SUMMIT FINANCIAL CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, 2004

Commission File Number 000-19235

SUMMIT FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

SOUTH CAROLINA

(State or other jurisdiction

of incorporation or organization)

57-0892056

(I.R.S. Employer

Identification No.)

Post Office Box 1087

937 North Pleasantburg Drive

Greenville, South Carolina 29602

(Address, including zip code, of principal executive offices)

(864) 242-2265

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of October 29, 2004, 4,478,334 shares of $1.00 par value common stock were outstanding.

SUMMIT FINANCIAL CORPORATION

FORM 10-Q FOR THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2004

TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT

PART I. FINANCIAL INFORMATION

Item 1.
Consolidated Balance Sheets September 30, 2004 and December 31, 2003	3
Consolidated Statements of Income Three Months and Nine Months Ended September 30, 2004 and 2003	4
Consolidated Statements of Shareholders' Equity and Comprehensive Income Three Months and Nine Months Ended September 30, 2004 and 2003	5
Consolidated Statements of Cash Flows Three Months and Nine Months Ended September 30, 2004 and 2003	6
Condensed Notes to Consolidated Financial Statements September 30, 2004	7

Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.
Quantitative and Qualitative Disclosures About Market Risk	27

Item 4.
Controls and Procedures	27

PART II. OTHER INFORMATION	28

SIGNATURES	29

EXHIBITS:
Exhibit 31.1 - Rule 13a-14(a) Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
Exhibit 31.2 - Rule 13a-14(a) Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
Exhibit 32.1 - Section 1350 Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 - Section 1350 Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


	2

SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)


	September 30,				December 31,
		2004			2003
ASSETS
Cash and due from banks	$	8,620		$	9,854
Interest-bearing bank balances		3,605			341
Federal funds sold		6,171			201
Investments available for sale		64,844			90,887
Investment in Federal Home Loan Bank and other stock		2,792			3,004
Loans, net of unearned income and net of allowance for loan losses of $3,511 and $3,437		225,240			228,365
Premises and equipment, net		4,606			4,070
Accrued interest receivable		1,336			1,505
Other assets		5,799			5,694
	$	323,013		$	343,921
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand	$	40,571		$	37,037
Interest-bearing demand		31,145			23,542
Savings and money market		85,561			73,245
Time deposits, $100,000 and over		39,006			65,200
Other time deposits		41,164			57,988
		237,447			257,012
Federal Home Loan Bank advances		47,518			52,317
Accrued interest payable		441			841
Other liabilities		1,439			1,546
		286,845			311,716
Shareholders' equity:
Common stock, $1.00 par value; 20,000,000 shares authorized; issued and
outstanding 4,478,334 and 4,312,925 shares		4,478			4,313
Additional paid-in capital		26,586			25,791
Retained earnings		5,046			2,102
Accumulated other comprehensive income, net of tax		287			28
Nonvested resticted stock		(229	)		(29	)
Total shareholders' equity		36,168			32,205
	$	323,013		$	343,921

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	3

SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars, except per share data, in Thousands)
(Unaudited)

		For the Three Months Ended				For the Nine Months Ended
		September 30,				September 30,
		2004		2003		2004		2003
Interest Income:
Loans	$	3,517	$	3,447	$	10,484	$	10,573
Taxable investment securities		480		583		1,598		1,764
Nontaxable investment securities		230		214		700		562
Federal funds sold		20		4		40		27
Other		35		32		101		107
		4,282		4,280		12,923		13,033
Interest Expense:
Deposits		725		822		2,212		2,713
Other		375		385		1,205		1,225
		1,100		1,207		3,417		3,938
Net interest income		3,182		3,073		9,506		9,095
Provision for loan losses		33		100		193		502

Net interest income after provision for loan losses		3,149		2,973		9,313		8,593
Noninterest income:
Service charges and fees on deposit accounts		117		143		377		417
Insurance commission fee income		130		119		381		333
Gain on sale of securities		44		12		66		367
Other income		257		484		943		1,257
		548		758		1,767		2,374
Noninterest expenses:
Salaries, wages and benefits		1,340		1,284		4,044		3,877
Occupancy		174		168		500		501
Furniture, fixtures and equipment		160		163		473		483
Other expenses		370		701		1,375		1,826
		2,044		2,316		6,392		6,687
Income before income taxes		1,653		1,415		4,688		4,280
Provision for income taxes		505		445		1,433		1,342
Net income	$	1,148	$	970	$	3,255	$	2,938

Net income per share:
Basic	$	.26	$	.23	$	.74	$	.69
Diluted	$	.23	$	.20	$	.66	$	.61
Average shares outstanding:
Basic		4,447,799		4,261,705		4,400,168		4,242,767
Diluted		4,941,316		4,843,354		4,914,210		4,822,627

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	4

SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(Dollars in Thousands)
(Unaudited)

								Accumulated
								other
			Additional					comprehensive			Nonvested			Total
	Common		paid-in		Retained			(loss)			restricted			shareholders'
	stock		capital		earnings			income, net			stock			equity

Balance at December 31, 2002	$	4,013	$	21,322	$	2,862		$	600			($55	)	$	28,742
Net income for the nine months ended September 30, 2003		-		-		2,938			-			-			2,938
Other comprehensive loss:
Unrealized loss on securities:
Unrealized holding losses arising during the period, net of tax of ($418)		-		-		-			(685	)		-			-
Less: reclassification adjustment for gains included in net income, net of tax of ($140)		-		-		-			(227	)		-			-
Other comprehensive loss		-		-		-			(912	)		-			(912	)
Comprehensive income		-		-		-			-			-			2,026
Stock options exercised		76		284		-			-			-			360
Amortization of deferred compensation on restricted stock		-		-		-			-			19			19
Balance at September 30, 2003	$	4,089	$	21,606	$	5,800			($312	)		($36	)	$	31,147

