UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 
 WASHINGTON, D.C. 20549
 
 
 **FORM 10-K**
 
 
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For The Fiscal Year Ended December 31, 2003
 
 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. Employerof 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)
 
 Registrant's Telephone Number, Including Area Code: **(864) 242-2265**
 
 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 checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES___ NO X s
 
 The registrants common stock is traded on the Small-Cap market of NASDAQ under the symbol SUMM. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the average bid and asked prices of such common equity as quoted on the NASDAQ Market, as of June 30, 2003, the last business day of the registrants most recently completed second fiscal quarter, was approximately $51.9 million (2,923,779 shares held by non-affiliates at $17.75 per share). For purposes of the foregoing calculation only, all directors, executive officers, and 5% shareholders of the registrant have been deemed affiliates.
 
 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 s
 
 As of March 2, 2004, there were 4,337,679 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 2004 Annual Meeting of Shareholders is incorporated by reference in Part III.
  
 Table of Contents
 
 
 Part IItem 1  Business
2The Company
2Summit National Bank
2Summit Investment Services, Inc
2Freedom Finance, Inc.
2Business Segments
3Territory Served and Competition
3Employees
4Monetary Policy
4Impact of Inflation
4Supervision and Regulation
4Item 2  Properties
11Item 3  Legal Proceedings
11Item 4  Submission of Matters to a Vote of Security Holders
11Part IIItem 5  Market for the Registrants Common Stock, Related Stockholder Matters, and Issuer Repurchases of Equity Securities
12Item 6  Selected Financial Data
13Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations
14Item 7a  Quantitative and Qualitative Disclosures About Market Risk
32Item 8  Financial Statements and Supplementary Data
33Item 9  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
56Item 9a  Controls and Procedures
56Part IIIItem 10  Directors and Executive Officers of the Registrant
57Item 11  Executive Compensation
57Item 12  Security Ownership of Certain Beneficial Owners and Management And Related Stockholder Matters
57Item 13  Certain Relationships and Related Transactions
57Item 14  Principal Accountant Fees and Services
57Part IVItem 15  Exhibits, Financial Statement Schedules and Reports on Form 8-K
58Signatures
61Exhibit 23  Consent of KPMG LLPExhibit 31.1  Rule 13a-14(a) Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2  Rule 13a-14(a) Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1  Section 1350 Certification of the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 32.2  Section 1350 Certification of the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 
 
 1
 PART I
 
 
 Item 1. BUSINESS
 
 The Company
 Summit Financial Corporation ("the Company"), headquartered in Greenville, South Carolina, was incorporated as a bank holding company under the Bank Holding Company Act of 1956, as amended, and under the laws of the State of South Carolina on May 26, 1989. The Company became a financial holding company on March 23, 2000 as provided by the "Gramm-Leach-Bliley" Financial Services Modernization Act of 1999. Subsidiaries of the Company are Summit National Bank ("the Bank" or "Summit"), a national bank organized in 1990, and Freedom Finance, Inc. ("the Finance Company" or "Freedom"), a consumer finance company organized in 1994. In 1997, the Bank incorporated Summit Investment Services, Inc., an investment and financial planning company, as a wholly-owned subsidiary. The Company has no foreign operations.
 
 The principal role of the Company is to supervise and coordinate the activities of its subsidiaries and to provide them with capital and services of various kinds. The Company derives substantially all of its income from management fees for services performed, interest on invested funds, interest on intercompany loans, and other intercompany payments as appropriate from the subsidiaries. The Company conducts its business from four banking offices and 11 consumer finance offices throughout South Carolina.
 
 At December 31, 2003, the Company had total assets of $343.9 million, total deposits of $257.0 million, loans, net of unearned income, of $231.8 million and shareholders equity of $32.2 million. This compares with total assets of $302.2 million, total deposits of $230.5 million, loans of $218.8 million and shareholders equity of $28.7 million at December 31, 2002. The operating results and key financial measures of the Company and its subsidiaries are discussed more fully in "Managements Discussion and Analysis of Financial Condition and Results of Operations", included under Item 7 below.
 
 Summit National Bank
 Summit National Bank, headquartered in Greenville, South Carolina, commenced operations in July 1990. The Bank targets individuals and small-to-medium-sized businesses in the Upstate of South Carolina that require a full range of quality banking services typically provided by the larger regional banking concerns, but who prefer the personalized service offered by a locally-based institution. The Bank currently has its headquarters and four full-service branch locations in Greenville and Spartanburg, South Carolina.  Summit provides a full range of deposit services that are typically available in most banks and savings and loan associations including checking accounts, NOW accounts, individual retirement accounts, savings and other time deposits of various types ranging from daily money market accounts to longer-term certificates of deposit.
 
 Deposits of the Bank are insured up to $100,000 by the Federal Deposit Insurance Corporation ("the FDIC"). The Company has no material concentration of deposits from any single customer or group of customers. Other services which the Bank offers include safe deposit boxes, bank money orders, wire transfer facilities, remote internet banking and various cash management and electronic banking programs.
 
 The Bank also offers a full range of short to intermediate-term, secured and unsecured commercial and personal loans for business, real estate, home improvement, automobiles, letters of credit, personal investments and home equity lines of credit. It is the Banks intent to originate quality, profitable loans which will benefit the areas economy, provide a reasonable return to our shareholders, and promote the growth of the Bank. Management strives to maintain quality in the loan portfolio and to accept only those credit risks which meet the Bank's underwriting standards. No significant portion of the Banks loan portfolio is concentrated within a single industry or group of related industries.
 
 Summit Investment Services, Inc.
 Summit Investment Services, Inc. commenced operations in November 1997. It provides a full range of nondeposit investment products including annuities and mutual funds, full and discount brokerage services, and financial management services. Summit Investment Services has offices in Greenville and Spartanburg, South Carolina.
 
 Freedom Finance, Inc.
 The Finance Company makes and services installment loans to individuals with loan principal amounts generally not exceeding $2,000 and with maturities ranging from three to 18 months. The Finance Company, which is headquartered in Greenville, South Carolina, currently has 11 branch offices throughout South Carolina. The Finance Company's loan customers are primarily in the low-to-moderate income brackets and are engaged in widely diverse occupations. A loan investigation and credit history review is made for each borrower, either through credit reporting agencies or directly by Freedoms employees. Freedom also makes available to borrowers credit life, accident and health, and property insurance directly related to the extension of credit to the individual. The business of the Finance Company is rather seasonal and the amount of loans outstanding increases significantly at the end of each calendar year due to the seasonal loan demand, while the first quarter of the calendar year often results in substantial loan paydowns.
 
 2
  Business Segments
 SFAS 131, " Disclosures about Segments of an Enterprise and Related Information " establishes standards for the way that public businesses report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company has two reportable operating business segments, Summit National Bank and Freedom Finance, Inc. Item 8, Note 20 to the Consolidated Financial Statements discusses the Companys business segments, which information is incorporated herein by reference.
 
 Territory Served and Competition
 THE BANK: Summit National Bank and its subsidiary, Summit Investment Services, Inc., are located in the Upstate of South Carolina, with offices in Greenville and Spartanburg. The extended market area encompasses Greenville and Spartanburg Counties, with the principal market area being the urban areas of these counties. The Upstate of South Carolina is a highly competitive commercial banking market in which all of the largest banks in the region are represented. The Bank competes with other major financial institutions, including commercial banks, investment banks, mutual savings banks, savings and loan associations, and credit unions, as well as other non-bank institutions, such as insurance companies, brokerage firms, and investment companies. The competition among the various financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans, credit and service charges, the quality and range of services rendered, the convenience of banking facilities, and, in the case of loans to large commercial borrowers, relative lending limits.
 
 Many of the competitor banks in the Banks market area are subsidiaries of bank holding companies which own banks in other southeastern states. In the conduct of certain areas of business, the Bank may also compete with savings and loan associations, credit unions, insurance companies, securities firms, leasing companies and other financial institutions, some of which are not subject to the same degree of regulation and restrictions as the Bank. The Bank may also compete with out-of-state financial institutions which operate loan production offices, originate mortgages, accept money market deposits, and provide other financial services. The Banks investment subsidiary competes with larger brokerage houses and financial planners, discount brokers and internet brokerage service providers.
 
 Many of these competitors may have substantially greater resources and lending abilities than the Bank due to their size and these competitors may offer services, such as international banking and trust services, that the Bank is not currently providing. Moreover, most of the competitors have multiple branch networks located throughout the extended market area, while the Bank currently has only four locations, which could be a competitive disadvantage. As a result, the Bank does not generally attempt to compete for the banking relationships of larger corporations, but concentrates its efforts on small and medium-sized businesses and individuals. The Company believes that the Bank is able to compete effectively in this market segment by offering competitive pricing of services and quality, experience and personal treatment in the execution of services.
 
 The Bank and its subsidiary are not dependent upon a single or a very few customers, the loss of which would have a material adverse effect.
 
 THE FINANCE COMPANY: Freedom Finance, Inc. serves its customers from 11 locations throughout South Carolina. Competition between consumer finance companies is not generally as intense as that among banks; however, this segment of the market has become over-served in areas of South Carolina. The amounts, rates, and fees charged on consumer finance loans are regulated by state law according to the type of license granted by the South Carolina State Board of Financial Institutions. Numerous other finance companies which offer similar types of loans are located in the areas served by Freedom.
 
 The Finance Company competes directly with national, regional, and local consumer finance companies. The principal areas of competition in the consumer finance industry are convenience of services to customers, effectiveness of advertising, effectiveness of administration of loans, and the cost of borrowed money. Many of the finance companies competing with Freedom may have substantially greater resources and lending abilities than the Finance Company and may have more branches within the specific market areas in which they and the Finance Company compete. The Company believes that the Finance Company is able to compete effectively in its current markets.
 
 3
  Employees
 As of December 31, 2003 the Company and its subsidiaries employed a total of 95 full-time equivalent employees. The Company and its subsidiaries provide a variety of benefit programs including retirement and stock ownership plans as well as health, life, disability, and other insurance. Summit also maintains training, educational, and affirmative action programs designed to prepare employees for positions of increasing responsibility. The Company believes that its relations with its employees are good.
 
 Monetary Policy
 The earnings of the Company and its bank subsidiary may be affected significantly by the monetary policies of the Federal Reserve Board which regulates the money supply in order to mitigate recessionary and inflationary pressures. Among the techniques used to implement these objectives are open market operations in United States Government securities, changes in the discount rate paid by member banks on borrowings, changes in the reserve requirements against bank deposits and limitations on interest rates which banks may pay on time and savings deposits. The Federal Reserve uses these techniques 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.
 
 The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Due to the changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, the Company can make no prediction as to the future impact that changes in interest rates, deposit levels, or loan demand may have on its business and earnings.
 
 Impact of Inflation
 Unlike most industrial companies, the assets and liabilities of financial institutions such as the Companys bank subsidiary are primarily monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. The Company believes that the effects of inflation are generally manageable through asset-liability management.
 
 Supervision and Regulation
 The businesses in which the Company and its subsidiaries are engaged are subject to extensive supervision, regulation and examination by various bank regulatory authorities and other governmental agencies in the state where the Company and its subsidiaries operate. The supervision, regulation and examination to which the Company and its subsidiaries are subject are intended primarily for the protection of depositors or are aimed at carrying out broad public policy goals, rather than for the protection of security holders.
 
 Several of the more significant regulatory provisions applicable to banks and bank holding companies to which the Company and its subsidiaries are subject are discussed below, along with certain regulatory matters concerning the Company and its subsidiaries. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory provisions. Any change in applicable law or regulation may have a material effect on the business and prospects of the Company and its subsidiaries.
 
 REGULATORY AGENCIES
 
 Financial Holding Company : The Company elected to become a financial holding company on March 23, 2000 and continues to be subject to regulation under the Bank Holding Company Act of 1956, as amended ("the BHCA"), and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System ("the Federal Reserve"). As a bank holding company registered under the laws of the State of South Carolina, the Company is also subject to regulation by the South Carolina State Board of Financial Institutions ("the State Board"). Consequently, subject to certain exceptions, the Company must receive the approval of the State Board prior to engaging in the acquisition of banking or nonbanking institutions or assets. The Company is also required to file annual reports and other information with the Federal Reserve and the State Board regarding its financial condition, results of operations, management and intercompany relationships and transactions between the Company and its subsidiaries.
 
 4
  Subsidiary Bank : The Companys national bank subsidiary, Summit National Bank ("the Bank"), is subject to regulation and examination primarily by the Office of the Comptroller of Currency ("the OCC") and secondarily by the Federal Reserve and the FDIC. The Bank is subject to various statutory requirements, supervision and regulation promulgated and enforced by the OCC. These statutes, rules and regulations relate to insurance of deposits, required reserves, allowable investments, loans, mergers, consolidations, issuance of securities, payment of dividends, establishment of branches, and other aspects of the business of Summit National Bank.
 
 Nonbank Subsidiary : The Companys nonbank subsidiary is subject to regulation by the Federal Reserve, the State Board, and other applicable state agencies.
 
 THE COMPANY
 
 The Sarbanes-Oxley Act of 2002:
 The Sarbanes-Oxley Act of 2002 enacted on July 30, 2002, also known as the Public Company Accounting Reform and Investor Protection Act of 2002 ("the Act"), is the most far-reaching securities legislation passed since the New Deal. The stated goals of the Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Act includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller General. The Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.
 
 The Act effects sweeping changes in the responsibilities of officers and directors of public companies, and revisions to the corporate reporting obligations of these companies and of their external auditors. Among the requirements and prohibitions addressed by the Act are certifications required by CEOs and CFOs of periodic reports filed with the SEC; accelerated reporting of stock transactions on Form 4 by directors, officers and large shareholders; prohibitions against personal loans from companies to directors and officers, except loans made in the ordinary course of business; new requirements for public companies audit committees; auditor independence; prohibition of directors and executive officers from trading during a pension plan blackout period; the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuers securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; various increased criminal penalties for violations of securities laws; and the creation of a public company accounting oversight board.
 
 Rules adopted by the SEC to implement provisions of the Act include CEO and CFO certifications related to the fair presentation of the financial statements and financial information in public filings as well as managements evaluation of disclosure controls and procedures; disclosure of whether any audit committee members qualify as "financial experts" as defined; disclosures related to the audit committee composition and auditor pre-approval policies; disclosure related to the companys written code of ethics; reconciling non-GAAP financial information with GAAP in public communications; disclosure of off-balance sheet transactions; and disclosures related to director independence and director nomination procedures.
 
 Financial and Bank Holding Company Activities:
 In November 1999, Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act ("the GLB Act") which repealed two provisions of the Glass-Stegall Act that previously separated banking, insurance, and securities activities. The purpose of this legislation is to modernize the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial services providers. Generally the GLB Act broadened the activities that may be conducted by national banks, banking subsidiaries of bank holding companies and their financial subsidiaries; provided an enhanced framework for protecting the privacy of consumer information; adopted a number of provisions related to the capitalization, membership, corporate governance and other measures designed to modernize the FHLB system; modified the laws governing the implementation of the CRA; and addressed a variety of other legal and regulatory issues affecting day-to-day operations and long-term activities of financial institutions.
 
 The GLB Act created a new financial services structure, the financial holding company, under the BHCA. Financial holding companies may engage in any activity that is deemed (1) financial in nature, (2) incidental to any such financial activity, or (3) complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. As a financial holding company, the Company may engage in, and acquire companies engaged in, activities that are considered "financial in nature," as defined by the GLB Act and Federal Reserve interpretations. These activities include, among other things, lending, exchanging, transferring, investing for others, or safeguarding money or securities; securities underwriting; dealing in or market-making in securities; insurance underwriting and agency activities; providing financial, investment, or economic advisory services; merchant banking; and any activity currently permitted for bank holding companies by the Federal Reserve Board under section 4(c)(8) of the Bank Holding Company Act. The GLB Act does not authorize banks or their affiliates to engage in commercial activities that are not financial in nature. A bank holding company may elect to be treated as a financial holding company only if all depository institution subsidiaries of the holding company are well capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment Act.
 
 5
  If any banking subsidiary of the Company ceases to be "well capitalized" or "well managed" under applicable regulatory standards, the Federal Reserve may, among other things, place limitations on the Companys ability to conduct the broader financial activities permissible for financial holding companies or, if the deficiencies persist, require the Company to divest the banking subsidiary. In addition, if any banking subsidiary of the Company receives a Community Reinvestment Act rating of less than satisfactory, the Company would be prohibited from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies. The Company may engage directly or indirectly in activities considered financial in nature, either de novo or by acquisition, as long as it gives the Federal Reserve after-the-fact notice of the new activities. The GLB Act also permits national banks, such as Summit National Bank, to engage in activities considered financial in nature through a financial subsidiary, subject to certain conditions and limitations and with the approval of the OCC.
 
 The GLB Act adopts a system of functional regulation where the primary regulator is determined by the nature of the activity rather than the type of institution. Although the Federal Reserve is the umbrella supervisor of financial holding companies, the GLB Act limits the Federal Reservess power to supervise and conduct examinations of affiliated companies of the financial holding company. Rather, under the provisions of the GLB Act, the securities activities would be regulated by the SEC and other securities regulators, insurance activities by the state insurance authorities, and banking activities by the appropriate bank regulator.
 
 The GLB Act also imposes certain obligations on financial institutions to develop privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the customers request, and establish procedures and practices to protect and secure customer data. These privacy provisions were implemented by regulations that were effective on November 12, 2000. Compliance with the privacy provisions was required by July 1, 2001. Additional customer privacy considerations are discussed below under "The Bank".
 
 Control Acquisitions:
 The BHCA requires prior Federal Reserve approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. The Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company, unless the Federal Reserve has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as the Company, would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company.
 
 Liability for Banking Subsidiaries
 Under the policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. This support may be required at times when the bank holding company may not have the resources to provide it. In the event of a bank holding companys bankruptcy, any commitment by the bank holding company to a U.S. federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to priority of payment. If a default occurred with respect to a bank, any capital loans to the bank from its parent holding company would be subordinate in right of payment to payment of the banks depositors and certain of its other obligations.
 
 6
  FDICIA
 The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), and the regulations promulgated under FDICIA, among other things, established five capital categories for insured depository institutions which are well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. FDICIA requires federal bank regulatory agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements based on these categories. 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 safety, 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 divest itself of any bank or nonbank subsidiary if the agency determines that divesture may aid the depository institution's financial condition.
 
 Interstate Banking and Branching
 As a bank holding company, the Company is required to obtain prior Federal Reserve approval before acquiring more than 5% of the voting shares, or substantially all of the assets, of a bank holding company, bank or savings association. The passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("the Riegle-Neal Act") has increased the ability of bank holding companies and banks to operate across state lines. Under the Riegle-Neal Act, with the approval of the Federal Reserve, and subject to nationwide and statewide concentration limits, the Company and any other bank holding company located in South Carolina may acquire or merge with a bank located in any other state and a bank holding company located outside of South Carolina may acquire or merge with any South Carolina-based bank, provided the acquirer is adequately capitalized and adequately managed, as defined in the Riegle-Neal Act. The Riegle-Neal Act also permits de novo branching provisions. The legislation preserves the state laws which require that a bank must be in existence for a minimum period of time before being acquired, as long as the requirement is five years or less.
 
 In July 1996, South Carolina enacted the South Carolina Banking and Branching Efficiency Act of 1996 ("the Act") which provides that, except as otherwise expressly permitted by federal law and in limited circumstances specified in the Act, a company may not acquire a South Carolina bank holding company (as defined in the Act) or a bank chartered under the laws of South Carolina unless the company obtains prior approval from the State Board. The company proposing to make the acquisition must file with the State Board a notice or application that the company filed with the responsible federal bank supervisory agency and pay the fee, if any, prescribed by the State Board. In addition, the company must publish prior notice of the application once in a daily newspaper of general circulation in South Carolina and provide an opportunity for public comment. If the company proposing to make the acquisition is an out-of-state bank holding company, it must qualify to do business in South Carolina or appoint an agent for service of process in South Carolina. The Act also provides that approval of the State Board must be obtained before an interstate bank merger involving a South Carolina bank may be consummated.
 
 Affiliate Transactions
 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 transaction", which includes an extension of credit, and limits a banks covered transactions with any affiliate to 10% of such banks capital and surplus. All covered transactions with all affiliates cannot in the aggregate exceed 20% of a banks capital and surplus. All covered and exempt transactions between a bank and its affiliates must be on terms and conditions consistent with safe and sound banking practices, and banks and their subsidiaries are prohibited from purchasing low-quality assets from the banks affiliates. Finally, Section 23A requires that all of a banks extensions of credit to an affiliate be appropriately secured by acceptable and adequate collateral, as set forth in the regulation. The Company and the Bank are also subject to Section 23B of the Federal Reserve Act, which generally limits covered and other transactions among affiliates to terms and circumstances, including credit standards, that are substantially the same or at least as favorable to a bank holding company, a bank or a subsidiary of either as prevailing at the time for comparable transactions with or involving unaffiliated companies.
 
 7
  THE BANK
 
 General
 The OCC is responsible for overseeing the affairs of all national banks and periodically examines national banks to determine their compliance with law and regulations. The OCC monitors all areas of the Banks operations, including loans, mortgages, issuance of securities, capital adequacy, risk management, payment of dividends, and establishment of branches. In addition, the OCC has authority to issue cease and desist orders against national banks which are engaged in unsafe or unsound practice in the conduct of their business. Federal banking laws applicable to all depository financial institutions, among other things, (i) afford federal bank regulatory agencies with powers to prevent unsafe and unsound banking practices; (ii) restrict preferential loans by banks to "insiders" of banks; (iii) require banks to keep information on loans to "insiders", including shareholders, executive officers, and directors; and (iv) bar certain director and officer interlocks between financial institutions.
 
 National banks are authorized by the GLB Act to engage, through "financial subsidiaries," in any activity that is permissible for a financial holding company (as described above) and any activity that the Secretary of the Treasury, in consultation with the Federal Reserve, determines is financial in nature or incidental to any such financial activity, except (1) insurance underwriting, (2) real estate development or real estate investment activities (unless otherwise permitted by law), (3) insurance company portfolio investments and (4) merchant banking. The authority of a national bank to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well managed and well capitalized (after deducting from the bank's capital outstanding investments in financial subsidiaries).
 
