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SECURITIES AND EXCHANGE COMMISSSION
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, 1996
Commission File No. 000-19235
SUMMIT FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
SOUTH CAROLINA 57-0892056
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification No.)
organization)
P. O. Box 1087, 937 North Pleasantburg Drive
Greenville, South Carolina 29602
(Address of Principal Executive Offices, including zip code)
(864) 242-2265
(Registrant's Telephone Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Class: COMMON STOCK, $1.00 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES [X] NO[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant computed by reference to the average bid and asked prices of such
stock, as of February 28, 1997 was approximately $13,721,500. For purposes of
the foregoing calculation only, all directors and executive officers of the
Registrant have been deemed affiliates.
As of February 28, 1997, there were 1,334,409 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 1997
Annual Meeting of Shareholders is incorporated by reference in Part III.
PART I
ITEM 1. BUSINESS
GENERAL
Summit Financial Corporation (the "Company") was incorporated under the
laws of the State of South Carolina on May 26, 1989. The Company,
headquartered in Greenville, South Carolina, is a financial institution
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. The
Company engages in no significant operations other than the ownership of its
two subsidiaries. The Company conducts its business from two banking offices
and twelve consumer finance offices throughout South Carolina.
The Bank targets individuals and small-to-medium-sized businesses in the
Upstate of South Carolina that require a full range of quality banking
services typically provided by the larger regional banking concerns, but who
prefer the personalized service offered by a locally-based institution. The
Bank currently has its headquarters and two full-service branch locations in
Greenville, South Carolina. Summit provides a full range of deposit services
that are typically available in most banks and savings and loan associations
including checking accounts, NOW accounts, individual retirement accounts,
savings and other time deposits of various types ranging from daily money
market accounts to longer-term certificates of deposit. Deposits of the Bank
are insured up to $100,000 by the Federal Deposit Insurance Corporation (the
"FDIC"). Other services which the Bank offers include safe deposit boxes,
bank money orders, wire transfer facilities, sale of nondeposit investment
products including annuities and mutual funds, full and discount brokerage
services, 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, agriculture, real
estate, home improvement and automobiles, credit cards, letters of credit,
personal investments and home equity lines of credit. It is the Bank's intent
to originate quality, profitable loans which will benefit the area's economy,
provide a reasonable return to our shareholders, and promote the growth of the
Bank. Management strives to maintain quality in the loan portfolio and to
accept only those credit risks which meet the Bank's underwriting standards.
The Company has no material concentration of deposits from any single customer
or group of customers. No significant portion of its loan portfolio is
concentrated within a single industry or group of related industries.
The Finance Company makes and services installment loans to individuals
with loan principal amounts generally not exceeding $1,000 and with maturities
ranging from three to eighteen months. The Finance Company, which is
headquartered in Greenville, South Carolina, currently has 12 branch offices
throughout South Carolina. The Finance Company's loan customers are primarily
in the low- to-middle 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 insurance, and property insurance directly related to the extension
of credit to the individual. The business of the Finance Company is rather
seasonal and the amount of loans outstanding increases significantly at the
end of each calendar year due to the seasonal loan demand, while the first
quarter of the calendar year often results in substantial loan paydowns.
With the exception of the loans acquired to expand Freedom's branch
network, the Company has pursued a strategy of growth through internal
expansion since its inception. At December 31, 1996, the Company had total
assets of $134.2 million, total deposits of $117.8 million, net loans of
$101.2 million and shareholders' equity of $11.6 million. This compares with
total assets of $115.1 million, total deposits of $99.3 million, net loans of
$74.6 million and shareholders' equity of $10.7 million at December 31, 1995.
As a bank holding company, the Company is a legal entity separate and
distinct from its subsidiaries. The Company coordinates the financial
resources of the consolidated enterprise and maintains financial, operational
and administrative systems that allow centralized evaluation of subsidiary
operations and coordination of selected policies and activities. The
Company's operating revenues and net income are derived from its subsidiaries
through fees for services performed and interest on advances and loans.
TERRITORY SERVED AND COMPETITION
THE BANK: Summit National Bank is located in Greenville, South Carolina.
The extended market area encompasses Greenville County, with the principal
market area being the urban areas of Greenville County. Greenville, South
Carolina is located in the fast growing Interstate-85 corridor between
Charlotte, North Carolina and Atlanta, Georgia. The economy of Greenville is
primarily industrial in nature and the area is considered one of the
Southeast's leading manufacturing centers.
Greenville, South Carolina is a highly competitive commercial banking
market in which all of the largest banks in the state are represented. The
competition among the various financial institutions is based upon interest
rates offered on deposit accounts, interest rates charged on loans, credit and
service charges, the quality of services rendered, the convenience of banking
facilities, and, in the case of loans to large commercial borrowers, relative
lending limits.
Many of the competitor banks in the Bank's market area are subsidiaries
of bank holding companies which own banks in other southeastern states. In
the conduct of certain areas of business, the Bank may also compete with
savings and loan associations, credit unions, insurance companies, securities
firms, leasing companies and other financial institutions, some of which are
not subject to the same degree of regulation and restrictions as the Bank.
The Bank may also compete with out-of-state financial institutions which
operate loan production offices, originate mortgages, accept money market
deposits, and provide other financial services.
Many of these competitors have substantially greater resources and
lending abilities due to their size than the Bank has and these competitors
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 two 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.
Neither the Company nor its subsidiaries are dependent upon a single or a
very few customers, the loss of which would have a material adverse effect on
the Company.
THE FINANCE COMPANY: Freedom Finance, Inc. serves its customers from
locations in Bishopville, Columbia, Conway, Florence, Greenville, Kingstree,
Lake City, Manning, Moncks Corner, St. George, and Sumter, South Carolina.
Competition between consumer finance companies is not generally as intense as
that among banks, however, this segment of the market has become over-served
in areas of South Carolina. Consumer finance companies in the state of South
Carolina are allowed only one outstanding loan per customer and the amounts of
such loans are restricted by state law according to the type of license
granted by the South Carolina State Board of Financial Institutions. Numerous
other finance companies which offer similar types of loans are located in the
areas served by Freedom.
Although the Finance Company competes directly with national, regional
and local consumer finance companies, the Company views locally owned finance
companies as its principal competition. 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, 1996, the Company employed a total of two executive
officers. Additionally, the Bank employed 34 full-time employees, of which
three are executive officers, and the Finance Company employed one executive
officer and 33 other employees. The employee benefits programs which the
Company provides include group health, life, short-term and long-term
disability insurance, paid vacation, sick leave, educational opportunities, a
401K plan, stock option plan and restricted stock plan for all employees.
Management considers its relations with its employees to be good.
SUPERVISION AND REGULATION
GENERAL: The Company and its subsidiaries are extensively regulated
under federal and state law. These laws and regulations are primarily
intended to protect consumer borrowers and depositors, not shareholders. To
the extent that the following information describes statutory or regulatory
provisions, it is qualified in its entirety by reference to the particular
statutes and regulations. Any change in the applicable laws may have a
material effect on the business and prospects of the Company. The operation
of the Company may be affected by legislative and regulatory changes and by
the monetary policies of various regulatory authorities. The Federal Reserve
examines the Company and may examine the Bank and Finance Company.
THE COMPANY: The Company is a bank holding company within the meaning of
the Bank Holding Company Act of 1956, as amended (the "BHCA"), and as such, is
under the supervisory and regulatory authority of the Board of Governors of
the Federal Reserve System (the "Federal Reserve"). As a bank holding company
registered under the laws of the South Carolina Bank Holding Company Act, the
Company is also subject to regulation by the State Board of Financial
Institutions. Thus, the Company is 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.
Under the BHCA, the Company's activities and those of its subsidiaries
are limited to banking, managing or controlling banks, furnishing services to
or performing services for its subsidiaries or engaging in any other activity
that the Federal Reserve determines to be so closely related to banking or
managing or controlling banks as to be a proper incident thereto. In making
such determinations, the Federal Reserve is required to consider whether the
performance of such activities by a bank holding company or its subsidiaries
can reasonably be expected to produce benefits to the public, such as greater
convenience and increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased
or unfair competition, conflicts of interest or unsound banking practices.
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.
Under the policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do
so absent such policy. The Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA"), requires that a bank holding company guarantee that
any "undercapitalized" (as defined in the statute) insured depository
institution subsidiary will comply with the terms of any capital restoration
plan filed by such subsidiary with its appropriate federal banking agency up
to the lesser of (i) an amount equal to 5% of the institution's total assets
at the time the institution became undercapitalized, or (ii) the amount that
is necessary (or would be necessary) to bring the institution into compliance
with all applicable capital standards as of the time the institution fails to
comply with such capital restoration plan.
Under Section 5(e) of the BHCA, the Federal Reserve has the authority to
terminate any activity of a bank holding company that constitutes a serious
risk to the financial soundness or stability of any subsidiary depository
institution or to terminate its control of such subsidiary. Further, FDICIA
grants federal bank regulatory authorities additional discretion to require a
bank holding company to devest itself of any bank or nonbank subsidiary if the
agency determines that divesture may aid the depository institution's
financial condition.
In August 1989, the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") was enacted. FIRREA contains major
regulatory reforms, stronger capital requirements for savings and loan
associations, restrictions on loans to one borrower, and stronger civil and
criminal enforcement provisions. FIRREA allows the acquisition of healthy and
failed savings and loans by bank holding companies and imposes no interstate
barriers on such bank holding company acquisitions. With certain
qualifications, FIRREA also allows bank holding companies to merge acquired
savings and loans into their existing commercial bank subsidiaries. FIRREA
also provides that a depository institution insured by the Federal Deposit
Insurance Corporation (the "FDIC") can be held liable for any loss incurred
by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in
connection with (I) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to a
commonly controlled FDIC-insured depository institution in danger of default.
In July 1994, South Carolina enacted legislation which effectively
provides that, after June 30, 1996, out-of-state bank holding companies
(including bank holding companies in the Southern Region, as defined under the
statute) may acquire other banks or bank holding companies having offices in
South Carolina upon the approval of the State Board and compliance with
certain other conditions. Major conditions included in the statute are that
the effect of the transaction not lessen competition and that the laws of the
state in which the out-of-state bank holding company filing the application
has its principal place business permit South Carolina bank holding companies
to acquire banks and bank holding companies in that state.
Congress enacted the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 ("the Riegle-Neal Act"), which will increase the
ability of bank holding companies and banks to operate across state lines.
Under the Riegle-Neal Act, the existing restrictions on interstate
acquisitions of banks by bank holding companies will be repealed one year
following enactment, such that the Company and any other bank holding company
located in South Carolina would be able to acquire a bank located in any other
state and a bank holding company located outside South Carolina could acquire
any South Carolina-based bank, in either case subject to certain deposit
percentage and other restrictions. The legislation also provides that, unless
an individual state elects beforehand either (I) to accelerate the effective
date or (ii) to prohibit out-of-state banks from operating interstate branches
within its territory, on or after June 1, 1997, adequately capitalized and
managed bank holding companies will be able to consolidate their multistate
bank operations into a single bank subsidiary and to branch interstate through
acquisitions. De novo branching by an out-of-state bank would be permitted
only if it is expressly permitted by the laws of the host state. The
authority of a bank to establish and operate branches within a state will
continue to be subject to applicable state branching laws. The Company
believes that this legislation may result in increased takeover activity of
South Carolina financial institutions by out-of-state financial institutions.
However, the Company does not presently anticipate that such legislation will
have a material impact on its operations.
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. The Company
and the Bank are also subject to Section 23B of the Federal Reserve Act, which
generally limits covered and other transactions among affiliates to terms and
circumstances, including credit standards, that are substantially the same or
at least as favorable to a bank holding company, a bank or a subsidiary of
either as prevailing at the time for transactions with unaffiliated companies.
THE BANK: The Company's subsidiary bank, Summit National Bank, is a
nationally chartered financial institution, and as such, is subject to various
statutory requirements, supervision and regulation, of which regular bank
examinations are a part, promulgated and enforced primarily by the Office of
the Comptroller of the Currency (the "Comptroller"). These statutes, rules
and regulations relate to insurance of deposits, required reserves, allowable
investments, loans, mergers, consolidations, issuance of securities, payment
of dividends, establishment of branches, and other aspects of the business of
Summit National Bank.
The Comptroller is responsible for overseeing the affairs of all national
banks and periodically examines national banks to determine their compliance
with law and regulations. The Comptroller monitors all areas of the Bank's
operations, including loans, mortgages, issuance of securities, capital
adequacy, risk management, payment of dividends, and establishment of
branches. In addition, the Comptroller has authority to issue cease and
desist orders against national banks which are engaged in unsafe or unsound
practice in the conduct of their business. Federal banking laws applicable to
all depository financial institutions, among other things, (I) afford federal
bank regulatory agencies with powers to prevent unsafe and unsound banking
practices; (ii) restrict preferential loans by banks to "insiders" of banks;
(iii) require banks to keep information on loans to major shareholders and
executive officers, and (iv) bar certain director and officer interlocks
between financial institutions.
The Comptroller also administers a number of federal statutes which apply
to national banks such as the Depository Institution Management Interlocks
Act, the International Lending Supervision Act of 1983 and the Community
Reinvestment Act of 1977 ("CRA"). CRA requires that, in connection with their
examinations of financial institutions, the Comptroller shall evaluate the
record of the Bank in meeting the credit needs of the local community,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of the Bank. These factors are also considered in evaluating
mergers, acquisitions, and applications to open a branch facility. The
federal banking agencies, including the Comptroller, have recently issued a
new joint rule that changes the method of 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 will be required to collect and report to the Comptroller
extensive demographic and loan data. Summit National Bank received a
satisfactory rating in its most recent CRA examination.
The Bank is also a member of the FDIC, which currently insures the
deposits of each member bank to a maximum of $100,000 per depositor. For this
protection, each bank pays a semiannual statutory assessment in two quarterly
installments 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.
Effective January 1, 1996, the FDIC implemented a risk-based assessment
schedule, having assessments ranging from 0.00% to 0.27% of an institution's
average assessment base. The actual assessment to be paid by each
FDIC-insured institution is 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. In addition, effective
January 1, 1997, the Deposit Insurance Funds Act of 1996 (the "Funds Act")
implemented a separate Financing Corporation ("FICO") assessment to service
the interest on its bond obligation from the Savings Association Insurance
Fund ("SAIF") assessment resulting from the Fund Act. The amount assessed on
individual institutions by the FICO will be in addition to the amount paid for
deposit insurance according to the FDIC's risk-related assessment schedules.
FICO assessment rates for the first semiannual period of 1997 are set at 1.30
basis points annually for Bank Insurance Fund ("BIF") assessable deposits.
These rates may be adjusted quarterly to reflect changes in assessment bases
for the BIF and SAIF. Based on the Bank's current financial condition, the
current FDIC assessment rate for the Bank is at the lowest available level.
FDICIA became effective December 19, 1991. FDICIA contains broad, new
powers for federal banking regulators to take certain enforcement actions
against problem institutions as well as imposing significant new restrictions
on undercapitalized financial institutions, including establishing a
capital-based supervisory system for prompt corrective action ("PCA"). Under
the PCA provisions, regulatory agencies can require submission and funding of
a capital restoration plan by an undercapitalized institution, place limits on
its activities, require the raising of additional capital, and can ultimately
require the appointment of a conservator or receivor of the institution if
deemed necessary and prudent by the regulatory agency.
FDICIA also makes some changes to the deposit insurance coverage rules;
limits the use of brokered deposits by certain banks; establishes a risk-based
deposit insurance premium system; provides pass-through protection for certain
types of pension plans; and mandates the promulgation of uniform regulations
that establish standards for real estate lending. The enacted legislation
includes the Truth in Savings Act; imposes new accounting, audit and
examination requirements for banks with assets greater than $150 million;
revises existing and imposes new provisions with regard to transactions with
insiders; and authorizes certain bank and thrift cross-industry mergers and
acquisitions.
In conjunction with the FDICIA, in September 1992, the Federal Reserve
Board approved a final rule which establishes the capital levels that
determine a bank's PCA capital category. Under the final capital level
definitions, the Bank is currently in the "well-capitalized" category. In
December 1992, a final rule was issued requiring insured depository
institutions to develop and implement internal procedures to evaluate and
control both credit and settlement exposure to financial institutions with
which they do business.
During 1994, the Comptroller issued new regulations including (1) a final
rule increasing the threshold level for the requirement of appraisals on
commercial real estate loans to properties securing loans totaling at least
$250,000 and other amendments to appraisal requirements effective June 7,
1994; (2) new examination procedures for "noncomplex" banks effective October
1, 1994; and (3) guidelines for financial derivatives, specifically addressing
the various risks associated with such.
In June 1995, the FDIC approved a final rule to implement the portion of
Section 305 of FDICIA that requires regulators to revise the risk-based
capital standards to ensure that they take adequate account of interest rate
risk. An exemption from the reporting requirement is offered to banks meeting
certain size and risk profile criteria.