Balance at December 31, 2003	$	4,313	$	25,791	$	2,102		$	28			($29	)	$	32,205
Net income for the nine months ended September 30, 2004		-		-		3,255			-			-			3,255
Other comprehensive income:
Unrealized gain on securities:
Unrealized holding gains arising during the period, net of tax of $184		-		-		-			300			-			-
Less: reclassification adjustment for gains included in net income, net of tax of ($25)		-		-		-			(41	)		-			-
Other comprehensive income		-		-		-			259			-			259
Comprehensive income		-		-		-			-			-			3,514
Stock options exercised		151		557		-			-			-			708
Stock issued pursuant to restricted stock plan		14		238		-			-			(252	)		-
Amortization of deferred compensation on restricted stock		-		-		-			-			52			52
Cash dividends declared ($0.07 per share)		-		-		(311	)		-			-			(311	)
Balance at September 30, 2004	$	4,478	$	26,586	$	5,046		$	287			($229	)	$	36,168

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	5

SUMMIT FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

		For the Nine Months Ended
		September 30,
		2004			2003
Cash flows from operating activities:
Net income	$	3,255		$	2,938
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		193			502
Depreciation and amortization		310			333
Net gain on sale of and disposal of equipment and vehicles		(22	)		(30	)
Net gain on sale of investments available for sale		(66	)		(367	)
Net amortization of net premium on investments		93			257
Amortization of deferred compensation on restricted stock		52			19
Increase in other assets		(36	)		(233	)
Decrease in other liabilities		(507	)		(189	)
Deferred income taxes		(59	)		(135	)
Net cash provided by operating activities		3,213			3,095

Cash flows from investing activities:
Purchases of securities available for sale		(8,451	)		(76,773	)
Proceeds from maturities of securities available for sale		10,487			29,878
Proceeds from sales of securities available for sale		24,398			29,510
Purchases of investments in FHLB and other stock		(68	)		(400	)
Redeemption of FHLB stock		280			275
Purchases of investments in bank-owned life insurance		-			(1,500	)
Net reduction (increase) in loans		2,932			(4,991	)
Purchases of premises and equipment		(846	)		(221	)
Proceeds from sale of equipment and vehicles		22			49
Net cash provided by (used in) investing activities		28,754			(24,173	)

Cash flows from financing activities:
Net (decrease) increase in deposit accounts		(19,565	)		18,195
Proceeds from Federal Home Loan Bank advances		4,000			18,500
Repayments of Federal Home Loan Bank advances		(8,799	)		(16,000	)
Cash dividends declared		(311	)		-
Proceeds from employee stock options exercised		708			360
Net cash (used in) provided by financing activities		(23,967	)		21,055
Net increase (decrease) in cash and cash equivalents		8,000			(23	)
Cash and cash equivalents, beginning of period		10,396			11,596
Cash and cash equivalents, end of period	$	18,396		$	11,573

SUPPLEMENTAL INFORMATION:
Cash paid during the period for interest	$	3,817		$	4,322
Cash paid during the period for income taxes	$	1,495		$	1,590
Change in market value of investment securities available for sale, net of income taxes	$	259			($912	)

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


	6

SUMMIT FINANCIAL CORPORATION

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2004

(Unaudited)

NOTE 1 - BASIS OF PRESENTATION:

The unaudited consolidated financial statements include the accounts of Summit Financial Corporation (the “Company”), a South Carolina corporation, and its wholly-owned subsidiaries, Summit National Bank (the “Bank”), a nationally chartered bank, and Freedom Finance, Inc. (the “Finance Company”), a consumer finance company. Also included are the accounts of Summit Investment Services, Inc. (the “Investment Company”) which is a wholly-owned subsidiary of the Bank. All significant intercompany items related to the consolidated subsidiaries have been eliminated.

Through its bank subsidiary, which commenced operations in July 1990, the Company provides a full range of banking services, including the taking of demand and time deposits and the making of commercial and consumer loans. The Bank currently has four full service branch locations in Greenville and Spartanburg, South Carolina. In 1997, the Bank incorporated the Investment Company as a wholly-owned subsidiary to offer nondeposit products and financial management services. The Finance Company commenced operations in November 1994 and makes and services small installment loans to individuals from its eleven offices throughout South Carolina.

The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) which requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, the estimates affect the reported income and expense during the reporting period. Actual results could differ from these estimates and assumptions.

The significant accounting policies followed by the Company for interim reporting are consistent with the accounting policies followed for annual financial reporting. The unaudited consolidated financial statements of the Company at September 30, 2004 and for the three month and nine month periods ended September 30, 2004 and 2003 were prepared in accordance with the instructions for Form 10-Q. In the opinion of management, all adjustments (consisting only of items of a normal recurring nature) necessary for a fair presentation of the financial position at September 30, 2004, and the results of operations and cash flows for the periods ended September 30, 2004 and 2003 have been included. The information contained in the footnotes included in the Company's latest annual report on Form 10-K for the year ended December 31, 2003 should be referred to in connection with the reading of these unaudited interim consolidated financial statements. Certain interim 2003 amounts have been reclassified to conform with the statement presentations for the interim 2004 period and to reflect the effect of the 5% stock dividend paid in December 2003.

The results for the three month and nine month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the full year or any other interim period.

NOTE 2 - CASH FLOW INFORMATION:

For the purposes of reporting cash flows, cash includes currency and coin, cash items in process of collection and due from banks. Included in cash and cash equivalents are federal funds sold and overnight investments. The Company considers the amounts included in the balance sheet line items, “Cash and due from banks”, “Interest-bearing bank balances” and “Federal funds sold” to be cash and cash equivalents. These accounts totaled $18,396,000 and $11,573,000 at September 30, 2004 and 2003, respectively.


	7

NOTE 3 - STOCK COMPENSATION PLANS:

At September 30, 2004, the Company had three stock-based employee and director option plans, which are described more fully in Note 13 of the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for December 31, 2003. 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 ov er 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. 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 following table illustrates 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 employee and non-employee compensation.