 Community Reinvestment Act
 Summit National Bank is subject to the requirements of the Community Reinvestment Act of 1977 ("CRA"). CRA requires that, in connection with its examinations of financial institutions, the OCC 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 OCC, issued a new joint rule which became effective for the Bank in 1997 related to evaluating an institutions CRA performance. The new rule evaluates institutions based on their actual performance (rather than efforts) in meeting community credit needs. Subject to certain exceptions, the OCC assesses the CRA performance of a bank by applying lending, investment, and service tests. The OCC assigns a rating to a bank based on the banks performance under the tests. To evaluate compliance with the lending, investment, and service tests, subject to certain exceptions, banks are required to collect and report to the OCC extensive demographic and loan data. Summit National Bank received a "satisfactory" rating in its most recent CRA examination.
 
 Federal Home Loan Bank Membership
 The Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLB") which provides a central credit facility primarily for member institutions. Members of the FHLB are required to acquire and hold shares of capital stock in, and may obtain advances from, the FHLB. The amount of stock owned is based on the Banks balance of residential mortgages and the balance of outstanding advances from the FHLB. The FHLB makes advances to members in accordance with policies and procedures established by its Board of Directors. The Bank is authorized to borrow funds from the FHLB to meet demands for withdrawals of deposit accounts, to meet seasonal requirements, to fund expansion of the loan portfolio, or for general asset/liability management. Advances are made on a secured basis. Collateral on advances may be in the form of first mortgages on 1-4 family real estate or commercial real estate, government securities, or other assets acceptable to the FHLB. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB, and general market conditions.
 
 Deposit Insurance Assessments
 The Bank is also a member of the FDIC, which currently insures the deposits of each member bank to a maximum of $100,000 per depositor. For this protection, each bank pays a semiannual statutory deposit insurance assessment to maintain the Bank Insurance Fund and is subject to the rules and regulations of the FDIC. Further, the FDIC is authorized to impose one or more special assessments in any amount deemed necessary to enable repayment of amounts borrowed by the FDIC from the United Stated Department of the Treasury. The FDIC has broad authority to prohibit Summit National Bank from engaging in unsafe or unsound banking practices and may remove or suspend officers or directors of a bank to protect its soundness. The FDIC requires insured banks to maintain specified levels of capital, maintain certain security devices and procedures and to file quarterly reports and other information regarding its operations. The FDIC requires assessment to be paid by each FDIC-insured institution based on the institutions assessment risk classification, which is determined based on whether the institution is considered "well capitalized", "adequately capitalized", or "undercapitalized", as such terms have been defined in applicable federal regulations, and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns.
 
 Brokered Deposits
 Current federal law regulates the acceptance of brokered deposits by insured depository institutions to permit only "well capitalized" depository institutions to accept brokered deposits without prior regulatory approval.
 
 8
  Prompt Corrective Action
 Pursuant to the authority granted under FDICIA, U.S. bank regulatory agencies were empowered to take prompt corrective action to resolve problems of insured depository institutions and impose progressively more restrictive constraints on operations, management and capital. The extent of these powers depends upon whether the institution is "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized", or "critically undercapitalized". Under uniform regulations defining such capital levels issued by each of the federal banking agencies, a bank is considered "well capitalized" if it has (1) a total risk-based capital ratio of 10% or greater; (2) a Tier I risk-based capital ratio of 6% or greater; (3) a leverage ratio of 5% or greater; and (4) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.
 
 Unless a banking institution is well capitalized, it is subject to restrictions on certain aspects of its operations. An undercapitalized banking institution must develop a capital restoration plan and its parent bank holding company must guarantee the banks compliance with the plan up to the lesser of 5% of the banks assets at the time it became undercapitalized and the amount needed to comply with the plan. As of December 31, 2003, the Bank was well capitalized, based on the prompt corrective action guidelines. It should be noted, however, that a banks capital category is determined solely for the purpose of applying the OCCs prompt corrective action regulations and that the capital category may not constitute an accurate representation of the banks overall financial condition or prospects.
 
 Privacy
 The deposit operations of the Bank are also subject to the Right to Financial Privacy Act which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, and the Electronic Fund Transfer Act and Regulation E issued by the Federal Reserve to implement that act which governs automatic deposits to and withdrawals from deposit accounts and customers rights and liabilities arising from the use of automated teller machines and other electronic banking services.
 
 The GLB Act also contains a number of other provisions that will affect the Companys operations and the operations of all financial institutions. One of the new provisions, which became effective on July 1, 2000, relates to the financial privacy of consumers. Federal banking regulators issued final regulations in November 2000 related to consumer privacy which limit the ability of banks and other financial entities to disclose non-public information about consumers to non-affiliated entities and establish practices and procedures to protect and secure customer data. The regulations require more disclosure to consumers, and in some circumstances, require consent by the consumer before information is allowed to be provided to a third party.
 
 The USA Patriot Act
 The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, also known as the USA Patriot Act ("the Act"), was signed into law on October 26, 2001. The Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.
 
 Among other requirements, Title III of the USA Patriot Act imposes the following requirements with respect to financial institutions:
 Establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and controls; (ii) specific designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs; and (iv) an independent audit function to test the anti-money laundering program.Establish policies and procedures to meet established standards with respect to customer identification at the time new accounts are opened.Establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering with respect to private banking accounts or correspondent accounts for non-United States persons or their representatives (including foreign individuals visiting the United States).Effective December 25, 2001, financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign banks that do not have a physical presence in any country, and will be subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks. 9
  Other Regulations
 Interest and certain other charges collected or contracted for by the Bank 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 FINANCE COMPANY
 The Company's subsidiary finance company, Freedom Finance, Inc., is a consumer finance company licensed and regulated by the State Board. Accordingly, the Finance Company is subject to annual examinations by the State Board and various regulatory requirements, including annual reporting, annual license renewal, and other regulations pertaining to the extension of credit. Specifically, state laws and regulations apply to maximum loan amounts, terms, interest rates and credit insurance and other fee charges. These laws and regulations are subject to both repeal and revision from time to time, often in response to pressures exerted by consumer rights groups.
 
 CAPITAL REQUIREMENTS
 Pursuant to the general supervisory authority conferred by the BHCA and the directives set forth in the International Lending Supervision Act of 1983, the Federal Reserve and the OCC 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 adverse effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Companys and the Banks assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Companys and the Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
 
 Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total capital to risk-weighted assets (as defined in the regulation) and Tier 1 capital (as defined in the regulation) to total assets. Management believes, as of December 31, 2003, that the Company and the Bank meet all capital adequacy requirements to which they are subject. At December 31, 2003 and 2002, the Bank was categorized as "well capitalized" under the regulatory framework for prompt corrective action as described above. There are no current conditions or events that management believes would change the Company's or the Bank's category.
  
 The Companys and the Banks actual capital amounts and ratios at December 31, 2003 and 2002 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 Supplementary Data" as Note 16 to the Notes to Consolidated Financial Statements.
 
 DIVIDENDS
 The holders of the Companys common stock are entitled to receive cash dividends when and if declared by the Board of Directors out of the funds legally available 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 OCC will be required for any cash dividend to be paid to the Company by the Bank if the total of all dividends, including any proposed dividend, declared by the Bank in any calendar year exceeds the total of its retained 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. During 2003, the Bank paid its first annual cash dividend to the Company, its sole shareholder, totaling $0.51 per share or $434,000.  It is currently the Banks intention to pay all dividends only from the net income of the current year.
 
 FUTURE LEGISLATION
 Changes to the laws and regulations in the state where the Company and its subsidiaries do business can affect the operating environment of financial and bank holding companies and their subsidiaries in substantial and unpredictable ways. The Company cannot accurately predict whether legislation will ultimately be enacted, and, if enacted, the ultimate effect that it, or implementing regulations, would have upon its or its subsidiaries financial condition or results of operations.
 
 10
  Item 2. PROPERTIES
 
 The operations of the Company and the Bank do not require any substantial investment in fixed assets. The principal executive offices for the Company, the Bank and the Finance Company are located at 937 North Pleasantburg Drive, Greenville, South Carolina. In addition, this site serves as the Banks main branch. The building at this location is approximately 7,500 square feet in area and is situated on a one-acre lot. The Company executed a lease for the land and building and assigned the lease to the Bank effective on the Bank's commencement of operations. The initial term of the lease commenced April 1, 1990 and renewal options were exercised in April 1995 and April 2000. The term on the renewal of the lease is five years under substantially the same terms. Under the terms of the original lease, the Company has one renewal option remaining. 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 built its second full service bank branch on .63 acres of land in Greenville, South Carolina. The facility is approximately 6,500 square feet and is fully owned and occupied by the Bank. During April of 1998, the Company entered into an agreement to lease a facility for a branch located in Greenville, South Carolina. This facility, which was occupied in October 1998, serves as the third full service bank branch and as the Banks operations facility. The facility is approximately 8,000 square feet and has an initial lease term of seven years with a renewal option for an additional seven year period. In 2001, the Bank completed construction and occupied a 7,500 square feet branch facility on 1.1 acres of land in Spartanburg, South Carolina. In January 2004, the Company entered into a contract to purchase one acre of land in Greenville County for a branch facility.
 
 The eleven Finance Company branches throughout South Carolina are housed in leased facilities averaging 1,200 square feet each with lease terms from three to ten years. The lease agreements have various renewal options under substantially the same terms as the original agreements.
 
 Refer to Note 17 to the Notes to Consolidated Financial Statements contained in Part II, Item 8. "Financial Statements and Supplementary Data" for information relating to minimum rental commitments under the Companys leases for office facilities and to Note 6 for further details on the Companys properties.
 
 
 Item 3. LEGAL PROCEEDINGS
 
 Although the Company is from time to time a party to various legal proceedings arising out of the ordinary course of business, management believes there is no litigation or proceeding threatened or pending against the Company that could reasonably be expected to result in a materially adverse change in the business or financial condition of the Company.
 
 
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 There were no matters submitted to a vote of the shareholders in the fourth quarter of the Companys fiscal year ending December 31, 2003.
 
 11 
  PART II
 
 Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES
 
 (a) Market information
 
 Summit Financial Corporations common stock is traded in the Small-Cap market on the NASDAQ system under the symbol SUMM. The following table presents the high, low and closing sales prices for the Companys common stock for each full quarterly period within the two most recent fiscal years. The source for the following information was the Nasdaq market.
 **2003**
**2002****4Q**
**3Q**
**2Q**
**1Q**
**4Q**
**3Q**
**2Q**
**1Q**Stock Price ranges: (1)High

$
21.42

$
19.05

$
17.24

$
15.54

$
15.90

$
14.50

$
14.29

$
12.29Low

$
17.73

$
15.71

$
14.76

$
14.16

$
13.38

$
13.15

$
11.79

$
8.93Close

$
18.00

$
18.74

$
16.14

$
14.87

$
14.62

$
14.05

$
13.90

$
12.29Volume traded


66,440


97,107


127,542


171,972


141,680


51,580


81,572


54,605Cash dividend declared

$
0.10


-


-


-


-


-


-


-
  (1) Share data has been restated to reflect all 5% stock dividends issued.
  
 (b) Holders
 
 As of March 2, 2004, there were 4,337,679 shares of common stock outstanding and approximately 375 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.
 
 (c) Dividends
 
 The Company and its bank subsidiary are subject to certain regulatory restrictions on the amount of dividends they are permitted to pay. In December 2003, the Company paid its first annual cash dividend of $0.10 per share, which amounted to 12.7% of fully diluted net income per common share for the year ended December 31, 2003. The Company presently intends to pay an annual cash dividend on the common stock; however, future dividends will depend upon the Companys earnings, financial condition, capital position, and such other factors as the Board may deem relevant. Further, the ability of the Company to pay cash dividends is dependent upon its 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. It is currently the Banks intention to pay all dividends only from the net income of the current year. For additional information on dividend restrictions, refer to Part II, Item 7. "Managements Discussion and Analysis of Financial Condition and Results of Operations, under Capital Management and Part II, Item 8. "Financial Statements and Supplementary Data", Note 15 under Notes to Consolidated Financial Statements.
 
 12
 Item 6.   SELECTED FINANCIAL DATA
  The information presented below should be read in conjunction with the consolidated financial statements, the notes thereto and "Managements Discussion and Analysis of Financial Condition and Results of Operations" contained under Item 7 of this report.
 
 Selected Consolidated Financial and Other Information
 (All Dollar Amounts In Thousands, Except Per Share Data)
 2003
2002
2001
2000
1999SUMMARY OF OPERATIONSNet interest income

$
12,289

$
11,647

$
10,398

$
10,023

$
8,749Provision for loan losses


786


847


725


654


445Noninterest income


2,930


2,671


2,582


1,846


1,560Noninterest expense


8,872


8,444


8,259


7,356


6,520Income taxes


1,754


1,585


1,280


1,204


936Net income


3,807


3,442


2,716


2,655


2,408Per common share  basic(1)


0.89


0.82


0.66


0.65


0.63Per common share  diluted(1)


0.79


0.73


0.60


0.59


0.53YEAR END BALANCE SHEETSInvestment securities

$
90,887

$
63,464

$
47,400

$
32,445

$
26,466Loans, net of unearned income


231,802


218,800


207,041


180,521


148,170Allowance for loan losses


3,437


3,369


2,937


2,560


2,163Total assets


343,921


302,206


273,097


249,835


191,229Noninterest-bearing deposits


37,037


33,342


29,372


35,468


23,823Interest-bearing deposits


219,975


197,173


189,406


173,723


134,173Long-term debt  FHLB advances


41,317


27,100


21,900


13,000


7,000Shareholders equity


32,205


28,742


24,601


21,528


17,591Book value per share(1)


7.47


6.82


5.89


5.17


4.46AVERAGE BALANCE SHEETSInvestment securities

$
74,661

$
52,157

$
40,232

$
28,681

$
26,151Loans, net of unearned income


223,365


211,704


195,573


159,711


138,989Total assets


322,766


288,887


263,695


212,177


180,141Noninterest-bearing deposits


32,132


29,678


26,549


21,746


19,204Interest-bearing deposits


212,048


197,631


190,713


153,624


132,468Shareholders equity


30,558


26,427


23,193


19,562


16,671RATIOS AND OTHER DATAReturn on average assets


1.18
%

1.19
%

1.03
%

1.25
%

1.34
%Return on average equity


12.46
%

13.02
%

11.71
%

13.57
%

14.45
%Net interest margin, tax-equivalent basis


4.14
%

4.38
%

4.29
%

5.11
%

5.31
%Total risk-based capital


13.75
%

13.20
%

12.41
%

12.21
%

12.51
%Leverage capital


9.92
%

9.70
%

9.25
%

10.13
%

9.97
%Net charge-offs to average loans


0.32
%

0.20
%

0.18
%

0.16
%

0.08
%Nonperforming assets to loans plus OREO, year end


0.38
%

0.22
%

0.64
%

0.19
%

0.19
%Allowance for loan losses to loans, year end


1.48
%

1.54
%

1.42
%

1.42
%

1.46
%Closing market price per share(1)

$
18.00

$
14.62

$
9.07

$
7.99

$
9.88Price to earnings, year end


22.8


20.3


15.1


13.5


18.6




(1) - All per share data has been restated to reflect all 5% stock dividends issued.

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|
|
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Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 The following information presents managements discussion and analysis of the financial condition and results of operations of Summit Financial Corporation ("the Company" or "Summit Financial"), a financial holding company, and its wholly-owned subsidiaries, Summit National Bank ("the Bank" or "Summit") and Freedom Finance, Inc. ("the Finance Company" or "Freedom"). The Bank, which is the principal subsidiary, owns all the outstanding shares of Summit Investment Services, Inc. Throughout this discussion and analysis, the term "the Company" refers to Summit Financial Corporation and its subsidiaries.
 
 This discussion and analysis should be read in conjunction with the consolidated financial statements and supplemental data contained elsewhere herein. Certain reclassifications have been made to prior years financial data to conform to current financial statement presentations as well as to reflect the effect of the 5% stock dividend paid in December 2003.
 
 FORWARD-LOOKING STATEMENTS
 
 Certain statements contained herein are "forward-looking statements" identified as such for purposes of the safe harbor provided in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, but are not limited to, statements as to industry trends, future results of operations or financial position, borrowing capacity and future liquidity, future investment results, future credit exposure, future loan losses and plans and objectives for future operations, and other statements that do not relate strictly to historical facts. These statements are not historical facts, but instead are based on current expectations, estimates and projections about the Company, are subject to numerous assumptions, risks and uncertainties, and represent only managements belief regarding future events, many of which, by their nature, are inherently uncertain and outside the Companys control. Any forward-looking statements made speak only as of the date on which such statements are made. The Company disclaims any obligation to update any forward-looking statements. Forward-looking statements are not guarantees of future performance and it is possible that actual results and financial position may differ, possibly materially, from the anticipated results and financial condition indicated in or implied by these forward-looking statements.
 
 Factors that could cause actual results to differ from those indicated by any forward-looking statements include, but are not limited to, the following:
 Inflation, interest rates, market and monetary fluctuations;Geopolitical developments and any future acts or threats of war or terrorism;The effects of, and changes in trade, monetary and fiscal policies and laws, including interest policies of the Federal Reserve;A decline in general economic conditions and the strength of the local economies in which the Company operates;The financial condition of the Companys borrowers and potential deterioration of credit quality;Competitive pressures on loan and deposit pricing and demand;Changes in technology and their impact on the marketing of products and services;The timely development and effective marketing of competitive new products and services;The impact of changes in financial service laws and regulations, including laws concerning taxes, banking, securities and insurance;Changes in accounting principles, policies, and guidelines;The Companys success at managing the risks involved in the foregoing as well as other risks and uncertainties detailed from time to time in press releases and other public filings.  COMPANY BUSINESS
 
 The Company is headquartered in Greenville, South Carolina. Through its primary subsidiary, the Bank, the Company offers a full range of financial products and services, including business and consumer loans, commercial and residential mortgage lending and brokerage, asset-based financing, corporate and consumer deposit services, and investment management services. The Bank currently has four full service offices in Greenville and Spartanburg, South Carolina. Freedom is a consumer finance company headquartered in Greenville, South Carolina. The Finance Company primarily makes and services installment loans to individuals with loan principal amounts generally not exceeding $2,000 and with maturities ranging from three to 18 months. Freedom operates 11 branches throughout South Carolina.
 
 14
  There is intense competition in all areas in which the Company conducts its business. The Bank competes with other major financial institutions, including commercial banks, investment banks, mutual savings banks, savings and loan associations, and credit unions, as well as other non-bank institutions, such as insurance companies, brokerage firms, and investment companies. The competition among the various financial institutions is based upon interest rates offered on deposit accounts, interest rates and fees charged on loans, service charges, the quality and range of services rendered, the convenience of banking facilities, and, in the case of loans to large commercial borrowers, relative lending limits. The Finance Company competes directly with national, regional and local consumer finance companies. The principal areas of competition in the consumer finance industry are convenience of services to customers, effectiveness of advertising, effectiveness of administration of loans and the cost of borrowed money. The amounts, rates, and fees charged on consumer finance loans are generally regulated by state law according to the type of license granted.
 
 CRITICAL ACCOUNTING POLICIES
 
 The preparation of consolidated financial statements requires management to make estimates and assumptions in the application of certain of its accounting policies about the effect of matters that are inherently uncertain. These estimates and assumptions affect the reported amounts of certain assets, liabilities, revenues and expenses. Different amounts could be reported under different conditions, or if different assumptions were used in the application of these accounting policies. The Companys accounting policies are discussed in Item 8. "Financial Statements and Supplementary Data", Note 1 under Notes to Consolidated Financial Statements. Of these significant accounting policies, the Company has determined that accounting for the allowance for loan losses and income taxes are deemed critical because of the valuation techniques used, and the sensitivity of these financial statement amounts to the methods, assumptions and estimates underlying these balances. Accounting for these critical areas requires the most subjective and complex judgments that could be subject to revision as new information becomes available.
 
 As explained in Note 1 to the consolidated financial statements, the allowance for loan losses represents managements estimate of probable credit losses inherent in the loan portfolio. This estimate is based on the current economys impact on the timing and expected amounts of future cash flows on problem or impaired loans, as well as historical loss experience associated with homogenous pools of loans. The Companys assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers, which is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Companys allowance for loan losses and related matters, see "Allowance for Loan Losses and Nonperforming Assets" and "Provision for Loan Losses" sections below.
 
 The income tax amounts disclosed in Note 10 to the consolidated financial statements reflect the current period income tax expense for all periods shown, as well as future tax liabilities associated with differences in the timing of expenses and income recognition for book and tax accounting purposes. The income tax returns, usually filed three months after year-end, are subject to review and possible revision by the tax authorities up until the statute of limitations has expired. These statutes usually expire three years after the time the respective tax returns have been filed.
 
 RISK MANAGEMENT
 
 Summits management of the risks inherent in its businesses is essential for financial performance and creating long-term value. Risk management is governed by policies approved annually by the Companys Board of Directors. The goal of risk management is the control of the Companys primary risk factors  credit risk, market risk, liquidity risk, and operating risk  to support the prudent use of capital. These risks, if not effectively managed, can result in current losses to the Company as well as erosion of its capital and damage to its reputation. Risk management techniques are structured around certain fundamental risk principals, including commitment from senior level management; clearly defined policies and procedures; training; independent oversight; established approval processes; management information systems; measurement and analytical tools; and performance evaluation processes. These processes assist the Company in managing its risk exposures, but they cannot fully insulate the Company from losses. The Companys business requires it to take risks while ensuring that it receives adequate compensation for the risks undertaken. Despite best efforts, losses will periodically occur, particularly with respect to credit risk, when unanticipated events challenge the limits of risk management processes.
 
 15
  EXECUTIVE SUMMARY
 
 The Company achieved 14% growth during the year for total assets of $343.9 million at December 31, 2003 compared to $302.2 million for the prior year end. The growth was driven by a 6% rise in gross loans to total $231.8 million from $218.8 million at December 31, 2002. In addition, investment securities increased 43% from $63.5 million at December 31, 2002 to $90.9 million at December 31, 2003. A portion of the investment growth is related to a $10 million investment leverage strategy implemented in 2003 to enhance future earnings and return on equity. The balance of the investment growth is a result of managements decisions to better utilize excess funds and maximize net interest income by investing liquidity in higher earning, cash-flowing securities.
 
