPARISON OF THE QUARTERS ENDED JUNE 30, 2002 AND 2001
GENERAL
The Company reported consolidated net income for the quarter ended June 30,
2002 of $800,000, compared to net income of $674,000 for the quarter ended June
30, 2001, or an improvement of approximately $126,000 or 19%. The primary
factor in the increased earnings was a significant reduction in the interest
expense due to lower cost of funds as higher priced promotional time deposits
have matured and renewed at lower current market rates. The other primary
contributor to the higher net income for the second quarter of 2002 was the 11%
growth in average earning assets. The increases in income were somewhat offset
by the 4% decrease in other income and the 7% increase in overhead associated
with the greater number of accounts and higher level of activity at the Bank.
NET INTEREST INCOME
Net interest income, the difference between the interest earned and
interest paid, is the largest component of the Company's earnings and changes in
it have the greatest impact on net income. Variations in the volume and mix of
assets and liabilities and their relative sensitivity to interest rate movements
determine changes in net interest income. During the quarter ended June 30,
2002, the Company recorded consolidated net interest income of $2.9 million, a
14% increase from the net interest income of $2.6 million for the quarter ended
June 30, 2001. The increase in this amount is related to the increase in the
average earning asset and interest-bearing liability volume of the Company of
11% each, combined with the 14 basis point increase in the net interest margin
for the Company between the second quarter of 2001 and 2002.
For the quarter ended June 30, 2002 and 2001, the Company's consolidated
net interest margin was 4.49% and 4.35%, respectively. The net interest margin
is calculated as annualized net interest income divided by year-to-date average
earning assets. The increase in consolidated net interest margin is primarily
related to the 227 basis point reduction in the average cost of funds resulting
from the decreasing interest rate environment and repricing of maturing time
deposits. The cost of funds decrease was offset somewhat by the 177 basis point
decrease in the average yield on assets during the same period related primarily
to the lower prime interest rate. During the second quarter of 2002, the
average prime rate decreased 259 basis points compared to the second quarter of
2001, resulting in an average prime rate of 4.75% for the second quarter of 2002
compared to 7.34% for the quarter ended June 30, 2001.
INTEREST INCOME
For the quarter ended June 30, 2002, the Company's earning assets averaged
$ 268.7 million and had an average tax-equivalent yield of 6.79%. This compares
to average earning assets of $241.4 million for the second quarter of 2001,
yielding approximately 8.56%. Thus, the 11% increase in volume of average
earning assets, offset by the 177 basis point decrease in average yield,
accounts for the $632,000 (12%) decrease in interest income between the second
quarter of 2002 and 2001.
Average loans comprised approximately 79% of the Company's average earning
assets for the both the second quarters of 2002 and 2001. The majority of the
Company's loans are tied to the prime rate (over 60% of the Bank's portfolio is
at floating rates at June 30, 2002), which averaged 4.75% and 7.34% for the
quarters ended June 30, 2002 and 2001, respectively. During the second quarter
of 2002, consolidated loans averaged $211.8 million, yielding an average of
7.13%, compared to $190.7 million, yielding an average of 9.22% for the second
quarter of 2001. The 209 basis point decrease in the average yield on loans is
primarily related to the lower prime lending rate and the general decline in
interest rates. The higher level of average loans (which increased 11%), was
more than offset by the decrease in average rate, and resulted in the lower
consolidated interest income on loans of $618,000 or 14%.
Investment securities averaged $46.4 million or 17% of average earning
assets and yielded 6.21% (tax equivalent basis) during the second quarter of
2002, compared to average securities of $39.1 million yielding 6.49% (tax
equivalent basis) for the quarter ended June 30, 2001. The decrease in the
average yield of the investment portfolio is related to the general decline in
market interest rates during 2001, portfolio mix, and the timing of security
maturities, calls, and sales which were reinvested in lower current market rate
instruments. The 19% increase in average securities, offset somewhat by the
reduction in average rate of 28 basis points, resulted in the increase of
interest income on securities of $60,000 or 11%.