	For the Three Months Ended September 30,				For the Nine months Ended September 30,
(dollars, except per share, in thousands)		2004		2003		2004		2003

Net income, as reported	$	1,148	$	970	$	3,255	$	2,938
Less - total stock-based employee compensation expense determined under fair value based method, net of taxes		31		42		93		126
Proforma net income	$	1,117	$	928	$	3,162	$	2,812
Earnings per share:
Basic - as reported	$	0.26	$	0.23	$	0.74	$	0.69
Basic - proforma	$	0.25	$	0.22	$	0.72	$	0.66
Diluted - as reported	$	0.23	$	0.20	$	0.66	$	0.61
Diluted - proforma	$	0.23	$	0.19	$	0.64	$	0.58

NOTE 4 - INTANGIBLE ASSETS:

As of January 1, 2002, the Company adopted SFAS 142, “Goodwill and Other Intangible Assets”. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of SFAS 142. The Company’s intangible assets consist of goodwill resulting from the Finance Company’s branch acquisitions and are included in “Other assets” on the accompanying consolidated balance sheets. The balance of goodwill at September 30, 2004 and December 31, 2003 was $187,000. There was no impairment expense charged in any period presented.


	8

NOTE 5 - PER SHARE INFORMATION:

The following is a reconciliation of the denominators of the basic and diluted per share computations for net income for the three months and nine months ended September 30, 2004 and 2003. There is no required reconciliation of the numerator from the net income reported on the accompanying statements of income. All average share and per share data have been restated to reflect all stock dividends as of the earliest period presented.

	For the Three months ended September 30,
		2004		2004		2003		2003
		BASIC		DILUTED		BASIC		DILUTED
Net Income	$	1,148,183	$	1,148,183	$	969,587	$	969,587
Average shares outstanding		4,447,799		4,447,799		4,261,705		4,261,705
Effect of Dilutive Securities:
Stock options		-		476,600		-		575,814
Unvested restricted stock		-		16,917		-		5,835
		4,447,799		4,941,316		4,261,705		4,843,354
Per-share amount	$	0.26	$	0.23	$	0.23	$	0.20

	For the Nine months Ended September 30,
		2004		2004		2003		2003
		BASIC		DILUTED		BASIC		DILUTED
Net Income	$	3,255,495	$	3,255,495	$	2,938,046	$	2,938,049
Average shares outstanding		4,400,168		4,400,168		4,242,767		4,242,767
Effect of Dilutive Securities:
Stock options		-		497,125		-		574,025
Unvested restricted stock		-		16,917		-		5,835
		4,400,168		4,914,210		4,242,767		4,822,627
Per-share amount	$	0.74	$	0.66	$	0.69	$	0.61


	9

NOTE 6 - SEGMENT INFORMATION:

The Company reports information about its operating segments in accordance with SFAS 131, “Disclosures about Segments of an Enterprise and Related Information”. Summit Financial Corporation is the parent holding company for Summit National Bank (“Bank”), a nationally chartered bank, and Freedom Finance, Inc. (“Finance”), a consumer finance company. The Company considers the Bank and the Finance Company separate business segments.

Financial performance for each segment is detailed in the following tables. Included in the “Corporate” column are amounts for general corporate activities and eliminations of intersegment transactions.

	For the three months ended September 30, 2004										At and for the nine months ended September 30, 2004
		Bank			Finance		Corporate			Total		Bank		Finance		Corporate			Total
Interest income	$	3,862		$	421		($1	)	$	4,282	$	11,653	$	1,275		($5	)	$	12,923
Interest expense		1,100			32		(32	)		1,100		3,417		92		(92	)		3,417
Net interest income		2,762			389		31			3,182		8,236		1,183		87			9,506
Provision for loan losses		(26	)		59		-			33		0		193		-			193
Other income		470			93		(15	)		548		1,540		272		(45	)		1,767
Other expenses		1,680			356		8			2,044		5,332		1,037		23			6,392
Income before taxes		1,578			67		8			1,653		4,444		225		19			4,688
Income taxes		478			24		3			505		1,343		83		7			1,433
Net income	$	1,100		$	43	$	5		$	1,148	$	3,101	$	142	$	12		$	3,255
Net loans											$	222,595	$	2,743		($98	)	$	225,240
Total assets											$	319,941	$	3,214		($142	)	$	323,013



	For the three months ended September 30, 2003										At and for the nine months ended September 30, 2003
		Bank			Finance		Corporate			Total		Bank		Finance		Corporate			Total
Interest income	$	3,820		$	467		($7	)	$	4,280	$	11,655	$	1,397		($19	)	$	13,033
Interest expense		1,207			36		(36	)		1,207		3,938		112		(112	)		3,938
Net interest income		2,613			431		29			3,073		7,717		1,285		93			9,095
Provision for loan losses		30			70		-			100		300		202		-			502
Other income		689			84		(15	)		758		2,165		254		(45	)		2,374
Other expenses		1,975			336		5			2,316		5,638		1,028		21			6,687
Income before taxes		1,297			109		9			1,415		3,944		309		27			4,280
Income taxes		401			41		3			445		1,216		116		10			1,342
Net income	$	896		$	68	$	6		$	970	$	2,728	$	193	$	17		$	2,938
Net loans											$	217,461	$	3,124		($665	)	$	219,920
Total assets											$	322,210	$	3,631		($724	)	$	325,117


	10

SUMMIT FINANCIAL CORPORATION

PART I. FINANCIAL INFORMATION

ITEM 2. 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 related notes and with the statistical information and financial data appearing in this report as well as the Annual Report of Summit Financial Corporation (the “Company”) on Form 10K for the year ended December 31, 2003. 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. Results of operations for the three month and nine month periods ended September 30, 2004 are not necessarily indicative of results to be attained for any other period.

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, ar e 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.