 During 2003, the rate of deposit growth exceeded the loan growth, thus, the increase in liquidity was invested in securities rather than being retained in federal funds sold, which earned a significantly lower yield in 2003. Loan growth continues to be slow as demand is down, which is a direct reflection of the economic slowdown the nation continues to experience. Customers of the Bank have felt the impact of the recession as well, and management continues to maintain a focus on asset quality. Procedures to ensure early detection of weak credits and strong underwriting criteria, as well as an emphasis on collection of potential problem loans has resulted in a manageable level of watch list and classified loans. Credit risk in the loan portfolio is certainly impacted by the continuing uncertainty of the economy and is discussed more fully in the "Financial Condition" section below.
 
 Asset growth was funded by the 11% increase in deposits to $257.0 million and higher FHLB advances which totaled $52.3 million at the 2003 year end. The increase in FHLB advances is partially related to the investment leverage strategy discussed above. The balance of the net growth is related to advances obtained as specific asset-liability management strategies to lock in low cost fixed rate funding and to lock in spreads against the Banks fixed rate loan portfolio as a strategy to enhance net interest income. Shareholders equity totaled $32.2 million at December 31, 2003 as compared to $28.7 million at December 31, 2002. This increase was primarily a result of retained net income of $3.8 million and proceeds from stock option exercises. Increases in equity were partially offset by the payment of a cash dividend totaling $430,000 and the decrease in the unrealized gain on available for sale securities during 2003. Refer to the additional detail discussion of components of the Companys balance sheet below under "Financial Condition".
 
 The Company reported another year of record earnings in 2003, up 11% from 2002. Net income totaled $3.8 million, or $0.79 diluted earnings per share, in 2003 compared with $3.4 million, or $0.73 diluted earnings per share, in 2002 and $2.7 million, or $0.60 diluted earnings per share, for 2001. The improvement in net income and earnings per share between 2002 and 2003 resulted primarily from the growth in earning assets and the continued reduction in the cost of funds, due principally to the low interest rate environment. The low short-term interest rate environment, which has persisted since 2001, resulted in lower earnings on assets as well. Although the decline in cost of funds exceeded the drop in interest income, resulting in higher net interest income, the Companys net interest margin declined in 2003.
 
 Maintenance of the net interest margin has been a significant challenge in this economic environment, and the Companys earnings are significantly impacted by monetary policies of the Federal Reserve Bank and general market interest rate fluctuations. This will continue to be a challenge for the Company until there is a sustained economic recovery and increase in short-term interest rates. Net interest margin decreased from 4.38% for 2002 to 4.14% for 2003 due primarily to the 56 basis point reduction in the average prime rate between 2002 and 2003. The Company employed a strategic move to improve the net interest margin for 2004 by prepaying several FHLB advances in the current year. Although the early repayment of these advances resulted in a prepayment expense in 2003 of $166,000, which is a primary contributor to the increase in overhead expenses during the year, the elimination of these advances has reduced the weighted average rate of the FHLB borrowings by approximately 15 basis points. Interest rate risk is discussed more thoroughly in the "Market Risk and Asset-Liability Management" section below.
 
 Lower provision for loan losses, and the related change in the allowance for loan losses as a percent of loans, contributed to the increase in net income for 2003. Factors affecting fluctuations in the allowance and the provision are discussed in the "Allowance for Loan Losses" and "Provision for Loan Losses" sections below. Other increases in income, primarily gain in sales of investment securities, mortgage referral and other loan fees, and gains on sales of fixed assets, and fluctuations in overhead expenses are discussed in more detail under "Results of Operations" section below.
 
 16
  FINANCIAL CONDITION
 
 Credit Risk Management and Loans
 Credit risk is defined as the risk of loss arising from a counterpartys failure or inability to meet payment or performance terms of a contract with the Company. The Companys credit risk management processes are intended to address the management of all forms of credit risk, including balance sheet and off-balance sheet exposures. The credit risk process involves a Loan Committee of the Board of Directors which is responsible for establishing and monitoring adherence to credit policies, approving underwriting standards and concentration limits, and granting credit approval authorities. Credit policies include loan officer and credit limits, periodic documentation examination, and follow-up procedures for any exceptions to credit policies. The processes are intended to ensure that risks are accurately assessed, properly approved, and continuously monitored. An independent credit review function also monitors compliance with credit policies, works to ensure that credit due diligence and credit administration meet acceptable standards, and is responsible for the effectiveness of the credit quality review process. Loans that are determined to involve any more risk than the normal portfolio risk are placed on a special review status and closely monitored.
 
 As of December 31, 2003, the Company had gross loans outstanding, net of unearned income, of $231.8 million which represents an increase of $13.0 million, or 6% from the 2002 outstanding loans of $218.8 million. Outstanding loans represent the largest component of earning assets at 73% and 77% of average earning assets for 2003 and 2002, respectively. For 2003, the Companys loans averaged $223.4 million with a yield of 6.27%. This is compared to $211.7 million average loans with a yield of 7.04% in 2002. The decrease in the loan yield is a direct result of the continued short-term interest rate reductions experienced from 2002 through 2003, as a majority of the Banks loans adjust immediately with movements in the prime lending rate. In addition, during 2003 fixed rate loans were repriced, renewed and originated at lower current rates. The interest rates charged on loans of the Bank vary with the degree of risk, maturity and amount of the loan. Competitive pressures, money market rates, availability of funds, and government policy and regulations also influence interest rates. Loans of the Finance Company are generally regulated under state laws which establish the maximum loan amounts and interest rates, and the types and maximum amounts of fees, insurance premiums, and other costs that may be charged.
 
 The loan portfolio 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, 2003, the Company had no loans for highly leveraged transactions and no foreign loans. The primary focus has been on commercial lending to small and medium-sized businesses in its marketplace. The Company has a diversified loan portfolio which is spread throughout a variety of industries, with no industry or group of related industries accounting for a significant portion of the commercial loan portfolio, and with no dependence on any specific economic segment. The Company regularly monitors its credit concentrations based on loan purpose, industry, and customer base. As of December 31, 2003, there were no material concentrations of credit risk within the Companys loan portfolio.
 
 The following table shows the composition of the loan portfolio at December 31 for each year presented.
   
 Loan Portfolio Composition
 (dollars in thousands)
 ****
**2003**
****
**2002**
**2001**
**2000**
**1999****Amount**
**Percent**
**Amount**
**Percent**
**Amount**
**Percent**
**Amount**
**Percent**
**Amount**
**Percent**Commercial and industrial

$
33,370


14.4
%
$
30,643


14.0
%
$
35,737


17.3
%
$
31,995


17.7
%
$
26,217


17.7
%Commercial secured by real estate


74,845


32.3
%

77,748


35.5
%

70,036


33.8
%

62,709


34.7
%

55,647


37.6
%Real estate  residential mortgages


64,921


28.0
%

67,963


31.1
%

64,239


31.0
%

52,287


29.0
%

47,366


32.0
%Real estate  construction


49,313


21.3
%

32,791


15.0
%

26,672


12.9
%

23,232


12.9
%

10,135


6.9
%Installment and other consumer loans


5,845


2.5
%

5,846


2.7
%

6,301


3.1
%

6,540


3.6
%

5,402


3.6
%Consumer finance, net ofunearned income


3,267


1.4
%

3,544


1.6
%

3,606


1.7
%

3,542


2.0
%

3,183


2.1
%Other loans and overdrafts


241


0.1
%

265


0.1
%

450


0.2
%

216


0.1
%

220


0.1
%231,802


100
%

218,800


100
%

207,041


100
%

180,521


100
%

148,170


100
%Less  Allowance for loan losses


(3,437
)




(3,369
)




(2,937
)




(2,560
)




(2,163
)Net loans

$
228,365




$
215,431




$
204,104




$
177,961




$
146,007
  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. Loans may be made on either a secured or unsecured basis, and, when taken, collateral generally consists of liens on inventories, receivables, equipment, and furniture and fixtures. Unsecured commercial loans are generally short-term with emphasis on repayment strengths and low debt-to-worth ratios.
 
 A significant portion of the installment and other consumer loans are secured by automobiles and other personal assets. Consumer finance loans are those originated by the Companys consumer finance subsidiary. These loans generally carry a higher risk of nonpayment than do the other categories of loans, but the increased risk is substantially offset by the smaller amounts of such loans and the higher rates charged thereon, as well as a higher allocation of the allowance for loan losses related to Freedoms loan portfolio.
  17 
 Loan Maturity and Interest Sensitivity
 The following table shows the maturity distribution and interest sensitivity of the Companys loan portfolio at December 31, 2003.
 
 Loan Portfolio Maturity Schedule
 (dollars in thousands)
 
   **1 Year**
**or Less**
**Over 1, to**
**5 Years**
**Over**
**5 Years**
****
**Total**MATURITY DISTRIBUTION:Commercial and industrial

$
23,317

$
10,053

$
-

$
33,370Commercial secured by real estate


12,823


61,328


694


74,845Real estate  residential mortgages


20,062


28,633


16,226


64,921Real estate  construction


35,434


11,180


2,699


49,313Installment and other consumer loans


2,666


3,131


48


5,845Consumer finance, net of unearned income


3,267


-


-


3,267Other loans and overdrafts


241


-


-


241Total

$
97,810

$
114,325

$
19,667

$
231,802INTEREST SENSITIVITY:Total of loans with:Floating interest rates

$
85,967

$
73,856

$
16,623

$
176,446Predetermined interest rates


11,843


40,469


3,044


55,356Total

$
97,810

$
114,325

$
19,667

$
231,802
    Allowance for Loan Losses and Nonperforming Assets
 The allowance for loan losses is established through charges in the form of a provision for loan losses based on managements periodic evaluation of the loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. The amount of the allowance reflects managements opinion of an adequate level to absorb probable losses inherent in the loan portfolio at December 31, 2003. In assessing the adequacy of the allowance and the amount charged to the provision, 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 as well as the credit risk associated with particular loans. The Companys methodology for evaluating the adequacy of the allowance for loan losses incorporates managements current judgments about the credit quality of the loan portfolio through a disciplined and consistently applied process. The methodology includes segmentation of the loan portfolio into reasonable components based on loan purpose for calculation of the most accurate reserve. Appropriate reserve estimates are determined for each segment based on a review of individual loans, application of historical loss factors for each segment, and adjustment factors applied as considered necessary. The adjustment factors are applied consistently and are quantified for consideration of national and local economic conditions; exposure to concentrations that may exist in the portfolio; impact of off-balance sheet risk; alterations of lending policies and procedures; the total amount of and changes in trends of past due loans, nonperforming loans, problem loans and charge-offs; the total amount of and changes in trends of the Banks internally graded "watch list" loans which include classified loans and OAEM; variations in the nature, maturity, composition, and growth of the loan portfolio; changes in trends of collateral value; entry into new markets; and other factors which may impact the current credit quality of the loan portfolio.
 
 Management maintains an allowance for loan losses which it believes adequate to cover probable losses in the loan portfolio. It must be emphasized, however, that the determination of the allowance for loan losses using the Companys procedures and methods rests upon various judgments and assumptions about future economic conditions, events, and other factors affecting loans which are believed to be reasonable, but which may or may not prove valid. While it is the Companys policy to provide for the loan losses in the current period in which a loss is considered probable, there are additional risks of future losses which cannot be quantified precisely or attributed to particular loans or classes of loans. Because these risks include the state of the economy, industry trends, and conditions affecting individual borrowers, managements judgment of the allowance is necessarily approximate and imprecise. No assurance can be given that the Company will not in any particular period sustain loan losses which would be sizable in relationship to the amount reserved or that subsequent evaluation of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. The allowance for loan losses is also subject to review by various regulatory agencies through their periodic examinations of the Companys subsidiaries. Such examination could result in required changes to the allowance for loan losses. No adjustment in the allowance or significant adjustments to the Banks internally classified loans were made as a result of the Banks most recent examination performed by the Office of the Comptroller of the Currency.
  18
  The allowance for loan losses totaled $3.4 million, or 1.48% of total loans, at the end of 2003. This is compared to a $3.4 million allowance, or 1.54% of total loans, at December 31, 2002. Changes in the allowance for loan losses as a percent of loans each year is reflective of the factors discussed previously as well as under the "Provision for Loan Losses" section below, including changes in charge-off and recovery activity each year, and trends in nonperforming assets, classified loans, and "watch list" loans. Another primary factor, and a contributor to the decrease in the allowance percentage in 2003, is fluctuations in the percentage of Finance Company loans, which have inherently more risk than do loans of the Bank, to total loans. Freedoms loans declined from 1.6% of consolidated loans in 2002 to 1.4% of consolidated loans for 2003.
 
 The table below presents an allocation of the allowance for loan losses for each of the years ended December 31 by the different loan categories. However, the breakdown is based on a number of qualitative factors and the amounts presented are not necessarily indicative of actual amounts which will be charged to any particular category.
 
 Allocation of Allowance for Loan Losses
 (dollars in thousands)
  2003
2002
2001
2000
1999**Allowance**
**Breakdown**
**Percent of**
**Loans in**
**Category**
**Allowance**
**Breakdown**
**Percent of**
**Loans in**
**Category**
**Allowance**
**Breakdown**
**Percent of**
**Loans in**
**Category**
**Allowance**
**Breakdown**
**Percent of**
**Loans in**
**Category**
**Allowance**
**Breakdown**
**Percent of**
**Loans in**
**Category**Commercial

$
1,811


46.7
%
$
1,802


49.5
%
$
1,365


51.1
%
$
1,011


52.4
%
$
879


55.3
%Real estate - residentialmortgage


702


28.0
%

722


31.1
%

746


31.0
%

741


29.0
%

692


32.0
%Real estate  construction


415


21.3
%

317


15.0
%

375


12.9
%

330


12.9
%

148


6.9
%Installment and consumerfinance and other loans


471


4.0
%

482


4.4
%

440


5.0
%

337


5.7
%

331


5.8
%Unallocated


38





46





11





141





113$
3,437


100
%
$
3,369


100
%
$
2,937


100
%
$
2,560


100
%
$
2,163


100
%
 
  For the year ended December 31, 2003, the Company reported consolidated net charge-offs of $718,000, or 0.32% of average loans. This is compared to consolidated net charge-offs of $415,000, or 0.20% of average loans, for the year ended December 31, 2002.
 
 The following table sets forth certain information with respect to changes in the Companys allowance for loan losses for the last five years.
 (dollars in thousands)

2003
2002
2001
2000
1999Balance at beginning of period

$
3,369

$
2,937

$
2,560

$
2,163

$
1,827Charge-offs:Commercial and industrial


167


179


-


-


74Commercial real estate


388


13


130


125


-Installment and consumer


519


455


358


309


3431,074


647


488


434


417Recoveries:Commercial and industrial


2


16


-


50


51Commercial real estate


205


78


31


-


-Installment and consumer


149


138


109


127


257356


232


140


177


308Net charge-offs


(718
)

(415
)

(348
)

(257
)

(109
)Provision charged to expense


786


847


725


654


445Balance at end of period

$
3,437

$
3,369

$
2,937

$
2,560

$
2,163Net charge-offs to average loans


0.32
%

0.20
%

0.18
%

0.16
%

0.08
%Allowance to loans, year end


1.48
%

1.54
%

1.42
%

1.42
%

1.46
%Net charge-offs to allowance


20.89
%

12.32
%

11.85
%

10.04
%

5.04
%


19





The Companys nonperforming assets consist of loans on non-accrual basis, loans which are contractually past due 90 days or more on which interest is still being accrued, troubled debt restructurings, and other real estate owned ("OREO"). Loans past due 90 days and greater totaled $170,000, or 0.07% of gross loans, at December 31, 2003 compared to $187,000, or 0.09% of gross loans, at December 31, 2002. Loans on non-accrual totaled $587,000 and $293,000, respectively, at December 31, 2003 and 2002. The increase in non-accrual loans is related to general economic conditions and not due to specific negative trends in any segment of the portfolio. Generally, loans of the Bank are placed on non-accrual status at the earlier of when they are 90 days past due or when the collection of the loan becomes doubtful. Loans of the Finance Company are not classified as non-accrual, but are charged-off when such become 150 days contractually past due or earlier if the loan is deemed uncollectible. At December 31, 2003 and 2002, there were no loans considered to be impaired under Statement of Financial Accounting Standards ("SFAS") 114, "Accounting by Creditors for Impairment of a Loan" .





The following table summarizes the nonperforming assets at December 31 for each year presented.







(dollars in thousands)

2003
2002
2001
2000
1999Non-accrual loans

$
587

$
293

$
1,180

$
218

$
147Loans past due 90 days or more


170


187


153


122


130Troubled debt restructurings


-


-


-


-


-Other real estate owned


125


-


-


-


-Total nonperforming assets

$
882

$
480

$
1,333

$
340

$
277Nonperforming assets to total loans
and OREO


0.38
%

0.22
%

0.64
%

0.19
%

0.19
%


Management maintains a list of potential problem loans which includes non-accrual 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, 2003 determined to be potential problem loans based upon managements internal designations, was $3.5 million or 1.5% of the loan portfolio at year end, compared to $3.1 million or 1.4% of the loan portfolio at December 31, 2002. The amount of potential problem loans at December 31, 2003 does not represent managements estimate of potential losses since the majority of such loans are considered adequately secured by real estate or other collateral. Management believes that the allowance for loan losses as of December 31, 2003 was adequate to absorb any losses related to the nonperforming loans and potential problem loans as of that date. Management continues to monitor closely the levels of 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.

Investment Securities


At December 31, 2003, the Companys total investment portfolio had an estimated fair value of $90.9 million, which is an increase of 43% from the $63.5 million invested as of the end of 2002. At the 2003 year end, the portfolio had a weighted average life of approximately 7.7 years and an average duration of 6.0 years. Investment securities averaged $74.7 million yielding 4.95% in 2003, compared to the 2002 average of $52.2 million yielding 5.81%. Securities are the second largest earning asset of the Company at 24% and 19% of average earning assets for 2003 and 2002, respectively.





The Companys investment portfolio consists primarily of securities of United States government agencies, mortgage-backed securities, and state and municipal obligations. The investment portfolio is designed to enhance liquidity while providing acceptable rates of return and minimizing asset quality risk. 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 an analysis of the financial impacts of alternative rate and 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 are classified as "available for sale" and recorded on the Companys balance sheet at estimated fair value. I nvestment securities are an important tool to the Companys liquidity management. Securities classified as available for sale may be sold in response to changes in interest rates, liquidity needs, and/or significant prepayment risk. There are no investments classified as "held to maturity" or "trading" pursuant to SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities" .







|
|
|
|
|

The following table sets forth the amortized cost and the estimated fair market value of the investment securities of the Company at December 31 for each year presented.





Security Portfolio Composition


(dollars in thousands)


2003
2002
2001Available for Sale:

**Amortized**
**Cost**
**Estimated**
**Fair**
**Value**
****
**Amortized**
**Cost**
**Estimated**
**Fair**
**Value**
****
**Amortized**
**Cost**
**Estimated**
**Fair**
**Value**U.S. government agencies

$
23,520

$
23,172

$
18,609

$
18,822

$
11,103

$
11,214Mortgage-backed


44,054


43,949


27,321


27,743


21,716


21,660State and municipal


23,268


23,766


16,567


16,899


14,253


14,526$
90,842

$
90,887

$
62,497

$
63,464

$
47,072

$
47,400







The Company also maintains certain investments in stock as required to be owned by the Bank at December 31 as follows:





(dollars in thousands)

2003
2002
2001Federal Home Loan Bank of Atlanta stock

$
2,616

$
2,030

$
1,345Federal Reserve Bank stock


255


255


255Bankers Bank of Atlanta stock


133


133


133$
3,004

$
2,418

$
1,733




The amount of Federal Reserve Bank stock owned is based on the Banks capital levels. The amount of Federal Home Loan Bank ("FHLB") stock owned is determined based on the Banks balances of residential and commercial real estate mortgages, and the level of advances from the FHLB. No ready market exists for these stocks and they have no quoted market value. However, redemption of these stocks has historically been at par value. Accordingly, the carrying amounts are deemed to be a reasonable estimate of fair value.





The following table indicates the estimated fair value of each investment security category by maturity as of December 31, 2003. The weighted average yield for each range of maturities at December 31, 2003 is also shown. All securities are classified as "Available for Sale" as defined in SFAS No. 115.





Security Portfolio Maturity Schedule


(dollars in thousands)





Within 1 Year
After 1, and Within
5 Years
After 5, and Within
10 Years
After 10 Years
Total**Estimated**
**Fair**
**Value**
**Weighted**
**Average**
**Yield**
**Estimated**
**Fair**
**Value**
**Weighted**
**Average**
**Yield**
**Estimated**
**Fair**
**Value**
**Weighted**
**Average**
**Yield**
**Estimated**
**Fair**
**Value**
**Weighted**
**Average**
**Yield**
**Estimated**
**Fair**
**Value**
**Weighted**
**Average**
**Yield**U. S. Government agencies


-


-

$
1,025


5.95
%
$
20,416


4.49
%
$
1,731


5.03
%
$
23,172


4.59
%Mortgage-backed


-


-


156


4.68
%

10,539


3.43
%

33,254


4.48
%

43,949


4.23
%State and municipal (1)


-


-


-


-


342


7.17
%

23,424


6.53
%

23,766


6.55
%Total


-


-

$
1,181


5.78
%
$
31,297


4.16
%
$
58,409


5.31
%
$
90,887


4.93
%


(1) - Yields have been adjusted to a tax equivalent basis assuming a 34% Federal tax rate.





The weighted average yields shown in the previous table are calculated using historical cost balances and effective yields for the scheduled maturity of each security. The yield calculations do not give effect to changes in fair value that are reflected as a component of shareholders equity. Certain securities contain call provisions which could decrease their anticipated maturity. Yields on certain securities are based on prepayment assumptions and changes in actual prepayment speeds could either increase or decrease their yields.





|
|
|
|
|

Deposits and Other Interest-Bearing Liabilities
 The Company has a large, stable base of deposits, principally money market accounts and certificates of deposit obtained primarily from customers in South Carolina. The Companys core deposit base consists of consumer and commercial money market accounts, checking accounts, savings and retirement accounts, NOW accounts, and non-jumbo time deposits (less than $100,000). Although such core deposits continue to be interest-sensitive for both the Company and the industry as a whole, these deposits provide the Company with a reliable source of funds. The Company closely monitors its reliance on certificates of deposit greater than $100,000, which are generally considered less stable and more interest rate sensitive than core deposits. Certificates of deposit in excess of $100,000 represented 25% and 21%, respectively, of total deposits at December 31, 2003 and 2002. At December 31, 2003 and 2002, the Company had no brokered deposits or foreign deposits.
 