Interest and certain other charges collected or contracted for by the
Banks are subject to state usury laws and certain federal laws concerning
interest rates. The Bank's operations are also subject to certain federal
laws applicable to credit transactions, such as the federal Truth-In-Lending
Act governing disclosures of credit terms to consumer borrowers; CRA requiring
financial institutions to meet their obligations to provide for the total
credit needs of the community; the Home Mortgage Disclosure Act of 1975
requiring financial institutions to provide information to enable the public
to determine whether it is fulfilling its obligation to meet the housing needs
of the community it serves; the Equal Credit Opportunity Act prohibiting
discrimination on the basis of race, creed, or other prohibited factors in
extending credit; the Fair Credit Reporting Act of 1978 governing the use and
provisions of information to credit reporting agencies; the Fair Debt
Collection Act governing the manner in which consumer debts may be collected;
and the rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws.
The deposit operations of the Bank are also subject to the Right to
Financial Privacy Act which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds
Transfer Act and Regulation E issued by the Federal Reserve to implement that
act which governs automatic deposits to and withdrawals from deposit accounts
and customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
THE FINANCE COMPANY: The Company's subsidiary finance company, Freedom
Finance, Inc., is a consumer finance company licensed by 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, limitations of one loan per customer 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 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.
Effective January 1, 1996, South Carolina Senate Bill 602 imposed new
regulations related to additional reporting requirements, limits on loan
renewals, elimination of nonrefundable charges on loans exceeding $150,
adjustment of credit life insurance rates, and certain adjustments in interest
rates on loans in excess of $150. Senate Bill 602 also includes a provision
for mandatory reviews of the effect of the new regulations in both 1997 and
1998.
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 (set forth in the table below) 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, 1996, that the Company and the Bank
meet all capital adequacy requirements to which they are subject. At December
31, 1996 and 1995, the Company and the Bank are both categorized as "well
capitalized" under the regulatory framework for prompt corrective action. To
be categorized as "well capitalized", the Company and the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table below. 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, 1996 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 17 to the Notes to
Consolidated Financial Statements.
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.
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 therefore. The Company is a legal entity separate and
distinct from its subsidiaries and depends in large part for its income
available to distribute to shareholders on the payment of cash dividends from
its subsidiaries. While the Company is not presently subject to any
regulatory restrictions on dividends, the Bank is subject to such regulatory
cash dividend restrictions.
Specifically, approval of the Comptroller of the Currency will be
required for any cash dividend to be paid to the Company by the Bank if the
total of all cash dividends, including any proposed cash dividend, declared by
the Bank in any calendar year exceeds the total of its net profits for that
year combined with its retained net profits for the preceding two years, less
any required transfers to surplus. Additionally, the National Bank Act
provides that a national bank cannot pay cash dividends or other distributions
to shareholders out of any portion of its common stock or preferred stock
accounts and that a bank shall pay no cash dividend in an amount greater than
its net profits then on hand, after deduction of its losses and bad debts. As
of December 31, 1996, no cash dividends have been declared or paid by the
Bank. At December 31, 1996, the Bank had available retained earnings of $1.7
million.
The Company has issued stock distributions to its shareholders. On
January 3, 1997, the Board of Directors approved the Company's fifth 5% stock
distribution which was issued on February 3, 1997 to shareholders of record as
of January 20, 1997. This distribution resulted in the issuance of 63,430
shares of the Company's $1.00 par value common stock.
SELECTED STATISTICAL FINANCIAL INFORMATION
The Company, through the operations of the Bank, offers a wide range of
financial related services to individual and corporate customers. The Bank is
subject to competition from other financial institutions. The Bank is also
subject to the regulations of certain federal agencies and undergoes periodic
examinations by those regulatory authorities. The Company has no foreign
operations.
The consolidated financial statements of the Company are prepared in
conformity with generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as
of the date of the balance sheet and revenues and expenses for the period. The
consolidated selected statistical financial data provided on the following
pages presents a more detailed review of the Company's business activities.
NET INTEREST INCOME ANALYSIS
Net interest income, the difference between the interest earned on assets
and the interest paid for liabilities used to support those assets, is the
principal source of the Company's operating income. Net interest income was
$5.6 million, $4.0 million, and $2.9 million for 1996, 1995, and 1994,
respectively. The Company's average interest rate spread, the difference
between the average interest rate earned on interest-earning assets and the
average interest paid on interest-bearing liabilities, has increased in recent
years because of the Company's balance sheet structure and the increases in
rates on interest-earning assets.
The Company believes it has emphasized proper management of interest rate
spreads to offset the higher cost of deposits recently realized due to the
Bank's loan demand and competition in the Bank's primary marketplace for
deposits. The Company manages interest rate spreads by monitoring the
maturity of assets and related liabilities, interest rates, risk exposure,
liquidity, funding sources, and capital resources. The objective of such
monitoring is to maximize net interest income over an extended period of time,
while maintaining associated risk within prescribed policy limits. The
average interest rate spread was 4.28% in 1996, 4.17% in 1995, and 3.11% in
1994. The net interest margin was 4.81% in 1996, 4.41% in 1995, and 3.93% in
1994.
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, 1996. Tabular presentation of all average statistical data is based on
daily averages.
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
(DOLLARS IN THOUSANDS)
Average 1996 1995
-------- --------
Yield/Rate Average Income/ Yield/ Average Income/ Yield/
12/31/96 Balance Expense Rate Balance Expense Rate
----------- -------- -------- ------- -------- -------- -------
ASSETS
Earning Assets:
Loans (net of unearned income) (1) 10.33% $ 88,481 $ 8,924 10.04% $ 66,451 $ 6,410 9.64%
Investment securities (taxable) 6.02% 20,641 1,241 6.01% 17,212 953 5.54%
Investment securities 6.73% 589 29 7.08% - - -
(non-taxable) (2)
Investment in stock (3) 5.57% 600 39 6.47% 510 32 6.33%
Federal funds sold 5.31% 3,834 207 5.41% 3,787 219 5.77%
Interest-bearing deposits with banks 5.69% 1,892 107 5.64% 2,158 122 5.64%
----------- -------- -------- ------- -------- -------- -------
TOTAL EARNING ASSETS 9.46% 116,037 $ 10,547 9.05% 90,118 $ 7,736 8.58%
=========== ======== ======= ======== =======
Non-earning assets 5,960 5,168
-------- --------
TOTAL AVERAGE ASSETS $121,997 $ 95,286
======== ========
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Interest-bearing deposits:
Interest checking 2.07% $ 5,383 $ 118 2.19% $ 4,148 $ 103 2.48%
Savings 2.82% 1,635 47 2.86% 1,535 48 3.12%
Money market accounts 4.10% 23,843 987 4.14% 18,338 751 4.09%
Time deposits > $100M 5.63% 22,566 1,279 5.67% 16,795 987 5.88%
Other time deposits 5.75% 40,673 2,322 5.71% 29,939 1,686 5.63%
----------- -------- -------- ------- -------- -------- -------
TOTAL INTEREST-BEARING DEPOSITS 5.09% 94,099 4,753 5.05% 70,754 3,575 5.05%
Securities sold under repurchase agreements and federal 5.26% 1,398 73 5.20% 916 53 5.79%
funds purchased
Other borrowings 6.28% 2,041 138 6.78% 2,000 132 6.59%
----------- -------- -------- ------- -------- -------- -------
TOTAL INTEREST-BEARING LIABILITIES 5.11% 97,538 $ 4,964 5.09% 73,670 $ 3,760 5.10%
=========== ======== ======= ======== =======
Non-interest bearing liabilities:
Non-interest bearing deposits 12,263 9,916
Other non-interest bearing liabilities 1,148 1,414
-------- --------
TOTAL LIABILITIES 110,950 85,000
Shareholders' equity 11,047 10,286
-------- --------
TOTAL AVERAGE LIABILITIES AND SHAREHOLDERS'EQUITY
$121,997 $ 95,286
======== ========
Net interest margin (4) $ 5,583 4.79% $ 3,976 4.41%
======== ======= ======== =======
Interest rate spread (5) 4.28% 4.17%
======= =======
1994
--------
Average Income/ Yield/
Balance Expense Rate
-------- -------- -------
ASSETS
Earning Assets:
Loans (net of unearned income) (1) $ 54,233 $ 4,318 7.96%
Investment securities (taxable) 15,574 740 4.75%
Investment securities - - -
(non-taxable) (2)
Investment in stock (3) 484 28 5.87%
Federal funds sold 3,458 129 3.73%
Interest-bearing deposits with banks 1,029 51 4.96%
-------- -------- -------
TOTAL EARNING ASSETS 74,778 $ 5,266 7.04%
======== =======
Non-earning assets 3,754
--------
TOTAL AVERAGE ASSETS $ 78,532
========
LIABILITIES & SHAREHOLDERS' EQUITY
Liabilities:
Interest-bearing deposits:
Interest checking $ 3,712 $ 88 2.36%
Savings 1,536 45 2.93%
Money market accounts 13,056 408 3.13%
Time deposits > $100M 12,849 538 4.18%
Other time deposits 26,433 1,138 4.31%
-------- -------- -------
TOTAL INTEREST-BEARING DEPOSITS 57,587 2,217 3.85%
Securities sold under repurchase agreements and federal 1,187 45 3.78%
funds purchased
Other borrowings 941 62 6.62%
-------- -------- -------
TOTAL INTEREST-BEARING LIABILITIES 59,715 $ 2,324 3.89%
======== =======
Non-interest bearing liabilities:
Non-interest bearing deposits 8,675
Other non-interest bearing liabilities 527
--------
TOTAL LIABILITIES 68,917
Shareholders' equity 9,615
--------
TOTAL AVERAGE LIABILITIES AND SHAREHOLDERS'EQUITY
$ 78,532
========
Net interest margin (4) $ 2,942 3.93%
======== =======
Interest rate spread (5) 3.11%
=======
(1) - Includes loans on nonaccrual status.
(2) - Yields on nontaxable investment securities have been adjusted to a tax equivalent basis assuming a 34% Federal tax
rate.
(3) - Includes investments in stock of Federal Reserve Bank, Federal Home Loan Bank, and other equities.
(4) - Net interest margin is computed by dividing net interest income by total average interest-earning assets.
(5) - Interest rate spread is the difference between the average yield on interest-earning assets and the average rate on
interest-bearing liabilities.
ANALYSIS OF CHANGES IN INTEREST DIFFERENTIAL
Net interest income is affected by changes in the average interest rate
earned on interest-earning assets and the average interest rate paid on
interest-bearing liabilities. In addition, net interest income is affected by
changes in the volume of interest-earning assets and interest-bearing
liabilities. The following table sets forth the dollar amount of increase in
interest income and interest expense resulting from changes in the volume of
interest-earning assets and interest-bearing liabilities and from changes in
yields and rates. For the purposes of this table, changes which are not
solely attributable to volume or rate have been attributed to rate.
VOLUME AND RATE VARIANCE ANALYSIS
(DOLLARS IN THOUSANDS)
1995 - 1994 -
1996 1995
--------- ---------
CHANGE CHANGE
RELATED RELATED
TO TO
TOTAL TOTAL
CHANGE CHANGE
IN NIM IN NIM
Volume Rate Volume Rate
--------- ------ --------- ------
EARNING ASSETS:
Loans (net of unearned income) $ 2,075 $ 439 $ 2,514 $ 973 $1,119 $ 2,092
Investment securities (taxable) 190 98 288 78 135 213
Investment securities (non-taxable) 29 - 29 - - -
Investment in stock 6 1 7 2 2 4
Federal funds sold 3 (15) (12) 12 78 90
Interest-bearing deposits with banks (15) - (15) 56 15 71
--------- ------ -------- --------- ------ -------
Total interest income 2,288 523 2,811 1,121 1,349 2,470
--------- ------ -------- --------- ------ -------
INTEREST-BEARING LIABILITIES:
Interest-bearing deposits:
Interest checking 31 (16) 15 10 5 15
Savings 3 (4) (1) - 3 3
Money market accounts 225 11 236 165 178 343
Time deposits > $100M 339 (47) 292 165 284 449
Other time deposits 604 32 636 151 397 548
--------- ------ -------- --------- ------ -------
Total interest-bearing deposits 1,202 (24) 1,178 491 867 1,358
Securities sold under repurchase 28 (8) 20 (10) 18 8
agreements and federal funds purchased
Other borrowed funds 3 3 6 70 - 70
--------- ------ -------- --------- ------ -------
Total interest expense 1,233 (29) 1,204 551 885 1,436
--------- ------ -------- --------- ------ -------
Net interest differential $ 1,055 $ 552 $ 1,607 $ 570 $ 464 $ 1,034
========= ====== ======== ========= ====== =======
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.
The Company's interest rate sensitivity gap at December 31, 1996 shows
the Company to be asset-sensitive in total as the Company has more
interest-earning assets than interest-bearing liabilities. However, the
Company is liability-sensitive in the four to 12 month period due to the
repricing of more liabilities than assets in this time frame, specifically as
related to the maturity of time deposits. An asset-sensitive position implies
that loans and other interest-earning assets will generally reprice faster
than will interest-bearing liabilities. This structure results in increases
in net interest income during periods of rising rates and decreases in net
interest income when market rates decline. Interest rates dropped starting in
July 1995 and into 1996, and the Bank's net interest margin (the difference
between the interest earned on assets and the interest paid for the
liabilities, divided by average earning assets) did decline as the loans which
are tied to the prime lending rate dropped immediately, while the majority of
liabilities did not reprice until their fixed maturity dates. If rates
continue to decline, the Company may realize a negative impact on its net
interest income. The decline in the Bank's net interest margin was offset by
the contribution of the higher level of Finance Company loans outstanding and
increases in the Finance Company's net interest margin.
The following table presents a measure, in a number of time frames, the
interest sensitivity gap by subtracting interest-sensitive liabilities from
interest-sensitive assets.
INTEREST SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
As of December 31, 1996
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) $ 60,427 $ 6,324 $33,189 $ 2,752 $102,692
Investments (1) 1,625 4,359 10,598 2,563 19,145
Federal funds sold 3,000 - - - 3,000
Interest-bearing deposits with banks 1,661 265 - - 1,926
--------- ---------- ------- ------- --------
Total 66,713 10,948 43,787 5,315 126,763
--------- ---------- ------- ------- --------
INTEREST-BEARING LIABILITIES:
Demand deposits (2) 29,593 - - - 29,593
Time deposits > $100M 11,241 12,237 1,915 - 25,393
Other time deposits 14,411 20,652 10,271 - 45,334
Repurchase agreements, federal funds 1,311 1,000 1,000 - 3,311
purchased and other borrowings
Total 56,556 33,889 13,186 - 103,631
--------- ---------- ------- ------- --------
Period interest-sensitivity gap $ 10,157 ($22,941) $30,601 $ 5,315 $ 23,132
========= ========== ======= ======= ========
Cumulative interest-sensitivity gap $ 10,157 ($12,784) $17,817 $23,132
========= ========== ======= =======
(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, 1996, approximately 61% of the Company's interest-earning
assets reprice or mature within one year, as compared to approximately 87% 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 an
asset-liability simulation model which quantifies balance sheet and earnings
variations under different interest rate environments and growth projections
to measure and manage interest rate risk.
SECURITIES
The Company maintains a portfolio of investment securities consisting
primarily of U.S. Treasury securities, U.S. government agencies, and
mortgage-backed securities. The investment portfolio is designed to enhance
liquidity while providing acceptable rates of return. The following table
sets forth the carrying value of the investment securities of the Company at
December 31, 1996, 1995, and 1994.
SECURITY PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
1996 1995 1994
------- ------- ------
Available for Sale, at market value:
U.S. Treasury $ 5,493 $ 5,772 $3,867
Obligations of U.S. government agencies 8,647 11,965 6,079
Mortgage-backed securities 3,746 1,977 -
Municipal securities 624 371 -
------- ------- ------
$18,510 $20,085 $9,946
======= ======= ======
Held to Maturity, at book value:
U.S. Treasury $ - $ - $1,746
Obligations of U.S. government agencies - - 2,538
Mortgage-backed securities - - 1,183
------- ------- ------
$ - $ - $5,467
======= ======= ======
The following table indicates the carrying value of each investment
security category by maturity as of December 31, 1996. The weighted average
yield for each range of maturities at December 31, 1996 is also shown. All
securities are classified as "Available for Sale" pursuant to the definitions
of Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities".