INTEREST EXPENSE
The Company's interest expense for the quarter ended June 30, 2002 was $1.5
million. The decrease of 39% from the comparable quarter in 2001 of $2.5
million was directly related to the 11% increase in volume of average
interest-bearing liabilities, which was more than offset by the 227 basis point
decrease in the average rate on liabilities. Interest-bearing liabilities
averaged $225.7 million for the second quarter of 2002 with an average rate of
2.74%. This is compared to average interest-bearing liabilities of $202.5
million with an average rate of 5.01% for the quarter ended June 30, 2001. The
decrease in average rate on liabilities is directly related to the general
decreasing interest rate environment and the repricing of deposits at lower
current market rates.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $225,000 for the second quarter of 2002,
compared to $209,000 for the comparable period of 2001. Changes in the
provision each year are generally related to the level of net originations in
each period as follows: $7.0 million for the quarter ended June 30, 2002 and
$18.1 million for the 2001 quarter. As discussed further under the "Allowance
for Loan Losses" section above, 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 and net chargeoffs, (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. Although the net originations were lower in the second quarter of 2002
as compared to the prior year, the higher provision in 2002 was related to the
increase in net charge-off activity of both the Bank and the Finance Company
which increased $90,000 or 87% between the two quarterly periods. 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, which is primarily related to service charges on
customers' deposit accounts; credit card interchange fees; merchant discount
fees; commissions on nondeposit investment product sales and insurance product
sales; and mortgage origination fees, was $662,000 for the quarter ended June
30, 2002 compared to $689,000 for the second quarter of 2001, or an decrease of
4%. Increases in service charges ($41,000 increase), credit card/merchant fees
($5,000 increase), and insurance commissions from nondeposit product sales
($12,000 increase) were related to higher levels of activity and number of
accounts at the Bank. These increases were more than offset by decreases in the
volume of sales of investments securities generating gains on sales and lower
mortgage origination and loan referral fees during the second quarter of 2002 as
compared with the prior year.
For the quarter ended June 30, 2002, noninterest expenses were $2.2 million
which is an increase of 7% over the amount incurred for the quarter ended June
30, 2001 of $2.0 million. The most significant item included in other expenses
is salaries, wages and benefits which amounted to $1.3 million for the quarter
ended June 30, 2002 as compared to $1.2 million for the quarter ended June 30,
2001. The increase of $127,000 or 11% is a result of normal annual raises,
higher commissions on nondeposit sales, approximately 8 additional full-time
equivalent staff, primarily related to the fully operational branch in
Spartanburg, and increases in group insurance and other benefit costs.
Occupancy and furniture, fixtures, and equipment ("FFE") expenses decreased
$19,000 or 6% between the second quarter of 2002 and 2001. There were no
significant changes in or additions to property and premises between the two
quarterly periods.
Included in the line item "other expenses", which increased $28,000 or 6%
from the comparable period of 2001, are charges for OCC assessments; property
and bond insurance; ATM switch fees; credit card expenses; professional
services; education and seminars; advertising and public relations; and other
branch and customer related expenses. The increase is primarily related to
higher level of activity, the additional branch location, increases in
advertising for deposit promotions and advertising campaigns, and higher legal
and consultant expenses incurred in 2002.
INCOME TAXES
For the quarter ended June 30, 2002, the Company reported $372,000 in
income tax expense, or an effective tax rate of 31.7%. This is compared to
income tax expense of $317,000 for the same period of the prior year, or an
effective tax rate of 32.0%.
RESULTS OF OPERATIONS -- COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2002 AND
2001
GENERAL
The Company reported consolidated net income for the six months ended June
30, 2002 of $1,573,000, compared to net income of $1,336,000 for the six months
ended June 30, 2001, or an improvement of approximately $237,000 or 18%. The
primary factor in the increased earnings from the same period of the prior year
was the significant reduction in interest expense due to the lower cost of funds
as higher priced promotional time deposits have matured and renewed at lower
current market rates. The other primary contributors to higher net income for
the six months ended June 30, 2002 as compared with the prior year was the 12%
growth in average earning assets and the 6% increase in other income. These
increases were somewhat offset by the 8% increase in overhead associated with
the greater number of accounts and higher level of activity at the Bank.
NET INTEREST INCOME
Net interest income, the difference between the interest earned and
interest paid, is the largest component of the Company's earnings and changes in
it have the greatest impact on net income. Variations in the volume and mix of
assets and liabilities and their relative sensitivity to interest rate movements
determine changes in net interest income. During the six months ended June 30,
2002, the Company recorded consolidated net interest income of $5.8 million, a
12% increase from the net interest income of $5.2 million for the six months
ended June 30, 2001. The increase in this amount is directly related to the
increase in the average earning asset and interest-bearing liability volume of
the Company of 12% each.