 During 2003, interest-bearing liabilities averaged $257.7 million with an average rate of 2.00% compared to $230.3 million with an average rate of 2.68% in 2002. The decrease in the average rate reflects the general decreasing rate environment experienced throughout 2002 and 2003, combined with the repricing of maturing time deposits and FHLB advances to lower current market rates. In pricing deposits, the Company considers its liquidity needs, the anticipated direction and levels of interest rates and local market conditions. At December 31, 2003, interest-bearing deposits comprised approximately 86% of total deposits and 81% of total interest-bearing liabilities. Federal Home Loan Bank advances comprise the remainder of interest-bearing liabilities.
 
 The Company uses its deposit base as a primary source with which to fund earning assets. Deposits increased 11% from $230.5 million at December 31, 2002 to $257.0 million as of year end 2003. The increase was primarily in time deposit accounts. Noninterest-bearing deposits averaged 13% of total average deposits for both 2003 and 2002. The Company faces continuing stiff competition from other banking and financial services companies in gathering deposits. As the percentage of funding provided by depositors decreases, other sources, such as FHLB advances and other short-term borrowings, have been developed to fund loan demand and increases in investment securities. The Company considers advances from the FHLB to be a reliable and readily available source of funds and utilizes these advances in its asset-liability management and interest rate risk management strategies. Advances from the FHLB increased 29% during the year to total $52.3 million at December 31, 2003 compared to $40.6 million at the prior year end.
 
 The following is a detailed breakout of the Companys deposit base as of December 31 of each year presented and the percent of deposits in each category as of year end (dollars in thousands).
 2003
2002
2001
2000
1999Balance
Percent of
Deposits in
Category
Balance
Percent of
Deposits in
Category
Balance
Percent of
Deposits in
Category
Balance
Percent of
Deposits in
Category
Balance
Percent of
Deposits in
CategoryNoninterest-bearing demand

$
37,037


14.4
%
$
33,342


14.4
%
$
29,372


13.5
%
$
35,468


17.0
%
$
23,823


15.1
%Interest-bearing demand


23,542


9.2
%

24,943


10.8
%

21,807


9.9
%

14,641


7.0
%

14,073


8.9
%Savings and money market


73,245


28.5
%

73,933


32.1
%

85,388


39.0
%

63,821


30.5
%

50,845


32.2
%Time deposits, $100,000and over


65,200


25.4
%

48,791


21.2
%

41,798


19.1
%

46,523


22.2
%

28,459


18.0
%Other time deposits


57,988


22.5
%

49,506


21.5
%

40,413


18.5
%

48,738


23.3
%

40,796


25.8
%$
257,012


100.0
%
$
230,515


100.0
%
$
218,778


100.0
%
$
209,191


100.0
%
$
157,996


100.0
%
  The maturity distribution of certificates of deposit greater than or equal to $100,000 as of December 31, 2003 is as follows (dollars in thousands):
 
 3 months or less

$
22,606Greater than 3, but less than or equal to 6 months


13,938Greater than 6, but less than or equal to 12 months


23,261Greater than 12 months


5,395$
65,200
 
 
 22 Advances from the FHLB, including scheduled maturities subsequent to year end, at December 31 consist of the following:
 
 (dollars in thousands)

2003
2002**Maturing in year ended**
**December 31,**
****
**Amount**
**Weighted**
**Rate**
**Amount**
**Weighted**
**Rate**2003

$
-


-

$
13,500


4.38
%2004


11,000


2.86
%

9,000


3.34
%2005


2,000


1.24
%

1,000


6.60
%2006


8,700


3.42
%

5,300


4.69
%2007


5,400


3.66
%

6,800


3.67
%2008


15,250


3.04
%

1,000


5.51
%Thereafter


9,967


3.40
%

4,000


3.78
%$
52,317


3.13
%
$
40,600


4.10
%
 
 OFF-BALANCE SHEET COMMITMENTS
 
 The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the liquidity, credit enhancement, and financing needs of its customers. These financial instruments include legally binding 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. Credit risk is the principal risk associated with these instruments. The contractual amounts of these instruments represent the amount of credit risk should the instruments be fully drawn upon and the customer defaults.
 
 To control the credit risk associated with entering into commitments and issuing letters of credit, the Company uses the same credit quality, collateral policies, and monitoring controls in making commitments and letters of credit as it does with its lending activities. 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.
 
 Legally binding 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. Standby letters of credit obligate the Company to meet certain financial obligations of its customers, if, under the contractual terms of the agreement, the customers are unable to do so. The financial standby letters of credit issued by the Company are irrevocable. Payment is only guaranteed under these letters of credit upon the borrowers failure to perform its obligations to the beneficiary. As such, there are no "stand-ready obligations" in any of the letters of credit issued by the Company and the contingent obligations are accounted for in accordance with SFAS 5, "Accounting for Contingencies" . At December 31, 2003 and 2002, the Company has recorded no liability for the current carrying amount of the obligation to perform as a guarantor, as such amounts are not considered material.
 
 Approximately $1.3 million and $2.5 million of total commitments at December 31, 2003 and 2002, respectively, represent commitments to extend credit at fixed rates of interest, which exposes the Company to some degree of interest rate risk. At December 31, the Companys total contractual amounts of commitments and letters of credit are as follows:
 
 (dollars in thousands)

2003
2002Legally binding commitments to extend credit:Commercial and industrial

$
14,621

$
18,474Residential real estate, including prime equity lines


17,890


18,499Construction and development


12,968


12,971Consumer and overdraft protection


2,373


2,92747,852


52,871Standby letters of credit


3,925


3,607Total commitments

$
51,777

$
56,478
 
 23 
 LIQUIDITY RISK MANAGEMENT
 
 Liquidity risk is defined as the risk of loss arising from the Companys inability to meet known near-term and projected long-term funding commitments and cash flow requirements. The objective of liquidity risk management is to ensure the ability of the Company to meet its financial obligations. These obligations are the payment of deposits on demand or at their contractual maturity; the repayment of borrowings as they mature; the payment of lease obligations as they become due; the ability to fund new and existing loan and other commitments; the payment of operating expenses; and the ability to take advantage of new business opportunities. Liquidity is measured and monitored frequently at both the parent company and the Bank levels, allowing management to better understand and react to balance sheet trends. A comprehensive liquidity analysis provides a summary of anticipated changes in loans, core deposits, and wholesale funds. Management also maintains a detailed liquidity contingency plan designed to respond to an overall decline in the condition of the banking industry or a problem specific to the Company.
 
 Liquidity is achieved by the maintenance of assets which can easily be converted to cash; a strong base of core customer deposits; maturing short-term assets; the ability to sell marketable securities; and access to borrowed funds and capital markets. Historically, deposits have been the primary source of funds for lending and investing activities. The amortization and scheduled payment of loans and mortgage-backed securities and maturities of investment securities provide a stable source of funds, while deposit fluctuations and loan prepayments are significantly influenced by the interest rate environment and other market conditions and competitive factors. Management meets frequently and makes changes relative to the mix, maturity and pricing of assets and liabilities in order to minimize the impact on earnings from such external conditions. Deposits are attractive sources of liquidity because of their stability and generally lower cost than other funding.
 
 In addition to deposits and normal cash flows, FHLB advances and short-term borrowings (including purchasing federal funds from other financial institutions or lines of credit through the Federal Reserve Bank) provide liquidity sources based on specific needs or if management determines that these are the best sources of funds to meet current requirements. At December 31, 2003, based on its approved line of credit equal to 25% of total assets and limited to eligible collateral available, the Bank had additional available credit of approximately $16 million from the FHLB. Further, the Bank had short-term lines of credit to purchase unsecured federal funds from unrelated correspondent banks with available balances of $19.8 million at December 31, 2003. The Bank considers advances from the FHLB to be a reliable and readily available source of funds for both liquidity purposes and asset-liability management and interest rate risk management strategies.
 
 Liquid assets, consisting primarily of cash and due from banks, interest-bearing deposits at banks, federal funds sold, and unpledged investment securities available for sale, accounted for 16% and 15%, respectively, of average assets for each of the years ended December 31, 2003 and 2002. Investment securities are an important tool to the Companys liquidity management. Securities classified as available for sale may be sold in response to changes in interest rates, liquidity needs, and/or significant prepayment risk. 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 following table summarizes future contractual obligations as of December 31, 2003.
 
 (dollars in thousands)

1 Year
or Less
>1 to 3
Years
>3 to 5
Years
Over 5
Years
TotalTime deposits

$
112,891

$
9,406

$
891

$
-

$
123,188FHLB advances


11,000


10,700


20,650


9,967


52,317Operating leases


278


111


-


-


389Total contractual cash obligations

$
124,169

$
20,217

$
21,541

$
9,967

$
175,894
 
 Summit Financial, the parent holding company, has limited liquidity needs required to pay operating expenses and to provide funding to its consumer finance subsidiary, Freedom Finance. Summit Financial has approximately $4.0 million in available liquidity remaining from its initial public offering and the retention of earnings. A total of $2.2 million of this liquidity was advanced to the Finance Company, in the form of an intercompany loan, to fund its operations as of December 31, 2003. Summit Financial also has an available line of credit totaling $2.5 million from an unaffiliated financial institution, all of which was available at December 31, 2003. Additional sources of liquidity for Summit Financial include borrowing funds from unrelated correspondent banks, borrowing from individuals, and payments for management fees and debt service which are made by the Companys subsidiary on a monthly basis. Liquidity needs of Freedom Finance, primarily for the funding of loan originations, paying operating expenses, and servicing debt, have been met to date through the initial capital investment of $500,000 made by Summit Financial, retention of earnings, borrowings from unrelated private investors, and line of credit facilities provided by Summit Financial and Summit National Bank. The Companys management believes its liquidity sources are adequate to meet its operating needs.
 
 24
  CAPITAL MANAGEMENT
 
 The Companys capital serves to support asset growth and provide protection against loss to depositors and creditors. The Company strives to maintain an optimal level of capital, commensurate with its risk profile, on which an attractive return to shareholders will be realized over both the short and long-term, while serving depositors, creditors and regulatory needs. Total shareholders equity amounted to $32.2 million, or 9.4% of total assets, at December 31, 2003. This is compared to $28.7 million, or 9.5% of total assets, at December 31, 2002. The $3.5 million increase in total shareholders equity resulted principally from retention of earnings of $3.8 million, and stock issued pursuant to the Companys stock option plans. Increases in equity were somewhat offset by the payment of cash dividends and the decrease of $572,000 in unrealized gain on investment securities available for sale during the year. The Companys unrealized gain on securities, net of tax, which is included in accumulated other comprehensive income, was $28,000 as of December 31, 2003 as compared to $600,000 as of December 31, 2002. Book value per share at December 31, 2003 and 2002 was $7.47 and $6.82, respectively.
 
 On December 5, 2003, the Company issued its twelfth consecutive 5% stock dividend to shareholders of record as of November 21, 2003. This dividend resulted in the issuance of approximately 205,000 shares of the Companys $1.00 par value common stock. Weighted average share and per share data has been restated to reflect all stock dividends issued.
 
 The Company and its bank subsidiary are subject to certain regulatory restrictions on the amount of dividends they are permitted to pay. The Company paid its first annual cash dividend of $0.10 per share in December 2003. The Company presently intends to pay an annual cash dividend on the common stock; however, future dividends will depend upon the Companys earnings, financial condition, capital position, and such other factors as the Board may deem relevant. Further, the ability of the Company to pay cash dividends is dependent upon its receiving cash in the form of dividends from the Bank. The dividends that may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements. The approval of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in any calendar year exceeds that 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. It is currently the Banks intention to pay all dividends only from the net income of the current year.
 
 To date, the capital needs of the Company have been met through the retention of earnings, from the proceeds of its initial offering of common stock, and from the proceeds of stock issued pursuant to the Companys stock option plans. The Company believes that the rate of asset growth will not negatively impact the capital base. The Company has no commitments or immediate plans for any significant capital expenditures outside of the normal course of business. The Companys management does not know of any trends, events or uncertainties that may result in the Companys capital resources materially increasing or decreasing.
 
 The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. The purpose of these regulations is to quantitatively measure capital against risk-weighted assets, including certain off-balance sheet items. These regulations define the elements of total capital and establish minimum ratios for capital adequacy purposes. To be categorized as "well capitalized", as defined in the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), Summit Financial and its banking subsidiary must maintain a risk-based Total Capital ratio of at least 10%, a risk-based Tier 1 Capital ratio of at least 6%, and a Tier 1 Leverage ratio of at least 5%, and not be subject to a written agreement, order, or capital directive with any of its regulators. At December 31, 2003, the Company and the Bank exceeded all regulatory required minimum capital ratios, and satisfied the requirements of the well capitalized category established by FDICIA. The following table summarizes capital ratios for the Company and the Bank at December 31, 2003 and 2002.
 
 The Company
The Bank12/31/03
12/31/02
12/31/03
12/31/02Total risk-based capital


13.75
%

13.20
%

12.05
%

11.69
%Tier 1 risk-based capital


12.50
%

11.95
%

10.80
%

10.44
%Tier 1 leverage capital


9.92
%

9.70
%

8.57
%

8.48
%
 
 
 25 
   RESULTS OF OPERATIONS
 
 Net Interest Income
 Net interest income is the difference between the interest earned on assets and the interest paid for the liabilities used to support those assets. It is the largest component of the Companys earnings and changes in net interest income have the greatest impact on net income. Variations in the volume and mix of assets and liabilities and their relative sensitivity to interest rate movements determine changes in net interest income.
 
 During 2003, the Company recorded net interest income of $12.3 million, a 6% increase from the 2002 net interest income of $11.6 million. This is compared to net interest income of $10.4 million for 2001. Fluctuations in net interest income between years is related to changes in the volume of average earning assets and interest-bearing liabilities, combined with changes in average yields and rates of the corresponding assets and liabilities as demonstrated in the tables following under "Average Balance Sheets and Yield/Rates".
 
 Net interest margin is calculated as net interest income divided by average earning assets. For the year ended December 31, 2003, the Companys net interest margin was 4.14% (fully tax-equivalent), compared to 4.38% in 2002 and 4.29% for 2001. The margin for 2003 decreased 24 basis points from the prior year due to the lower yield on earning assets resulting from the 56 basis point reduction in average prime rate during the year. Lower asset yields were partially offset by a continued reduction in the Companys cost of funds related to repricing deposits and FHLB advances to lower current market rates during 2002 and 2003. The reduction in cost of funds in 2002 was slightly greater than the drop in asset yield that year as compared to 2001, thus resulting in a 9 basis point higher net interest margin for 2002 as compared to 2001.
 
 Interest Income
 Interest income for 2003 was $17.4 million, which was a decrease of $376,000, or 2%, from the $17.8 million for 2002. Interest income for 2001 was $20.2 million. The decrease between 2002 and 2003 is a result of the 12% increase in average earning assets being more than offset by the 81 basis point reduction in the average yield on assets. Interest income was lower in 2002 as compared to 2001 as a result of the 10% increase in average earning assets being more than offset by the 160 basis point reduction in the average yield on assets. The tax-equivalent yield on interest-earning assets decreased from 8.23% in 2001 to 6.63% in 2002, and decreased to 5.82% in 2003 due to declines in the general interest rate environment during the three year period.
 
 Interest earned on the loan portfolio was $14.0 million in 2003, $14.9 million in 2002, and $17.3 million in 2001. Loans averaged $223.4 million in 2003 with an average yield of 6.27%, compared to $211.7 million in 2002 with an average yield of 7.04%, and $195.6 million in 2001 with an average yield of 8.84%. In excess of 60% of the Companys loan portfolio adjusts immediately with changes in the prime lending rate. Thus, the decline in average yield each year is directly related to the significant drop in the average prime rate from 6.91% in 2001, to 4.68% in 2002, and 4.12% for 2003. The reduction in average rate each year, offset somewhat by the higher level of average loans each year, resulted in lower interest income on loans for the three-year period.
 
 The second largest component of interest income is earnings from the Companys investment portfolio which averaged $74.7 million yielding 4.95% (fully tax-equivalent) in 2003. This is compared to average securities of $52.2 million in 2002 yielding 5.81%, and $40.2 million yielding 6.49% for 2001. The fluctuations in the average yield of the investment portfolio each year is related to the timing, maturity distribution and types of securities purchased, called, matured, and sold, combined with fluctuations in the general interest rate environment. The increase in average securities, offset somewhat by lower yields each year, resulted in an increase in interest income on investments of $616,000, or 23%, between 2002 and 2003, and an increase of $340,000, or 15%, between 2001 and 2002.
 
 Interest Expense
 The Companys interest expense for 2003 was $5.2 million, compared to $6.2 million for 2002 and $9.8 million for 2001. Interest-bearing liabilities averaged $257.7 million in 2003 with an average rate of 2.00%, $230.3 million in 2002 with an average rate of 2.68%, and an average of $211.2 million with an average rate of 4.64% during 2001. The 16% decrease in interest expense in 2003 was related to the 68 basis point decrease in the cost of funds, partially offset by the 12% increase in average interest-bearing liabilities. The 37% decrease in interest expense in 2002 was related to the 196 basis point decrease in the cost of funds, partially offset by the 9% increase in average interest-bearing liabilities. The reduction in average cost of funds during 2002 and 2003 and between 2001 and 2002 was a direct result of declining interest rates throughout the period combined with the maturity of CDs and FHLB advances renewed at lower current market rates. In addition, during 2003, the Company prepaid $2 million in FHLB advances with an average rate of 6.05% as a strategy to further reduce the cost of funds in 2003 and future years.
 
 26
  Average Balance Sheets and Yield/Rates
 The following table presents certain information related to the Companys average balance sheet, its average yields on assets, and its average costs of liabilities for the last three years. Also presented is the average yields on assets and costs of liabilities at December 31, 2003. Such yields and rates are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been calculated based on daily averages (dollars in thousands).
    2003


2002


2001AverageYield/Rate
Average
Income/
Yield/
Average
Income/
Yield/
Average
Income/
Yield/12/31/03
Balance
Expense
Rate
Balance
Expense
Rate
Balance
Expense
RateASSETSEarning assets:Loans, net of unearned income (1)


6.03
%
$
223,365

$
13,996


6.27
%
$
211,704

$
14,914


7.04
%
$
195,573

$
17,293


8.84
%Investment securities (taxable) (2)


4.59
%

57,010


2,459


4.31
%

37,425


1,934


5.17
%

28,940


1,751


6.05
%Investment securities(non-taxable)
(2) (3)


6.79
%

17,651


816


7.00
%

14,732


725


7.46
%

11,292


568


7.62
%Federal funds sold


0.88
%

3,883


40


1.03
%

4,913


80


1.63
%

7,808


318


4.07
%Investment in stock (4)


4.36
%

2,684


106


3.95
%

2,087


108


5.17
%

1,485


96


6.46
%Interest-bearing bank balances


0.89
%

2,641


28


1.06
%

3,522


60


1.70
%

4,054


179


4.42
%Total earning assets


5.63
%

307,234

$
17,445


5.82
%

274,383

$
17,821


6.63
%

249,152

$
20,205


8.23
%Non-earning assets





15,532








14,504








14,543Total average assets




$
322,766







$
288,887







$
263,695LIABILITIES & SHAREHOLDERS EQUITYInterest-bearing deposits:Interest-bearing demand


0.24
%
$
23,470

$
78


0.33
%
$
21,074

$
155


0.73
%
$
17,475

$
329


1.88
%Savings and money market


0.92
%

72,611


758


1.04
%

75,207


1,163


1.55
%

78,513


2,780


3.54
%Time deposits, $100,000 and over


2.00
%

58,136


1,353


2.33
%

49,860


1,579


3.17
%

47,705


2,737


5.74
%Other time deposits


2.02
%

57,831


1,361


2.35
%

51,490


1,701


3.30
%

47,020


2,782


5.92
%Total interest-bearing deposits


1.46
%

212,048


3,550


1.67
%

197,631


4,598


2.33
%

190,713


8,628


4.52
%FHLB advances


3.19
%

44,655


1,590


3.56
%

32,207


1,563


4.85
%

19,891


1,146


5.76
%Federal funds purchased and
other short-term borrowings


1.55
%

1,030


16


1.55
%

441


13


2.85
%

558


33


5.91
%Total interest-bearing liabilities


1.78
%

257,733

$
5,156


2.00
%

230,279

$
6,174


2.68
%

211,162

$
9,807


4.64
%Noninterest-bearing deposits





32,132








29,678








26,549Other noninterest-bearing liabilities





2,343








2,503








2,791Total liabilities





292,208








262,460








240,502Shareholders equity





30,558








26,427








23,193Total average liabilities and equity




$
322,766







$
288,887







$
263,695Net interest margin (5)







$
12,289


4.14
%



$
11,647


4.38
%



$
10,398


4.29
%Interest rate spread (6)











3.82
%







3.95
%







3.59
%
   (1) - Average loans are stated net of unearned income and include non-accrual loans. Interest recognized on non-accrual loans has been included in
 interest income.
 (2) - Average yield on investment securities is computed using historical cost balances; the yield information does not give effect to changes in fair value
 that are reflected as a component of shareholders equity.
 (3) - Yields on nontaxable investment securities have been adjusted to a tax equivalent basis assuming a 34% Federal tax rate.
 (4) - Includes investments in stock of Federal Reserve Bank, Federal Home Loan Bank, and other equities.
 (5) - Net interest margin is computed by dividing net interest income (adjusted to a tax equivalent basis assuming a 34% Federal tax rate) by total average
 earning assets.
 (6) - Interest rate spread is the difference between the average yield on earning assets and the average rate on interest-bearing liabilities.
 
 
 27 Rate/Volume Analysis
 The following table presents the dollar amount of changes in interest income, interest expense and net interest income attributable to changes in the volume of interest-earning assets and interest-bearing liabilities and the amount attributable to changes in rates earned and paid on the corresponding assets and liabilities (dollars in thousands).
 