SECURITY PORTFOLIO MATURITY SCHEDULE
(DOLLARS IN THOUSANDS)
AFTER 1, AFTER 5, AND AFTER 10
WITHIN AND WITHIN WITHIN YEARS
1 YEAR 5 YEARS 10 YEARS TOTAL
------- ----------- ------------- -------
Weighted Weighted Weighted Weighted
Market Average Market Average Market Average Market Average Market
Value Yield Value Yield Value Yield Value Yield Value
------- --------- ----------- --------- ------------- --------- --------- --------- -------
U. S. Treasury $ 2,004 5.70% $ 3,489 5.76% - - - - $ 5,493
U. S. Government agencies 2,254 5.16% 6,020 6.38% $ 373 6.99% - - 8,647
Mortgage-backed securities - - 1,089 6.25% 1,304 6.59% $ 1,353 7.22% 3,746
Municipal securities (1) - - - - - - 624 7.03% 624
------- --------- ----------- --------- ------------- --------- --------- --------- -------
Total $ 4,258 5.41% $ 10,598 6.16% $ 1,677 6.68% $ 1,977 7.16% $18,510
======= ========= =========== ========= ============= ========= ========= ========= =======
Weighted
Average
Yield
---------
U. S. Treasury 5.74%
U. S. Government agencies 6.09%
Mortgage-backed securities 6.72%
Municipal securities (1) 7.03%
---------
Total 6.14%
=========
(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 on
the basis of cost and effective yields for the scheduled maturity of each
security. At December 31, 1996, the market value of the Company's security
portfolio was equal to its amortized cost, the average maturity of the
security portfolio was 2.9 years, and the average adjusted tax equivalent
yield on such portfolio was 6.14%. 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, 1996 were classified as "available for sale" and recorded on the
Company's balance sheet at market value.
LOANS
The loan portfolio is the Company's principal earning asset. Management
believes that the loan portfolio is adequately diversified. The following
table shows the composition of the loan portfolio at December 31, 1996, 1995,
and 1994.
LOAN PORTFOLIO COMPOSITION
(DOLLARS IN THOUSANDS)
1996 1995 1994
--------- -------- --------
Commercial and industrial $ 21,775 $14,898 $15,478
Real estate - commercial 33,475 26,889 18,288
Real estate - residential 33,140 21,482 16,225
Construction 4,518 4,909 4,476
Installment and other consumer loans 10,217 7,692 5,674
Other loans, including overdrafts 227 211 232
--------- -------- --------
103,352 76,081 60,373
Less - unearned income (660) (369) (102)
--------- -------- --------
102,692 75,712 60,271
Less - Allowance for loan losses (1,487) (1,068) (822)
--------- -------- --------
Net loans $101,205 $74,644 $59,449
========= ======== ========
The Company's real estate loans are primarily owner-occupied commercial
facilities and other loans secured by both commercial and residential real
estate located within the Company's primary market area. The Company does not
actively pursue long-term, fixed rate mortgage loans for retention in its loan
portfolio. Commercial loans are spread through a variety of industries, with
no industry or group of related industries accounting for a significant
portion of the commercial loan portfolio. These loans may be made on either a
secured or unsecured basis. When taken, collateral consists of liens on
inventories, receivables, equipment, and furniture and fixtures. Unsecured
commercial loans are generally short-term with emphasis on repayment strengths
and low debt-to-worth ratios. As of December 31, 1996, approximately $4.2
million or 19% of commercial and industrial loans. At December 31, 1996, the
Company had only one foreign loan totaling $75,000.
A significant portion of the installment and other consumer loans are
secured by automobiles and other personal assets. Also included in
installment and other consumer loans is $3.2 million, $2.0 million, and
$560,000, at December 31, 1996, 1995, and 1994, respectively, of higher rate
consumer finance loans which have been 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, 1996.
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 $ 9,962 $ 11,131 $ 682 $ 21,775
Real estate - commercial 3,756 28,296 1,423 33,475
Real estate - residential 9,589 16,983 6,568 33,140
Construction 1,889 2,596 33 4,518
Installment and other consumer loans 5,558 4,595 64 320,500
Other loans, including overdrafts 227 - - 227
-------- ---------- -------- --------
Total $ 30,981 $ 63,601 $ 8,770 $413,635
======== ========== ======== ========
INTEREST SENSITIVITY:
Total of loans with:
Predetermined interest rates $ 9,147 $ 33,189 $ 2,752 $ 45,088
Floating interest rates 21,834 30,412 6,018 58,264
-------- ---------- -------- --------
Total $ 30,981 $ 63,601 $ 8,770 $103,352
======== ========== ======== ========
NONPERFORMING ASSETS AND POTENTIAL PROBLEM LOANS
The Company's nonperforming assets consist of loans on nonaccrual basis,
loans which are contractually past due 90 days or more on which interest is
still being accrued, and other real estate owned ("OREO"). Generally, loans
of the Bank are placed on nonaccrual status when loans become 90 days past due
as to principal or interest, or when management believes, after considering
economic and business conditions and collection efforts, that the borrower's
financial condition is such that collection of the loan is doubtful. Payments
of interest on loans which are classified as nonaccrual are recognized as
income when received. Loans of the Finance Company are not classified as
nonaccrual, but are charged-off when such become 150 days contractually past
due or earlier if the loan is deemed uncollectible.
At December 31, 1996 and 1995, the Bank held no other real estate owned
acquired in partial or total satisfaction of problem loans. Loans on
nonaccrual at December 31, 1996 totaled $110,000 or .10% of outstanding loans.
There were no loans on nonaccrual at December 31, 1995. The nonaccrual loan
at December 31, 1996 was considered impaired under the definitions of
Statement of Financial Accounting Standards No. 114. The related impairment
allowance at the current year end was zero. There were no impaired loans at
December 31, 1995. Assuming the nonaccrual loan performed in accordance with
its original terms, additional interest income for 1996 would have been
approximately $1,800. Loans past due 90 days and greater totaled $200,000 or
0.19% of gross loans at December 31, 1996 compared to $9,000 or .01% of gross
loans at December 31, 1995.
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, 1996 determined
to be potential problem loans was $212,000 or .2% of the loan portfolio at
year end, compared to $385,000 or .5% of the loan portfolio at December 31,
1995. The amount of potential problem loans at December 31, 1996 does not
represent management's estimate of potential losses since the majority of such
loans are secured by real estate or other collateral. Management believes
that the allowance for loan losses as of December 31, 1996 was adequate to
absorb any losses related to the nonperforming loans and problem loans as of
that date.
Management continues to monitor closely the levels on nonperforming and
potential problem loans and will address the weaknesses in these credits to
enhance the amount of ultimate collection or recovery on these assets. Should
increases in the overall level of nonperforming and potential problem loans
accelerate from the current trend, management will adjust the methodology for
determining the allowance for loan losses and will increase the provision for
loan losses accordingly. This would likely decrease net income.
PROVISION AND ALLOWANCE FOR LOAN LOSSES, LOAN LOSS EXPERIENCE
The allowance for loan losses is based on management's periodic
evaluation of the loan portfolio and reflects an amount that, in management's
opinion, is adequate in relation to the risk of future losses inherent in the
loan portfolio. The allowance is established through charges to earnings in
the form of a provision for loan losses. Loan losses and recoveries are
charged or credited directly to the allowance. The amount charged to the
provision for loan losses by the Company is based on management's judgement
and is dependent upon growth in the loan portfolios; the total amount of past
due loans; nonperforming loans; known loan deteriorations and/or
concentrations of credit; trends in portfolio volume, maturity and
composition; projected collateral values; general economic conditions; and
management's assessment of potential losses based upon internal credit grading
of the loans and periodic reviews and assessments of credit risk associated
with particular loans.
In assessing the adequacy of the allowance, management relies
predominately on its ongoing review of the loan portfolio, which is undertaken
both to ascertain whether there are losses which must be charged-off and to
assess the risk characteristics of the portfolio in the aggregate. The Bank
attempts to deal with repayment risks through the establishment of, and
adherence to, internal credit policies. These policies include loan officer
and credit limits, periodic documentation examination, and follow-up
procedures for any exceptions to credit policies. Loans that are determined
to involve any more than the normal risk are placed in a special review
status.
On December 31, 1996, the allowance for loan losses was $1.5 million or
1.43% of outstanding loans. This is compared to $1.1 million allowance for
loan losses at December 31, 1995 or 1.41% of outstanding loans at that date.
For the year ended December 31, 1996, the Company reported consolidated net
charge-offs of $154,000 or .17% of average loans. This is compared to
consolidated net charge-offs of $59,000 or .09% of average loans for the year
ended December 31, 1995. During 1996, the Company charged a total of $516,000
to expense through its provision for loan losses, compared to $277,000 for
1995 and $168,000 for 1994. The increase in provision required in 1996 is
primarily a result of the higher level of net originations in 1996 as compared
to the prior year.
For the years ended December 31, 1996, 1995, and 1994, Summit National
Bank recorded a provision for loan losses of $361,000, $160,000, and $157,000,
respectively. The significant increase for 1996 is a direct result of the 36%
loan growth experienced by the Bank in 1996. For the years ended December 31,
1996, 1995, and 1994, the Bank experienced net charge-offs (recoveries) of
$29,000, $(14,000), and $60,000, respectively. In fiscal 1996, 1995, and
1994, Freedom Finance, Inc. recorded provisions for loan losses of $155,000,
$117,000, and $11,000, respectively. For those same years, Freedom
experienced net charge-offs of $125,000, $73,000, and $1,000, respectively.
The increase in net charge-offs and the related increase in this subsidiary's
provision is related to the (1) growth of number of branches, accounts and
loans outstanding, and (2) industry trends and general increases in consumer
debt and consumer bankruptcies. Freedom's customers are generally in the
low-to-moderate income group of borrowers. Over the past several years, there
has been a proliferation of small consumer loan companies and other consumer
debt providers competing for pieces of this segment of the consumer debt
market. It is not unusual for customers of Freedom simultaneously to have
loans outstanding at several other small loan companies which results in some
customers incurring more debt than they can service.
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, 1996, 1995, and
1994.
SUMMARY OF LOAN LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
1996 1995 1994
------- ------- ------
Balance at beginning of period $1,068 $ 822 $ 697
------- ------- ------
Charge-offs: 50 2 15
Commercial & industrial - - 52
Real estate 337 88 2
Installment & consumer
387 90 69
------- ------- ------
Recoveries: 17 14 7
Commercial & industrial 216 18 -
Installment & consumer
233 32 7
------- ------- ------
Net charge-offs (154) (58) (62)
Provision charged to expense 516 277 168
Allocation for purchased loans 57 27 19
------- ------- ------
Balance at end of period $1,487 $1,068 $ 822
======= ======= ======
Ratio of net charge-offs to average loans .17% .09% .11%
======= ======= ======
Ratio of allowance for loan losses to gross loans 1.43% 1.41% 1.36%
======= ======= ======
Ratio of net charge-offs to allowance for loan losses 10.36% 5.43% 7.54%
======= ======= ======
Management considers the allowance for loan losses adequate to cover
inherent losses on the loans outstanding at December 31, 1996. In the opinion
of management, there are no material risks or significant loan concentrations,
and the allowance for loan losses is adequate to absorb anticipated loan
losses in the present portfolios. It must be emphasized, however, that the
determination of the allowance for loan losses using the Company's procedures
and methods rests upon various judgments and assumptions about future economic
conditions and other factors affecting loans. While it is the Company's
policy to charge-off in the current period loans in which a loss is considered
probable, there are additional risks of future losses which cannot be
quantified precisely or attributed to particular loans or classes of loans.
Because these risks include the state of the economy, industry trends, and
conditions affecting individual borrowers, management's judgement of the
allowance is necessarily approximate and imprecise. No assurance can be given
that the Company will not in any particular period sustain loan losses which
would be sizable in relationship to the amount reserved or that subsequent
evaluation of the loan portfolio, in light of conditions and factors then
prevailing, will not require significant changes in the allowance for loan
losses or future charges to earnings. The allowance for loan losses is also
subject to review and approval by various regulatory agencies through their
periodic examinations of the Company's subsidiaries. Such examinations could
result in required changes to the allowance for loan losses. Summit National
Bank was examined in November 1996 by the Office of the Comptroller of
Currency. No adjustments in the allowance or significant adjustments to the
Bank's internal classified loans were made as a result of this examination.
COMPOSITION OF ALLOWANCE FOR LOAN LOSSES
The table below presents an allocation of the allowance for loan losses
for the years ended December 31, 1996, 1995, and 1994, by the different loan
categories. However, the breakdown is based on a number of qualitative
factors and the amounts presented are not necessarily indicative of actual
amounts which will be charged to any particular category. Any unallocated
reserve has been included within the various loan categories in the table
below.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
1996 1995 1994
---------- ---------- ----------
Percent of Percent of Percent of
Allowance Loans in Allowance Loans in Allowance Loans in
Breakdown Category Breakdown Category Breakdown Category
---------- ----------- ---------- ----------- ---------- -----------
Commercial and industrial $ 313 21.07% $ 209 19.58% $ 211 25.64%
Real estate - commercial 482 32.39% 377 35.34% 249 30.29%
Real estate - residential 477 32.07% 302 28.24% 221 26.87%
Construction 65 4.37% 69 6.45% 61 7.41%
Installment and other consumer loans 147 9.89% 108 10.11% 77 9.40%
Other loans, including overdrafts 3 0.22% 3 0.28% 3 0.54%
---------- ----------- ---------- ----------- ---------- -----------
$ 1,487 100.00% $ 1,068 100.00% $ 822 100.15%
========== =========== ========== =========== ========== ===========
DEPOSITS
The Company has a large, stable base of time deposits, principally
certificates of deposit and individual savings and retirement accounts
obtained primarily from customers in South Carolina. The Company does not
purchase brokered deposits.
The maturity distribution of certificates of deposit greater than or
equal to $100,000 as of December 31, 1996 is as follows (dollars in
thousands):
3 months or less $11,241
Greater than 3, but less than or equal to 6 months 7,693
Greater than 6, but less than or equal to 12 months 4,544
Greater than 12 months 1,915
-------
$25,393
=======
At December 31, 1996, the Company had no foreign deposits.
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, 1996, 1995,
and 1994 are presented in the following table. The Company has not paid a
cash dividend since its inception.
1996 1995 1994
----- ------ ------
Return on average assets 0.82% 0.56% 0.84%
Return on average shareholders' equity 9.07% 5.14% 6.88%
Average shareholders' equity as a percent 9.05% 10.79% 12.24%
of average assets
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
operations facility and 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 an renewal option was exercised
in April 1995. The term on the renewal of the lease is five years and the
Company has additional options to renew for two consecutive five-year periods
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 occupied by the Bank.
The twelve Finance Company branches throughout South Carolina as of
February 28, 1997 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 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, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
Summit Financial Corporation's common stock is traded in the Small-Cap
market on the NASDAQ system under the symbol SUMM. As of December 31, 1996
there were approximately 450 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.
QUARTERLY STOCK BID PRICE
Oct-Dec Jul-Sep Apr-Jun Jan-Mar Oct-Dec Jul-Sep Apr-Jun Jan-Mar
1996 1996 1996 1996 1995 1995 1995 1995
-------- -------- -------- -------- -------- -------- -------- --------
HIGH $ 14.00 $ 13.50 $ 13.50 $ 13.50 $ 13.00 $ 13.00 $ 13.00 $ 13.00
LOW $ 13.50 $ 13.50 $ 13.50 $ 13.00 $ 13.00 $ 13.00 $ 13.00 $ 11.00
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 16 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 elsewhere in this report.
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(All Amounts, Except Per Share Data, In Thousands)
PERCENT
CHANGE
----------
INCOME STATEMENT DATA
FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994 1993 1992 1996/1995
--------- --------- -------- -------- -------- ----------
Net interest income $ 5,583 $ 3,976 $ 2,942 $ 2,070 $ 1,637 40%
Provision for loan losses 516 277 168 129 188 86%
Other income 980 611 345 260 203 60%
Other expenses 4,401 3,469 2,348 1,847 1,502 27%
Provision for income taxes 644 312 109 - - 106%
Net income 1,002 529 661 354 150 89%
PER SHARE DATA (1)
Net income $ 0.71 $ 0.38 $ 0.49 $ 0.27 $ 0.10 87%
Book value, at December 31 $ 8.72 $ 8.01 $ 7.40 $ 7.09 $ 6.81 9%
PERCENT
CHANGE
BALANCE SHEET DATA AT DECEMBER 31, 1996 1995 1994 1993 1992 1996/1995
- ----------------------------------------- --------- --------- -------- -------- -------- ----------
Total assets $134,162 $115,072 $83,656 $71,173 $62,606 17%
Total deposits 117,805 99,319 67,348 60,446 51,477 19%
Total gross loans 102,692 75,712 60,272 50,043 43,578 36%
Allowance for loan losses 1,487 1,068 822 697 578 39%
Investment securities 18,510 20,085 15,912 14,758 11,366 (8%)
Total earning assets 126,763 107,730 79,704 67,941 59,578 18%
Shareholders' equity 11,637 10,664 9,846 9,427 9,075 9%
RATIOS:
Tier 1 risk-based capital 11% 13% 16% 18% 21%
Allowance for loan losses to total loans 1.43% 1.41% 1.36% 1.39% 1.33%
(1) Per share and book value data have been restated to reflect all 5% stock distributions 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.