	11

NON-GAAP FINANCIAL INFORMATION

This report contains certain financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s management uses these non-GAAP measures to analyze the Company’s performance. In particular, net interest income and net interest margin ratios are presented on a fully tax-equivalent basis. Management believes that the presentation of net interest margin on a fully tax-equivalent basis aids in the comparability of net interest margin arising from both taxable and tax-exempt sources. These disclosures should not be viewed as a substitute for GAAP measures, and furthermore, the Company’s non-GAAP measures may not necessarily be comparable to non-GAAP pe rformance measures of other companies.

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 So uth Carolina.

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 Note 1 under Notes to Consolidated Financial Statements included in the Company’s Form 10-K for December 31, 2003. 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.

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.

The income tax calculations 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 nine 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.

BALANCE SHEET ACTIVITY

Total assets decreased $20.9 million or 6% from December 31, 2003 to September 30, 2004 to total $323.0 million. The decrease was primarily related to a reduction in investment securities from sales, calls, and maturities totaling $26.0 million. The decision to restructure the balance sheet through the sale of investment securities was a strategy to manage the expectations of further changes in the treasury market. The securities selected for sale were to reposition the investment portfolio to reduce the price risk and volatility, and to reduce the extension risk arising from increases in the treasury yield curve resulting in a slow down in cash flows from mortgage-backed securities and callable agency securities.


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Liquidity generated from the reduction of investments funded the decrease in deposits of $19.6 million or 8% during the period to total $237.4 million. A majority of the decrease in deposits was in the time deposit categories, and were primarily non-core deposit accounts from outside the local market which management made a strategic decision to let leave the Bank upon maturity. Management made the decision to not retain these deposits in order to reduce the Bank’s cost of funds, return the loan-to-deposit ratios to more historic levels in order to maximize net interest margin, and to focus on local market deposits.

In addition to the retention of earnings, total equity increased $4.0 million, or 12%, related to the exercise of stock options during the first nine months of the year and the increase in unrealized gain on investment securities, which increased from $28,000 at December 31, 2003 to $287,000 at September 30, 2004. There were no individual securities with significant unrealized losses, and those securities with unrealized losses at September 30, 2004 are considered to have a temporary impairment in value resulting primarily from the significant market shifts in the Treasury yield curve over the past year. 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 o f the securities with unrealized losses and the agency securities carry the implied guarantee of the U.S. Government. Increases in equity were partially offset by cash dividend of $311,000 paid in July 2004.

ALLOWANCE FOR LOAN LOSSES AND NON-PERFORMING 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 September 30, 2004. 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 classified loans; 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, indus try trends, and conditions affecting individual borrowers, management’s judgment of the allowance is necessarily approximate and imprecise. No assurance can be given that the Company will not in any particular period sustain loan losses which would be sizable in relationship to the amount reserved or that subsequent evaluation of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings. The allowance for loan losses is also subject to review by various regulatory agencies through their periodic examinations of the Company’s subsidiaries. Such examination could result in required changes to the allowance for loan losses. No adjustment in the allowance or significant adjustments to the Bank’s internal classified loans were made as a result of the Bank’s most recent examination performed by the Office of the Comptroller of the Currency.


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The following table sets forth certain information with respect to changes in the Company’s allowance for loan losses for each period presented.

(dollars in thousands)		At and For the Nine months Ended September 30, 2004			At and For the Year Ended December 31, 2003			At and For the Nine months Ended September 30, 2003

Balance at beginning of period	$	3,437		$	3,369		$	3,369
Charge-offs:
Commercial and industrial		-			167			92
Commercial real estate		70			388			216
Installment and consumer		309			519			293
		379			1,074			601
Recoveries:
Commercial and industrial		35			2			-
Commercial real estate		130			205			180
Installment and consumer		95			149			67
		260			356			247
Net charge-offs		119			718			254
Provision charged to expense		193			786			502
Balance at end of period	$	3,511		$	3,437		$	3,517
Net charge-offs to average loans, annualized		0.07	%		0.32	%		0.21	%
Allowance to loans, period end		1.53	%		1.48	%		1.57	%

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”). Generally, loans of the Bank are placed on non-accrual status at the earlier of when they are 90 days past due or when the collection of the loan becomes doubtful. Loans of the Finance Company are not classified as non-accrual, but are charged-off when such become 150 days contractually past due or earlier if the loan is deemed uncollectible. There were no loans considered to be impaired under Statement of Financial Accounting Standards (“SFAS”) 114, “Accounting by Creditors for Impairment of a Loan” for any period presented. The following table summarizes the nonperforming assets for each period presented.

(dollars in thousands)		September 30, 2004			December 31, 2003			September 30, 2003
Loans past due 90 days or more, still accruing	$	341		$	170		$	169
Non-accrual loans		408			587			527
Troubled debt restructurings		-			-			-
Other real estate owned		230			125			-
Total nonperforming assets	$	979		$	882		$	696
Nonperforming assets to total loans and OREO		0.43	%		0.38	%		0.31	%


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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 graded internally, by independent review or regulatory examinations) as “watch”, “OAEM”, “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 adversely classified loans (i.e., defined as loans with a credit grade of “substandard”, “doubtful”, or “loss”) at September 30, 2004 was $5.5 million or 2.5% of the loan portfolio at September 30, 2004, compared to $3.5 million or 1.5% of the loan portfolio at December 31, 2003, and $4.6 million or 2.1% of the loan portfolio at September 30, 2003. The amount of potential problem loans at September 30, 2004 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. Although adversely classified loans have increased somewhat during the nine months ended September 30, 2004, loans classified as OAEM have decreased substantially by $6.9 million since December 31, 2003. The overall decrease in the amount of total classified loans in 2004 is primarily related to the significant payoffs and paydowns in loans and management proactively worked these loans to improve the quality of the portfolio, as well as an improvement in the general economic conditions during the period. Management believes that the allowance for loan losses as of September 30, 2004 is 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.