 2002  2003
2001 - 2002Change Related to

Change Related toVolume
Rate
Rate/
Volume
Total
Change
Volume
Rate
Rate/
Volume
Total
ChangeEarning Assets:Loans, net of unearned income

$
821

$
(1,648
)
$
(91
)
$
(918
)
$
1,426

$
(3,515
)
$
(290
)
$
(2,379
)Investment securities (taxable)


1,012


(320
)

(167
)

525


513


(255
)

(75
)

183Investment securities (non-taxable)


144


(44
)

(9
)

91


173


(12
)

(4
)

157Federal funds sold


(17
)

(29
)

6


(40
)

(118
)

(191
)

71


(238
)Other


(8
)

(27
)

1


(34
)

16


(129
)

6


(107
)Total interest income


1,952


(2,068
)

(260
)

(376
)

2,010


(4,102
)

(292
)

(2,384
)Interest-Bearing Liabilities:Interest-bearing deposits:Interest-bearing demand


17


(84
)

(10
)

(77
)

68


(201
)

(41
)

(174
)Savings and money market accounts


(40
)

(378
)

13


(405
)

(117
)

(1,566
)

66


(1,617
)Time deposits, $100,000 and over


262


(419
)

(69
)

(226
)

124


(1,226
)

(56
)

(1,158
)Other time deposits


209


(489
)

(60
)

(340
)

264


(1,229
)

(116
)

(1,081
)Total interest-bearing deposits


448


(1,370
)

(126
)

(1,048
)

339


(4,222
)

(147
)

(4,030
)FHLB advances


604


(416
)

(161
)

27


710


(181
)

(112
)

417Other


17


(6
)

(8
)

3


(7
)

(17
)

4


(20
)Total interest expense


1,069


(1,792
)

(295
)

(1,018
)

1,042


(4,420
)

(255
)

(3,633
)Net Interest Differential

$
883

$
(276
)
$
35

$
642

$
968

$
318

$
(37
)
$
1,249
 
 Provision for Loan Losses
 The provision for loan losses was $786,000 in 2003, $847,000 in 2002, and $725,000 in 2001. A component of the change in the provision each year is the level of net originations as follows: $13.7 million in 2003, $12.2 million in 2002, and $26.9 million in 2001. As discussed under the "Allowance for Loan Losses" section above, other factors influencing the amount charged to the provision each year include the total amount of past due, classified, and "watch list" loans, trends in nonperforming assets, charge-off activity each year, and the percentage of Finance Company loans to the consolidated totals. Thus, in addition to the general economic uncertainty from 2001 through 2003, factors contributing to the fluctuations in the level of provision each year included changes in net charge-off activity of 0.32% of average loans in 2003, 0.20% in 2002 and 0.18% in 2001; and the fluctuations in nonperforming assets which amounted to 0.38%, 0.22%, and 0.64% of gross loans plus OREO at December 31, 2003, 2002, and 2001, respectively. Somewhat offsetting the previously mentioned factors and contributing to the lower provision in 2003 are trends in the Banks total "watch list" loans, which include classified loans, non-accrual loans, and other assets especially mentioned ("OAEM") in the Banks internal credit grading procedures and periodic reviews. Total watch list loans have decreased from 7.9% of gross loans at December 31, 2002 to 7.6% as of the 2003 year end. Finally, the percentage of Finance Company loans, which have inherently more risk than do loans of the Bank, has decreased from 1.62% at December 31, 2002 to 1.41% of consolidated loans as of December 31, 2003, thus contributing to the lower provision required in 2003. Estimates charged to the provision for loan losses are based on managements judgment as to the amount required to cover probable losses in the loan portfolio, and are adjusted as necessary based on a calculated model quantifying the estimated required balance in the allowance.
 
 Noninterest Income and Expenses
 Noninterest income increased $259,000, or 10%, in 2003 to $2.9 million from $2.7 million in 2002 and $2.6 million in 2001. Fluctuations in service charges and fees on deposit accounts, which decreased slightly in 2003 to $550,000 from $553,000 in 2002 and increased from $430,000 in 2001, is related to the level of and changes in transaction fees and number of Bank deposit accounts, as well as fluctuations in the volume of transactions subject to service charges, NSF and other fees each year. Insurance commission fee income decreased 25% to $438,000 in 2003 from $587,000 in 2002 and $485,000 in 2001, primarily related to general market conditions and interest rate declines affecting the volume of annuity product sales made by the Banks nondeposit investment subsidiary. These decreases in 2003 were offset by higher gains on sales of investment securities which totaled $367,000 in 2003 compared with $117,000 for 2002 and $257,000 in 2001. Fluctuations in gain on sales of investment securities are primarily related to the volume of investment sales each year from the Companys available for sale investment portfolio. In addition to the volume of transactions, changes in general market interest rates and thus, the market valuations, affect the amount of gain recorded.
  28
  Increases in the line item, "other income", which was up $183,000, or 19%, in 2003 and $11,000 in 2002, is primarily related to fluctuations in (1) the level of mortgage and other loan referrals and loan late fees which increased $58,000 in 2003 and $65,000 in 2002; (2) the level of mutual fund and brokerage activity in the Banks nondeposit investment subsidiary which decreased $10,000 in 2003 and decreased $55,000 in 2002; (3) earnings on bank-owned life insurance which increased $34,000 in 2003 related to additional insurance policies purchased during the year; and (4) gains of sales of fixed assets which vary each year based on activity and resulted in higher other income of $30,000 for 2003. Additional fluctuations in other income are related to the normal activity of the Bank and the level of transactions each year.
 
 Noninterest expense totaled $8.9 million in 2003, $8.4 million in 2002, and $8.3 million in 2001. A majority of the increased expenditures each year reflects the higher personnel and related costs necessary to support the Companys growth and new facilities. The most significant item included in noninterest expense is salaries, wages and benefits which amounted to $5.2 million in 2003, $5.1 million in 2002, and $4.8 million in 2001. The increase of $153,000, or 3%, in 2003 was primarily related to normal annual raises and increases in group health insurance premiums, somewhat offset by lower bonuses in 2003 and lower commission expense on nondeposit product sales due to less volume in 2003. The increase of $245,000 or 5% in 2002 was primarily related to normal annual raises and increases in group health insurance premiums.
 
 Occupancy and furniture, fixtures, and equipment expenses remained fairly flat in 2003 and 2002 due to reductions in depreciation for fully depreciated assets and expenses associated with a mobile facility used through mid-2002 being offset by normal increases in utilities, maintenance, and other ongoing occupancy and equipment expenses. There were no significant changes in facilities in any year presented, with the exception of completing construction on a branch in 2002 and relocating from a mobile branch facility during that year.
 
 Included in the line item "other expenses", which increased $279,000, or 13%, between 2002 and 2003 and decreased $58,000, or 3%, between 2001 and 2002, are charges for advertising and public relations; insurance claims and premiums; printing and office support; merchant program expenses; legal and professional services; and other branch and customer related expenses. A majority of these items are related directly to the normal operations of the Bank and fluctuate in relation to the increase in assets, the higher level of transaction volume, and the larger number of customer accounts. A majority of the increase in 2003 is related to the $166,000 prepayment penalty incurred on the early repayment of higher cost FHLB advances during the year. Other increases for 2003 are a result of higher legal and consultant fees ($60,000) for collection matters and special projects, and higher advertising ($43,000) related to new marketing campaigns. The decline in 2002 is primary related to a decrease in amortization of goodwill of $157,000. This decrease is partially offset by higher levels of legal and professional fees of $60,000 and advertising of $41,000 during 2002.
 
 Income Taxes
 The Company recorded an income tax provision of $1.8 million, $1.6 million, and $1.3 million in 2003, 2002, and 2001, respectively. The effective tax rate in each year was 31.5%, 31.5%, and 32.0%, respectively for the years ended December 31, 2003, 2002, and 2001.
 
 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, 2003, 2002, and 2001 are presented in the following table.
 
 2003
2002
2001Return on average assets


1.18
%

1.19
%

1.03
%Return on average shareholders equity


12.46
%

13.02
%

11.71
%Average shareholders equity as a percent ofaverage assets


9.47
%

9.15
%

8.80
%
 
 29
   MARKET RISK AND ASSET-LIABILITY MANAGEMENT
 
 The Companys primary earnings source is its net interest income; therefore, the Company devotes significant time and has invested in resources to assist in the management of market risk. The Companys net interest income is affected by changes in market interest rates, and by the level and composition of earning assets and interest-bearing liabilities. The Companys objectives in its asset-liability management are to utilize its capital effectively, to provide adequate liquidity and enhance net interest income, without taking undue risks or subjecting the Company unduly to interest rate fluctuations. The Company takes a coordinated approach to the management of its capital, liquidity, and interest rate risk.
 
 Market risk is the risk of loss from adverse changes in market prices and rates. The Companys market risk arises principally from interest rate risk inherent in its lending, investment, deposit, and borrowing activities. Management actively monitors and manages its interest rate risk exposure. Other types of market risks, such as foreign currency exchange rate risk, and equity and commodity price risk, do not arise in the normal course of the Companys business. Interest rate risk is the exposure to changes in market interest rates. The major source of the Companys interest rate risk is the difference in the maturity and repricing characteristics between core banking assets and liabilities  loans and deposits. This difference, or mismatch, poses a risk to net interest income. The Company attempts to control the mix and maturities of assets and liabilities to maintain a reasonable balance between exposure to interest rate fluctuations and earnings and to achieve consistent growth in net interest income, while maintaining adequate liquidity and capital. A sudden and substantial increase or decrease in interest rates may adversely impact the Companys earnings to the extent that the interest rates on earning assets and interest-bearing liabilities do not change at the same speed, to the same extent, or on the same basis.
 
 The Company monitors the interest rate sensitivity of its balance sheet position and controls this risk by identifying and quantifying exposures in its near-term sensitivity through the use of simulation and valuation models, as well as its long-term gap position, reflecting the known or assumed maturity, repricing, and other cash flow characteristics of assets and liabilities. The Companys simulation analysis involves dynamically modeling interest income and expense from current assets and liabilities over a specified time period under various interest rate scenarios and balance sheet structures, primarily to measure the sensitivity of net interest income over relatively short (e.g., < 2-year) time horizons. As the future path of interest rates cannot be known in advance, management uses simulation analysis to project earnings under various interest rate scenarios including reasonable or "most likely", as well as deliberately extreme and perhaps unlikely, scenarios. Key assumptions in these simulation analyses relate to the behavior of interest rates and spreads, changes in the mix and volume of assets and liabilities, repricing and/or runoff of deposits, and, most importantly, the relative sensitivity of the Companys assets and liabilities to changes in market interest rates. This relative sensitivity is important to consider as the Companys core deposit base has not been subject to the same degree of interest rate sensitivity as its assets, the majority of which are based on external indices and change in concert with market interest rates. According to the model, the Company is presently positioned so that net interest income will increase in the short-term if interest rates rise and will decrease in the short-term if interest rates decline.
 
 The Company monitors and considers methods of managing the rate sensitivity and repricing characteristics of the balance sheet components in order to minimize the impact of sudden and sustained changes in interest rates. Accordingly, the Company performs a valuation analysis involving projecting future cash flows from current assets and liabilities to determine the Economic Value of Equity ("EVE") which is the estimated net present value of those discounted cash flows. EVE represents the market value of equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for certain off-balance sheet items, over a range of assumed changes in market interest rates. The sensitivity of EVE to changes in the level of interest rates is a measure of the sensitivity of long-term earnings to changes in interest rates, and is used primarily to measure the exposure of earnings and equity to changes in interest rates over a relatively long (e.g., > 2 years) time horizon.
 
 The Companys market risk exposure is measured using interest rate sensitivity analysis by computing estimated changes in EVE in the event of a range of assumed changes in market interest rates. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 - 300 basis points increase or decrease in the market interest rates. The Companys Board of Directors has adopted an interest rate risk policy which establishes maximum allowable decreases in EVE in the event of a sudden and sustained increase or decrease in market interest rates. The following table presents the Companys projected change in EVE for the various rate shock levels as of year end. At December 31, 2003, the Companys estimated changes in EVE were within the limits established by the Board.
  (dollars in thousands)


December 31, 2003
December 31, 2002Change in Interest Rates

Policy
Limit
Economic
Value of
Equity
(000s)
Percent
Change
Economic
Value of
Equity
(000s)
Percent
Change300 basis point rise


40.00
%
$
25,094


22.08
%
$
25,285


12.03
%200 basis point rise


25.00
%
$
27,159


15.67
%
$
26,779


6.83
%100 basis point rise


10.00
%
$
29,617


8.04
%
$
28,214


1.84
%No change


0.00
%
$
32,205


0.00
%
$
28,742


0.00
%100 basis point decline


10.00
%
$
30,205


6.21
%
$
28,544


0.69
%200 basis point decline


25.00
%
$
28,851


10.41
%
$
28,171


1.99
%300 basis point decline


40.00
%
$
27,331


15.13
%
$
27,414


4.62
%
 30
 A traditional gap analysis is also prepared based on the maturity and repricing characteristics of earning assets and interest-bearing liabilities for selected time bands. The mismatch between repricings or maturities within a time band is commonly referred to as the "gap" for that period. A positive gap (asset sensitive) where interest rate sensitive assets exceed interest rate sensitive liabilities generally will result in the net interest margin increasing in a rising rate environment and decreasing in a falling rate environment. A negative gap (liability sensitive) will generally have the opposite result on net interest income. However, the traditional gap analysis does not assess the relative sensitivity of assets and liabilities to changes in interest rates and other factors that could have an impact on interest rate sensitivity or net interest income, and is thus not, in managements opinion, a true indicator of the Companys interest rate sensitivity position.
 
 The Companys balance sheet structure is primarily short-term in nature with a substantial portion of assets and liabilities maturing within one year. The Companys gap analysis, presented below, indicates a negative 12 month gap as of December 31, 2003 of $46.6 million. However, when the "effective change ratio" (the historical relative movement of each assets and liabilitys rates in relation to a 100 basis point change in the prime rate) is applied to the interest gap position, the Company is actually asset sensitive over a 12 month period and the entire repricing lives of the assets and liabilities. This is primarily due to the fact that in excess of 60% of the loan portfolio moves immediately on a one-to-one ratio with a change in the prime lending rate, while the deposit rates do not increase or decrease as much or as quickly relative to a prime rate movement. The Companys asset sensitive position means that assets reprice faster than the liabilities, which causes a decrease in the short-term in the net interest income and net interest margin in periods of declining rates as experienced in 2002 through 2003, until the fixed rate deposits mature and are repriced at then lower current market rates, thus narrowing the difference between what the Company earns on its assets and what it pays on its liabilities. Given the Companys current balance sheet structure, the opposite effect (that is, an increase in net interest income and net interest margin) is realized in the short-term in a rising rate environment. The following is the Companys gap analysis as of December 31, 2003 (dollars in thousands).
 
 Assets and Liabilities Repricing Within3 Months
or Less
4 to 12
Months
1 to 5
Years
Over 5
Years
TotalEarning assets:Loans, net of unearned income

$
158,043

$
15,483

$
55,467

$
2,809

$
231,802Investment securities (1)


-


-


1,181


92,710


93,891Federal funds sold and other


542


-


-


-


542Total


158,585


15,483


56,648


95,519


326,235Interest-bearing liabilities:Interest-bearing demand deposits (2)


96,787


-


-


-


96,787Time deposits, $100,000 and over


22,606


37,199


5,395


-


65,200Other time deposits


15,566


37,520


4,902


-


57,988FHLB advances


3,000


8,000


31,350


9,967


52,317Total


137,959


82,719


41,647


9,967


272,292Period interest sensitivity gap

$
20,626


($67,236
)
$
15,001

$
85,552

$
53,943Cumulative interest sensitivity gap

$
20,626


($46,610
)

($31,609
)
$
53,943
 
 (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.
 
 
 ACCOUNTING, REPORTING AND REGULATORY MATTERS
 
 In September 2002, SFAS 146, " Accounting for Costs Associated with Exit or Disposal Activities ," was issued which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, " Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) ". SFAS 146 applies to costs associated with an exit activity that does not involve an entity newly acquired in a business combination or with a disposal activity covered by SFAS 144, " Accounting for the Impairment or Disposal of Long-Lived Assets ". Those costs include, but are not limited to, the following: a) termination benefits provided to current employees that are involuntarily terminated under the terms of a benefit arrangement that, in substance, is not an ongoing benefit arrangement or an individual deferred compensation contract; b) costs to terminate a contract that is not a capital lease; and c) costs to consolidate facilities or relocate employees. SFAS 146 does not apply to costs associated with the retirement of a long-lived asset covered by SFAS 143, " Accounting for Asset Retirement Obligations ". A liability for a cost associated with an exit or disposal activity shall be recognized and measured initially at its fair value in the period in which the liability is incurred. A liability for a cost associated with an exit or disposal activity is incurred when the definition of a liability is met. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS 146 had no material impact on the Company.
 
 31
  In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which addresses consolidation by business enterprises of variable interest entities. A revised version of FIN 46 was issued in December 2003. Under FIN 46, an enterprise that holds significant variable interest in a variable interest entity but is not the primary beneficiary is required to disclose the nature, purpose, size, and activities of the variable interest entity, its exposure to loss as a result of the variable interest holders involvement with the entity, and the nature of its involvement with the entity and date when the involvement began. The primary beneficiary of a variable interest entity is required to disclose the nature, purpose, size, and activities of the variable interest entity, the carrying amount and classification of consolidated assets that are collateral for the variable interest entitys obligations, and any lack of recourse by creditors (or beneficial interest holders) of a consolidated variable interest entity to the general credit of the primary beneficiary. The December 2003 revisions to FIN 46 clarify some requirements, addressed identification of variable interest entities, and add new scope exceptions. FIN 46 is effective for all entities that are not "special-purpose" (as defined) entities for the first fiscal year or interim period beginning after December 15, 2003. The unmodified provisions on FIN 46 must be applied to entities that are considered "special-purpose" entities by the end of the first reporting period ending after December 15, 2003. The Company does not expect the adoption to have an impact since it has no interest in entities which it considers to be within the scope of FIN 46.
 
 In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement (a) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative; (b) clarifies when a derivative contains a financing component; (c) amends the definition of an underlying to conform to language used in FIN 45; and (d) amends certain other existing pronouncements. The provisions of SFAS 149 are effective for contracts entered into or modified after June 30, 2003. The adoption did not have an impact on the Company.
 
 Effective July 1, 2003, the Company adopted SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 requires an issuer to classify certain financial instruments that include certain obligations, such as mandatory redemption, repurchase of the issuer's equity, or settlement by issuing equity, as liabilities or assets in some circumstances. Forward contracts to repurchase an issuer's equity shares that require physical settlement in exchange for cash are initially measured at the fair value of the shares at inception, adjusted for any consideration or unstated rights or privileges, which is the same as the amount that would be paid under the conditions specified in the contract if settlement occurred immediately. Those contracts and mandatorily redeemable financial instruments are subsequently measured at the present value of the amount to be paid at settlement, if both the amount of cash and the settlement date are fixed, or, other wise at the amount that would be paid under the conditions specified in the  contract if settlement occurred at the reporting date. Other financial instruments are initially and subsequently measured at fair value, unless required by SFAS 150 or other generally accepted accounting principles to be measured differently. The Company had no impact upon adoption since it had no financial instruments which is considers to be included within the scope of SFAS 150.
 
 
 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 See "Market Risk and Asset-Liability Management" in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations for quantitative and qualitative disclosures about market risk, which information is incorporated herein by reference.
 