For both the six months ended June 30, 2002 and 2001, the Company's
consolidated net interest margin was 4.50%. The net interest margin is
calculated as annualized net interest income divided by year-to-date average
earning assets. The net interest margin did not change between the 2001 and 2002
periods because decreases in the average yield on assets due to a lower prime
interest rate were offset by reductions in the cost of funds related to the
declining interest rate environment and the repricing of maturing time deposits.
INTEREST INCOME
For the six months ended June 30, 2002, the Company's earning assets
averaged $266.7 million and had an average yield of 6.88%. This compares to
average earning assets of $237.6 million for the first six months of 2001,
yielding approximately 8.99%. Thus, the 12% increase in volume of average
earning assets, which was more than offset by the 211 basis point decrease in
average yield, accounts for the $1.5 million (15%) decrease in interest income
between 2002 and 2001.
Consolidated loans averaged approximately 79% and 78% of the Company's
average earning assets for the first six months of 2002 and 2001, respectively.
The majority of the Company's loans are tied to the prime rate (over 60% of the
Bank's portfolio is at floating rates at June 30, 2002), which averaged 4.75%
and 7.98% for the six months ended June 30, 2002 and 2001, respectively. During
the first six months of 2002, consolidated loans averaged $209.7 million,
yielding an average of 7.25%, compared to $186.4 million, yielding an average of
9.72% for the first six months of 2001. The 247 basis point decrease in the
average yield on loans is primarily related to the lower prime lending rate
which decreased 323 basis points between 2001 and 2002. The higher level of
average loans (which increased 13%), offset by the decrease in average rate,
resulted in a decrease in consolidated interest income on loans of $1.4 million
or 16%.
Investment securities averaged $46.9 million or 18% of average earning
assets and yielded 6.21% (tax equivalent basis) during the first six months of
2002, compared to average securities of $36.7 million yielding 6.77% (tax
equivalent basis) for the six months ended June 30, 2001. The decrease in
average yield on the investment portfolio of 56 basis points is related to the
general decline in market interest rates during 2001, portfolio mix, and the
timing of security maturities, calls, and sales which were reinvested in lower
current market rate instruments. The 28% increase in volume of investment
securities, offset somewhat by the reduction in average rate, resulted in the
increase in interest income on securities of $165,000 or 15%.
INTEREST EXPENSE
The Company's interest expense for the six months ended June 30, 2002 was
$3.2 million. The decrease of 41% from the comparable six months in 2001 of
$5.3 million was related to the 12% increase in the volume of average
interest-bearing liabilities, which was more than offset by the 251 basis point
decrease in the average rate on liabilities. Interest-bearing liabilities
averaged $224.7 million for the first six months of 2002 with an average rate of
2.83%. This is compared to average interest-bearing liabilities of $200.0
million with an average rate of 5.34% for the six months ended June 30, 2001.
The decrease in average rate on liabilities is directly related to the general
decreasing interest rate environment and the repricing of deposits at lower
current market rates.
PROVISION FOR LOAN LOSSES
As previously discussed under the quarterly analysis, the amount charged to
the provision for loan losses by the Bank and the Finance Company is based on
management's judgment as to the amounts required to maintain an allowance
adequate to provide for probable losses inherent in the loan portfolio.
Included in the net income for the six months ended June 30, 2002 is a
provision for loan losses of $350,000 compared to a provision of $337,000 for
the same period of 2001. Factors impacting the amount charged to the provision
each period, in addition to the level of net originations, are the increases in
past due, classified and problem loans; concentrations of credit risk in the
loan portfolio; local and national economic conditions and anticipated trends;
and the total outstanding loans and charge-off activity of the Finance Company
which generally have higher inherent risk than do loans of the Bank. Although
the net originations were lower for the first six months of 2002 as compared to
the prior year ($9.6 million in 2002 versus $22.0 million in 2001), the higher
provision in 2002 was related to the increase in net charge-off activity of both
the Bank and the Finance Company which increased $108,000 (70%) between the
comparable periods of 2002 and 2001. Estimates charged to the provision for loan
losses are based on management's judgment as to the amount required to cover
probable losses inherent in the loan portfolio and are adjusted as necessary.