Summit Financial Corporation (the "Company") is a financial institution
holding company headquartered in Greenville, South Carolina. The Company
offers a broad range of financial services through its wholly-owned
subsidiary, Summit National Bank (the "Bank", "Summit"). The Bank is a
nationally chartered commercial bank which operates principally in the Upstate
of South Carolina. The Bank currently has two full service offices in
Greenville, South Carolina. The Bank received its charter and commenced
operations in July 1990. Summit provides a full range of banking services to
individuals and businesses, including the taking of time and demand deposits
and making loans. 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. ("Freedom", the "Finance Company") 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 $1,000 and with maturities
ranging from three to eighteen months. Freedom ended 1996 with ten branch
offices throughout South Carolina.
BALANCE SHEET REVIEW
GENERAL
As of December 31, 1996, total assets and total gross loans had increased
17% and 36%, respectively, as compared to 1995, while total deposits had
increased approximately 19% during the same period. The difference is
reflected in the decrease in federal funds sold of $6.1 million (67%) and the
decrease in investment securities of $1.6 million (8%). On January 3, 1997, a
5% stock distribution was approved by the Board of Directors and was issued on
February 3, 1997 to shareholders of record as of January 20, 1997. This
distribution resulted in the issuance of 63,430 shares of the Company's $1.00
par value common stock. All share and per share data has been restated to
reflect this stock distribution.
LOANS
As of December 31, 1996, the Company had total loans outstanding, net of
unearned income, of $102.7 million, a loan-to-deposit ratio of 87% and a
loan-to-funds ratio of 85%. The Company includes total deposits, federal
funds purchased, Federal Home Loan Bank advances and other borrowings in
calculating the "loans-to-funds" measurement. The 1996 amounts are compared
to outstanding loans of $75.7 million for the year ended 1995, a
loan-to-deposit ratio of 76% and a loan-to-funds ratio of 74% at December 31,
1995.
Outstanding loans represent the largest component of earning assets at
76% of average earning assets for 1996 compared to 74% for 1995. Gross loans
were 77% and 66%, respectively, of total assets at December 31, 1996 and 1995.
The 36% increase in loans between 1995 and 1996 is attributable to internal
growth for the Bank as the Bank utilized excess liquidity which had
accumulated during 1995, and the Finance Company's acquisition of $1.2 million
in loans receivable. Freedom's outstanding loans, net of unearned income,
totaled $2.5 million, or 2.5% of consolidated loans at December 31, 1996. The
Company has experienced steady loan demand from customers desiring the
personalized service that the Company offers.
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, 1996, the Company has no loans for
highly leveraged transactions and has only one foreign loan totaling $75,000.
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.
The interest rates charged on loans of the Bank vary with the degree of
risk, maturity and amount of the loan, and are further subject to competitive
pressures and availability of funds. 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. On average, consolidated loans yielded
10.09% in 1996, compared to an average yield of 9.64% in 1995. This increase
is primarily a result of the contribution of the Finance Company's loans which
generally yield a higher rate than the loans of the Bank, combined with a
shift in the mix of loans at the Bank to a higher percent of fixed rate loans.
At December 31, 1996, approximately 42% of the Company's loan portfolio was at
fixed rates of interest, compared to 39% at December 31, 1995.
DEPOSITS
The Company uses its deposit base as a primary source with which to fund
earning assets. Deposits grew 19% from $99.3 million at December 31, 1995 to
$117.8 million as of year end 1996. Internal growth and new customers
resulting from the new Bank branch which opened in 1995 were entirely
responsible for the increase as the Company did not purchase any deposits
during 1996. The majority of the growth in deposits occurred in certificates
of deposit over $100,000 which increased $5.6 million from 1995; and other
time deposit which increased $12.7 million from 1995.
The Company's core deposit base consists of consumer and commercial
savings and retirement accounts, NOW accounts, money market accounts, checking
accounts, and non-jumbo time deposits (less than $100,000). Although such
core deposits are becoming increasingly 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. Core deposits as a
percentage of total deposits were approximately 77% and 80%, respectively, at
December 31, 1996 and 1995. 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, which represented 22% and 20%, respectively,
of total deposits at December 31, 1996 and 1995, are held primarily by
customers in the Company's service area who have dealt with the Company for an
extended period of time. The Company has no brokered deposits.
In pricing deposits, the Company considers its liquidity needs, the
direction and levels of interest rates and local market conditions. During
1996, interest-bearing deposits averaged $94.1 million with an average rate of
5.09% compared to $70.8 million with an average rate of 5.10% in 1995.
Although the general interest rate environment decreased during 1996, which
resulted in the Bank repricing non-time and maturing time deposits at lower
current market rates, the Bank offered several deposit promotions during the
year to increase the level of core deposits as necessary to meet loan growth
demands. The combination of the above two factors resulted in the average
rate on interest-bearing deposits remaining fairly constant between 1995 and
1996.
INVESTMENT SECURITIES
The Company emphasizes safety in its selection of investment securities.
Accordingly, the investment portfolio consists primarily of United States
Treasury securities, securities of United States government agencies and
mortgage-backed securities. The Company does not invest in corporate bonds
and has no trading account securities. Investment securities averaged $21.2
million in 1996, 23% above the 1995 average of $17.2 million. As of December
31, 1996, investment securities totaled $18.5 million, which is a decrease of
8% from the $20.1 million invested as of the end of 1995. The decrease is
primarily a result of securities totaling in excess of $2 million maturing in
the fourth quarter, the proceeds of which were utilized to fund the
significant loan growth in that quarter.
Investment securities are the second largest earning asset of the Company
at 18% and 19% of average earning assets for 1996 and 1995, respectively. The
average portfolio yield increased from 5.54% in 1995 to 6.05% in 1996
primarily as a result of the maturity of several investments at lower than
current market rates combined with a shift in the portfolio mix and average
maturity.
CAPITAL RESOURCES
To date, the capital needs of the Company have been met through earnings
and from the proceeds of its initial offering of common stock. The Company
believes that the rate of asset growth will not negatively impact the capital
base. Total equity at December 31, 1996 was $11.6 million. 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 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.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and
ratios (set forth in the table below) 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, 1996, that the Company and the Bank
meet all capital adequacy requirements to which they are subject. At December
31, 1996 and 1995, the Company and the Bank are both categorized as "well
capitalized" under the regulatory framework for prompt corrective action. To
be categorized as "well capitalized", the Company and the Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set
forth in the table below. 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, 1996 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 17 to the Notes to
Consolidated Financial Statements.
EARNINGS ANALYSIS
1996 vs. 1995
GENERAL
The Company's net income increased 90%, or $473,000 from $529,000 in 1995
to $1,002,000 for 1996. Earnings per common share, adjusted for all stock
distributions, rose from $.38 in 1995 to $.71 in 1996. Increases in average
earning assets, the net interest margin and other income were the primary
reasons for the growth in net income and earnings per share between 1995 and
1996.
Summit National Bank recorded net earnings of $991,000 for the year ended
December 31, 1996, a $284,000 or 40% increase over the $707,000 recorded in
1995. The increase in earnings for this subsidiary resulted primarily from an
increase in the Bank's net interest income of $913,000 or 26% due to the
higher level of earning assets. Another significant factor was the increase
in other income of the Bank, which increased $231,000 or 41% primarily in the
area of nondeposit investment product sales resulting in commission income.
The income increases were somewhat offset by higher overhead expenses
resulting from operating two full-service branches for the entire year of 1996
as compared to a partial year in 1995.
The Company's nonbank subsidiary, Freedom Finance, Inc., recorded a net
loss for 1996 of $(67,000), a $161,000 or 71% improvement over the 1995 loss
of $(229,000). The improvement is a direct result of the higher level of
earning assets contributing to an increase in net interest income and fee
income which outpaced the increase in overhead expenses. As the original
branches begin to mature and grow to a size sufficient to support the overhead
in place, they will be better able to support the newer branches during their
start-up phase.
NET INTEREST INCOME
Net interest income is the difference between the interest earned on
assets and the interest paid for the liabilities used to support those assets.
It is the largest component of the Company's earnings and changes in it have
the greatest impact on net income. Variations in the volume and mix of assets
and liabilities and their relative sensitivity to interest rate movements
determine changes in net interest income. During 1996, the Company recorded
net interest income of $5.6 million, a 40% increase from the 1995 net interest
income of $4.0 million. The increase in this amount is related to (1) the
increase in the loan and deposit volume of the Bank of 33% and 32%,
respectively; and (2) the contributions of the Finance Company as its earning
assets continued to grow.
The Company's interest rate sensitivity gap (interest-sensitive assets
minus interest-sensitive liabilities) is asset sensitive over the repricing
lives of its interest-earning assets and interest-bearing liabilities. An
asset sensitive position means that the Company's assets reprice faster than
the liabilities, resulting in increases in the net interest income during
periods of rising rates and decreases in net interest income when market rates
decline, as experienced most recently. Interest rates dropped starting in
July 1995 and into 1996, and the Bank's net interest margin did decline as the
loans which are tied to the prime rate dropped immediately, while the majority
of liabilities did not reprice until their fixed maturity dates. If rates
continue to decline, the Company may realize a negative impact on its net
interest income.
For the year ended December 31, 1996, the Company's net interest margin
was 4.81%, compared to 4.41% for 1995. The net interest margin is calculated
as net interest income divided by average earning assets. The increase is
primarily related to the contribution of the higher level of Finance Company
loans outstanding and increases in Freedom's margin. The higher margin at
Freedom offset the decline in the Bank's net interest margin which dropped
from 4.03% for 1995 to 3.88% for 1996 related primarily to the 56 basis point
drop in the prime lending rate for the period.
INTEREST INCOME
For the year ended December 31, 1996, the Company's average earning
assets grew $25.9 million from $90.2 million in 1995 to $116 million. The
average yield on earning assets also increased during the period, from 8.58%
in 1995 to 9.09% in 1996. Thus, the increase in volume of approximately 29%,
combined with the increase in average yield of 51 basis points, accounts for
the increase in interest income of $2.8 million or 36% between 1995 and 1996.
The majority of the increase in average earning assets was in loans,
which are the Company's highest yielding assets and represented 76% of average
earning assets for 1996. Consolidated loans averaged $88.5 million in 1996,
compared to $66.5 million in 1995 or an increase of 33%. The Bank's loans
represent 97% of the consolidated totals and yielded an average 8.93% for 1996
compared to 9.20% for 1995. The decline in the average yield on the Bank's
loan portfolio is directly related to the drop in the average prime rate
during the period from 8.83% in 1995 to 8.27% in 1996. As of December 31,
1996, approximately 58% of the Bank's loan portfolio was tied to the prime
rate compared to 61% tied to the prime rate at December 31, 1995. The decline
in the Bank's yield on loans was offset by an increase in the average yield of
the Finance Company's loans and the increase in the relative percentage of the
Finance Company's loans to the total portfolio in comparison with the prior
year. Thus, the consolidated average yield on loans actually increased 45
basis points to 10.09% for 1996 compared to 9.64% for 1995. The higher level
of average loans, combined with the increase in average yield, resulted in an
increase in consolidated interest income on loans of $2.5 million or 39%.
The second largest component of earning assets is the Company's
investment portfolio which averaged $21.2 million or 18% of earning assets for
1996, yielding 6.05% for the current year. This is compared to average
securities of $17.2 million yielding 5.54% for 1995. The increase in the
average yield of the investment portfolio is related to the timing, maturity
distribution and types of securities purchased during the latter half of 1995
and during 1996 as well as the maturities of some investments with lower than
current market yields. The higher level of average securities, combined with
the increase in average rate, resulted in an increase in interest income on
investments of $317,000 or 33%.
INTEREST EXPENSE
The Company's interest expense for 1996 was $5.0 million, compared to
$3.8 million for 1995. The increase in interest expense of 32% is directly
related to the 32% increase in the average volume of interest-bearing
liabilities. Interest-bearing liabilities averaged $97.5 million in 1996 with
an average rate of 5.09% compared to an average of $73.7 million and an
average rate of 5.10% during 1995. Although the general interest rate
environment decreased during 1996, which resulted in the Bank repricing
non-time and maturing time deposits at lower market rates, the Bank offered
several deposit promotions during the year to increase the level of core
deposits as required to meet loan growth demands. The combination of the
above two factors resulted in the average rate on interest-bearing deposits
remaining fairly constant between 1995 and 1996.
PROVISION FOR LOAN LOSSES
The amount charged to the provision for loan losses by the Bank and the
Finance Company is based on management's judgment as to the amounts required
to maintain an allowance adequate to provide for inherent losses in the loan
portfolio. The level of this allowance is dependent upon growth in the loan
portfolios; the total amount of past due loans; nonperforming loans; known
loan deteriorations and/or concentrations of credit; trends in portfolio
volume, maturity and composition; projected collateral values; general
economic conditions; and management's assessment of potential losses based
upon internal credit grading of the loans and periodic reviews and assessments
of credit risk associated with particular loans.
While it is the Company's policy to charge-off in the current period
loans 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. Management uses the best information available to
make evaluations, however, future adjustments to the allowance may be
necessary if economic conditions differ substantially from the assumptions
used in making evaluations. The Company is also subject to regulatory
examinations and determinations as to the adequacy of the allowance, which may
take into account such factors as the methodology used to calculate the
allowance for loan losses and the size of the allowance in comparison to a
group of peer companies identified by the regulatory agencies.
During 1996, $516,000 was charged to the provision for loan losses,
compared to $277,000 for 1995. The increase in the provision was a result of
(1) the higher net originations between 1995 and 1996 of $27.2 million as
compared to net originations of $15.7 million between 1994 and 1995; and (2)
the larger percentage of the Finance Company's loans to the consolidated total
as these generally have higher inherent risk than do loans of the Bank.
Estimates charged to the provision for loan losses based on the factors
discussed above are adjusted as necessary. At December 31, 1996, the
allowance for loan losses was $1.5 million or 1.43% of total loans, compared
to $1.1 million or 1.41% of total loans at December 31, 1995.
The Company continues to maintain a high quality loan portfolio.
Although loan volume increased 36% during the past year, the majority of which
was a result of the Bank's internal growth, total nonperforming assets
remained at a very low level in comparison to peer banks. Loans on nonaccrual
at December 31, 1996 totaled $110,000 or .10% of outstanding loans. There
were no loans on nonaccrual at December 31, 1995. Generally, loans of the
Bank are placed on nonaccrual status at the earlier of when they are 90 days
past due or when the collection of the loan becomes doubtful. Loans of the
Finance Company are not classified as nonaccrual, but are charged-off when
such become 150 days contractually past due or earlier if the loan is deemed
uncollectible. At December 31, 1996 and 1995, the Bank held no other real
estate owned acquired in partial or total satisfaction of problem loans. At
December 31, 1996, one loan totaling $110,000 was considered impaired under
the definitions of Statement of Financial Accounting Standards No. 114. The
related impairment allowance at the current year end was zero. There were no
impaired loans at December 31, 1995.
For the year ended December 31, 1996, the Company reported net
charge-offs of $154,000, which is a result of the Finance Company net
charge-offs of $125,000 (4.85% of average loans of the Finance Company)
combined with the Bank's net charge-offs of $29,000 (.03% of average loans of
the Bank) for the year. This is compared to consolidated net charge-offs of
$59,000 for the year ended December 31, 1995. Loans past due 90 days and
greater totaled $200,000 or 0.19% of gross loans at December 31, 1996 compared
to $9,000 or .01% of gross loans at December 31, 1995. The allowance for loan
losses at December 31, 1996 represents management's estimate of inherent
losses in the loan portfolio at that date.
OTHER INCOME AND OTHER EXPENSES
Other income, which is primarily service charges on customers' deposit
accounts; credit card interchange fees; credit card merchant discount fees;
commissions on nondeposit investment product sales and insurance product
sales; and mortgage origination fees, was $980,000 in 1996 compared to
$611,000 in 1995, or an increase of 60%. The majority of the increase is
related to the increase in insurance commission fee income ($119,000 or 32% of
the increase) related to the higher level of activity for both the Bank and
the Finance Company. Included in this amount is commissions on annuity sales
made in the Bank's nondeposit investment sales department which increased
$52,000 during 1996 as compared to 1995. Also included is earned commissions
on credit-related insurance products generated by the Finance Company which
increased $61,000 during the same period primarily related to the higher
number of offices operating in 1996 as compared to 1995. A portion of the
higher amount in other income is related to the increase in the number of Bank
deposit accounts and transactions subject to service charges and fees (10% of
the increase or $38,000) and the higher volume of transactions and merchant
activity in the Bank's credit card portfolio ($50,000 or 14% of the increase).
The remainder of the increase is related to (1) late charge income and other
income generated by the Finance Company in 1996 related to the higher number
of offices and customer accounts as compared to the prior year; and (2) a
higher level of activity in the Bank's nondeposit financial services and
brokerage department in 1996 which accounted for $135,000 of the increase or
36%.