The allowance for loan losses totaled $3.5 million, or 1.53% of total loans, at September 30, 2004. This is compared to a $3.4 million allowance, or 1.48% of total loans, at December 31, 2003, and $3.5 million, or 1.57% of total loans at September 30, 2003. The fluctuations in the allowance for loan losses as a percent of loans between September 30, 2003, December 31, 2003 and September 30, 2004 is reflective of the factors discussed previously, as well as under the “Provision for Loan Losses” section below, primarily related to change in levels of and trends in classified loans between the periods.

EARNINGS REVIEW - COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

GENERAL

The Company reported consolidated net income for the three months ended September 30, 2004 of $1,148,000, compared to net income of $970,000 for the three months ended September 30, 2003, or an improvement of approximately $178,000 or 18%. The primary contributors to increased earnings for the third quarter of 2004 was the lower cost of funds, lower provision for loan losses and control of overhead expenses. The reduction in the provision for loan losses was related to the lower originations in 2004 as compared to the prior year and the overall improvement of credit quality in the loan portfolio. The improvements in income were somewhat offset by the 28% reduction in other income primarily as a result of lower mortgage referral fees.

NET INTEREST INCOME

Net interest income, the difference between the interest earned and interest paid, is the largest component of the Company’s earnings and changes in it have the greatest impact on net income. Variations in the volume and mix of assets and liabilities and their relative sensitivity to interest rate movements determine changes in net interest income. During the quarters ended September 30, 2004 and September 30, 2003, the Company recorded net interest income of $3.2 million and $3.1 million, respectively. The 22 basis point increase in net interest margin was somewhat offset by the 2% decrease in average earning assets between the two periods, thus resulting in the $109,000 (4%) increase in net interest income between the third quarter of 2003 and the third quarter of 2 004.

For the three months ended September 30, 2004 and September 30, 2003, the Company’s net interest margin was 4.35% and 4.13%, respectively. The net interest margin is calculated as annualized net interest income divided by year-to-date average earning assets. The increase in net interest margin is related primarily to the 41 basis point increase in the prime interest rate contributing to a higher average yield on assets, combined with the 10 basis point reduction in the average cost of funds.


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INTEREST INCOME

For the three months ended September 30, 2004, the Company’s earning assets averaged $301.8 million and had an average yield of 5.80%. This compares to average earning assets of $306.5 million for the third quarter of 2003, yielding approximately 5.69%. Thus, the 11 basis point increase in average yield, offset by the 2% decrease in volume of average earning assets, accounts for the nominal $2,000 increase in interest income.

Gross loans comprised approximately 75% of the Company’s average earning assets for the third quarter of 2004 and compared to 73% for the third quarter of 2003. The majority of the Company’s loans are tied to the prime rate (over 70% of the Bank’s loan portfolio is at floating rates at September 30, 2004), which averaged 4.41% and 4.00% for the quarters ended September 30, 2004 and 2003, respectively. During the third quarter of 2004, loans averaged $225.1 million, yielding an average of 6.21%, compared to $223.0 million, yielding an average of 6.13% for the third quarter of 2003. The 8 basis point increase in the average yield on loans is directly related to the increases in the short-term market interest rates and the prime lending rate between 2003 and 20 04. The 1% increase in average loans was combined with the higher average yields and resulted in the increase in interest income on loans of $70,000 or 2%.

Investment securities averaged $65.2 million or 22% of average earning assets and yielded 5.08% (tax equivalent basis) during the third quarter of 2004, compared to average securities of $77.0 million yielding 4.71% (tax equivalent basis) for the three months ended September 30, 2003. The 37 basis point increase in the average yield of the investment portfolio is related to the general increase in treasury market interest rates during 2004, sales of lower yielding investments during the period, the overall portfolio mix, and the slow down in mortgage-backed securities principal payments. As of September 30, 2004, the portfolio had a weighted average life of approximately 7.4 years and an average duration of 5.9 years. This is compared to a weighted average life of 7.7 year s and an average duration of 6.0 years as of December 31, 2003. The 15% decrease in average securities, offset somewhat by the increase in yield, resulted in the net decrease of interest income on taxable and nontaxable investments of $87,000 or 11%.

INTEREST EXPENSE

The Company’s interest expense for the three months ended September 30, 2004 was $1.1 million. The decrease in interest expense of $107,000, or 9%, from the comparable quarter in 2003 of $1.2 million was related primarily to the 10 basis point decrease in the average rate on liabilities, combined with the 4% decrease in the level of average interest-bearing liabilities. Interest-bearing liabilities averaged $244.0 million for the third quarter of 2004 with an average rate of 1.79%. This is compared to average interest-bearing liabilities of $253.6 million with an average rate of 1.89% for the quarter ended September 30, 2003. The decrease in average rate on liabilities is directly related to the maturities of fixed rate deposits and other borrowings which were renewed at lower current market rates.

PROVISION FOR LOAN LOSSES

The provision for loan losses was $33,000 for the third quarter of 2004, compared to $100,000 for the comparable period of 2003. As discussed further under the “Allowance for Loan Losses” section above, in addition to the level of net originations, other factors influencing the amount charged to the provision each period include (1) trends in and the total amount of past due, nonperforming, and classified loans; (2) trends in and the total amount of net chargeoffs, (3) concentrations of credit risk in the loan portfolio, and (4) local and national economic conditions and anticipated trends. Thus, the $67,000 or 67% decrease in the provision for loan losses is related to the lower level of net loan originations in the third quarter of 2004 as compared to the third quarter of 2003, as well as the overall improvement in credit quality of the loan portfolio as evidenced by the reduction in net charge-offs, past due loans, and classified loans. 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.