NONINTEREST INCOME AND EXPENSES
Noninterest income, which is primarily related to service charges on
customers' deposit accounts; credit card interchange fees; merchant discount
fees; commissions on nondeposit investment product sales and insurance product
sales; and mortgage origination fees, was $1.34 million for the six months ended
June 30, 2002 compared to $1.27 million for the first six months of 2001, or an
increase of 6%. Increases in service charges ($69,000 increase), credit
card/merchant fees ($12,000 increase) and insurance commission fees from
nondeposit product sales ($111,000 increase) accounted for a majority of the
higher other income. The increases are primarily related to the higher levels of
activity and transactions of the Bank generating other income in the normal
course of business. These increases were somewhat offset by decreases in the
volume of investment security sales generating gains on sales and lower mortgage
originations and loan referral fees during 2002.
For the six months ended June 30, 2002, total noninterest expenses were
$4.5 million which is an increase of 8% over the amount incurred for the six
months ended June 30, 2001 of $4.1 million. The most significant item included
in other expenses is salaries, wages and benefits which amounted to $2.7 million
for the six months ended June 30, 2002 as compared to $2.4 million for the six
months ended June 30, 2001. The increase of $269,000 or 11% is a result of
normal annual raises, higher commissions on nondeposit sales, approximately 8
additional full-time equivalent staff primarily related to the fully operational
branch in Spartanburg, and increases in group insurance and other benefit costs.
Occupancy and furniture, fixtures, and equipment ("FFE") expenses decreased
a total of $13,000 or 2% between the first six months of 2002 and 2001. There
were no significant changes in or additions to property and premises between the
two periods.
Included in the line item "other expenses", which increased $74,000 or 7%
from the comparable period of 2001, are charges for OCC assessments; property
and bond insurance; ATM switch fees; credit card expenses; professional
services; education and seminars; advertising and public relations; and other
branch and customer related expenses. The increase is primarily related to
higher levels of activity and numbers of accounts at the Bank, the additional
branch location, increases in advertising for deposit promotion campaigns, and
higher legal and consultant expenses incurred in 2002.
INCOME TAXES
For the six months ended June 30, 2002, the Company reported $737,000 in
income tax expense, or an effective tax rate of 31.9%. This is compared to
income tax expense of $641,000 for the same period of the prior year, or an
effective tax rate of 32.4%.
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company both at the holding company level as well as the subsidiary level. The
Company's bank subsidiary must maintain an adequate liquidity position in order
to respond to the short-term demand for funds caused by the withdrawals from
deposit accounts, maturities of short-term borrowings, extensions of credit and
for the payment of operating expenses. Maintaining an adequate level of
liquidity is accomplished through a combination of liquid assets, assets which
can be easily 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 (exclusive of
cash flow on loans) accounted for approximately 14% and 15% of average assets
for the six month periods ended June 30, 2002 and 2001, respectively. In
management's opinion, the Company maintains adequate levels of liquidity by
retaining liquid assets and assets which can easily be converted into cash and
by maintaining access to various sources of funds. The primary sources of funds
available through the Bank include advances from the Federal Home Loan Bank,
purchasing federal funds from other financial institutions, lines of credit
through the Federal Reserve Bank, and increasing deposits by raising rates paid.
At June 30, 2002, the Company had approximately $42.0 million in available
credit under its FHLB and correspondent bank federal funds borrowing facilities.
Summit Financial Corporation ("Summit Financial"), the parent holding
company, has limited liquidity needs. Summit Financial requires liquidity to
pay limited operating expenses, to service its debt, and to provide funding to
its consumer finance subsidiary, Freedom Finance. Summit Financial has
approximately $3.3 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 June 30, 2002. In addition, Summit Financial
has an available line of credit totaling $2.5 million with an unaffiliated
financial institution, all of which was available at June 30, 2002. Additional
sources of liquidity for Summit Financial include borrowing funds from unrelated
correspondent banks, unsecured borrowings from individuals, and management fees
and debt service which are paid by its subsidiaries.
Liquidity needs of Freedom Finance, primarily for the funding of loan
originations, acquisitions, and operating expenses, have been met to date
through the initial capital investment of $500,000 made by Summit Financial,
borrowings from an unrelated private investor, and line of credit facilities
provided by Summit Financial and Summit National Bank, its sister company.