For the year ended December 31, 1996, total other expenses were $4.4
million which is an increase of 27% over the amount incurred for the prior
year of $3.5 million. The most significant item included in other expenses is
salaries, wages and benefits which amounted to $2.3 million for 1996 as
compared to $1.7 million for 1995. The increase of $600,000 or 35% is a
result of (1) normal annual raises; (2) the Bank increasing the total number
of employees related to the opening of the new branch in August 1995 by
approximately 16%; and (3) the Finance Company's operations which accounted
for $294,000 or 49% of the increase due to the opening of additional branches
throughout 1995 and 1996.
The 26% ($81,000) increase in occupancy expenses and the 18% ($62,000)
increase in furniture, fixtures, and equipment ("FFE") between 1995 and 1996
are primarily related to (1) expenses associated with the operations of the
second Bank branch which opened in August 1995; and (2) the addition of
Finance Company branches throughout 1995 and 1996.
Included in the line item "other operating expenses", which increased
$189,000 or 17% between 1995 and 1996, are charges for OCC assessments;
property and bond insurance; automated teller machine switch fees; credit card
expenses; professional services; education and seminars; advertising and
public relations; and other branch and customer related expenses. These items
are related directly to the normal operations of the Bank and increase in
relation to the increase in assets, the higher level of transaction volume,
and the larger number of customer accounts. The Bank's activity accounted for
a net $62,000 increase (33% of the total increase), primarily related to the
increased level of activity and number of accounts as compared to the prior
year, and the higher telephone, advertising, courier, and supplies expenses
associated with the second Bank branch added in August 1995. The remainder of
the consolidated increase, or $126,000, was generated by the activity of the
Finance Company with ten operational offices in the during 1996 compared to
eight for the prior year (of which three were added after mid-year 1995),
primarily related to credit reports, license fees, acquisition premium
amortization, and office support.
INCOME TAXES
For the year ended December 31, 1996, the Company reported $644,000 in
income tax expense, or an effective tax rate of 39%. This is compared to
income tax expense of $312,000 for the prior year, or an effective tax rate of
37%. The increase of the effective rate in 1996 is related to the full
utilization of net operating loss carryforwards in prior years.
EARNINGS ANALYSIS
1995 vs. 1994
NET INTEREST INCOME
Net interest income, the difference between the interest earned on assets
and the interest paid for the liabilities, was reported at $4.0 million for
1995, a 35% increase from the 1994 net interest income of $2.9 million. The
increase in this amount is related to (1) the increase in the loan and deposit
activity as the Bank expanded with the addition of a new location; (2) the
increasing interest rate environment experienced during 1994 through mid-1995;
and (3) the loans of Freedom Finance, operational for the entire year in 1995,
which contributed $451,000 or 11% to the consolidated net interest income in
1995.
For the year ended December 31, 1995, the Company's net interest margin
was 4.41%, compared to 3.93% for 1994. The net interest margin is calculated
as net interest income divided by average earning assets. The increase is
primarily related to the prime rate increases during 1994 and 1995 and the
contribution of the Finance Company's loans. The yield on a majority of the
Company's earning assets adjusts simultaneously with changes in the general
level of interest rates. The prime lending rate increased from an average of
7.13% in 1994 to an average of 8.83% during 1995.
INTEREST INCOME
For the year ended December 31, 1995, the Company's earning assets
averaged $90.2 million and had an average yield of 8.58%. This compares to
average earning assets of $74.8 million for 1994, yielding approximately
7.04%. Thus, the increase in volume of approximately 21%, combined with the
increase in average yield of 154 basis points, accounts for the increase in
interest income of $2.5 million or 47% between 1994 and 1995.
The majority of the Company's loans are tied to the prime rate. And, as
loans represented approximately 74% of average earning assets in 1995, this
has meant that the general rise in the level of interest rates during 1994 and
into 1995 has had a positive impact on the Company's earnings. During 1995,
loans averaged $66.5 million yielding an average of 9.64%, compared to $54.2
million yielding 7.96% in 1994. The increase in the average yield on loans is
directly related to the 170 basis point increase in the average prime rate in
1995 compared to 1994 and the contribution of the Finance Company loans.
In addition to the increase in the average yield on loans, the general
rising interest rate environment provided the Company with opportunities to
invest in and reinvest maturities of investment securities at higher current
market rates, thus increasing the overall yield on the investment portfolio.
Investment securities averaged $17.2 million or 19% of average earning assets
and yielded 5.54% during 1995, compared to average securities of $15.6 million
yielding 4.75% for 1994.
INTEREST EXPENSE
The Company's interest expense for 1995 was $3.8 million, compared to
$2.3 million for 1994. The increase in the average volume of interest-bearing
liabilities of 20%, combined with the 135 basis point increase in average rate
on interest-bearing liabilities, are the primary contributors to the increase
in interest expense in 1995. The increase in average rate is a direct result
of the general increases in rates during 1994 and into 1995. Interest-bearing
liabilities averaged $71.7 million in 1995 with an average rate of 5.25%
compared to an average of $59.7 million and an average rate of 3.89% during
1994.
PROVISION FOR LOAN LOSSES
The amount charged to the provision for loan losses by the Bank is based
on management's judgment as to the amounts required to maintain an allowance
adequate to provide for potential losses in the loan portfolio. During 1995,
$277,000 was charged to the provision for loan losses, compared to $168,000
for 1994. The increase in the provision was a result of (1) the higher net
originations between 1995 and 1994 as compared to 1993 to 1994; and (2) a full
year of loan growth for the Finance Company, which generally has higher
inherent risk in its portfolio than does the Bank, thus its provision as a
percent of outstanding loans is generally higher than that of the Bank.
Net loan charge-offs as a percent of average loans has remained low in
1995 at .09% or approximately $59,000. This is compared to $61,000 net loan
charge-offs during 1994 or .11% of average loans. Loans past due 30 days or
more totaled $149,000 or .2% of total loans at December 31, 1995. This is
compared to $338,000 past due 30 days or more or .56% of total loans at
December 31, 1994. The amount of loans past due in excess of 90 days included
in the previous totals was minor in both 1995 and 1994. There were no loans
on nonaccrual at December 31, 1995 and only $37,000 of the Bank's loans were
classified as nonaccrual at December 31, 1994. At December 31, 1995, there
were no nonperforming assets, which include nonaccrual loans and other real
estate owned acquired in partial or total satisfaction of problem loans.
Total nonperforming assets were only .06% of total loans at December 31, 1994.
The allowance for loan losses at December 31, 1995 represents management's
estimate of potential future losses in the loan portfolio at that date.
OTHER INCOME AND OTHER EXPENSES
Other income, which is primarily service charges on customers' deposit
accounts; credit card interchange fees; credit card merchant discount fees;
nondeposit investment product sales commissions; and mortgage origination and
other fees on loans, was $611,000 in 1995 compared to $345,000 in 1994. The
increase of 77% is primarily related to the higher volume of consumer and
merchant transactions generating fee income related to the Bank's credit card
program (approximately $49,000 or 18% of the increase); the higher level of
commercial and consumer loan originations of the Bank generating fees ($49,000
of the increase); the contribution of the Finance Company which generated
earned insurance commissions, late fees and other income for the entire year
of 1995, compared to 2 months in 1994 ($90,000 or 34% of the increase); and
the increase in the level of activity of the nondeposit investment product
sales generating commission fees (which increased $33,000 or 13% of the total)
and mortgage department originations ($51,000 of the increase or 19%).
For the year ended December 31, 1995, total overhead expenses were $3.5
million which is an increase of 48% from the 1994 total of $2.3 million. The
most significant item included in overhead expenses is salaries, wages and
benefits which amounted to $1.7 million in 1995 as compared to $1.1 million in
1994. The $652,000 or 62% increase is a result of (1) normal annual raises;
(2) salary and benefits associated with the increase in Bank personnel of 33%
(27 full time equivalent ("FTE") employees at December 31, 1994 compared to 36
FTE for 1995 year end); and (3) the Finance Company's personnel expenses
totaling $330,000 or 19% of the consolidated total for the entire year of 1995
versus personnel expenses for only 3 months in 1994. The Finance Company
ended 1995 with 22 FTE employees compared to 7 FTE at December 31, 1994.
The $109,000 or 53% increase in occupancy and the $106,000 or 44%
increase in furniture, fixtures and equipment expenses are a direct result of
(1) the new Bank branch which commenced operations in August 1995; and (2) the
addition of 5 branch locations of the Finance Company between May and December
1995, combined with the initial 3 branches which were operational for the full
year of 1995 compared to only 2 months in 1994.
Included in the line item "Other operating expenses", which increased
$254,000 or 30% during 1995, are OCC assessments; FDIC insurance premiums;
property and bond insurance premiums; automated teller machine switch fees;
credit card program expenses; professional services; education and seminar
costs; advertising and public relations; and other branch and customer-related
expenses. These items are related directly to the normal operations of the
Bank and increase in relation to the increase in assets, the higher level of
transaction volume, and the larger number of customer accounts. The Bank's
activity accounted for approximately $73,000 or 29% of the increase. This
amount equates to a 9% net increase in the total amount of other operating
expenses for the Bank from 1994 to 1995. The remaining increase in other
operating expense (approximately $181,000) is related to the full year of
operations of the 8 branches of the Finance Company and includes credit
reports, office support and forms, insurance claims, and other expense
associated with the normal operations of Freedom.
PROVISION FOR INCOME TAXES
Net income for 1995 includes a provision for income taxes of $312,000 for
an effective tax rate of 37%, compared to a tax provision of $109,000 for 1994
which relates to an effective tax rate of approximately 14%. The increase in
the tax provision for 1995 relates to the 9% increase in pretax net income and
the utilization of operating loss carryforwards during 1994.
LIQUIDITY
Liquidity management involves meeting the cash flow requirements of the
Company. The Company must maintain an adequate liquidity position in order
to respond to the short-term demand for funds caused by withdrawals from
deposit accounts, maturities of repurchase agreements, extensions of credit,
and for the payment of operating expenses. Maintaining an adequate level of
liquidity is accomplished through a combination of liquid assets, those which
can easily be converted into cash, and access to additional sources of funds.
The Company's primary liquid assets are cash and due from banks, federal funds
sold, unpledged investment securities available for sale, other short-term
investments and maturing loans. These primary liquidity sources accounted for
17% and 20% of average assets for the years ended December 31, 1996 and 1995,
respectively. In management's opinion, the Company maintains adequate levels
of liquidity by retaining sufficient liquid assets and assets which can be
easily converted into cash and by maintaining access to various sources of
funds. The primary sources of funds available through the Bank include lines
of credit through the Federal Home Loan Bank and Federal Reserve Bank,
purchasing federal funds from other financial institutions, and increasing
deposits by raising rates paid.
Summit Financial Corporation ("Summit Financial"), the parent holding
company, has limited liquidity needs. Summit Financial requires liquidity to
pay limited operating expenses, to service its debt, and to provide funding to
its consumer finance subsidiary, Freedom Finance. Summit Financial has $1.8
million in available liquidity remaining from its initial public offering and
the retention of earnings. All of this liquidity was advanced to the Finance
Company to fund its operations as of December 31, 1996. In addition, Summit
Financial has available lines of credit totaling $3 million with unaffiliated
financial institutions, of which $2.95 million was available at December 31,
1996. A further source of liquidity for Summit Financial includes management
fees and debt service which are paid by its subsidiary on a monthly basis.
Liquidity needs of Freedom Finance, primarily for the funding of loan
originations, acquisitions, and operating expenses, have been meet to date
through the initial capital investment of $500,000 made by Summit Financial,
borrowings from an unrelated private investor, and line of credit facilities
provided by Summit Financial and Summit National Bank, a sister company.
The Company's management believes its liquidity sources are adequate to
meet its operating needs and does not know of any trends, events or
uncertainties that may result in a significant adverse affect on the Company's
liquidity position.
EFFECT OF INFLATION AND CHANGING PRICES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles which require the measurement of
financial position and results of operations in terms of historical dollars,
without consideration of changes in the relative purchasing power over time
due to inflation.
Unlike most other industries, virtually all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest
rates generally have a more significant effect in a financial institution's
performance than does the effect of inflation.
The yield on a majority of the Company's earning assets adjusts
simultaneously with changes in the general level of interest rates. Most of
the Company's liabilities are issued with fixed terms and can be repriced only
at maturity. During periods of rising interest rates, as experienced from
1994 through mid-1995, the Company's assets reprice faster than the supporting
liabilities. This causes an increase in the net interest margin until the
deposits mature and are repriced at higher current market rates, thus
narrowing the difference between what the Company earns on its assets and what
it pays on its liabilities. Given the Company's current balance sheet
structure, the opposite effect (that is, a decrease in net interest income) is
realized in a falling rate environment as was experienced in the latter part
of 1995 and into 1996.
ACCOUNTING, REPORTING AND REGULATORY MATTERS
On March 31, 1995, the FASB issued SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
which is effective for financial statements issued for fiscal years beginning
after December 15, 1995. SFAS No. 121 provides guidance for recognition and
measurement of impairment of long-lived assets, certain identifiable
intangibles, and goodwill related both to assets to be held and used and
assets to be disposed of. Based on the Company's current balance sheet, the
adoption of this statement has not had a material effect on the Company.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights, an amendment of SFAS No. 65" which is effective
prospectively for years beginning after December 15, 1995. The statement
requires the recognition of an asset for the right to service mortgage loans
for others, regardless of how those rights were acquired (either purchased or
originated). Further, it amends SFAS 65 to require assessment of impairment
based on fair value. Based upon the Company's present mortgage lending
operation, which includes pre-selling all mortgages servicing released, the
adoption of this statement has not had a material effect on the Company.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock
Based Compensation". This statement is effective for financial statements
issued for fiscal years beginning after December 15, 1995. SFAS No. 123
provides guidance on the valuation of compensation costs arising from both
fixed and performance stock compensation plans. SFAS No. 123 encourages but
does not require entities to account for stock compensation awards based on
their estimated fair value on the date they are granted. Entities can
continue to follow current accounting requirements, which generally do not
result in an expense charge for most options. However, they must disclose in
a footnote to their financial statements what the effect on net income and
earnings per share would have been had they recognized expense for the
options. The Company has continued its current accounting practice.
Therefore, the adoption of this statement has not had an effect on the
Company's operating results, but merely expanded its footnotes to include the
required proforma disclosures.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities." This
statement will become effective for transactions occurring after December 31,
1996. The statement uses a "financial components" approach that focuses on
control to determine the proper accounting for financial asset transfers.
Under that approach, after financial assets are transferred, an entity would
recognize on its balance sheet all assets it controls and liabilities it has
incurred. The entity would remove from the balance sheet those assets it no
longer controls and liabilities it has satisfied. The Company does not
anticipate that adoption of this statement will have a material effect on the
Company's financial statements in 1997.
In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of SFAS No. 125", an amendment to SFAS
No. 125 which is effective December 31, 1996. This statement delays the
effective date of certain provisions of SFAS No. 125 until December 31, 1997.