   32 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
   
 SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
  
 December 31,2003
2002ASSETSCash and due from banks

$
9,854

$
6,929Interest-bearing bank balances


341


2,176Federal funds sold


201


2,491Investment securities available for sale


90,887


63,464Investment in Federal Home Loan Bank and other stock


3,004


2,418Loans, net of unearned income and net of allowancefor loan losses of $3,437 and $3,369


228,365


215,431Premises and equipment, net


4,070


4,197Accrued interest receivable


1,505


1,418Other assets


5,694


3,682$
343,921

$
302,206LIABILITIES AND SHAREHOLDERS' EQUITYDeposits:Noninterest-bearing demand

$
37,037

$
33,342Interest-bearing demand


23,542


24,943Savings and money market


73,245


73,933Time deposits, $100,000 and over


65,200


48,791Other time deposits


57,988


49,506257,012


230,515Federal Home Loan Bank advances


52,317


40,600Accrued interest payable


841


1,006Other liabilities


1,546


1,343Total liabilities


311,716


273,464Shareholders' equity:Common stock, $1.00 par value; 20,000,000 sharesauthorized; 4,312,925 and 4,013,486 sharesissued and outstanding


4,313


4,013Additional paid-in capital


25,791


21,322Retained earnings


2,102


2,862Accumulated other comprehensive income, net of tax


28


600Nonvested restricted stock


(29
)

(55
)Total shareholders' equity


32,205


28,742$
343,921

$
302,206See accompanying notes to consolidated financial statements. 
 33 SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF INCOME
  
 For the year ended December 31,2003
2002
2001Interest Income:Loans

$
13,996

$
14,914

$
17,293Taxable securities


2,459


1,934


1,751Nontaxable securities


816


725


568Federal funds sold


40


80


318Other


134


168


27517,445


17,821


20,205Interest Expense:Deposits


3,550


4,598


8,628Federal Home Loan Bank advances


1,590


1,563


1,146Federal funds purchased


16


5


2Other short-term borrowings


-


8


315,156


6,174


9,807Net interest income


12,289


11,647


10,398Provision for loan losses


786


847


725Net interest income after provision for loan losses


11,503


10,800


9,673Noninterest Income:Service charges and fees on deposit accounts


550


553


430Merchant and credit card fee income


428


450


457Insurance commission fee income


438


587


485Gain on sale of investment securities


367


117


257Other income


1,147


964


9532,930


2,671


2,582Noninterest Expense:Salaries, wages and benefits


5,213


5,060


4,815Occupancy


666


644


652Furniture, fixtures and equipment


647


673


667Other expenses


2,346


2,067


2,1258,872


8,444


8,259Income before income taxes


5,561


5,027


3,996Income taxes


1,754


1,585


1,280Net income

$
3,807

$
3,442

$
2,716Net income per common share:Basic

$
0.89

$
0.82

$
0.66Diluted

$
0.79

$
0.73

$
0.60Average shares outstanding:Basic


4,256,000


4,176,000


4,133,000Diluted


4,842,000


4,744,000


4,550,000See accompanying notes to consolidated financial statements. 
 34 SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
 For the Years Ended December 31, 2003, 2002 and 2001
   ****
****
**Accumulated**
****
********
****
****
**Additional**
****
**other**
**Nonvested**
**Total******
****
**Common**
**paid-in**
**Retained**
**comprehensive**
**restricted**
**shareholders'******
****
**stock**
**capital**
**earnings**
**income, net**
**stock**
**equity**Balance at December 31, 2000

$
3,598

$
16,803

$
1,425

$
32


($330
)
$
21,528Net income for the year ended December 31, 2001


-


-


2,716


-


-


2,716Other comprehensive income:Unrealized holding gains on securities arising during the period, net of taxes of$187


-


-


-


346


-Less: reclassification adjustment for gainsincluded in net income, net of tax of $82


-


-


-


(175
)Other comprehensive income


-


-


-


171


-


171Comprehensive income


-


-


-


-


-


2,887Stock options exercised, including tax benefit of $9


16


47


-


-


-


63Cancellation of restricted common stock


(2
)

(19
)

-


-


21


-Amortization of deferred compensationon restricted stock


-


-


-


-


126


126Issuance of 5% stock dividend


181


1,578


(1,759
)

-


-


-Cash in lieu of fractional shares


-


-


(3
)

-


-


(3
)Balance at December 31, 2001


3,793


18,409


2,379


203


(183
)

24,601Net income for the year ended December 31, 2002


-


-


3,442


-


-


3,442Other comprehensive income:Unrealized holding gains on securities arising  during the period, net of taxes of $287


-


-


-


469


-Less: reclassification adjustment for gains included in net income, net of tax of $45


-


-


-


(72
)Other comprehensive income


-


-


-


397


-


397Comprehensive income


-


-


-


-


-


3,839Stock options exercised, including tax benefit of $33


30


148


-


-


-


178Amortization of deferred compensationon restricted stock


-


-


-


-


128


128Issuance of 5% stock dividend


190


2,765


(2,955
)

-


-


-Cash in lieu of fractional shares


-


-


(4
)

-


-


(4
)Balance at December 31, 2002


4,013


21,322


2,862


600


(55
)

28,742Net income for the year ended December 31, 2003


-


-


3,807


-


-


3,807Other comprehensive loss:Unrealized holding losses on securities arising  during the period, net of taxes of ($210)


-


-


-


(345
)

-Less: reclassification adjustment for gains   included in net income, net of tax of $140


-


-


-


(227
)Other comprehensive loss


-


-


-


(572
)

-


(572
)Comprehensive income


-


-


-


-


-


3,235Stock options exercised, including tax benefit of $193


95


544


-


-


-


639Amortization of deferred compensationon restricted stock


-


-


-


-


26


26Cash dividends declared ($0.10 per common share)


-


-


(430
)

-


-


(430
)Issuance of 5% stock dividend


205


3,925


(4,130
)

-


-


-Cash in lieu of fractional shares


-


-


(7
)

-


-


(7
)Balance at December 31, 2003

$
4,313

$
25,791

$
2,102

$
28


($29
)
$
32,205See accompanying notes to consolidated financial statements. 
 35
 SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  
 For the year ended December 31,2003
2002
2001Cash flows from operating activities:Net income

$
3,807

$
3,442

$
2,716Adjustments to reconcile net income to net cashprovided by operating activities:Provision for loan losses


786


847


725Depreciation


435


488


467Net gain on sale and disposal of equipment and vehicles


(30
)

-


(28
)Net gain on sale of investment securities


(367
)

(117
)

(257
)Net amortization of net premium on investment securities


257


221


175Amortization of deferred compensation on restricted stock


26


128


126(Increase) decrease in other assets


(260
)

(222
)

309Increase (decrease) in other liabilities


231


64


(289
)Deferred income taxes


11


(156
)

(205
)Net cash provided by operating activities


4,896


4,695


3,739Cash flows from investing activities:Purchases of investment securities


(89,706
)

(48,930
)

(38,533
)Proceeds from sales of investment securities


29,547


19,945


12,695Proceeds from maturities of investment securities


31,924


13,456


11,241Purchases of Federal Home Loan Bank stock


(861
)

(685
)

(345
)Redemptions of Federal Home Loan Bank stock


275


-


-Purchase of bank-owned life insurance


(1,500
)

-


-Net increase in loans


(13,720
)

(12,174
)

(26,868
)Purchases of premises and equipment


(327
)

(238
)

(1,470
)Proceeds from sale of equipment and vehicles


49


-


57Net cash used by investing activities


(44,319
)

(28,626
)

(43,223
)Cash flows from financing activities:Net increase in deposit accounts


26,497


11,737


9,587Proceeds from Federal Home Loan Bank advances


29,500


25,500


17,000Repayments of Federal Home Loan Bank advances


(17,783
)

(11,800
)

(6,100
)Repayments of other short-term borrowings


-


(500
)

-Cash dividends paid


(430
)

-


-Proceeds from stock options exercised


446


145


54Cash paid in lieu of fractional shares


(7
)

(4
)

(3
)Net cash provided by financing activities


38,223


25,078


20,538Net (decrease) increase in cash and cash equivalents


(1,200
)

1,147


(18,946
)Cash and cash equivalents, beginning of year


11,596


10,449


29,395Cash and cash equivalents, end of year

$
10,396

$
11,596

$
10,449Supplemental Information:Cash paid during the period for interest

$
5,321

$
6,362

$
10,366Cash paid during the period for income taxes


1,590


1,610


1,445Change in fair market value of investment securitiesavailable for sale, net of income taxes


(572
)

397


171Stock option tax benefit


193


33


9See accompanying notes to consolidated financial statements. 
 36 SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 For the Years Ended December 31, 2003, 2002 and 2001
 
 Note 1 - Summary of Significant Accounting Policies
 
 Principles of Consolidation - Summit Financial Corporation ("the Company"), a South Carolina corporation, is the parent holding company for Summit National Bank ("the Bank"), a nationally chartered bank, and Freedom Finance, Inc. ("the Finance Company"), a consumer finance company. Summit Investment Services, Inc. is a wholly-owned subsidiary of the Bank which provides financial management services and nondeposit product sales. The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
 
 Use of Estimates - The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") which requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, they affect the reported amounts of income and expense during the reporting period. Actual results could differ from these estimates and assumptions.
 
 Cash and cash equivalents - For the purpose of reporting cash flows, cash includes currency and coin, cash items in process of collection and due from banks. Included in cash and cash equivalents are federal funds sold and overnight investments. The Company considers the amounts included in the balance sheet line items, "Cash and due from banks", "Interest-bearing bank balances" and "Federal funds sold" to be cash and cash equivalents. These accounts totaled $10,396,000 and $11,596,000 at December 31, 2003 and 2002, respectively.
 
 Investment Securities - Investment securities are accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") 115, " Accounting for Certain Investments in Debt and Equity Securities" . At the time of purchase, investment securities are classified by management into one of three categories as follows: (1) Investments Held to Maturity: securities which the Company has the positive intent and ability to hold to maturity, which are reported at amortized cost; (2) Trading Securities: securities that are bought and held principally for the purpose of selling them in the near future, which are reported at fair value with unrealized gains and losses included in earnings; and (3) Investments Available for Sale: securities that may be sold under certain conditions, which are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders equity, net of income taxes. The amortization of premiums and accretion of discounts on investment securities are recorded as adjustments to interest income. Gains or losses on sales of investment securities are based on the net proceeds and the adjusted carrying amount of the securities sold, using the specific identification method. Unrealized losses on securities, reflecting a decline in value or impairment judged by the Company to be other than temporary, are charged to income in the consolidated statements of income.
 
 Loans - Loans of the Bank are carried at principal amount outstanding, reduced by an allowance for loan losses. The Bank recognizes interest income daily based on the principal amount outstanding using the simple interest method. The accrual of interest is generally discontinued on loans of the Bank which become 90 days past due as to principal or interest or when management believes, after considering economic and business conditions and collection efforts, that the borrowers financial condition is such that collection of interest is doubtful. Management may elect to continue accrual of interest when the estimated net realizable value of collateral is sufficient to cover the principal balances and accrued interest and the loan is in the process of collection. Amounts received on nonaccrual loans generally are applied against principal prior to the recognition of any interest income. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.
 
 Loans of the Finance Company are carried at the gross amount outstanding, reduced by unearned interest, insurance income and other deferred fees, and an allowance for loan losses. Unearned interest and fees are deferred at the time the loans are made and accreted to income using the "Rule of 78s" method. The results of this method are not materially different from those obtained by using the simple interest method. Charges for late payments are credited to income when collected. Loans of the Finance Company are generally charged-off when they become 150 days contractually past due or when it is determined that collection is doubtful.
 
 37
  Loan Origination and Commitment Fees - The Company accounts for loan origination fees and direct costs of loan originations in accordance with SFAS 91, " Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Direct Costs of Leases ". SFAS 91 generally limits the definition of loan origination costs to the direct costs attributable to originating a loan, which are principally actual personnel costs. Pursuant to SFAS 91, loan commitment fees, net of certain direct origination costs, are deferred and recognized as an adjustment of yield by the interest method over the related loans life, or if the commitment expires unexercised, recognized in income upon expiration.
 
 Allowance for Loan Losses - It is the Companys policy to provide a valuation allowance for estimated losses on loans based upon past loss experience, trends in the level of delinquent and specific problem loans, adverse situations that may affect the borrowers ability to repay, the estimated value of any underlying collateral, and current economic conditions in the Banks primary market areas. 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 and specific loans, in addition to other factors which, in managements judgment, deserve recognition in estimating loan losses. Loans are charged-off when, in the opinion of management, they are deemed to be uncollectible. Recognized losses are charged against the allowance and subsequent recoveries are added to the allowance. Management believes that the allowance is adequate to absorb probable losses inherent in the loan portfolio. While management uses the information available to make evaluations, future adjustments to the allowance may be necessary if economic conditions differ from the assumptions used in making the evaluations. The allowance for loan losses is subject to periodic evaluation by various regulatory authorities and may be subject to adjustments based upon information that is available to them at the time of their examination.
 
 Impaired Loans - The Company accounts for impaired loans in accordance with SFAS 114, " Accounting by Creditors for Impairment of a Loan ". Loans are considered to be impaired when, in managements judgment, the collection of all amounts of principal and interest is not probable in accordance with the terms of the loan agreement. SFAS 114 requires that impaired loans be recorded at fair value, which is determined based upon the present value of expected cash flows discounted at the loans effective interest rate, the market price of the loan, if available, or the value of the underlying collateral. All cash receipts on impaired loans are applied to principal until such time as the principal is brought current, and thereafter according to the contractual terms of the agreement. After principal has been satisfied, future cash receipts are applied to interest income, to the extent that any interest has been foregone. As a practical matter, the Bank determines which loans are impaired through a loan review process.
 
 Other Real Estate Owned - Other real estate owned, included in "Other assets" in the accompanying consolidated balance sheets, is comprised of real estate properties acquired in partial or total satisfaction of problem loans. In accordance with SFAS No.144, " Accounting for the Impairment or Disposal of Long-Lived Assets ", the property is classified as held for sale when the sale is probable and is expected to occur within one year. The property is initially carried at the lower of cost or estimated fair value less estimated selling costs. Principal losses existing at the time of acquisition of such properties are charged against the allowance for loan losses. Interest losses are charged to interest income. Subsequent write-downs that may be required to the carrying value of these properties and gains and losses realized from the sale of other real estate owned are included in other noninterest income. Costs related to the development and improvement of such property are capitalized, whereas the costs related to holding the property are charged to expense. Other real estate owned ("OREO") totaled $125,000 at December 31, 2003. There was no OREO at December 31, 2002.
 
 Off-Balance Sheet Commitments - In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of legally binding commitments to extend credit and letters of credit. Such financial instruments are recorded in the financial statements when they are funded.
 
 Premises and Equipment - Premises, equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization. Depreciation is recorded using the straight-line method over the estimated useful life of the related assets as follows: building, 40 years; furniture and fixtures, 7 years; equipment and computer hardware and software, 3 to 7 years; and vehicles, 3 years. Amortization of leasehold improvements is recorded using the straight-line method over the lesser of the estimated useful life of the asset or the term of the respective lease. Additions to premises and equipment and major replacements or betterments are added at cost. Maintenance, repairs and minor replacements are charged to operating expense as incurred. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in income.
 
 38 Per Share Data - Earnings per share ("EPS") are computed in accordance with SFAS 128, " Earnings per Share. " SFAS 128 requires companies to report basic and diluted EPS. Basic EPS includes no dilution and is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Shares of restricted stock that are unvested are not included in weighted average shares outstanding. Diluted EPS reflects the potential dilution of securities that could occur if the Companys dilutive stock options were exercised and thus resulted in the issuance of common stock. Also included in diluted weighted average shares outstanding is unvested restricted stock. The Company has issued twelve consecutive 5% stock dividends between 1993 and 2003. The basic and diluted average number of shares outstanding and earnings per share information for all prior reporting periods have been restated to reflect the effect of all stock dividends.
 
 Intangible Assets - As of January 1, 2002, the Company adopted SFAS 142, "Goodwill and Other Intangible Assets" . SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS 142. The Companys intangible assets consist of goodwill resulting from the Finance Companys branch and loan acquisitions accounted for as purchases, and are included in "Other assets" on the accompanying consolidated balance sheets. Prior to the adoption of SFAS 142, the Company recorded amortization of goodwill of $157,000 for the year ended December 31, 2001 using the straight-line method over a seven-year period. The balance of goodwill at both December 31, 2003 and 2002 was $187,000. Information regarding the effect of amortization expense and net income of the Company for the years ended December 31 is as follows:
 
 (dollars in thousands, except per share data)

2003
2002
2001Net income as reported

$
3,807

$
3,442

$
2,716Goodwill amortization, net of taxes


-


-


107Adjusted net income

$
3,807

$
3,442

$
2,823Basic earnings per share, as reported

$
0.89

$
0.82

$
0.66Goodwill amortization, net of taxes


-


-


0.03Adjusted basic earnings per share

$
0.89

$
0.82

$
0.69Diluted earnings per share, as reported

$
0.79

$
0.73

$
0.60Goodwill amortization, net of taxes


-


-


0.02Adjusted diluted earnings per share

$
0.79

$
0.73

$
0.62
 
 Income Taxes - Income taxes are accounted for in accordance with SFAS 109, " Accounting for Income Taxes ". Under the asset and liability method of SFAS 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established to reduce deferred tax assets if it is determined to be "more likely than not" that all or some portion of the potential deferred tax asset will not be realized.
 
 Reporting Comprehensive Income - The Company reports comprehensive income in accordance with SFAS 130, " Reporting Comprehensive Income. " SFAS 130 requires that all items that are required to be recognized under accounting standards as comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The disclosure requirements of SFAS 130 have been included in the Companys consolidated statements of shareholders equity and comprehensive income.
 
 Fair Value of Financial Instruments - SFAS 107, " Disclosures about Fair Value of Financial Instruments ", requires disclosures about the fair value of all financial instruments, whether or not recognized in the balance sheet, when it is practicable to estimate fair value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized through immediate settlement of the instrument. SFAS 107 defines a financial instrument as cash, evidence of an ownership interest in an entity, or contractual obligations which require the exchange of cash or other financial instruments. Certain financial instruments and all non-financial instruments are specifically excluded from the disclosure requirements, including the Companys common stock, premises and equipment, and other assets and liabilities. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
 
 39
  Disclosures Regarding Segments - SFAS 131, " Disclosures about Segments of an Enterprise and Related Information " establishes standards for the way that public businesses report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company has two reportable operating segments, Summit National Bank and Freedom Finance, Inc.
 
 Stock-Based Compensation - The Company reports stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion 25, " Accounting for Stock Issued to Employees ", which measures compensation expense as the excess, if any, of the quoted market price of the Companys stock at the date of the grant over the amount an employee must pay to acquire the stock. SFAS 123, " Accounting for Stock-Based Compensation ", encourages but does not require companies to record compensation cost for stock-based compensation plans at fair value. The Company follows the disclosure-only provisions of SFAS 123. Accordingly, no compensation cost has been recognized for the stock-based option plans as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation is as follows:
 
 (dollars, except per share, in thousands)

2003
2002
2001Net income, as reported

$
3,807

$
3,442

$
2,716Less - total stock-based employeecompensation expense determined underfair value based method, net of taxes


170


216


345Proforma net income

$
3,637

$
3,226

$
2,371Basic earnings per share:As reported

$
0.89

$
0.82

$
0.66Proforma

$
0.85

$
0.77

$
0.57Diluted earnings per share:As reported

$
0.79

$
0.73

$
0.60Proforma

$
0.75

$
0.68

$
0.52
 
 Reclassifications - Certain amounts in the 2002 and 2001 consolidated financial statements have been reclassified to conform with the 2003 presentations. These reclassifications had no impact on shareholders equity or net income as previously reported.
 
 Note 2 - Restrictions on Cash and Due From Banks
 The Companys bank subsidiary is required to maintain average reserve balances, net of vault cash, with the Federal Reserve Bank of Richmond against outstanding domestic deposits and certain other liabilities. The required reserves, which are reported in "Cash and due from banks" on the accompanying consolidated balance sheets, were $1,957,000 and $1,877,000 at December 31, 2003 and 2002, respectively.
   Note 3 - Investment Securities
 All investment securities are classified as "Available for Sale" in each year presented. There are no securities classified as "Held to Maturity" or "Trading" in any year presented. The aggregate amortized cost, estimated fair value, and gross unrealized gains and losses of investment securities available for sale at December 31 are as follows:
 
 (dollars in thousands)

2003
2002**Amortized**
Gross
Unrealized
**Estimated**
Fair
**Amortized**
Gross
Unrealized
**Estimated**
FairCost
Gains
Losses
Value
Cost
Gains
Losses
ValueU.S. government agencies

$
23,520

$
49

$
(397
)
$
23,172

$
18,609

$
246

$
(33
)
$
18,822Mortgage-backed securities


44,054


132


(237
)

43,949


27,321


422


-


27,743State and municipal securities


23,268


666


(168
)

23,766


16,567


370


(38
)

16,899$
90,842

$
847

$
(802
)
$
90,887

$
62,497

$
1,038

$
(71
)
$
63,464
 
 40 Note 3 - Investment Securities - continued
 The estimated fair value and gross unrealized losses of investment securities available for sale at December 31, 2003 for securities with unrealized losses, and the period of time the securities have been in a loss position, are presented in the following table.
 
 (dollars in thousands)

Less than 12 months
12 months or longer
TotalFair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
LossesU.S. government agencies

$
19,372

$
(397
)
$
-

$
-

$
19,372

$
(397
)Mortgage-backed securities


30,082


(237
)

-


-


30,082


(237
)State and municipal securities


5,162


(168
)

-


-


5,162


(168
)$
54,616

$
(802
)
$
-

$
-

$
54,616

$
(802
)
 
 The above investment securities are considered to have a temporary impairment in value resulting primarily from the current year market shifts in the Treasury yield curve. There are 39 securities which have been in an unrealized loss position for less than 12 months and none in an unrealized loss position for more than 12 months. The Company has demonstrated an ability to hold securities until maturity, thus an actual loss may not be realized. There has been no credit quality deterioration of any of the above securities and the agency securities carry the implied guarantee of the U.S. Government.
 
 The amortized cost and estimated fair value of investment securities available for sale at December 31, by contractual maturity, are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without prepayment penalties. Estimated fair value of securities was determined using quoted market prices.
 
 (dollars in thousands)

2003
2002Amortized
Cost
Estimated
Fair
Value
Amortized
Cost
Estimated
Fair
ValueDue in one year or less

$
-

$
-

$
-

$
-Due after one year, through five years


1,153


1,181


9,780


9,951Due after five years, through ten years


31,684


31,297


16,233


16,400Due after ten years


58,005


58,409


36,484


37,113$
90,842

$
90,887

$
62,497

$
63,464
 
 The change in the net unrealized gain on securities available for sale, net of taxes, recorded in shareholders equity for the year ended December 31, 2003 was ($572,000). Investment securities with an approximate book value of $43,788,000 and $23,917,000 at December 31, 2003 and 2002, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. Estimated fair values of securities pledged were $43,870,000 and $24,481,000 at December 31, 2003 and 2002, respectively.
 
 Information related to the sale of securities classified as available for sale for each year is as follows:
 
 (dollars in thousands)

2003
2002
2001Proceeds from sales of securities

$
29,547

$
19,945

$
12,695Gross realized gains on securities sold


391


159


261Gross realized losses on securities sold


24


42


4
 
 Note 4 - Investments in Stock
 Summit National Bank, as a member of the Federal Reserve Bank ("FRB") and the Federal Home Loan Bank of Atlanta ("FHLB"), is required to own capital stock in these organizations. The amount of stock owned is based on the Banks capital levels in the case of the FRB and totaled $255,000 at December 31, 2003 and 2002. The amount of FHLB stock owned is determined based on the Banks balances of residential mortgages and advances from the FHLB and totaled $2,616,000 and $2,030,000 at December 31, 2003 and 2002, respectively. At December 31, 2003 and 2002, the Bank owns $133,000 of stock in The Bankers Bank located in Atlanta, Georgia. No ready market exists for these stocks and they have no quoted market value. However, redemption of these stocks has historically been at par value. Accordingly, the carrying amounts are deemed to be a reasonable estimate of fair value.
 41
 Note 5 - Loans and Allowance for Loan Losses
 A summary of loans by classification at December 31 is as follows:
 
 (dollars in thousands)

2003
2002Commercial and industrial

$
33,370

$
30,643Commercial secured by real estate


74,845


77,748Real estate - residential mortgages


64,921


67,963Real estate - construction


49,313


32,791Installment and other consumer loans


5,845


5,846Consumer finance, net of unearned income
of $1,033 and $1,088


3,267


3,544Other loans and overdrafts


241


265231,802


218,800Less - allowance for loan losses


(3,437
)

(3,369
)$
228,365

$
215,431
 
 The Companys loan portfolio is composed of loans to individuals and small and medium-sized businesses for various personal and commercial purposes primarily in the Upstate of South Carolina. The loan portfolio is diversified by borrower and geographic area. The Company regularly monitors its credit concentrations based on loan purpose, industry, and customer base. Industry concentrations parallel the mix of economic activity in the Companys markets, the most significant of which are the commercial real estate, textile, and automobile and trucking industries. Although the portfolio is affected by economic conditions, repayment of loans therein is not excessively dependent on any specific economic segment. As of December 31, 2003, there were no material concentrations of credit risk within the Companys loan portfolio as determined by management.
 