The Company's management believes its liquidity sources are adequate to
meet its operating needs and does not know of any trends, events or
uncertainties that may result in a significant adverse effect 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 June 30, 2002 and December 31, 2001 the Company's commitments to extend
additional credit totaled approximately $54.7 million and $47.2 million,
respectively. Included in the total commitments were approximately $3.4 million
and $2.8 million at June 30, 2002 and December 31, 2001, respectively, which
represent 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 $5.0 million and $4.8
million at June 30, 2002 and December 31, 2001, respectively. 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 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
the 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. Given the
Company's asset-sensitive balance sheet position, assets reprice faster than
liabilities, which generally results in decreases in net interest income during
periods of declining interest rates, as experienced in 2001. This may cause a
decrease in the net interest margin until the fixed rate deposits mature and are
repriced at lower current market rates, thus narrowing the difference between
what the Company earns on its assets and what it pays on its liabilities. The
opposite effect (that is, an increase in net interest income) is generally
realized in a rising rate environment. The degree of interest rate sensitivity
of the Company's assets and liabilities and the differences in timing of
repricing assets and liabilities provides an indication of the extent to which
the Company's net interest income may be affected by interest rate movements.
INTEREST RATE SENSITIVITY
Achieving consistent growth in net interest income, which is affected by
fluctuations in interest rates, is the primary goal of the Company's
asset/liability function. The Company attempts to control the mix and
maturities of assets and liabilities to maintain a reasonable balance between
exposure to interest rate fluctuations and earnings and to achieve consistent
growth in net interest income, while maintaining adequate liquidity and capital.
A sudden and substantial increase in interest rates may adversely impact the
Company's earnings to the extent that the interest rates on interest-earning
assets and interest-bearing liabilities do not change at the same speed, to the
same extent or on the same basis. The Company's asset/liability mix is
sufficiently balanced so that the effect of interest rates moving in either
direction is not expected to be significant over time.
The Company's Asset/Liability Committee ("ALCO") uses a simulation model,
among other techniques, to assist in achieving consistent growth in net interest
income while managing interest rate risk. The model takes into account, over a
12 month period or longer if necessary, interest rate changes as well as changes
in the mix and volume of assets and liabilities. The model simulates the
Company's balance sheet and income statement under several different rate
scenarios and rate shocks. The model's inputs (such as interest rates and
levels of loans and deposits) are updated as necessary throughout the year in
order to maintain a current forecast as assumptions change. According to the
model, the Company is presently positioned so that net interest income will
increase 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 also reviewed periodically to provide insights related to static
repricing structure of assets and liabilities. At June 30, 2002, on a
cumulative basis through 12 months, rate-sensitive liabilities exceed
rate-sensitive assets, resulting in a 12 month period liability-sensitive
position of $22.0 million. When the effective change ratio (the historical
relative movement of each asset's and liability's rates in relation to a 100
basis point change in the prime rate) is applied to the interest gap position,
the Company is actually in an asset-sensitive position over a 12 month period
and the entire repricing lives of the assets and liabilities. This is primarily
due to the fact that over 60% of the loan portfolio moves immediately on a
one-to-one ratio with a change in the prime rate, while the deposit accounts do
not increase or decrease as much relative to a prime rate movement. The
Company's asset-sensitive position means that assets reprice faster than the
liabilities, which generally results in 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.
CAPITAL RESOURCES
Total shareholders' equity at June 30, 2002 was $26.3 million or 9.1% of
total assets. This is compared to $24.6 million or 9.0% of total assets at
December 31, 2001. The $1.7 million increase in total shareholders' equity
resulted principally from the retention of earnings and proceeds from employees'
exercises of stock options.
Book value per share at June 30, 2002 and December 31, 2001 was $6.91 and
$6.49, respectively. Tangible book value per share at June 30, 2002 and December
31, 2001 was $6.86 and $6.44, respectively. Tangible book value was below book
value as a result of the purchase premiums associated with branch acquisitions
of Freedom Finance which were accounted for as purchases.
To date, the capital needs of the Company have been met through the
retention of net income and from the proceeds of its initial offering of common
stock. The Company has no commitments or immediate plans for any significant
capital expenditures outside the normal course of business. The Company's
management does not know of any trends, events or uncertainties that may result
in the Company's capital resources materially increasing or decreasing.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
material effect on the financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific capital guidelines that involve quantitative measures of
the Company's and the Bank's assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The Company's and
the Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
The Company and the Bank are required to maintain minimum amounts and
ratios of total risk-based capital, Tier 1 capital, and Tier 1 leverage capital
as set forth in the table following. Management believes, as of June 30, 2002,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject. At June 30, 2002 and 2001, the Bank was categorized as "well
capitalized" under the regulatory framework for prompt corrective action. There
are no current conditions or events that management believes would change the
Company's or the Bank's category.