The amended provisions include those related to the transfers of financial
assets and secured borrowings. The provisions in SFAS No. 125 related to
servicing assets and liabilities are not delayed by this amendment. The
Company does not anticipate that adoption of this standard will have a
material effect on the Company's financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1996 1995
------------- -------------
ASSETS
Cash and interest-bearing deposits $ 6,026,267 $ 6,345,071
Federal funds sold 3,000,000 9,100,000
Investment securities available for sale (amortized cost 18,510,478 20,085,151
of $18,510,478 and $19,994,851)
Investments in stock of Federal Reserve Bank, Federal 634,340 512,340
Home Loan Bank and other, at cost
Loans, net of unearned income and net of allowance 101,204,867 74,644,469
for loan losses of $1,486,873 and $1,067,584
Premises and equipment, net of accumulated 2,501,937 2,735,630
depreciation and amortization of $1,167,110
and $848,837
Accrued interest receivable 940,479 780,514
Other assets 1,343,798 868,507
------------- -------------
$ 134,162,166 $ 115,071,682
============= =============
LIABILITIES AND SHAREHOLDERS'
EQUITY
Deposits:
Demand $ 17,484,409 $ 13,863,019
Interest-bearing demand 6,227,317 4,891,911
Savings and money market 23,366,281 28,181,365
Time deposits, $100,000 and over 25,392,780 19,777,667
Other time deposits 45,334,608 32,605,103
------------- -------------
117,805,395 99,319,065
Securities sold under repurchase agreements 761,047 569,933
Federal funds purchased - 991,000
Other borrowings 2,550,000 2,000,000
Accrued interest payable 822,911 718,917
Other liabilities 585,915 809,265
------------- -------------
Total liabilities 122,525,268 104,408,180
------------- -------------
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000 shares 1,334,409 1,267,251
authorized; 1,334,409 issued and outstanding
Additional paid-in capital 10,254,039 9,342,451
Retained earnings 48,450 -
Unrealized net gain on investment securities
available for sale, net of income taxes - 53,800
------------- -------------
Total shareholders' equity 11,636,898 10,663,502
Commitments and contingencies
$ 134,162,166 $ 115,071,682
============= =============
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
----------------------------------
1996 1995 1994
------------ ----------- -----------
Interest Income:
Interest on loans $ 8,923,573 $6,410,423 $4,317,602
Interest on taxable securities 1,240,996 952,889 739,277
Interest on nontaxable securities 29,165 - -
Interest on federal funds sold 207,446 218,602 128,840
Other interest income 145,525 153,973 79,908
------------ ----------- -----------
10,546,705 7,735,887 5,265,627
------------ ----------- -----------
Interest Expense:
Interest on deposits 4,752,790 3,574,912 2,216,627
Other interest expense 211,013 184,898 107,233
------------ ----------- -----------
4,963,803 3,759,810 2,323,860
------------ ----------- -----------
Net interest income 5,582,902 3,976,077 2,941,767
Provision for loan losses (516,100) (277,000) (167,868)
------------ ----------- -----------
Net interest income after provision for loan losses 5,066,802 3,699,077 2,773,899
------------ ----------- -----------
Other Income:
Service charges and fees on 173,920 136,201 136,172
deposit accounts
Credit card fees and income 217,354 167,100 117,962
Insurance commissions 182,168 62,787 3,692
Other income 406,902 244,955 86,815
------------ ----------- -----------
980,344 611,043 344,641
------------ ----------- -----------
Other Expenses:
Salaries, wages and benefits 2,310,917 1,711,248 1,059,622
Occupancy 395,389 313,919 204,958
Furniture, fixtures and equipment 410,426 348,309 242,151
Other operating expenses 1,284,640 1,096,049 841,655
------------ ----------- -----------
4,401,372 3,469,525 2,348,386
------------ ----------- -----------
Net income before income taxes 1,645,774 840,595 770,154
Provision for income taxes (644,000) (312,000) (109,000)
------------ ----------- -----------
Net income $ 1,001,774 $ 528,595 $ 661,154
============ =========== ===========
Net income per common share:
Primary $ 0.71 $ 0.38 $ 0.49
Fully diluted $ 0.71 $ 0.38 $ 0.49
Average shares outstanding:
Primary 1,410,775 1,404,404 1,341,055
Fully diluted 1,410,775 1,404,404 1,341,055
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
Shares Amount Additional Retained Unrealized net Total
paid-in earnings gain (loss) on shareholders'
capital (accumulated investment equity
deficit) securities
available for
sale, net of
income taxes
----------------
Balance at December 31, 1993 1,149,693 $1,149,693 $ 8,869,487 ($590,210) ($1,701) $ 9,427,269
Cash in lieu of fractional shares from
stock distribution - - (1,902) - - (1,902)
Net income for the year ended
December 31, 1994 - - - 661,154 - 661,154
Change in unrealized net gain (loss) on
investment securities available for sale,
net of income taxes - - - - (237,894) (237,894)
Issuance of 5% stock distribution 57,474 57,474 10,675 (68,149) - -
Cash in lieu of fractional shares from
stock distribution - - - (2,795) - (2,795)
--------- ---------- ------------ -------------- ---------------- ---------------
Balance at December 31, 1994 1,207,167 1,207,167 8,878,260 - (239,595) 9,845,832
Net income for the year ended
December 31, 1995 - - - 528,595 - 528,595
Change in unrealized net gain (loss) on
investment securities available for sale,
net of income taxes - - - - 293,395 293,395
Issuance of 5% stock distribution 60,084 60,084 464,191 (524,275) - -
Cash in lieu of fractional shares from
stock distribution - - - (4,320) - (4,320)
--------- ---------- ------------ -------------- ---------------- ---------------
Balance at December 31, 1995 1,267,251 1,267,251 9,342,451 - 53,800 10,663,502
Net income for the year ended
December 31, 1996 - - - 1,001,774 - 1,001,774
Change in unrealized net gain (loss) on
investment securities available for sale,
net of income taxes - - - - (53,800) (53,800)
Employee stock options exercised 3,728 3,728 23,568 - - 27,296
Issuance of 5% stock distribution 63,430 63,430 888,020 (951,450) - -
Cash in lieu of fractional shares from
stock distribution - - - (1,874) - (1,874)
--------- ---------- ------------ -------------- ---------------- ---------------
Balance at December 31, 1996 1,334,409 $1,334,409 $10,254,039 $ 48,450 $ - $ 11,636,898
========= ========== ============ ============== ================ ===============
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------
1996 1995 1994
------------- ------------- -------------
Cash flows from operating activities:
Net income $ 1,001,774 $ 528,595 $ 661,154
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 516,100 277,000 167,868
Depreciation and amortization 318,274 255,116 174,712
Loss (gain) on sale and disposal of fixed assets - 1,293 (22,320)
Net amortization (accretion) of net premium 22,668 (8,108) 1,585
(discount) on investment securities
Increase in accrued interest receivable (159,965) (227,928) (175,515)
Increase in other assets (344,291) (369,765) (47,861)
Increase in accrued interest payable 103,994 353,147 86,179
(Decrease) increase in other liabilities (186,850) 380,156 235,269
Deferred income taxes (131,000) (52,000) (174,000)
------------- ------------- -------------
Net cash provided by operating activities 1,140,704 1,137,506 907,071
------------- ------------- -------------
Cash flows from investing activities:
Purchases of securities held to maturity - (512,522) (500,000)
Proceeds from maturities of securities held to maturity - 208,772 1,280,973
Purchases of investment securities available for sale (8,692,842) (9,606,427) (6,335,376)
Proceeds from maturities and sales of investment 10,154,547 5,700,000 4,149,965
securities available for sale
Purchases of investments in FHLB and other stock (122,000) (14,000) (112,240)
Net increase in loans (25,922,171) (14,940,423) (9,988,142)
Purchases of finance loans receivable (1,154,327) (531,604) (283,528)
Purchases of premises and equipment (84,581) (1,832,673) (804,345)
Proceeds from sale of premises and equipment - - 36,900
------------- ------------- -------------
Net cash used by investing activities (25,821,374) (21,528,877) (12,555,793)
------------- ------------- -------------
Cash flows from financing activities:
Net increase in deposit accounts 18,486,330 31,970,980 6,901,719
Net (decrease) increase in securities sold under (799,886) (2,142,712) 2,840,451
repurchase agreements and federal funds purchased
Proceeds from other borrowings 2,550,000 - 2,000,000
Repayments of other borrowings (2,000,000) - -
Proceeds from employee stock options exercised 27,296 - -
Cash paid in lieu of fractional shares (1,874) (4,320) (4,697)
------------- ------------- -------------
Net cash provided by financing activities 18,261,866 29,823,948 11,737,473
------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents (6,418,804) 9,432,577 88,751
Cash and cash equivalents, beginning of period 15,445,071 6,012,494 5,923,743
------------- ------------- -------------
Cash and cash equivalents, end of period $ 9,026,267 $ 15,445,071 $ 6,012,494
============= ============= =============
Supplemental information:
Cash paid during year for interest $ 4,859,809 $ 3,406,663 $ 2,237,681
Cash paid during year for income taxes $ 801,939 $ 496,362 $ 37,348
Noncash transfer of investment securities from - $ 5,751,248 -
held to maturity to available for sale portfolio
Change in market value of investment securities ($53,800) $ 293,395 ($237,894)
available for sale, net of income taxes
See accompanying notes to consolidated financial statements.
SUMMIT FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1996 and 1995
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 two full-service branches in Greenville, South Carolina.
The Finance Company commenced operations in November 1994 and makes and
services small, short-term installment loans and related credit insurance
products to individuals from its ten offices throughout South Carolina.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the more significant accounting
policies used in preparing the consolidated financial statements. The
accounting and reporting policies of the Company conform to generally accepted
accounting principles ("GAAP") and to general practices within the banking
industry. The preparation of financial statements in conformity with GAAP
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.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries, the Bank and the Finance Company. All significant intercompany
accounts and transactions have been eliminated in consolidation.
INVESTMENT SECURITIES - Investment securities are accounted for in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", which was
adopted by the Company on January 1, 1994. Investments are classified into
three categories as follows: (1) Investments Held to Maturity - debt
securities which the enterprise has the positive intent and ability to hold to
maturity, which are reported at amortized cost; (2) Trading Securities - debt
and equity 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 - debt and equity 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.
LOANS AND INTEREST INCOME - Loans are carried at principal amounts, net of
unearned income, 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.
Loans of the Finance Company are carried at the gross amount outstanding,
reduced by unearned interest and insurance income, net deferred origination
fees and direct costs, and an allowance for loan losses. Unearned interest is
deferred at the time the loans are made and accreted to income on a collection
method, which approximates the level yield method. Charges for late payments
are credited to income when collected.
IMPAIRMENT OF LOANS - The Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" on January 1, 1995. This standard
requires that all creditors value loans at the loan's fair value if it is
probable that the creditor will be unable to collect all amounts due according
to the terms of the loan agreement. Fair value may be determined based upon
the present value of expected cash flows, market price of the loan, if
available, or value of the underlying collateral. Expected cash flows are
required to be discounted at the loan's effective interest rate. SFAS No. 114
was amended by SFAS No. 118 to allow a creditor to use existing methods for
recognizing interest income on an impaired loan and by requiring additional
disclosures about how a creditor recognizes interest income on an impaired
loan. The adoption of the standards required no increase in the allowance for
loan losses and had no impact on net income in the year of adoption.
Under SFAS No. 114, as amended by SFAS No. 118, when the ultimate
collectibility of an impaired loan's principal is in doubt, wholly or
partially, all cash receipts are applied to principal. When this doubt does
not exist, cash receipts are applied under the contractual terms of the loan
agreement first to principal then to interest income. Once the recorded
principal balance has been reduced to zero, future cash receipts are applied
to interest income, to the extent that any interest has been foregone.
Further cash receipts are recorded as recoveries of any amounts previously
charged off.
A loan is also considered impaired if its terms are modified in a
troubled debt restructuring after January 1, 1995. For these accruing
impaired loans, cash receipts are typically applied to principal and interest
receivable in accordance with the terms of the restructured loan agreement.
Interest income is recognized on these loans using the accrual method of
accounting. As a practical matter, the Bank determines which loans are
impaired through a loan review process.
Although SFAS No. 114 potentially applies to all problem loans, it
specifically states that it need not be applied to "large groups of smaller
balance homogeneous loans that are collectively evaluated for impairment".
Thus, the Company determined that the statement does not apply to its consumer
loan, credit card or residential mortgage loan portfolios, except that it may
choose to apply the statement to certain specific larger loans determined by
management. In effect, these portfolios are covered adequately in the
Company's normal formula for determining loss reserves.
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. While management uses the
best information available to make evaluations, future adjustments to the
allowance may be necessary if economic conditions differ substantially from
the assumptions used in making the evaluations. The allowance for loan losses
is subject to periodic evaluation by various regulatory authorities and may be
subject to adjustments based upon information that is available to them at the
time of their examination.
LOAN FEES - Loan origination fees and direct costs of loan originations are
deferred and recognized as an adjustment of yield by the interest method based
on the contractual terms of the loan. Loan commitment fees are deferred and
recognized as an adjustment of yield over the related loan's life, or if the
commitment expires unexercised, recognized in income upon expiration.
PREMISES AND EQUIPMENT - Premises and equipment 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, 5 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 lease. Additions to premises and
equipment and major replacements or betterments are added at cost.
Maintenance and repairs and minor replacements are charged to operating
expense as incurred. When assets are retired or otherwise disposed of, the
cost and accumulated depreciation are removed from the accounts and any gain
or loss is reflected in income.
INTANGIBLE ASSETS - Intangible assets are included in "Other assets" on the
accompanying consolidated balance sheets and have unamortized balances of
$787,143 and $360,152 at December 31, 1996 and 1995, respectively, with
related amortization of $106,221; $37,200; and $900 for the years ended 1996,
1995, and 1994, respectively. Intangible assets consist primarily of goodwill
and customer lists resulting from the Finance Company's branch acquisitions.
On an ongoing basis, the Company evaluates the carrying value of these
intangible assets and determines whether these assets have been impaired based
upon an undiscounted cash flow approach. Amortization of intangibles is
provided by using the straight-line method over the estimated economic lives
of the assets, which is generally from 5 - 7 years.
INCOME TAXES - Income taxes are accounted for in accordance with SFAS No.
109, "Accounting for Income Taxes". Under the asset and liability method of
SFAS No. 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 No. 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.
CASH AND CASH EQUIVALENTS - 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, overnight investments and short-term
investments with maturities of less than three months.
For the purposes of reporting cash flows, the Company considers "Cash and
interest-bearing deposits" and "Federal funds sold" to be cash and cash
equivalents. These accounts totaled $9,026,267 and $15,445,071 at December
31, 1996 and 1995, respectively.
STOCK-BASED COMPENSATION - SFAS No. 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 has chosen to adopt the disclosure-only provisions of SFAS No. 123 and
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations. Accordingly,
compensation cost for stock options is measured 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.
NOTE 2 - SUBSEQUENT EVENT
In January 1997, the Company entered into separate letters of intent to
acquire the loans receivable of four unrelated consumer finance companies.
Following regulatory approvals, the acquisitions were completed in February
1997 and resulted in the establishment of two new branch locations of the
Finance Company in Columbia, South Carolina and in Conway, South Carolina.
The receivables of the other two acquisitions were combined into separate
existing offices of the Finance Company. The combined cash purchase price for
the four transactions to acquire loans receivable totaled $595,000 and gross
loans receivable of approximately $520,000 were recorded as a result of these
transactions. No liabilities were assumed in any transaction.
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and market values of investments available for sale
are as follows at December 31:
1996 1995
--------- ---------
Unreal- Unreal- Unreal- Unreal-
Amortized ized ized Market Amortized ized ized Market
Cost Gains Losses Value Cost Gains Losses Value
----------- -------- --------- ----------- ----------- -------- --------- -----------
U.S. Treasury due:
Within 1 year $ 2,000,993 $ 3,499 $ - $ 2,004,492 $ 2,249,952 $ - $(11,600) $ 2,238,352
After 1, within 5
years 3,495,141 4,973 (11,322) 3,488,792 3,502,199 31,300 - 3,533,499
U.S. Government
Agencies due:
Within 1 year 2,250,944 3,799 (799) 2,253,964 3,417,442 - (11,500) 3,405,942
After 1, within 5
years 5,988,322 39,984 (8,652) 6,019,654 8,475,040 87,100 (3,000) 8,559,140
After 5, within 10
years 392,968 - (19,590) 373,378 - - - -
Mortgage-backed
securities:
5 year balloon
maturing within 1
year - - - - 360,104 5,300 - 365,404
5 - 7 year balloon
maturing within 2 -
7 years 2,414,716 - (21,807) 2,392,892 1,618,897 - (7,300) 1,611,597
Maturing beyond 10
years 1,341,379 11,814 - 1,353,193 - - - -
Municipal securities
maturing beyond 10
years 626,015 1,500 (3,402) 624,113 371,217 - - 371,217
----------- -------- --------- ----------- ----------- -------- --------- -----------
$18,510,478 $ 65,569 $(65,569) $18,510,478 $19,994,851 $123,700 $(33,400) $20,085,151
=========== ======== ========= =========== =========== ======== ========= ===========
Investment securities with an aggregate carrying value and market value
of approximately $9,193,000 and $9,220,000, respectively, at December 31, 1996
were pledged to secure public deposits, securities sold under repurchase
agreements, and for other purposes as required or permitted by law.
In 1996, the Company sold securities with a par value of $750,000 from
its available for sale portfolio for total proceeds of $749,531 and recorded a
gain on sale of $460. There were no sales of securities in either 1995 or
1994.
NOTE 4 - LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of loans by classification at December 31 is as follows:
1996 1995
------------- ------------
Commercial $ 21,775,428 $14,898,309
Real estate - commercial 33,474,802 26,888,629
Real estate - residential 33,140,082 21,482,258
Construction 4,517,579 4,909,217
Installment and other consumer loans 10,216,846 7,691,807
Other loans and overdrafts 226,908 211,082
------------- ------------
103,351,645 76,081,302
Less - unearned income (659,905) (369,249)
------------- ------------
102,691,740 75,712,053
Less - allowance for loan losses (1,486,873) (1,067,584)
------------- ------------
$101,204,867 $74,644,469
============= ============
Loans on nonaccrual at December 31, 1996 totaled $110,000 or .10% of
outstanding loans. There were no loans on nonaccrual at December 31, 1995.
If interest on nonaccrual loans had been accrued, such income would have
approximated $1,800 for the year ended December 31, 1996. Loans past due in
excess of 30 days amounted to approximately $449,000 and $149,000 at December
31, 1996 and 1995, respectively. There were no significant loans past due in
excess of 90 days included in the above amounts for which interest continued
to be accrued. There were no foreclosed loans or other real estate owned in
any year presented. At December 31, 1996, one loan totaling $110,000 was
considered impaired under the definitions of SFAS No. 114. The related
impairment allowance at December 31, 1996 was zero. The average impaired
loans during 1996 was $27,500. There were no impaired loans at or for the
year ended December 31, 1995.