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NONINTEREST INCOME AND EXPENSES

Noninterest income, which is primarily related to service charges on customers’ deposit accounts; commissions on nondeposit investment product sales and insurance product sales; mortgage origination fees; and gains on sales of investment securities, was $548,000 for the three months ended September 30, 2004 compared to $758,000 for the third quarter of 2003, or a decrease of 28%. The decrease is related to the reduction in mortgage referral fees, which decreased $112,000 as compared to the third quarter of 2003 due to the slowdown in mortgage refinance activity. Also contributing to the lower other income was a decline of $71,000 in the revenue related to merchant credit card transactions due to the Company’s outsourcing the operations of this product in mid-2004 and thereafter, receiving a residual net revenue amount.

For the three months ended September 30, 2004 and 2003, noninterest expense was $2.0 million and $2.3 million, respectively. The most significant item included in noninterest expense is salaries, wages and benefits, which totaled $1.3 million for both the three months ended September 30, 2004 and 2003. The increase of $56,000 or 4% is primarily a result of normal annual raises and higher group insurance costs, offset somewhat by lower bonus accruals in 2004.

Occupancy and furniture, fixtures, and equipment (“FFE”) expenses increased a total of $3,000 or 1% between the third quarter of 2003 and 2004. The nominal increase was due to normal increases in expenses being offset by an adjustment in property taxes for one of the Company’s branch locations and lower depreciation due to assets which became fully depreciated in 2003. There were no significant changes in or additions to property and premises between the two quarterly periods.

Included in the line item “other expenses”, which decreased $331,000 or 47% from the comparable period of 2003, are charges for OCC assessments; property and bond insurance; ATM switch fees; professional services; merchant credit card expenses; education and seminars; advertising and public relations; and other branch and customer related expenses. The decrease is primarily related to no FHLB prepayment penalties in 2004 which amounted to $166,000 in 2003 for the early retirement of several advances. Also contributing to the expense reduction was lower advertising ($39,000) and consultant fees ($21,000) in 2004 due to changes in the promotional campaigns and other programs of the Company requiring these services; lower legal fees ($31,000) related to less loan collection costs in 2004; and reductions in merchant credit card expenses ($79,000) due to the Company’s outsourcing the operations of this product line in mid-2004 and receiving a residual net revenues amount thereafter. Fluctuations in other expense categories are primarily related to deposit related expenses and are a result of normal activity of the Company and normal changes in the volume and nature of transactions.

INCOME TAXES

For the three months ended September 30, 2004, the Company reported $505,000 in income tax expense, or an effective tax rate of 30.5%. This is compared to income tax expense of $445,000 for the same period of the prior year, or an effective tax rate of 31.4%. The slight reduction in effective tax rate is primarily related to the level of tax-free municipal securities in each period.

EARNINGS REVIEW - COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

GENERAL

The Company reported consolidated net income for the nine months ended September 30, 2004 of $3,255,000, compared to net income of $2,938,000 for the nine months ended September 30, 2003, or an improvement of approximately $317,000 or 11%. The primary factors in the increased earnings from the same period of the prior year were the 3% increase in average earning assets, the 13% reduction in interest expense due to lower cost of funds, and the lower provision for loan losses resulting from lower net originations during the period and the improvement in overall quality of the loan portfolio. The increases in income were somewhat offset by the 26% reduction in other income as a result of lower gains on sales of investment securities and lower mortgage referral fees.


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NET INTEREST INCOME

Net interest income, the difference between the interest earned and interest paid, is the largest component of the Company's earnings and changes in it have the greatest impact on net income. Variations in the volume and mix of assets and liabilities and their relative sensitivity to interest rate movements determine changes in net interest income. During the nine months ended September 30, 2004, the Company recorded consolidated net interest income of $9.5 million, a 5% increase from the net interest income of $9.1 million for the nine months ended September 30, 2003. The increase in this amount is related to the increase in net interest margin, combined with the higher average earning asset and interest-bearing liability volume of the Company of 3% and 2%, respectively.

For the nine months ended September 30, 2004 and 2003, the Company's consolidated net interest margin was 4.21% and 4.15%, respectively. The net interest margin is calculated as annualized net interest income divided by year-to-date average earning assets. The 6 basis point increase in net interest margin is related primarily to the 31 basis point reduction in the average cost of funds, offset somewhat by the 23 basis point reduction in the average yield on assets. The average prime rate decreased 2 basis points to 4.14% for the nine months ended September 30, 2004.

INTEREST INCOME

For the nine months ended September 30, 2004, the Company's earning assets averaged $312.6 million and had an average tax-equivalent yield of 5.67%. This compares to average earning assets of $302.7 million for the first nine months of 2003, yielding 5.90%. Thus, the 3% increase in volume of average earning assets, which was more than offset by the 23 basis point decrease in average yield, accounts for the $110,000 (1%) decrease in interest income between the comparable nine month periods of 2004 and 2003.

Consolidated loans averaged approximately 74% and 73% of the Company’s average earning assets for the first nine months of 2004 and 2003, respectively. The majority of the Company’s loans are tied to the prime rate (over 70% of the Bank’s portfolio is at floating rates at September 30, 2004), which averaged 4.14% and 4.16% for the nine months ended September 30, 2004 and 2003, respectively. During the first nine months of 2004, consolidated loans averaged $231.9 million, yielding an average of 6.03%, compared to $222.4 million, yielding an average of 6.35% for the first nine months of 2003. The 32 basis point decrease in the average yield on loans is primarily related to the origination and renewal of fixed rate loans at lower current market rates, combined with the slightly lower average prime lending rate between the two periods. The 4% increase in average loans, offset by the decrease in average rate, resulted in a decrease in consolidated interest income on loans of $89,000 or 1%.

Investment securities averaged $70.6 million or 23% of average earning assets and yielded 5.02% (tax equivalent basis) during the first nine months of 2004, compared to average securities of $71.2 million yielding 4.89% (tax equivalent basis) for the nine months ended September 30, 2003. The increase in average yield on the investment portfolio is related to the changes in the treasury yield curve, the timing and volume of security maturities, calls, and sales which were reinvested in instruments with higher current market rates, changes in cash flow speeds on mortgage-backed securities, and the overall portfolio mix. The 1% decrease in volume of investment securities, offset somewhat by the increase in average rate, resulted in the net decrease in interest income on taxab le and nontaxable investments of $28,000 or 1%.