The following table presents the Company's and the Bank's actual capital
amounts (dollars in thousands) and ratios at June 30, 2002 and 2001 as well as
the minimum calculated amounts for each regulatory defined category.
RISK-BASED CAPITAL CALCULATION
TO BE
FOR CAPITAL CATEGORIZED
ADEQUACY "WELL-
ACTUAL PURPOSES CAPITALIZED"
-------------- -------------- ---------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ------ ------- ------ ------- ------
AS OF JUNE 30, 2002
THE COMPANY
Total capital to risk-weighted assets. $28,903 12.51% $18,487 8.00% N.A.
Tier 1 capital to risk-weighted assets $26,014 11.26% $ 9,244 4.00% N.A.
Tier 1 capital to average assets . . . $26,014 9.25% $11,244 4.00% N.A.
THE BANK
Total capital to risk-weighted assets. $25,247 11.06% $18,263 8.00% $22,829 10.00%
Tier 1 capital to risk-weighted assets $22,461 9.84% $ 9,132 4.00% $13,698 6.00%
Tier 1 capital to average assets . . . $22,461 8.09% $11,099 4.00% $13,874 5.00%
AS OF JUNE 30, 2001
THE COMPANY
Total capital to risk-weighted assets. $25,546 11.98% $17,064 8.00% N.A.
Tier 1 capital to risk-weighted assets $22,880 10.73% $ 8,532 4.00% N.A.
Tier 1 capital to average assets . . . $22,880 9.09% $10,067 4.00% N.A.
THE BANK
Total capital to risk-weighted assets. $22,249 10.57% $16,836 8.00% $21,045 10.00%
Tier 1 capital to risk-weighted assets $19,717 9.37% $ 8,418 4.00% $12,627 6.00%
Tier 1 capital to average assets . . . $19,717 7.92% $ 9,953 4.00% $12,441 5.00%
ACCOUNTING, REPORTING AND REGULATORY MATTERS
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 was required to test the intangible asset for impairment in
accordance with the provisions of SFAS 142 within the first interim period. Any
impairment loss was 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.
The Company adopted SFAS No. 142 effective January 1, 2002. The adoption
of SFAS 142 did not have a material effect on results of operations during the
first quarter. As of the date of adoption, the Company's gross carrying amount
for goodwill associated with its previous acquisitions totaled $184,000, net of
accumulated amortization. For the year ended December 31, 2001, the
amortization of goodwill was $157,000 and for the quarter ended June 30, 2001,
amortization totaled $39,000, and for the six months ended June 30, 2001
amortization totaled $78,000. The amortization of goodwill ceased effective
January 1, 2002.
Information regarding the effect of amortization expense and net income of the
Company for the quarters and the six months ended June 30, 2002 and June 30,
2001 follows:
For the For the
Quarter Six Months
Ended Ended
June 30, June 30,
------------ --------------
2002 2001 2002 2001
----- ----- ------ ------
Net income as reported. . . . . . . . . $ 800 $ 674 $1,573 $1,336
Goodwill amortization, net of taxes . . - 26 - 52
----- ----- ------ ------
Adjusted net income . . . . . . . . . . $ 800 $ 700 $1,573 $1,388
===== ===== ====== ======
Basic earnings per share, as reported . $0.21 $0.18 $ 0.42 $ 0.36
Goodwill amortization, net of taxes . . - 0.01 - 0.01
----- ----- ------ ------
Adjusted basic earnings per share . . . $0.21 $0.19 $ 0.42 $ 0.37
===== ===== ====== ======
Diluted earnings per share, as reported $0.19 $0.16 $ 0.37 $ 0.32
Goodwill amortization, net of taxes . . - 0.01 - 0.02
----- ----- ------ ------
Adjusted diluted earnings per share . . $0.19 $0.17 $ 0.37 $ 0.34
===== ===== ====== ======
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 adopted SFAS 144 on
January 1, 2002 with no material effect on the Company.
In April 2002, SFAS 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections" was issued. This
statement rescinds SFAS 4, "Reporting Gains and Losses from Extinguishment of
Debt", SFAS 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund
Requirements", and SFAS 44, "Accounting for Intangible Assets of Motor
Carriers". SFAS 145 amends SFAS 13, "Accounting for Leases", to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. SFAS 145 also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. SFAS 145 has no material effect on the Company.