 Changes in the allowance for loan losses for the years ended December 31 are as follows:
 
 (dollars in thousands)

2003
2002
2001Balance, beginning of year

$
3,369

$
2,937

$
2,560Provision for losses


786


847


725Loans charged-off


(1,074
)

(647
)

(488
)Recoveries of loans previously charged-off


356


232


140Balance, end of year

$
3,437

$
3,369

$
2,937
 
 Nonperforming assets and impaired loans at December 31 are as follows:
 
 (dollars in thousands)

2003
2002
2001Accruing loans, past due in excess of 90 days

$
170

$
187

$
153Accruing loans, considered impaired under SFAS 114


-


-


-Non-accrual loans, not considered impaired


587


293


135Non-accrual loans, considered impaired under SFAS 114


-


-


1,045Other real estate owned


125


-


-
 
 There were no loans considered impaired during 2003 or 2002. The average balance of impaired loans was $1,099,000 for the year ended December 31, 2001. There was no allowance required on impaired loans at the 2001 year end. The amount of foregone interest income that would have been recorded had the non-accrual loans performed according to their contractual terms amounted to approximately $27,000, $10,000 and $62,000 during 2003, 2002 and 2001, respectively. Interest income recognized on non-accrual and impaired loans was approximately $33,000, $15,000 and $35,000 during 2003, 2002 and 2001, respectively.
 
 42 Note 6 - Premises and Equipment
 A summary of premises and equipment at December 31 is as follows:
 
 (dollars in thousands)

2003
2002Land

$
1,043

$
1,043Building and leasehold improvements


3,336


3,333Furniture, fixtures, equipment and software


3,084


2,950Vehicles


188


188Construction and assets in process


98


-7,749


7,514Less - accumulated depreciation


(3,679
)

(3,317
)$
4,070

$
4,197
 
 Depreciation expense charged to operations totaled $435,000, $488,000, and $467,000 in 2003, 2002, and 2001, respectively.
 
 Note 7 - Deposits
 The scheduled maturities of time deposits subsequent to December 31 each year end are as follows:
 
 (dollars in thousands)

2003
20022003

$
-

$
85,5092004


112,891


8,2712005


4,237


2,2172006


5,169


1,6902007


670


5792008


221


-Thereafter


-


31$
123,188

$
98,297
 
 At December 31, 2003, the remaining maturity of time deposits in denominations in excess of $100,000 is $22,606,000 in three months or less; $13,938,000 in over three through six months; $23,261,000 in over six through 12 months; and $5,395,000 in over 12 months.
 
 Note 8 - Short-Term Borrowings
 Federal funds purchased represent unsecured overnight borrowings from other financial institutions by the Bank. These borrowings bear interest at the prevailing market rate for federal funds purchased. Average interest rates on federal funds purchased were 1.55%, 1.95%, and 3.72% for the years ended December 31, 2003, 2002, and 2001, respectively. There were no outstanding balances of federal funds purchased at December 31, 2003 or 2002. Average balances were $1,030,000, $236,000, and $58,000 for 2003, 2002, and 2001, respectively. The maximum balance of federal funds purchased at any time during 2003, 2002, and 2001 was $11.5 million, $5.5 million, and $5.6 million, respectively. At December 31, 2003, the Bank had short-term lines of credit to purchase unsecured federal funds from unrelated banks with available balances totaling $19.8 million. These lines are generally available to be outstanding up to ten consecutive days for general corporate purposes of the Bank and have specified repayment deadlines after disbursement of funds. All of the lenders have reserved the right to withdraw these lines at their option.
 
 Other short-term borrowings outstanding during 2002 and 2001 consisted of a term loan agreement with an unrelated individual. This loan had an initial term of six months and matured during 2002. This term loan was unsecured and paid interest at a fixed rate. The weighted average interest rate on short-term borrowings outstanding for each of the years ended December 31, 2002 and 2001 was 3.88% and 6.22%, respectively.
 
 43 Note 9 - Federal Home Loan Bank Advances
 Federal Home Loan Bank ("FHLB") advances represent borrowings from the FHLB of Atlanta by the Bank pursuant to a line of credit collateralized by a blanket lien on qualifying loans secured by first mortgages on 1-4 family residences and commercial real estate. These advances have various maturity dates, terms and repayment schedules with fixed or variable rates of interest, payable monthly on maturities of one year or less and payable quarterly on maturities over one year.
 
 Total qualifying loans of the Bank pledged to the FHLB for advances at December 31, 2003 were approximately $97 million. In addition, investment securities with a book value and market value of $10 million are pledged to the FHLB for advances. The Bank has adopted the policy of pledging excess collateral to facilitate future advances. At December 31, 2003, the Bank had a total credit facility with the FHLB equal to 25% of the Banks total assets, limited to qualifying collateral. Available credit at December 31, 2003 was approximately $16 million.
 
 At December 31, 2003 fixed rate FHLB advances had initial maturities from one to ten years. At December 31, 2003, included in the three, five, and greater than five year maturities, detailed below, were advances totaling $14 million subject to call provisions at the option of the FHLB with call dates ranging from March 2004 to March 2008. Call provisions are more likely to be exercised by the FHLB when rates rise. Advances totaling $6,000,000 at December 31, 2003 were at variable rates based on three month LIBOR and were priced at approximately 1.23% as of year end.
 
 Advances from the FHLB, including scheduled maturities subsequent to year end, at December 31 consist of the following:
 
 (dollars in thousands)

2003
2002Maturing in year ended December 31,

Amount
Weighted
Rate
Amount
Weighted
Rate2003

$
-


-

$
13,500


4.38
%2004


11,000


2.86
%

9,000


3.34
%2005


2,000


1.24
%

1,000


6.60
%2006


8,700


3.42
%

5,300


4.69
%2007


5,400


3.66
%

6,800


3.67
%2008


15,250


3.04
%

1,000


5.51
%Thereafter


9,967


3.40
%

4,000


3.78
%$
52,317


3.13
%
$
40,600


4.10
%
 
 
 Note 10 - Income Taxes
 The provision for income taxes for the years ended December 31 is as follows:
 
 (dollars in thousands)

2003
2002
2001Current:Federal

$
1,558

$
1,584

$
1,356State


185


157


1291,743


1,741


1,485Deferred:Federal


7


(160
)

(200
)State


4


4


(5
)11


(156
)

(205
)Total tax provision

$
1,754

$
1,585

$
1,280
 
 
 44 Note 10 - Income Taxes - continued
 Income taxes are different than tax expense computed by applying the statutory federal tax rate of 34% to income before income taxes. The reasons for the differences for years ended December 31 are as follows:
 
 (dollars in thousands)

2003
2002
2001Tax expense at statutory rate

$
1,891

$
1,709

$
1,359State tax, net of federal benefit


125


106


82Effect of tax exempt interest


(260
)

(227
)

(168
)Other, net


(2
)

(3
)

7Total

$
1,754

$
1,585

$
1,280
 
 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:
 
 (dollars in thousands)

2003
2002Deferred tax assets:Allowance for loan losses deferred for tax purposes

$
1,139

$
1,117Book depreciation and amortization in excess of tax


19


86Other


128


100Gross deferred tax assets


1,286


1,303Deferred tax liabilities:Unrealized net gains on securities available for sale


(17
)

(367
)Compensation expense deferred for financial reporting


(12
)

(18
)Gross deferred tax liabilities


(29
)

(385
)Net deferred tax asset

$
1,257

$
918
 
 The net deferred tax asset is included in "Other assets" in the accompanying consolidated balance sheets. A portion of the change in the net deferred tax asset relates to unrealized gains and losses on securities available for sale for which a current period deferred tax benefit of $350,000 has been recorded directly to shareholders equity. The balance of the change in the net deferred tax asset results from the current period deferred tax expense of $11,000. In managements opinion, it is more likely than not that the results of future operations will generate sufficient income to realize the net deferred tax asset and no valuation allowance is considered necessary at December 31, 2003.
 
 Note 11 - Other Income and Other Expenses
 The components of other operating income and other operating expenses for the years ended December 31 are as follows:
 
 (dollars in thousands)

2003
2002
2001Other Income:Late charges and other loan fees

$
274

$
274

$
295Mortgage origination fees


325


267


181Nondeposit product sales commission


99


110


165Other


449


313


312$
1,147

$
964

$
953Other Expenses:Advertising and public relations

$
313

$
271

$
230Stationary, printing and office support


382


357


386Merchant and credit card service expense


354


386


391Legal and professional fees


466


395


335Amortization of intangibles


-


-


157Other


831


658


626$
2,346

$
2,067

$
2,125
 
 45 Note 12 - Common Stock and Per Share Information
 On December 5, 2003, the Company issued a 5% stock dividend. The dividend was issued to all shareholders of record on November 21, 2003 and resulted in the issuance of approximately 205,000 shares of common stock of the Company. All average share and per share data have been retroactively restated to reflect the stock dividend as of the earliest period presented.
 
 As of December 31, 2003, there were approximately 994,000 common shares reserved for issuance under stock compensation benefit plans, of which approximately 369,000 were available for issuance.
 
 The following is a reconciliation of the denominators of the basic and diluted per share computations for net income. There was no required adjustment to the numerator from the net income reported on the accompanying consolidated statements of income.
 
 2003
2002
2001Basic
Diluted
Basic
Diluted
Basic
DilutedNet income

$
3,807,000

$
3,807,000

$
3,442,000

$
3,442,000

$
2,716,000

$
2,716,000Average shares outstanding


4,256,000


4,256,000


4,176,000


4,176,000


4,133,000


4,133,000Effect of dilutive securities:Stock options


-


580,000


-


549,000


-


381,000Unvested restricted stock

-

6,000

-

19,000

-

36,0004,256,000


4,842,000


4,176,000


4,744,000


4,133,000


4,550,000Per share amount

$
0.89

$
0.79

$
0.82

$
0.73

$
0.66

$
0.60
 
 
 Note 13 - Stock Compensation Plans
 The Company has a Restricted Stock Plan for awards to certain key employees. Under the Restricted Stock Plan, the Company may grant common stock to its employees for up to 326,000 shares, with 244,000 shares available for grant at December 31, 2003. All shares granted under the Restricted Stock Plan are subject to restrictions as to continuous employment for a specified time period following the date of grant. During this period, the holder is entitled to full voting rights and dividends. The restrictions as to transferability of shares granted under this plan vest over a period of five years at a rate of 20% per year on each anniversary date of the grant. At December 31, 2003, there were 82,000 shares of common stock outstanding which were issued under the Restricted Stock Plan, of which 6,000 shares were unvested. Deferred compensation representing the difference between the fair market value of the stock at the date of grant and the cash paid for the stock is amortized over the five-year vesting period as the restrictions lapse. Included in the accompanying consolidated statements of income under the caption "Salaries, wages and benefits" is $26,000, $128,000, and $126,000 of amortized deferred compensation for the years ended December 31, 2003, 2002 and 2001, respectively.
 
 The Company has two Incentive Stock Option Plans, one approved in 1989 (which has expired and no additional grants may be made under it) and one in 2000, and a nonqualified Non-Employee Stock Option Plan (collectively referred to as stock-based option plans). Under the Incentive Stock Option Plans, options are periodically granted to employees at a price not less than the fair market value of the shares at the date of grant. Options granted are exercisable for a period of ten years from the date of grant and become exercisable at a rate of 20% each year on the first five anniversaries of the date of grant. At December 31, 2003, 261,000 shares of common stock are reserved under the Incentive Stock Option Plans, and 80,000 of these reserved shares are available to be granted under the 2000 Plan.
 
 Under the Non-Employee Stock Option Plan, options have been granted at a price not less than the fair market value of the shares at the date of grant to eligible non-employee directors as a retainer for their services as directors. Options granted are exercisable for a period of ten years from the date of grant. Options granted in 1995 became exercisable one year after the date of grant. Options granted in 1996 become exercisable over a period of nine years at a rate of 11.1% per year on each of the first nine anniversaries of the date of grant. The Non-Employee Stock Option Plan authorizes the granting of stock options up to a maximum of 407,000 shares of common stock. At December 31, 2003, 46,000 reserved shares of common stock are available to be issued under this plan.
 
 All outstanding options, option price, and option activity for all stock-based option plans have been retroactively restated to reflect the effects of all 5% stock dividends issued.
 
 
 46 Note 13 - Stock Compensation Plans - continued
 The Company follows APB 25 to account for its stock-based option plans. Accordingly, no compensation cost has been recognized for the stock-based option plans as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Refer to Note 1 for details of the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based compensation.
 
 The weighted average fair value per share of options, calculated using the Black-Scholes option-pricing model, granted in 2003 and 2002 amounted to $9.16 and $7.66, respectively. There were no stock options granted during 2001. For purposes of the proforma calculation, compensation expense is recognized on a straight line basis over six years. In calculating the proforma disclosures, the fair values of options granted were estimated as of the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants:
 
 2003
2002
2001Historical volatility
49.6%
49.5%
N/ARisk-free interest rate
3.35%
2.70%
N/AExpected life of options
5.8 years
5.7 years
N/ADividend yield
0.60%
N/A
N/A
 
 A summary of the activity under the stock-based option plans for the years ended December 31 and information about stock options outstanding under the stock-based option plans at December 31, 2003 is as follows:
 2003
2002
2001Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
Price
Shares
Weighted
Average
Exercise
PriceOutstanding, January 1


968,221

$
5.67


1,000,386

$
5.61


1,031,946

$
5.60Granted


4,641

$
17.48


4,190

$
13.91


-


-Canceled


(10,489
)
$
5.25


(3,739
)
$
9.55


(12,521
)
$
8.83Exercised


(99,096
)
$
4.50


(32,616
)
$
4.46


(19,039
)
$
2.86Outstanding, December 31


863,277

$
5.87


968,221

$
5.67


1,000,386

$
5.61Exercisable, December 31


735,002

$
5.64


759,367

$
5.33


708,116

$
5.10
 
 
 
 At December 31, 2003

Options Outstanding
Options ExercisableRange of Exercise Prices:

Number of
Options
Outstanding
Weighted
Average
Remaining
Contractual
Life
Weighted
Average
Exercise
Price
Number of
Options
Exercisable
Weighted
Average
Exercise
Price$3.61


123,587


0.8 years

$
3.61


123,587

$
3.61$4.83


274,295


2.0 years

$
4.83


222,174

$
4.83$5.25 - $5.33


246,496


3.0 years

$
5.33


246,496

$
5.33$7.20 - $7.82


135,340


6.3 years

$
7.78


80,278

$
7.77$8.64 - $10.49


36,648


6.2 years

$
9.19


23,775

$
9.29$11.94 - $12.14


38,301


4.3 years

$
11.95


37,854

$
11.95$13.91  $17.86


8,610


9.3 years

$
15.84


838

$
13.91$3.61 - $17.86


863,277


3.1 years

$
5.87


735,002

$
5.64
 
   47 Note 14 - Employee Benefit Plans
 The Company maintains an employee benefit plan for all eligible employees of the Company and its subsidiaries under the provisions of Internal Revenue Code Section 401K. The Summit Retirement Savings Plan ("the Plan") allows for employee contributions and, upon annual approval of the Board of Directors, the Company matches employee contributions from one percent to a maximum of six percent of deferred compensation. The matching contributions as a percent of deferred compensation were 6% for each year 2003, 2002 and 2001. A total of $164,000, $179,000, and $157,000, respectively, in 2003, 2002, and 2001 was charged to operations for the Companys matching contribution. Employees are immediately vested in their contributions to the Plan and become fully vested in the employer matching contribution after completion of six years of service, as defined in the Plan.
 
 During 1998, Summit National Bank entered into salary continuation agreements with several key management employees. Under the agreements, the Bank is obligated to provide for each such executive officer or his beneficiaries, during a period of 20 years after the employees death, disability, or retirement, annual benefits ranging from $43,000 to $130,000. The estimated present value of future benefits to be paid is being accrued over the period from the effective date of the agreements until the expected retirement dates of the participants. The expense incurred and amount accrued for this nonqualified salary continuation plan, which is an unfunded plan, for the years ended December 31, 2003, 2002 and 2001 amounted to $87,000, $69,000 and $62,000, respectively. To partially finance benefits to be paid under this plan, the Bank purchased, and is the beneficiary of, several life insurance policies. Proceeds from the insurance policies are payable to the Company upon the death of the participant. During 2003, additional insurance policies totaling $1.5 million were purchased to finance additional benefits added to existing agreements during the year. The cash surrender value of these policies included in the accompanying consolidated balance sheets in "Other assets" was $3,737,000 and $2,109,000 at December 31, 2003 and 2002, respectively.
 
 Note 15 - Regulatory Restrictions
 The ability of the Company to pay cash dividends is dependent upon its receiving cash in the form of dividends from the Bank. The dividends that may be paid by the Bank to the Company are subject to legal limitations and regulatory capital requirements. The approval of the Comptroller of the Currency is required if the total of all dividends declared by a national bank in any calendar year exceeds that 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. The Bank paid its first cash dividend of $0.51 per common share totaling $434,000 in December 2003. It is currently the Banks intention to pay all dividends only from the net income of the current year.
 
 Under current Federal Reserve regulations, the Bank is limited in the amount it may loan to the Company, the Finance Company, or other affiliates. Loans made by the Bank to a single affiliate may not exceed 10%, and loans to all affiliates may not exceed 20%, of the Banks capital, surplus, and undivided profits, after adding back the allowance for loan losses. Based on these limitations, approximately $6.1 million was available for loans to the Company and the Finance Company at December 31, 2003. Certain collateral restrictions also apply to loans from the Bank to its affiliates.
 
 Note 16 - Regulatory  Capital Requirements
 The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Companys and the Banks assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Companys and the Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
 
 The Company and the Bank are required to maintain minimum amounts and ratios of total risk-based capital, Tier I capital, and Tier I leverage capital as set forth in the table following. Management believes, as of December 31, 2003, that the Company and the Bank meet all capital adequacy requirements to which they are subject. At December 31, 2003 and 2002, the Bank is categorized as "well capitalized" under the regulatory framework for prompt corrective action. There are no current conditions or events that management believes would change the Companys or the Banks risk-based capital regulatory-defined category.
   48 Note 16 - Regulatory  Capital Requirements - continued
 The following table presents the Companys and the Banks actual capital amounts and ratios at December 31, 2003 and 2002 as well as the minimum calculated amounts for each regulatory defined category.
 
 (dollars in thousands)

Actual
To Be Categorized "Adequately Capitalized"
To Be Categorized "Well Capitalized"Amount
Ratio
Amount
Ratio
Amount
RatioAs of December 31, 2003*The Company*Total capital to risk-weighted assets

$
35,223


13.75
%
$
20,486


8.00
%
N.A.Tier 1 capital to risk-weighted assets

$
32,019


12.50
%
$
10,243


4.00
%
N.A.Tier 1 capital to average assets

$
32,019


9.92
%
$
12,911


4.00
%
N.A.*The Bank*Total capital to risk-weighted assets

$
30,522


12.05
%
$
20,269


8.00
%
$
25,336


10.00
%Tier 1 capital to risk-weighted assets

$
27,354


10.80
%
$
10,134


4.00
%
$
15,202


6.00
%Tier 1 capital to average assets

$
27,354


8.57
%
$
12,772


4.00
%
$
15,965


5.00
%As of December 31, 2002The CompanyTotal capital to risk-weighted assets

$
30,946


13.20
%
$
18,754


8.00
%
N.A.Tier 1 capital to risk-weighted assets

$
28,010


11.95
%
$
9,377


4.00
%
N.A.Tier 1 capital to average assets

$
28,010


9.70
%
$
11,555


4.00
%
N.A.The BankTotal capital to risk-weighted assets

$
27,099


11.69
%
$
18,543


8.00
%
$
23,179


10.00
%Tier 1 capital to risk-weighted assets

$
24,199


10.44
%
$
9,271


4.00
%
$
13,907


6.00
%Tier 1 capital to average assets

$
24,199


8.48
%
$
11,411


4.00
%
$
14,263


5.00
%
 
 
 Note 17 - Contingent Liabilities and Commitments
 In the normal course of business, the Company and its subsidiaries are periodically subject to various pending or threatened lawsuits in which claims for monetary damages may be asserted. In the opinion of the Companys management, after consultation with legal counsel, none of this litigation should have a material adverse effect on the Companys financial position or results of operations.
 
 The Company leases branch facilities for both the Bank and the Finance Company. These leases have initial terms of from two to ten years and various renewal options under substantially the same terms with certain rate escalations. Rent expense charged to operations totaled $294,000, $290,000, and $299,000, respectively, for the years ended December 31, 2003, 2002, and 2001. The annual minimum rental commitments under the terms of the Companys noncancellable leases subsequent to December 31, 2003 are: $278,000 in 2004; $87,000 in 2005; and $24,000 in 2006 totaling lease commitments of $389,000. There are no commitments after 2006.
 
 Note 18 - Related Party Transactions
 Directors, executive officers, and associates of such persons are customers of and have transactions with the Companys bank subsidiary in the ordinary course of business. Included in such transactions are outstanding loans and commitments, all of which are made under substantially the same credit terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. All loans to related parties were current and performing in accordance with contractual terms at December 31, 2003. The aggregate dollar amount of loans outstanding to related parties was approximately $4,925,000 and $5,333,000 at December 31, 2003 and 2002, respectively. During 2003, new loans and advances on lines of credit of approximately $3,691,000 were made, and payments on these loans and lines totaled approximately $4,099,000. At December 31, 2003, there were commitments to extend additional credit to related parties in the amount of approximately $2,689,000.
 
 49 
 Note 19 - Off-Balance Sheet Financial Instruments
 The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the liquidity, credit enhancement, and financing needs of its customers. These financial instruments include legally binding 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. Credit risk is the principal risk associated with these instruments. The contractual amounts of these instruments represent the amount of credit risk should the instruments be fully drawn upon and the customer defaults.
 