INTEREST EXPENSE

The Company's interest expense for the nine months ended September 30, 2004 was $3.4 million. The decrease of 13% from the comparable nine months in 2003 of $3.9 million was directly related to the 31 basis point decrease in the average rate on liabilities, offset somewhat by the 2% increase in the volume of average interest-bearing liabilities. Interest-bearing liabilities averaged $257.5 million for the first nine months of 2004 with an average rate of 1.77%. This is compared to average interest-bearing liabilities of $253.0 million with an average rate of 2.08% for the nine months ended September 30, 2003. The decrease in average rate on liabilities is directly related to the maturities of fixed rate deposits which were renewed at lower current market rates.


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PROVISION FOR LOAN LOSSES

As previously discussed under the quarterly analysis above, the amount charged to the provision for loan losses by the Bank and the Finance Company is based on management's judgment as to the amounts required to maintain an allowance adequate to provide for probable losses inherent in the loan portfolio.

Included in the net income for the nine months ended September 30, 2004 is a provision for loan losses of $193,000 compared to a provision of $502,000 for the same period of 2003. As discussed further under the “Allowance for Loan Losses” section above, in addition to the level of net originations, other factors influencing the amount charged to the provision each period include (1) trends in and the total amount of past due, classified, nonperforming, and “watch list” loans; (2) trends in and the total amount of net chargeoffs, (3) concentrations of credit risk in the loan portfolio, and (4) local and national economic conditions and anticipated trends. Thus, the $309,000 or 61% decrease in the provision for loan losses is related to the net reduction in loans outstanding for the first nine month of 2004 of $3.1 million compared to net origination of $4.6 million for the same period of 2003. In addition, contributing to the lower provision expense for the period is the overall improvement in credit quality of the loan portfolio as evidenced by the reduction in net charge-offs, past due loans, and classified loans. 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, which is primarily related to service charges on customers’ deposit accounts; commissions on nondeposit investment product sales and insurance product sales; and mortgage origination fees, was $1.8 million for the nine months ended September 30, 2004 compared to $2.4 million for the first nine months of 2003, or a decrease of $607,000 or 26%. The decrease is related to lower gains on sales of securities, which decreased $301,000 due to a reduction in the volume of sales transactions and the general market conditions effecting the amount of gain or loss on securities sold. Also contributing to the reduction in other income was lower mortgage referral fees which decreased $225,000 as compared to the first nine months of 2003 due to the significant sl owdown in mortgage refinancing activity. Finally, other income declined of $84,000 between the two periods related to merchant credit card transactions due to the Company’s outsourcing the operations of this product in mid-2004 and thereafter, receiving a residual net revenue amount.

For the nine months ended September 30, 2004, total noninterest expenses were $6.4 million, which is a decrease of $295,000, or 4%, from the amount incurred for the nine months ended September 30, 2003 of $6.7 million. The most significant item included in other expenses is salaries, wages and benefits, which amounted to $4.0 million for the nine months ended September 30, 2004 as compared to $3.9 million for the nine months ended September 30, 2003. The increase of $167,000 or 4% is primarily a result of normal annual raises and higher group insurance costs, offset somewhat by lower bonus accruals in 2004.

Occupancy and furniture, fixtures, and equipment (“FFE”) expenses decreased a total of $11,000 between the first nine months of 2003 and 2004. The decrease was primarily related to an adjustment in property taxes for one of the Company’s branch locations, and lower depreciation due to assets which became fully depreciated in 2003. There were no significant changes in or additions to property and premises between the two comparable periods.

Included in the line item “other expenses”, which decreased $451,000 or 25% from the comparable period of 2003, are charges for OCC assessments; property and bond insurance; ATM switch fees; merchant and credit card expenses; professional services; education and seminars; advertising and public relations; and other branch and customer related expenses. The decrease is primarily related to no FHLB prepayment penalties in 2004 which amounted to $166,000 in 2003 for the early retirement of several advances. Also contributing to the expense reduction was lower advertising ($135,000), consultant fees ($52,000), and other professional fees ($45,000) in 2004 due to changes in the promotional campaigns and other programs of the Company requiring these services. Legal fee s were lower in 2004 by $26,000 related to less loan collection costs in 2004 and the Company realized reductions in merchant credit card expenses of $84,000 due to outsourcing the operations of this product line in mid-2004 and receiving a residual net revenues amount thereafter. Fluctuations in other expense categories are primarily related to deposit related expenses and are a result of normal activity of the Company and normal changes in the volume and nature of transactions.


	19

INCOME TAXES

For the nine months ended September 30, 2004, the Company reported $1.4 million in income tax expense, or an effective tax rate of 30.6%. This is compared to income tax expense of $1.3 million for the same period of the prior year, or an effective tax rate of 31.3%. The slight reduction in effective tax rate is primarily related to the level of tax-free municipal securities in each period.

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 $36.2 million, or 11.2% of total assets, at September 30, 2004. This is compared to $32.2 million, or 9.4% of total assets, at December 31, 2003. The $4.0 million increase in total shareholders’ equity resulted principally from retention of earnings and stock issued pursuant to the Company’s stock option plans and restricte d stock plan. Increases in equity were partially offset by cash dividend of $311,000 paid in July 2004. Book value per share at September 30, 2004 and December 31, 2003 was $8.08 and $7.47, 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. In June 2004, the Company declared a semi-annual cash dividend of $0.07 per share payable July 26, 2004 to shareholders of record July 12, 2004. The Company presently intends to pay a semi-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 pai d 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.


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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 writ ten agreement, order, or capital directive with any of its regulators. At September 30, 2004, the Company and the Bank exceeded all regulatory required minimum capital ratios, and satisfied the requirements of the well capitalized category established by FDICIA. There are no current conditions or events that management believes would change the Company’s or the Bank’s category. The following table summarizes capital ratios for the Company and the Bank at September 30, 2004 and December 31, 2003.