In June 2002, SFAS 146, "Accounting for Costs Associated with Exit or
Disposal Activities," was issued which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)". SFAS 146 applies to
costs associated with an exit activity that does not involve an entity newly
acquired in a business combination or with a disposal activity covered by SFAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Those
costs include, but are not limited to, the following: a) termination benefits
provided to current employees that are involuntarily terminated under the terms
of a benefit arrangement that, in substance, is not an ongoing benefit
arrangement or an individual deferred compensation contract (hereinafter
referred to as one-time termination benefits); b) costs to terminate a contract
that is not a capital lease; and c) costs to consolidate facilities or relocate
employees. SFAS 146 does not apply to costs associated with the retirement of a
long-lived asset covered by SFAS 143, "Accounting for Asset Retirement
Obligations". A liability for a cost associated with an exit or disposal
activity shall be recognized and measured initially at its fair value in the
period in which the liability is incurred. A liability for a cost associated
with an exit or disposal activity is incurred when the definition of a liability
is met. The provisions of SFAS 146 are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The impact of adoption on the Company is not known at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises principally from interest rate risk
inherent in its lending, deposit and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Although the Company
manages other risks, as in credit quality and liquidity risk, in the normal
course of business, management considers interest rate risk to be its most
significant market risk and it could potentially have the largest material
effect on the Company's financial condition and results of operations. Other
types of market risks, such as foreign currency exchange rate risk and commodity
price risk, do not arise in the normal course of the Company's business
activities.
The Bank's ALCO monitors and considers methods of managing the rate and
sensitivity repricing characteristics of the balance sheet components consistent
with maintaining acceptable levels of changes in net portfolio value ("NPV") and
net interest income. Net portfolio value represents the market value of
portfolio equity and is equal to the market value of assets minus the market
value of liabilities, with adjustments made for off-balance sheet items over a
range of assumed changes in market interest rates. A primary purpose of the
Company's asset and liability management is to manage interest rate risk to
effectively invest the Company's capital and to preserve the value created by
its core business operations. As such, certain management monitoring processes
are designed to minimize the impact of sudden and sustained changes in interest
rates on NPV and net interest income.
The Company's exposure to interest rate risk is reviewed on a periodic
basis by the Board of Directors and the ALCO which is charged with the
responsibility to maintain the level of sensitivity of the Bank's net portfolio
value within Board approved limits. Interest rate risk exposure is measured
using interest rate sensitivity analysis by computing estimated changes in NPV
of its cash flows from assets, liabilities, and off-balance sheet items in the
event of a range of assumed changes in market interest rates. This analysis
assesses the risk of loss in market risk sensitive instruments in the event of a
sudden and sustained 100 - 300 basis points increase or decrease in the market
interest rates. The Board of Directors has adopted an interest rate risk policy
which establishes maximum allowable decreases in NPV in the event of a sudden
and sustained increase or decrease in market interest rates.
As of June 30, 2002, there was no substantial change from the interest rate
sensitivity analysis or the market value of portfolio equity for various changes
in interest rates calculated as of December 31, 2001. The foregoing disclosures
related to the market risk of the Company should be read in conjunction with the
Company's audited consolidated financial statements, related notes and
management's discussion and analysis of financial condition and results of
operations for the year ended December 31, 2001 included in the Company's 2001
Annual Report on Form 10-K.
SUMMIT FINANCIAL CORPORATION
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Corporation and its subsidiaries from time to time may be involved as
plaintiff or defendant in various legal actions incident to its business. There
are no material actions currently pending.
Item 2. Changes in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders held April 23, 2002 pursuant to
the Notice of Annual Meeting of Shareholders and Proxy Statement dated March 21,
2002, the following matters were voted on:
Election of 4 nominees for director to 3-year terms
For the above matter, 3,304,101 shares (99.9% of the votes cast) voted FOR the
election of the directors.
No other matters were submitted to the shareholders for a vote at the
Annual Meeting or at any other time during the quarter.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
3.2 Amended and Restated Bylaws of Summit Financial Corporation
(b) Reports on Form 8-K:
None.
SUMMIT FINANCIAL CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SUMMIT FINANCIAL CORPORATION
Dated: August 12, 2002
/s/ J. Randolph Potter
- -------------------------
J. Randolph Potter, President and Chief Executive Officer
Dated: August 12, 2002
/s/ Blaise B. Bettendorf
- ---------------------------
Blaise B. Bettendorf, Senior Vice President and Chief Financial Officer