 To control the credit risk associated with entering into commitments and issuing letters of credit, the Company uses the same credit quality, collateral policies, and monitoring controls in making commitments and letters of credit as it does with its lending activities. 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.
 
 Legally binding 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. Standby letters of credit obligate the Company to meet certain financial obligations of its customers, if, under the contractual terms of the agreement, the customers are unable to do so. The financial standby letters of credit issued by the Company are irrevocable. Payment is only guaranteed under these letters of credit upon the borrowers failure to perform its obligations to the beneficiary. As such, there are no "stand-ready obligations" in any of the letters of credit issued by the Company and the contingent obligations are accounted for in accordance with SFAS 5, "Accounting for Contingencies" . At December 31, 2003 and 2002, the Company has recorded no liability for the current carrying amount of the obligation to perform as a guarantor, as such amounts are not considered material.
 
 At December 31, the Companys total contractual amounts of commitments and letters of credit are as follows:
 
 
 (dollars in thousands)

2003
2002Legally binding commitments to extend credit:Commercial and industrial

$
14,621

$
18,474Residential real estate, including prime equity lines


17,890


18,499Construction and development


12,968


12,971Consumer and overdraft protection


2,373


2,92747,852


52,871Standby letters of credit


3,925


3,607Total commitments

$
51,777

$
56,478
 
 
 Approximately $1,326,000 and $2,535,000 of total commitments at December 31, 2003 and 2002, respectively, represent commitments to extend credit at fixed rates of interest, which exposes the Company to some degree of interest rate risk.
 
 
 50 Note 20 - Segment Information
 The Company reports information about its operating segments in accordance with SFAS 131, " Disclosures about Segments of an Enterprise and Related Information ". Summit Financial Corporation is the parent holding company for Summit National Bank ("Bank"), a nationally chartered bank, and Freedom Finance, Inc. ("Finance"), a consumer finance company. The Company considers the Bank and the Finance Company separate business segments. Financial performance for each segment is detailed in the following tables. Included in the "Corporate" column are amounts for general corporate activities and eliminations of intersegment transactions.
 
 (dollars in thousands)

Bank
Finance
Corporate
TotalAt and for the year ended December 31, 2003Interest income

$
15,642

$
1,829

$
(26
)
$
17,445Interest expense


5,156


147


(147
)

5,156Net interest income


10,486


1,682


121


12,289Provision for loan losses


450


336


-


786Noninterest income


2,654


336


(60
)

2,930Noninterest expenses


7,476


1,367


29


8,872Income before income taxes


5,214


315


32


5,561Income taxes


1,626


116


12


1,754Net income

$
3,588

$
199

$
20

$
3,807Net loans

$
225,968

$
3,038

$
(641
)
$
228,365Total assets

$
341,033

$
3,596

$
(708
)
$
343,921
 
 (dollars in thousands)

Bank
Finance
Corporate
TotalAt and for the year ended December 31, 2002Interest income

$
15,931

$
1,924

$
(34
)
$
17,821Interest expense


6,166


184


(176
)

6,174Net interest income


9,765


1,740


142


11,647Provision for loan losses


530


317


-


847Noninterest income


2,394


337


(60
)

2,671Noninterest expenses


7,037


1,379


28


8,444Income before income taxes


4,592


381


54


5,027Income taxes


1,423


142


20


1,585Net income

$
3,169

$
239

$
34

$
3,442Net loans

$
213,318

$
3,298

$
(1,185
)
$
215,431Total assets

$
298,484

$
3,938

$
(216
)
$
302,206
 
 (dollars in thousands)

Bank
Finance
Corporate
TotalAt and for the year ended December 31, 2001Interest income

$
18,439

$
1,813

$
(47
)
$
20,205Interest expense


9,776


266


(235
)

9,807Net interest income


8,663


1,547


188


10,398Provision for loan losses


478


247


-


725Noninterest income


2,293


337


(48
)

2,582Noninterest expenses


6,763


1,482


14


8,259Income before income taxes


3,715


155


126


3,996Income taxes


1,174


60


46


1,280Net income

$
2,541

$
95

$
80

$
2,716Net loans

$
201,682

$
3,368

$
(946
)
$
204,104Total assets

$
269,570

$
3,964

$
(437
)
$
273,097
 
 
 51 
 Note 21 - Fair Value of Financial Instruments
 The Company estimates the fair value of financial instruments in accordance with SFAS 107, " Disclosures about Fair Value of Financial Instruments" .  Fair value is assumed to approximate book value for the following financial instruments due to the short-term nature of the instrument: cash and due from banks, interest-bearing bank balances, federal funds sold, and other short-term borrowings. Fair value of investment securities is estimated based on quoted market prices where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
 
 Fair value for variable rate loans that reprice frequently and for loans that mature in less that one year is based on the carrying value, reduced by an estimate of credit losses inherent in the portfolio. Fair value of fixed rate real estate, consumer, commercial and other loans maturing after one year is based on the discounted present value of the estimated future cash flows, reduced by an estimate of credit losses inherent in the portfolio. Discount rates used in these computations approximate the rates currently offered for similar loans of comparable terms and credit quality. The estimated fair market value of commitments to extend credit and standby letters of credit are equal to their carrying value as the majority of these off-balance sheet instruments have relatively short terms to maturity and are written with variable rates of interest.
 
 Fair value for demand deposit accounts and variable rate interest-bearing accounts is equal to the carrying value. Fair value of certificate of deposit accounts are estimated by discounting cash flows from expected maturities using current interest rates on similar instruments. Fair value for FHLB advances is based on discounted cash flows using the current market rate.
 
 The Company has used managements best estimate of fair values based on the above assumptions. Thus, the fair values presented may not be the amounts which could be realized in an immediate sale or settlement of the instrument. In addition, any income tax or other expenses which would be incurred in an actual sale or settlement are not taken into consideration in the fair values presented.
 
 The estimated fair values of the Companys financial instruments as of December 31 are as follows:
 
 
 (dollars in thousands)

2003
2002Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair ValueFinancial Assets:Cash and due from banks

$
9,854

$
9,854

$
6,929

$
6,929Interest-bearing bank balances


341


341


2,176


2,176Federal funds sold


201


201


2,491


2,491Investment securities available for sale


90,887


90,887


63,464


63,464Investment in FHLB and other stock


3,004


3,004


2,418


2,418Loans, net


228,365


235,651


215,431


224,011Financial Liabilities:Deposits


257,012


257,872


230,515


229,155Federal Home Loan Bank advances


52,317


52,148


40,600


39,398
 
 52 Note 22  Quarterly Operating Results (unaudited)
 Consolidated quarterly operating data for the years ended December 31 is summarized as follows (per share data has been restated to reflect all 5% stock dividends issued):
 
 (dollars in thousands, except per share data)
2003
2002**First**
**Quarter**
**Second**
**Quarter**
**Third**
**Quarter**
**Fourth**
**Quarter**
**First**
**Quarter**
**Second**
**Quarter**
**Third**
**Quarter**
**Fourth**
**Quarter**Interest income

$
4,329

$
4,424

$
4,280

$
4,412

$
4,465

$
4,453

$
4,515

$
4,388Interest expense


1,368


1,363


1,207


1,218


1,611


1,540


1,562


1,461Net interest income


2,961


3,061


3,073


3,194


2,854


2,913


2,953


2,927Provision for loan losses


173


229


100


284


125


225


196


301Net interest income after provision


2,788


2,832


2,973


2,910


2,729


2,688


2,757


2,626Noninterest income


761


855


758


556


682


662


682


645Noninterest expenses


2,223


2,148


2,316


2,185


2,273


2,178


2,106


1,887Income before taxes


1,326


1,539


1,415


1,281


1,138


1,172


1,333


1,384Income taxes


417


480


445


412


365


372


424


424Net income

$
909

$
1,059

$
970

$
869

$
773

$
800

$
909

$
960Net income per share:Basic

$
0.21

$
0.25

$
0.23

$
0.20

$
0.18

$
0.19

$
0.22

$
0.23Diluted

$
0.19

$
0.22

$
0.20

$
0.18

$
0.17

$
0.17

$
0.19

$
0.20Average common shares outstanding:Basic


4,213,000


4,253,000


4,262,000


4,296,000


4,162,000


4,170,000


4,175,000


4,194,000Diluted


4,781,000


4,842,000


4,843,000


4,899,000


4,630,000


4,766,000


4,784,000


4,793,000
 
 
 Note 23 - Parent Company Financial Information
 The following is condensed financial information of Summit Financial Corporation (parent company only) at December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002, and 2001.
 
 SUMMIT FINANCIAL CORPORATION
 Condensed Balance Sheets
 
 December 31,(dollars in thousands)

2003
2002AssetsCash

$
1,791

$
134Interest-bearing deposits


-


1,139Investment in bank subsidiary


27,382


24,800Investment in nonbank subsidiary


653


454Due from subsidiaries


2,428


2,268$
32,254

$
28,795Liabilities and Shareholders EquityAccruals and other liabilities

$
49

$
39Due to subsidiaries


-


14Shareholders equity


32,205


28,742$
32,254

$
28,795
 
 53 Note 23 - Parent Company Financial Information - continued
 
 
 SUMMIT FINANCIAL CORPORATION
 Condensed Statements of Income
 
 For the Years Ended December 31,(dollars in thousands)

2003
2002
2001Interest income

$
121

$
142

$
188Interest expense


-


-


-Net interest income


121


142


188Noninterest expenses


89


88


62Net operating income


32


54


126Equity in undistributed net incomeof subsidiaries


3,787


3,408


2,636Income before taxes


3,819


3,462


2,762Income taxes


12


20


46Net income

$
3,807

$
3,442

$
2,716
 
 
 SUMMIT FINANCIAL CORPORATION
 Condensed Statements of Cash Flows
 
 For the Years Ended December 31,(dollars in thousands)

2003
2002
2001Operating activities:Net income

$
3,807

$
3,442

$
2,716Adjustments to reconcile net income to net cash provided by operating activities:Equity in undistributed net income of subsidiaries


(3,787
)

(3,408
)

(2,636
)Decrease (increase) in other assets


-


2


(2
)Increase in other liabilities


10


4


8Amortization of deferred compensation


26


128


126Net cash provided by operating activities


56


168


212Investing activities:Net decrease (increase) in due from subsidiaries


33


8


(374
)Net (decrease) increase in due to subsidiaries


(14
)

12


2Net cash provided (used) by investing activities


19


20


(372
)Financing activities:Employee stock options exercised


446


145


54Cash dividends declared ($0.10 per common share)


(430
)

-


-Cash dividends received from subsidiary


434


-


-Cash paid in lieu of fractional shares


(7
)

(4
)

(3
)Net cash provided by financing activities


443


141


51Net increase (decrease) in cash and cash equivalents


518


329


(109
)Balance, beginning of year


1,273


944


1,053Balance, end of year

$
1,791

$
1,273

$
944
 
 
 
 54 
   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, 2003 and 2002, and the related consolidated statements of income, shareholders equity and comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
 We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Summit Financial Corporation and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
 
 As discussed in Note 1 to the consolidated financial statements, on January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, " Goodwill and Other Intangible Assets ".
   Greenville, South Carolina
/s/ KPMG LLPFebruary 12, 2004
 
  
 MANAGEMENTS REPORT
 
 Primary responsibility for the integrity and objectivity of the Companys consolidated financial statements rests with management. The accompanying consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America and accordingly include amounts that are based on managements best estimates and judgments. Non-financial information included in the Summary Annual Report to Shareholders has also been prepared by management and is consistent with the consolidated financial statements.
 To assure that financial information is reliable and data is presented fairly in the financial statements, management has established and maintains an internal control structure which is supplemented by a program of internal audits. The internal control structure is designed to provide reasonable assurance that assets are safeguarded and transactions are executed, recorded and reported in accordance with management intentions and authorizations. The internal control structure includes disclosure controls and procedures and internal controls over financial reporting.
To assure the effective administration of the system of internal controls, the Company develops and widely disseminates written policies and procedures, provides adequate communication channels and fosters an environment conducive to the effective functioning of internal controls. All employees of the Company are informed of the need to conduct our business affairs in accordance with the highest ethical standards. The Company has set forth a written code of business conduct and ethics and communicated it to all employees. The Audit Committee, composed entirely of outside directors, meets periodically (separately and jointly) with Company management, the internal auditor, and the independent auditors, KPMG LLP, to review matters relative to the quality of financial reporting, internal control, and the nature, timing, extent and results of the audit efforts. KPMG LLP, have audited the Companys consolidated financial statements in accordance with auditing standards generally accepted in the United States of America, as described in their report.
 
 /s/ J. Randolph Potter
/s/ Blaise B. BettendorfJ. Randolph Potter
Blaise B. BettendorfPresident and Chief Executive Officer
Senior Vice President and Chief Financial Officer
   55
   Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
 There have been no changes in or disagreements with accountants on accounting and financial disclosure as defined by Item 304 of Regulation S-K.
 
 
 Item 9a. CONTROLS AND PROCEDURES
 
 (a) Evaluation of Disclosure Controls and Procedures
 
 The Companys principal executive officer and principal financial officer have evaluated the effectiveness of the Companys "disclosure controls and procedures," as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended, ("the Exchange Act") as of the end of the period covered by this report. Based upon this evaluation, the principal executive officer and principal financial officer have concluded that the Companys disclosure controls and procedures are designed and effective to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Companys management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
 (b) Changes in Internal Controls
 
 There was no significant change in the Companys "internal control over financial reporting" (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
 
 
 
 56 
 PART III
 
 Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
 The information required by this item is set forth under the headings "Proposal 1 - Election of Directors", "Executive Officers and Compensation", "Section 16(a) Beneficial Ownership Reporting Compliance", and "Audit Committee Matters" in the definitive Proxy Statement of the Company filed in connection with its 2004 Annual Meeting of Shareholders, which information is incorporated herein by reference.
 
 The Company has adopted a Code of Ethics for its directors, chief executive officer, chief financial officer, controller and all employees. A copy of the Companys Code of Ethics will be furnished to any interested party, without charge, upon written request to: Ms. Blaise B. Bettendorf, CFO, Summit Financial Corporation, Post Office Box 1087, Greenville, South Carolina, 29602.
 
 Item 11. EXECUTIVE COMPENSATION
 
 The information required by this item is set forth under the headings "Directors Compensation", "Executive Officers and Compensation", "Compensation Committee Report", and "Stock Performance Graph" in the definitive Proxy Statement of the Company filed in connection with its 2004 Annual Meeting of Shareholders, which information is incorporated herein by reference.
 
 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 
 The information required by this item is set forth under the headings "Stock Ownership"  and "Proposal 1 - Election of Directors" in the definitive Proxy Statement of the Company filed in connection with its 2004 Annual Meeting of Shareholders, which information is incorporated herein by reference.
 
 Information related to securities authorized for issuance under equity compensation plans as of December 31, 2003 is as follows:
  EQUITY COMPENSATION PLAN INFORMATION
 
 (a)





Plan Category
(b)


Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants, and Rights
(c)



Weighted-Average Price of
Outstanding Options,
Warrants, and Rights
(d)
Number of Securities
Remaining Available for
Future Issuance under Equity
Compensation Plans
(excluding securities in
column (a))Equity compensation plansapproved by shareholders
863,277
$5.87
369,321Equity compensation plansnot approved by shareholders
N/A
N/A
N/ATotal
863,277
$5.87
369,321 
 
 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
 The information required by this item is set forth under the heading "Compensation Committee Interlocks and Insider Participation" and "Transactions with Management" in the definitive Proxy Statement of the Company filed in connection with its 2004 Annual Meeting of Shareholders, which information is incorporated herein by reference.
 
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 The information required by this item is set forth under the heading "Audit Committee Matters" in the definitive Proxy Statement of the Company filed in connection with its 2004 Annual Meeting of Shareholders, which information is incorporated herein by reference.
 
 57 
 PART IV
 
 Item 15. 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 II, Item 8 hereof:
 
 Consolidated Balance Sheets as of December 31, 2003 and 2002
 Consolidated Statements of Income For The Years Ended December 31, 2003, 2002 and 2001
 Consolidated Statements of Shareholders Equity And Comprehensive Income For The Years Ended December 31, 2003, 2002, and 2001
 Consolidated Statements of Cash Flows For The Years Ended December 31, 2003, 2002, and 2001
 Notes to Consolidated Financial Statements
 Independent Auditors Report
 
 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 15(a)1 above, or is not applicable or required.
 
 3. Exhibits (numbered in accordance with Item 601 of Regulation S-K):
  3.1
Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 filed with the Registrant's Registration Statement on Form S-1 Under The Securities Act of 1933, File No. 33-31466).3.2
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 filed with the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003, File No. 000-19235).4.
Form of Certificate for Common Stock (incorporated by reference to Exhibit 4 filed with the Registrant's Registration Statement on Amendment No. 1 To Form S-1 Under The Securities Act of 1933, File No. 33-31466).10.1 ***
Summit Financial Corporation Incentive Stock Plan (incorporated by reference to Exhibit 10.1 filed with the Registrant's Registration Statement on Form S-1 Under The Securities Act of 1933, File No. 33-31466).10.2
Lease Agreement for North Pleasantburg Drive Bank Site (incorporated by reference to Exhibit 10.2 filed with the Registrant's Registration Statement on Form S-1 Under The Securities Act of 1933, File No. 33-31466).10.3 ***
Employment Agreement of J. Randolph Potter dated December 21, 1998 (incorporated by reference to Exhibit 10.3 filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 1998, File No. 000-19235).10.4 ***
Employment Agreement of Blaise B. Bettendorf dated December 21, 1998 (incorporated by reference to Exhibit 10.4 filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 1998, File No. 000-19235).10.5 ***
Summit Financial Corporation Restricted Stock Plan (incorporated by reference to Exhibit 10.5 filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 1993, File No. 000-19235).10.6 ***
Summit Financial Corporation Non-Employee Stock Option Plan (incorporated by reference to Exhibit 10.6 filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 1994, File No. 000-19235).
 
 58
  10.7 ***
Employment Agreement of James B. Schwiers dated September 2, 1999 (incorporated by reference to Exhibit 10.7 filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 1999, File No. 000-19235).10.8 ***
Summit Financial Corporation 1999 Incentive Stock Plan (incorporated by reference to Exhibit 10.8 filed the Registrants Annual Report on Form 10-K for the year ended December 31, 1999, File No. 000-19235).10.9 ***
Employment Agreement of James G. Bagnal dated April 20, 2001 (incorporated by reference to Exhibit 10.9 filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 2001, File No. 000-19235).10.10
Lease Agreement for East North Street Bank Site (incorporated by reference to Exhibit 10.10 filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 2001, File No. 000-19235)10.11 ***
Salary Continuation Agreement of J. Randolph Potter dated September 9, 1998 (incorporated by reference to Exhibit 10.11 filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 2001, File No. 000-19235) .10.12 ***
Salary Continuation Agreement of Blaise B. Bettendorf dated September 9, 1998 (incorporated by reference to Exhibit 10.12 filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 2001, File No. 000-19235).10.13 ***
Salary Continuation Agreement of James B. Schwiers dated September 9, 1998 (incorporated by reference to Exhibit 10.13 filed with the Registrants Annual Report on Form 10-K for the year ended December 31, 2001, File No. 000-19235).21.
Subsidiaries of Summit Financial Corporation:Summit National Bank, a nationally chartered bank, incorporated in South CarolinaSummit Investment Services, Inc., a subsidiary of Summit National Bank, incorporated in South CarolinaFreedom Finance, Inc., a consumer finance company, incorporated in South Carolina23.
Consent of KPMG LLP with regard to S-8 Registration Statements for Summit Financial Corporation Restricted Stock Plan (as filed with the Securities and Exchange Commission, "SEC", August 23, 1994, File No. 33-83538); Summit Financial Corporation Incentive Stock Option Plan (as filed with the SEC July 19, 1995, File No. 33-94962); Summit Financial Corporation 1995 Non-Employee Stock Option Plan (as filed with the SEC July 19, 1995, File No. 33-94964) and Summit Financial Corporation 1999 Incentive Stock Option Plan (as filed with the SEC November 21,2003, File No. 333-101367)31.1
Rule 13a  14(a) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.31.2
Rule 13a  14(a) Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002.32.1
Section 1350 Certificate of Chief Executive Officer furnished pursuant to Section 906 of the Sarbanes Oxley Act of 2002.32.2
Section 1350 Certificate of Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
 
 
 *** - Management contracts or compensatory plan or arrangement.
 59  NOTE: The exhibits listed above will be furnished to any security holder upon written request to Ms. Blaise B. Bettendorf, Chief Financial Officer, Summit Financial Corporation, Post Office Box 1087, Greenville, South Carolina 29602. The Registrant will charge a fee of $.50 per page for photocopying such exhibit.
 
 
 
 (b)  Reports on Form 8-K :
 
 On October 21, 2003, the Company filed a Form 8-K related to the earnings press release dated October 21, 2003, which included selected financial data for the quarter ended September 30, 2003 and for other selected periods.
 
 (c)  Exhibits required to be filed with this report, which have not been previously filed as indicated in Item 15(a) above, are submitted as a separate section of this report.
 
 (d) Not applicable.
 
 60 
 SIGNATURES
  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 SUMMIT FINANCIAL CORPORATION/s/ J. Randolph PotterDated: March 17, 2004
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 and Director
March 17, 2004J. Randolph Potter/s/ Blaise B. Bettendorf
Senior Vice President (Principal Financial and Accounting Officer)
March 17, 2004Blaise B. Bettendorf/s/ C. Vincent Brown
Chairman, Director
March 17, 2004C. Vincent Brown/s/ David C. Poole
Secretary, Director
March 17, 2004David C. Poole/s/ James G. Bagnal, III
Director
March 17, 2004James G. Bagnal, III/s/ Ivan E. Block
Director
March 17, 2004Ivan E. Block/s/ J. Earle Furman, Jr.
Director
March 17, 2004J. Earle Furman, Jr.___________________
Director
March 17, 2004John W. Houser/s/ T. Wayne McDonald
Director
March 17, 2004T. Wayne McDonald/s/ Allen H. McIntyre
Director
March 17, 2004Allen H. McIntyre_________________
Director
March 17, 2004Larry A. McKinney/s/ James B. Schwiers
Director
March 17, 2004James B. Schwiers
 61