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. As of December
31, 1996 the Company had no significant concentrations of credit risk in its
loan portfolio other than most loans being located in the same geographic
region.
The following is a summary of activity in the allowance for loan losses
for the years ended December 31:
1996 1995 1994
----------- ----------- ---------
Balance, beginning of year $1,067,584 $ 822,143 $696,923
Provision for losses 516,100 277,000 167,868
Charge-offs (386,515) (90,408) (68,831)
Recoveries 232,704 31,849 7,500
Allocation for purchased loans 57,000 27,000 18,683
----------- ----------- ---------
Balance, end of year $1,486,873 $1,067,584 $822,143
=========== =========== =========
NOTE 5 - PREMISES AND EQUIPMENT
A summary of fixed assets at December 31 is as follows:
1996 1995
------------ -----------
Land $ 483,463 $ 483,463
Building 1,253,699 1,251,792
Leasehold improvements 434,093 420,229
Computer, office equipment 947,050 913,279
Furniture and fixtures 470,660 458,521
Vehicles 80,082 57,183
------------ -----------
3,669,047 3,584,467
Less - accumulated depreciation (1,167,110) (848,837)
------------ -----------
$ 2,501,937 $2,735,630
============ ===========
NOTE 6 - SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
At December 31, 1996 and 1995, the Company had securities sold under
repurchase agreements with customers in the amount of $761,047 and $569,933,
respectively. Interest rates on these repurchase agreements range from 10
basis points to 25 basis points below the average federal funds sold rate and
averaged 5.2% and 5.7%, respectively, during 1996 and 1995. The repurchase
agreements mature on a daily basis and rollover under a continuing contract.
Amounts under repurchase agreements are secured by U.S. Government agency
securities with a carrying and market value of $1,498,000 and $1,499,000,
respectively, at December 31, 1996 and a carrying and market value of $982,000
and $1,006,000, respectively, at December 31, 1995. The securities underlying
the repurchase agreements were held in safekeeping by an authorized broker.
The following is a summary of the average amounts outstanding of
securities sold under repurchase agreements and the maximum amounts
outstanding at any month-end for each of the years ended December 31:
1996 1995 1994
---------- -------- ----------
Average outstanding $1,277,000 $553,000 $ 732,000
Maximum at any month-end $1,745,000 $570,000 $1,149,000
NOTE 7 - OTHER BORROWINGS & LINES OF CREDIT
Other borrowings at December 31 are summarized as follows:
1996 1995
---------- ----------
Federal Home Loan Bank advances $2,000,000 $2,000,000
Line of credit payable to a commercial
bank due October 1997, bearing interest
at 7.75% in 1996 50,000 -
Term loan payable to an individual due
March 1997, bearing interest at 7.50%
in 1996 500,000 -
---------- ----------
$2,550,000 $2,000,000
========== ==========
At December 31, 1996, the Company had outstanding advances from the
Federal Home Loan Bank of Atlanta (the "FHLB") totaling $2,000,000 through
Summit National Bank. The advances bear interest at rates from 5.89% to 6.60%
and mature in $1,000,000 increments in October 1997 and January 1998,
respectively. The advances require monthly interest payments with the
principal due at maturity. These advances are secured by a blanket collateral
agreement with the FHLB pledging the Bank's portfolio of personal first
mortgage loans. In addition to the advances outstanding, at December 31,
1996, the Bank had an available line of credit of $10,000,000 with the FHLB.
Borrowing under this arrangement can be made with various terms and repayment
schedules and with fixed or variable rates of interest. The blanket
collateral agreement which the Company has with the FHLB pledging the Bank's
portfolio of personal first mortgage loans as collateral, pertains to any
outstanding borrowings under this line of credit, in addition to the current
outstanding debt previously discussed. Loans secured by available first
mortgages at December 31, 1996 totaled approximately $21,849,000.
In addition, at December 31, 1996, the Bank had unused short-term lines
of credit to purchase federal funds from unrelated banks totaling $10,000,000,
of which $9,000,000 is on an unsecured basis and the remaining $1,000,000
would require security in the form of U.S. Treasury or government agency
obligations. The interest rate on any borrowings under these lines would be
the prevailing market rate for federal funds purchased. These lines are
available on a short-term basis 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.
During 1996, the Company entered into a line of credit arrangement with a
commercial bank for funding the loans receivable of the Finance Company. The
line, which is for a total of $2.2 million, is secured by the common stock of
the Bank and bears interest at the prime lending rate less 50 basis points.
The line requires quarterly interest payments and matures in October 1997.
Under the terms of the line, the Company is required to meet certain
covenants, including minimum capital levels and other performance ratios. At
December 31, 1996, $50,000 was outstanding under the revolving line of credit
and $2.15 million was available.
During 1996, the Finance Company entered into a term loan agreement with
an individual who is not affiliated with the Company or its subsidiaries. The
$500,000 loan matures in March 1997, bears interest at a fixed rate of 7.5%
and is unsecured.
The Company has an unsecured revolving line of credit with a commercial
bank in the amount of $800,000. Advances on this line bear interest at the
prime lending rate plus 1%. There were no advances outstanding on this line
at December 31, 1996 or 1995.
NOTE 8 - INCOME TAXES
A reconciliation of expected federal tax expense, at the statutory
federal tax rate of 34%, to consolidated effective income tax expense for the
years ended December 31 is as follows:
1996 1995 1994
-------- --------- ----------
Expected federal income
tax expense $560,000 $285,000 $ 262,000
Adjustments to income tax:
Change in beginning of year
valuation allowance for
deferred tax assets - (3,000) (159,000)
State income tax, net of
federal benefit 29,000 20,000 -
Other 55,000 10,000 6,000
-------- --------- ----------
Total $644,000 $312,000 $ 109,000
======== ========= ==========
Income tax expense for the years ended December 31 is as follows:
1996 1995 1994
---------- --------- ----------
Current tax provision:
Federal $ 706,000 $334,000 $ 283,000
State 48,000 30,000 -
---------- --------- ----------
754,000 364,000 283,000
---------- --------- ----------
Deferred tax benefit:
Federal (110,000) (52,000) (174,000)
State - - -
(110,000) (52,000) (174,000)
---------- --------- ----------
Total tax provision $ 644,000 $312,000 $ 109,000
========== ========= ==========
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 are as follows:
1996 1995 1994
--------- ---------- ---------
Deferred tax assets:
Allowance for loan losses deferred for tax purposes $469,000 $ 328,000 $250,000
Accrual-to-cash adjustment 17,000 19,000 -
Unrealized net losses on securities available for sale - - 123,000
Amortization of unamortized start-up costs - - 20,000
Depreciation for financial reporting in excess
of amount for income tax reporting 2,000 - 57,000
Other 28,000 28,000 1,000
--------- ---------- ---------
Gross deferred tax assets 516,000 375,000 451,000
Less: valuation allowance (28,000) (28,000) (31,000)
--------- ---------- ---------
Net deferred tax assets 488,000 347,000 420,000
--------- ---------- ---------
Deferred tax liabilities:
Net deferred loan costs (49,000) (42,000) (36,000)
Unrealized net gains on securities available for sale - (36,500) -
Accrual-to-cash adjustment - - (25,000)
Accumulated discount accretion (6,000) (13,000) (5,000)
Depreciation for income tax reporting in excess
of amount for financial reporting - (7,000) -
Other (5,000) (9,000) (7,000)
--------- ---------- ---------
Gross deferred tax liabilities (60,000) (107,500) (73,000)
--------- ---------- ---------
Net deferred tax asset $428,000 $ 239,500 $347,000
========= ========== =========
A portion of the change in the net deferred tax asset relates to the
change in unrealized net losses and gains on securities available for sale.
The related current period deferred tax benefit of $36,500 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.
The valuation allowance for deferred income taxes as of January 1,
1995 was $28,000. There was no net change in the total valuation allowance
for 1996 which also totaled $28,000 at year end. During 1995, the valuation
allowance decreased $3,000 from the December 31, 1994 balance of $31,000 based
on the actual earnings of the Company for that year which provided sufficient
justification to recognize that portion of the deferred tax asset. The
valuation allowance at December 31, 1996 is primarily related to state net
operating loss carryforwards and is established as the Company is not certain
that realization of this portion of net deferred tax asset is more likely than
not based on the historical lack of taxable income for state tax purposes.
NOTE 9 - OTHER INCOME AND OTHER EXPENSES
Other income for the years ended December 31 are as follows:
1996 1995 1994
-------- -------- -------
Late charges and other loan fees $ 48,927 $ 82,160 $33,490
Mortgage origination fees 51,756 59,982 8,890
Nondeposit product sales commission 177,976 43,433 20,777
Other 128,243 59,380 23,658
-------- -------- -------
$406,902 $244,955 $86,815
======== ======== =======
Other operating expenses for the years ended December 31 are as follows:
1996 1995 1994
---------- ---------- --------
Advertising and public relations $ 171,488 $ 146,098 $149,545
Stationary, printing and office support 261,849 182,100 90,207
FDIC insurance assessment 2,000 74,513 138,230
Credit card service expenses 171,049 128,150 91,659
Deposit and branch expenses 143,021 120,528 67,526
Legal and professional fees 160,191 133,456 122,142
Other 375,042 311,204 182,346
---------- ---------- --------
$1,284,640 $1,096,049 $841,655
========== ========== ========
NOTE 10 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, certain of the Company's directors
and executive officers are also customers of the Bank. At December 31, 1996
and 1995 these directors, executive officers, and their related interests were
indebted, both directly and indirectly, to the Bank in the approximate amounts
of $6,300,000 and $3,776,000, respectively. In the opinion of management,
these loans were made under normal credit terms and do not involve more than
the normal risk of collectability.
Activity in the related party loans is as follows for the years ended
December 31:
1996 1995
------------ ------------
Outstanding, beginning of year $ 3,776,000 $ 3,011,000
Loans originated and net advances
on lines of credit 4,818,000 3,857,000
Principal collected and proceeds of
refinanced loans (2,294,000) (3,092,000)
------------ ------------
Outstanding, end of year $ 6,300,000 $ 3,776,000
============ ============
At December 31, 1996, there were commitments to extend additional credit
to related parties in the amount of approximately $2,731,000. In addition,
directors, executive officers and their related interests had on deposit
approximately $6,458,000 and $7,556,000 at December 31, 1996 and 1995,
respectively.
NOTE 11 - COMMITMENTS
The Bank leases one building under a noncancellable operating lease which
had an initial term of five years and was renewed for a five year term in
April 1995. The lease on the Bank building has an additional option to renew
under substantially the same terms with certain rate escalations. The Finance
Company branches are housed in leased facilities which have terms of from two
to ten years, each with various renewal options and with monthly payments
ranging from $350 - $1,250 per month.
Minimum rental commitments under noncancellable leases at December 31,
1996, exclusive of renewal options, are as follows:
1997 $192,000
1998 179,000
1999 157,000
2000 58,000
2001 21,000
2002 and beyond 31,000
--------
Total minimum obligation $638,000
========
Rent expense included in the accompanying consolidated statements of
operations under the caption "Occupancy" totaled $179,940, $153,555, and
$93,500 for each of the years ended December 31, 1996, 1995, and 1994,
respectively.
NOTE 12 - 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, 1996, the Company's commitments to extend additional
credit, including obligations under the Company's revolving credit card
program, totaled approximately $28,733,000, of which approximately $5,763,000
represents commitments to extend credit at fixed rates of interest.
Commitments to extend credit at fixed rates exposes 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 $2,675,000 at
December 31, 1996. 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 13 - PER SHARE INFORMATION
Per share information is calculated by dividing net income by the
weighted average number of common stock and dilutive stock options, which are
common stock equivalents, outstanding during the period using the modified
treasury stock method. The primary and fully diluted earnings per share
calculation are the same as the average and ending market price were the same
for the year.
The Company issued 5% stock distributions on June 15, 1993; February 15,
1994; February 6, 1995 and February 5, 1996, which resulted in the issuance of
52,150; 54,543; 57,474; and 60,084 shares of common stock, respectively. The
Company's Board of Directors declared a 5% stock distribution on January 3,
1997 which was issued on February 3, 1997 to shareholders of record on January
20, 1997. This stock distribution resulted in the issuance of 63,430 shares
of common stock. All share and per share data have been restated to reflect
these stock distributions as of the earliest period presented.
NOTE 14 - STOCK OPTION PLANS
During 1989, the Company adopted an incentive stock option plan for
certain of its officers and employees. Under the terms of the stock option
plan, 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 stock option plan authorizes the granting of stock options
up to a maximum of 329,255 shares of common stock, adjusted for stock
distributions. During 1996, options to purchase 3,749 shares of common stock
(as adjusted for the February 3, 1997 stock distribution) were exercised.
There were no stock options exercised in the year ended December 31, 1995.
Option information for the years ended December 31, 1996 and 1995 is as
follows:
Option Price
Shares per Share Total
------- --------------- ----------
Outstanding at:
December 31, 1996 260,265 $ 5.48 - $15.00 $2,727,900
December 31, 1995 188,524 $ 5.48 - $13.61 $1,577,961
Granted:
1996 85,367 $14.76 - $15.00 $1,279,650
1995 18,468 $ 13.61 $ 251,250
Exercised:
1996 3,749 $ 5.76 - $8.43 $ 27,300
Canceled:
1996 9,877 $ 6.47 - $13.61 $ 102,261
1995 3,192 $ 5.48 - $7.05 $ 20,126
Exercisable at:
December 31, 1996 118,737 $ 5.48 - $13.61 $ 852,672
December 31, 1995 87,628 $ 5.48 - $10.15 $ 590,798
Effective January 5, 1995, the Company adopted a non-employee stock
option plan. Under the terms of this 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 directors as a retainer for their services as directors. Options
granted are exercisable for a period of ten years from the date of grant.
Options granted on January 1, 1995 became exercisable one year after the date
of grant. Options granted on January 1, 1996 become exercisable over a period
of nine years at a rate of 11.1% on each of the first nine anniversaries of
the date of grant. As of January 1, 1996, all 144,694 stock options
authorized to be granted under this plan had been granted.
There were no stock options exercised in 1996. Option information under
the non-employee plan for the years ended December 31, 1996 and 1995 is as
follows:
Option Price
Shares per Share Total
------- --------------- ----------
Outstanding at:
December 31, 1996 144,694 $10.15 - $13.61 $1,919,203
December 31, 1995 14,467 $ 10.15 $ 146,875
Granted:
1996 130,227 $ 13.61 $1,772,328
1995 14,467 $ 10.15 $ 146,875
Exercisable at:
December 31, 1996 14,467 $ 10.15 $ 146,875
December 31, 1995 - - -
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost
has been recognized for the stock 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 1996 and 1995 consistent
with the provisions of SFAS No. 123, the Company's net earnings and earnings
per share would have been reduced to the proforma amounts as follows:
1996 1995
---------- --------
Net earnings - as reported $1,001,774 $528,595
Net earnings - proforma $ 759,636 $475,078
Earnings per share - as reported $ .71 $ .38
Earnings per share - proforma $ .54 $ .34
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants: expected volatility of 6.38% for 1996 and 4.59% for 1995;
risk-free interest rate of 6.21% for 1996 and 5.37% for 1995; and expected
lives of 6 years in both 1996 and 1995. There were no cash dividends in
either year.
NOTE 15 - EMPLOYEE BENEFIT PLAN
Effective October 15, 1993, the Company established 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 were 2% of deferred compensation for 1996 and 1% of
deferred compensation for both 1995 and 1994. A total of $28,528; $10,114;
and $6,483, respectively, was charged to operations for the Company's matching
contribution. Employees are immediately vested in their contributions to the
Plan and become fully vested in the employer matching contribution after five
years of service.
NOTE 16 - CASH, DIVIDEND AND LOAN RESTRICTIONS AND CONTINGENT LIABILITIES
In the normal course of business, the Company and its subsidiaries enter
into agreements, or are subject to regulatory requirements, that may result in
cash, debt and dividend restrictions. A summary of the most restrictive items
follows.
The Company's banking subsidiary is required to maintain average reserve
balances with the Federal Reserve Bank. The average amount of the required
reserve balance for the year ended December 31, 1996 was $377,000.
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. Prior 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,
1996, no cash dividends have been declared or paid by the Bank and the Bank
had available retained earnings of $1.7 million.
Under Federal Reserve Board regulations, the Bank is limited in the
amount it may loan to the Company or the Finance Company. 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. Certain collateral restrictions
also apply to loans from the Bank to its affiliates.
In the normal course of business, the Company and its subsidiaries are
periodically involved in litigation. In the opinion of the Company's
management, none of this litigation should have a material adverse effect on
the accompanying consolidated financial statements.
NOTE 17 - CAPITAL REQUIREMENTS AND REGULATORY
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.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts and
ratios (set forth in the table following) 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, 1996, that the Company and
the Bank meet all capital adequacy requirements to which they are subject.
At December 31, 1996 and 1995, the Company and the Bank are both
categorized as "well capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well capitalized", the Company and
the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table following. 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 December 31, 1996 as well as the
minimum calculated amounts for each regulatory defined category.
To Be
For Capital Categorized
Adequacy "Well
Actual Purposes Capitalized"
------- ------------ -------------
Actual Ratio Amount Ratio Amount Ratio
------- ------ ------------ ------ ------------- ------
Total Qualifying
Capital to Risk-
Weighted Assets:
Company $13,124 12.17% $ 8,625 8.00% $ 10,781 10.00%
Bank $11,012 10.47% $ 8,416 8.00% $ 10,519 10.00%
Tier 1 Capital to
Risk-Weighted
Assets:
Company $11,637 10.79% $ 4,312 4.00% $ 6,469 6.00%
Bank $ 9,712 9.23% $ 4,208 4.00% $ 6,311 6.00%
Tier 1 Capital to
Average Assets:
Company $11,637 9.54% $ 4,880 4.00% $ 6,100 5.00%
Bank $ 9,712 7.67% $ 5,064 4.00% $ 6,330 5.00%
NOTE 18 - FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
adopted by the Company on December 31, 1995, requires disclosure of fair value
information, whether or not recognized in the statement of financial position,
when it is practicable to estimate fair value. SFAS No. 107 defines a
financial instrument as cash, evidence of an ownership interest in an entity,
or contractual obligations which require the exchange of cash or other
financial instruments. Certain items are specifically excluded from the
disclosure requirements, including the Company's common stock, premises and
equipment, and other assets and liabilities.
Fair value approximates book value for the following financial
instruments due to the short-term nature of the instrument: cash and due from
banks, interest-bearing deposits in banks, federal funds sold, federal funds
purchased and securities sold under repurchase agreements, short-term FHLB
advances, and other short-term borrowings. Fair value of investment
securities is estimated based on quoted market prices where available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Fair value for variable rate loans that reprice frequently and for loans
that mature in less that one year is based on the carrying value. 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. Discount rates used in these computations approximate the rates
currently offered for similar loans of comparable terms and credit quality.
Fair value for demand deposit accounts and interest-bearing accounts with
no fixed maturity date is equal to the carrying value. Certificate of deposit
accounts maturing during 1997 are valued at their carrying value. Certificate
of deposit accounts maturing after 1997 are estimated by discounting cash
flows from expected maturities using current interest rates on similar
instruments.
Fair value for the Company's off-balance sheet financial instruments is
based on the current value of the instruments outstanding. The Company has
used management's best estimate of fair values based on the above assumptions.
Thus, the fair values presented may not be the amounts which could be realized
in an immediate sale or settlement of the instrument. In addition, any income
tax or other expenses which would be incurred in an actual sale or settlement
are not taken into consideration in the fair values presented.
The estimated fair values of the Company's financial instruments are as
follows (dollars in thousands):
DECEMBER 31, 1996
------------------
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
--------- ------------------
Financial assets:
Cash and interest-bearing deposits $ 6,026 $ 6,026
Federal funds sold 3,000 3,000
Securities available for sale 18,510 18,510
Loans, net 101,205 100,933
Financial liabilities:
Deposits 117,805 117,896
Federal funds purchased and securities
sold under repurchase agreements 761 761
Short-term FHLB advances 2,000 2,000
Other short-term borrowings 550 550
Financial Instruments with
Off-Balance Sheet Risk:
Commitments to extend credit 26,058 26,058
Standby letters of credit 2,675 2,675
DECEMBER 31, 1995
------------------
ESTIMATED
CARRYING FAIR
AMOUNT VALUE
--------- ------------------
Financial assets:
Cash and interest-bearing deposits $ 6,345 $ 6,345
Federal funds sold 9,100 9,100
Securities available for sale 20,085 20,085
Loans, net 74,644 75,175
Financial liabilities:
Deposits 99,319 99,346
Federal funds purchased and securities
sold under repurchase agreements 1,561 1,561
Short-term FHLB advances 2,000 2,000
Financial Instruments with
Off-Balance Sheet Risk:
Commitments to extend credit 22,266 22,266
Standby letters of credit 2,716 2,716
NOTE 19 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Consolidated quarterly operating data for the years ended December 31 is
summarized as follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
1996:
Interest income $ 2,363,064 $ 2,535,714 $ 2,742,398 $ 2,905,529
Interest expense (1,162,816) (1,227,372) (1,252,579) (1,321,036)
------------ ------------ ------------ ------------
Net interest income 1,200,248 1,308,342 1,489,819 1,584,493
Provision for loan losses (83,000) (102,500) (127,600) (203,000)
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 1,117,248 1,205,842 1,362,219 1,381,493
Other income 242,836 258,171 241,912 237,425
Other expenses (1,093,078) (1,043,894) (1,080,974) (1,183,426)
------------ ------------ ------------ ------------
Income before income taxes 267,006 420,119 523,157 435,492
Income taxes (102,000) (160,000) (202,000) (180,000)
------------ ------------ ------------ ------------
Net income $ 165,006 $ 260,119 $ 321,157 $ 255,492
============ ============ ============ ============
Earnings per common share $ 0.12 $ 0.18 $ 0.23 $ 0.18
============ ============ ============ ============
Weighted average shares
outstanding 1,409,221 1,410,003 1,410,742 1,413,130
============ ============ ============ ============
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ------------
1995:
Interest income $1,638,974 $1,860,021 $2,013,764 $ 2,223,128
Interest expense (752,230) (903,054) (994,917) (1,109,609)
----------- ----------- ----------- ------------
Net interest income 886,744 956,967 1,018,847 1,113,519
Provision for loan losses (8,432) (68,168) (63,200) (137,200)
----------- ----------- ----------- ------------
Net interest income after
provision for loan losses 878,312 888,799 955,647 976,319
Other income 98,234 160,307 151,796 200,706
Other expenses (744,501) (767,042) (922,811) (1,035,171)
----------- ----------- ----------- ------------
Income before income taxes 232,045 282,064 184,632 141,854
Income taxes (82,000) (101,700) (69,600) (58,700)
----------- ----------- ----------- ------------
Net income $ 150,045 $ 180,364 $ 115,032 $ 83,154
=========== =========== =========== ============
Earnings per common share $ 0.11 $ 0.13 $ 0.08 $ 0.06
=========== =========== =========== ============
Weighted average shares
outstanding 1,401,755 1,403,446 1,403,446 1,408,968
=========== =========== =========== ============
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
1994:
Interest income $1,109,330 $1,232,800 $1,408,501 $1,514,996
Interest expense (508,293) (523,539) (635,285) (656,743)
----------- ----------- ----------- -----------
Net interest income 601,037 709,261 773,216 858,253
Provision for loan losses (25,000) (36,000) (55,000) (51,868)
----------- ----------- ----------- -----------
Net interest income after
provision for loan losses 576,037 673,261 718,216 806,385
Other income 77,964 67,842 95,513 103,322
Other expenses (515,400) (565,968) (600,075) (666,943)
----------- ----------- ----------- -----------
Income before income taxes 138,601 175,135 213,654 242,764
Income taxes - - (9,600) (99,400)
----------- ----------- ----------- -----------
Net income $ 138,601 $ 175,135 $ 204,054 $ 143,364
=========== =========== =========== ===========
Earnings per common share $ 0.10 $ 0.13 $ 0.15 $ 0.11
=========== =========== =========== ===========
Weighted average shares
outstanding 1,330,901 1,330,901 1,330,901 1,371,476
=========== =========== =========== ===========
NOTE 20 - CONDENSED FINANCIAL INFORMATION
The following is condensed financial information of Summit Financial
Corporation (parent company only) at December 31, 1996 and 1995 and for the
years ended December 31, 1996, 1995 and 1994.
SUMMIT FINANCIAL CORPORATION
FINANCIAL CONDITION DATA
December 31, December 31,
1996 1995
------------- -------------
ASSETS
Cash and cash equivalents $ 42,796 $ 196,262
Investment securities - 1,991,008
Investment in bank subsidiary 9,712,041 7,781,236
Investment in nonbank subsidiary 154,408 221,435
Due from subsidiaries 1,801,000 1,100,000
Other assets 5,000 50,608
------------- -------------
$ 11,715,245 $ 11,340,549
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accruals and other liabilities $ 28,347 $ 77,047
Notes payable to subsidiary bank - 600,000
Other borrowings 50,000 -
Shareholders' equity 11,636,898 10,663,502
------------- -------------
$ 11,715,245 $ 11,340,549
============= =============
SUMMIT FINANCIAL CORPORATION
OPERATIONS DATA
For the Years Ended December 31,
-------------------------------------
1996 1995 1994
----------- ---------- ---------
Interest income $ 181,332 $ 161,147 $129,893
Interest expense (30,352) (42,598) (10,918)
----------- ---------- ---------
Net interest income 150,980 118,549 118,975
Other operating expenses (29,185) (38,574) (38,141)
----------- ---------- ---------
Net operating income 121,795 79,975 80,834
Equity in undistributed earnings of
bank subsidiary 991,004 707,329 619,324
Equity in undistributed loss of
nonbank subsidiary (67,025) (228,709) (49,856)
----------- ---------- ---------
Net income before provision for
income taxes 1,045,774 558,595 650,302
Provision for income taxes (44,000) (30,000) 10,852
----------- ---------- ---------
Net income $1,001,774 $ 528,595 $661,154
=========== ========== =========
SUMMIT FINANCIAL CORPORATION
CASH FLOW DATA
For the Years Ended December 31,
--------------------------------
1996 1995 1994
------------ ---------- ------------
Operating activities:
Net income $ 1,001,774 $ 528,595 $ 661,154
Adjustments to reconcile net income to net cash:
Equity in undistributed earnings of bank subsidiary (991,004) (707,329) (619,324)
Equity in undistributed loss of nonbank subsidiary 67,027 228,709 49,856
Decrease in other assets 21,316 6,193 4,679
(Decrease) increase in other liabilities (52,000) 42,558 2,102
Deferred taxes 25,000 (5,000) (25,000)
------------ ---------- ------------
72,113 93,726 73,467
------------ ---------- ------------
Investing activities:
Investment in nonbank subsidiary - - (500,000)
Net increase in due from subsidiary (701,000) (580,000) (520,000)
Purchases of investment securities - - (250,549)
Maturities of investment securities 2,000,000 950,000 250,000
Capital contribution to bank subsidiary (1,000,000) - -
299,000 370,000 (1,020,549)
------------ ---------- ------------
Financing activities:
Proceeds from notes payable 50,000 100,000 500,000
Repayments of notes payable (600,000) - -
Net (increase) decrease in due to subsidiary - (502,257) 502,257
Employee stock options exercised 27,296 - -
Cash paid in lieu of fractional shares (1,875) (4,320) (4,697)
(524,579) (406,577) 997,560
------------ ---------- ------------
Net (decrease) increase in cash and cash equivalents (153,466) 57,149 50,478
Balance, beginning of year 196,262 139,113 88,635
Balance, end of year $ 42,796 $ 196,262 $ 139,113
============ ========== ============
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, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Summit
Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
Greenville, South Carolina /s/ KPMG Peat Marwick
January 20, 1997
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" and "Executive Officers and Compensation" on pages 3
through 9 in the definitive Proxy Statement of the Company filed in connection
with its 1997 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
"Election of Directors" and "Executive Officers and Compensation" on pages 3
through 9 in the definitive Proxy Statement of the Company filed in connection
with its 1997 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 heading
"Election of Directors" on pages 3 through 5 in the definitive Proxy Statement
of the Company filed in connection with its 1997 Annual Meeting of
Shareholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the heading
"Compensation Committee Interlocks and Insider Participation" on page 10 and
"Certain Transactions" on page 11 in the definitive Proxy Statement of the
Company filed in connection with its 1997 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, 1996 and 1995
Consolidated Statements of Operations For The Years Ended December 31, 1996,
1995, and 1994
Consolidated Statements of Shareholders' Equity For The Years Ended December
31, 1996, 1995, and 1994
Consolidated Statements of Cash Flows For The Years Ended December 31, 1996,
1995, 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. Financial Statement Schedules:
All other consolidated financial statements or schedules have been omitted
since the required information is included in the consolidated financial
statements or notes thereto referenced in Item 14(a)1 above, or is not
applicable or required.
3. Exhibits (numbered in accordance with Item 601 of Regulation S-K):
3.1 Articles of Incorporation, as amended (incorporated by reference
to exhibits filed with the Registrant's Registration Statement on Form S-1
Under The Securities Act of 1933, as filed with the SEC on October 6, 1989,
File No. 33-31466).
3.2 Bylaws, as amended (incorporated by reference to exhibits filed
with the Registrant's Registration Statement on Amendment No. 1 To Form S-1
Under The Securities Act of 1933, as filed with the SEC on December 7, 1989,
File No. 33-31466).
4. Form of Certificate for Common Stock (incorporated by reference to
exhibits filed with the Registrant's Registration Statement on Amendment No. 1
To Form S-1 Under The Securities Act of 1933, as filed with the SEC on
December 7, 1989, File No. 33-31466).
10.1 Summit Financial Corporation Incentive Stock Plan (incorporated
by reference to exhibits filed with the Registrant's Registration Statement on
Form S-1 Under The Securities Act of 1933, as filed with the SEC on October 6,
1989, File No. 33-31466).
10.2 Lease Agreement for Bank Site (incorporated by reference to
exhibits filed with the Registrant's Registration Statement on Form S-1 Under
The Securities Act of 1933, as filed with the SEC on October 6, 1989, File No.
33-31466).
10.3 Employment Agreement of J. Randolph Potter (incorporated by
reference to exhibits filed with the Registrant's Registration Statement on
Form S-1 Under the Securities Act of 1933, as filed with the SEC on October 6,
1989, File No. 33-31466).
10.4 Employment Agreement of Blaise B. Bettendorf (incorporated by
reference to exhibits filed with Summit Financial Corporation's Annual Report
to the Securities and Exchange Commission on Form 10-K for the year ended
December 31, 1989, File No. 33-31466).
10.5 Summit Financial Corporation Restricted Stock Plan (incorporated
by reference to exhibits filed with Summit Financial Corporation's Annual
Report to the Securities and Exchange Commission on Form 10-K for the year
ended December 31, 1993, File No. 000-19235).
10.6 Summit Financial Corporation Non-Employee Stock Option Plan
(incorporated by reference to exhibits filed with Summit Financial
Corporation's Annual Report to the Securities and Exchange Commission on Form
10-K for the year ended December 31, 1994, File No. 000-19235).
10.7 Agreement of Purchase and Sale dated April 7, 1994 for the
Summit National Bank branch land site (incorporated by reference to exhibits
filed with Summit Financial Corporation's Annual Report to the Securities and
Exchange Commission on Form 10-K for the year ended December 31, 1994, File
No. 000-19235).
21 Subsidiaries of Summit Financial Corporation:
Summit National Bank, a nationally chartered bank.
Freedom Finance, Inc., a consumer finance company.
23 Consent of KPMG Peat Marwick LLP with regard to S-8 Registration
Statements for Summit Financial Corporation Restricted Stock Plan (as filed
with the Securities and Exchange Commission, "SEC", August 23, 1994, File No.
33-83538); Summit Financial Corporation Incentive Stock Option Plan (as filed
with the SEC July 19, 1995, File No. 33-94962); and Summit Financial
Corporation 1995 Non-Employee Stock Option Plan (as filed with the SEC July
19, 1995, File No. 33-94964).
27 Financial data schedule
NOTE: The exhibits listed above will be furnished to any security holder upon
written request to Mrs. Blaise B. Bettendorf, Chief Financial Officer, Summit
Financial Corporation, Post Office Box 1087, Greenville, South Carolina 29602.
The Registrant will charge a fee of $.25 per page for photocopying such
exhibit.
(b) No reports on Form 8-K were filed by the Registrant during the
fourth quarter of 1996.
(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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Greenville, South Carolina, on the 17th day of March, 1997.
SUMMIT FINANCIAL CORPORATION
/s/ J. Randolph Potter
------------------------
Dated: March 17, 1997 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 Officer March 17, 1997
J. Randolph Potter and Director
/s/ Blaise B. Bettendorf Senior Vice President & CFO March 17, 1997
Blaise B. Bettendorf (Principal Financial and Accounting
Officer)
/s/ C. Vincent Brown Chairman March 17, 1997
C. Vincent Brown
John A. Kuhne Vice Chairman
/s/ David C. Poole Secretary March 17, 1997
David C. Poole
/s/ Ivan E. Block Director March 17, 1997
Ivan E. Block
/s/ John A. Burgess Director March 17, 1997
John A. Burgess
/s/ J. Earle Furman, Jr. Director March 17, 1997
J. Earle Furman, Jr.
/s/ Charles S. Houser Director March 17, 1997
Charles S. Houser
John W. Houser
Director
/s/ T. Wayne McDonald Director March 17, 1997
T. Wayne McDonald
/s/ Larry A. McKinney Director March 17, 1997
Larry A. McKinney
/s/ George O. Short, Jr. Director March 17, 1997
George O. Short, Jr.