RISK-BASED CAPITAL CALCULATION

					FOR CAPITAL				TO BE CATEGORIZED
	ACTUAL				ADEQUACY PURPOSES				“WELL-CAPITALIZED”
		Amount	Ratio			Amount	Ratio			Amount	Ratio

As of September 30, 2004
THE COMPANY
Total capital to risk-weighted assets	$	39,060	15.59	%	$	20,049	8.00	%		N.A.
Tier 1 capital to risk-weighted assets	$	35,923	14.33	%	$	10,024	4.00	%		N.A.
Tier 1 capital to average assets	$	35,923	10.93	%	$	13,152	4.00	%		N.A.

THE BANK
Total capital to risk-weighted assets	$	33,231	13.42	%	$	19,817	8.00	%	$	24,771	10.00	%
Tier 1 capital to risk-weighted assets	$	30,132	12.16	%	$	9,908	4.00	%	$	14,863	6.00	%
Tier 1 capital to average assets	$	30,132	9.25	%	$	13,032	4.00	%	$	16,290	5.00	%

As 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	%


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LIQUIDITY

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 managemen t 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 September 30, 2004, 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 $2.4 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 $23.1 million at September 30, 2004. 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 18%, respectively, of average assets for each of the nine month period ended September 30, 2004 and 2003. 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.

As of September 30, 2004, there was no substantial change from the future contractual obligations as of December 31, 2003 as presented in the Company’s 2003 Annual Report on Form 10-K. The foregoing disclosures related to the liquidity of the Company should be read in conjunction with the Company’s audited consolidated financial statements, related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2003 included in the Company’s 2003 Annual Report on Form 10-K.


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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 $2.7 million in available liquidity remaining from its initial public offering and the retention of earnings. In addition, a total of $2.2 million of Summit Financial’s funds were advanced to the Finance Company, in the form of an intercompany loan, to fund its operations as of September 30, 2004. This amount could be replaced by a loan from an unrelated source to create additional liquidity for Summit Financial. Other sources of liquidity for Summit Financial include borrowing funds from unrelated correspondent banks, borrowing from in dividuals, and receipt of management fees and debt service from 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, intercompany loan facilities provided by Summit Financial and Summit National Bank, and borrowings from unrelated private investors as necessary. The Company’s management believes its liquidity sources are adequate to meet its operating needs.

OFF-BALANCE SHEET ARRANGEMENTS

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& #146;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 September 30, 2004 and 2003, 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.


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At September 30, the Company’s total contractual amounts of commitments and letters of credit are as follows:

(dollars in thousands)		2004		2003
Legally binding commitments to extend credit:
Commercial and industrial	$	12,377	$	12,477
Commercial real estate		5,993		3,011
Residential real estate, including prime equity lines		19,372		17,851
Construction and development		17,348		18,547
Consumer and overdraft protection		2,337		2,510
		57,427		54,396
Standby letters of credit		3,687		3,713
Total commitments	$	61,114	$	58,109

EFFECT OF INFLATION AND CHANGING PRICES

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America which require the measurement of financial position and results of operations in terms of historical dollars, without consideration of changes in the relative purchasing power over time due to inflation. Unlike most industries, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect in the financial institution’s performance than does the effect of inflation.

The yield on a majority of the Company’s earning assets adjusts simultaneously with changes in the short-term rates established by the Federal Reserve Board of Governors, specifically the discount rate, changes in which leads to a change in the prime lending rate. Given the Company’s asset-sensitive balance sheet position, assets reprice faster than liabilities, which generally results in decreases in net interest income during periods of declining interest rates. This may cause a decrease in the net interest margin until the fixed rate deposits mature and are repriced at lower current market rates, thus narrowing the difference between what the Company earns on its assets and what it pays on its liabilities. The opposite effect (that is, an increase in net inter est income) is generally realized in a rising rate environment. The degree of interest rate sensitivity of the Company’s assets and liabilities and the differences in timing of repricing assets and liabilities provides an indication of the extent to which the Company’s net interest income may be affected by interest rate movements.

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.


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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., less than 2-year) time horizons. As the future path of interest rat es 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 in terest rates decline.

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 i n 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 indicates an asset-sensitive position over the entire lives of the assets and liabilities. For a 12 month period, the gap analysis indicates an asset-sensitive position as of September 30, 2004 of $14.9 million. When the “effective change ratio” (the historical relative movement of each asset’s and liability’s rates in relation to a 100 basis point change in the prime rate) is applied to the interest gap position, the Company actually has a somewhat higher asset-sensitive gap over a 12 month period. This is primarily due to the fact that in excess of 70 % 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 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 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 also 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., greater than 2 years) time horizon.


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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.

At December 31, 2003, the Company’s estimated changes in EVE were within the limits established by the Board. As of September 30, 2004, there was no substantial change from the interest rate sensitivity analysis or the market value of portfolio equity for various changes in interest rates calculated as of December 31, 2003. The foregoing disclosures related to the market risk of the Company should be read in conjunction with the Company’s audited consolidated financial statements, related notes and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2003 included in the Company’s 2003 Annua l Report on Form 10-K.

ACCOUNTING, REPORTING AND REGULATORY MATTERS

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 enti ty, 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 repor ting period ending after December 15, 2003. The adoption of FIN 46 did not have an impact on the Company.

In March 2004, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on paragraphs 6 through 20, 22 and 23 of EITF Issue No. 03-01, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (“EITF 03-01”). EITF 03-01 provided for adoption of the related consensus as of the beginning of the third quarter of 2004. Subsequent to the FASB’s ratification, in September 2004 the FASB issued FASB Staff Position (“FSP”) EITF 03-1-1 which effectively delay s the guidance in paragraphs 10 through 20 of EITF 03-01 until the FASB issues final guidance, expected in the fourth quarter of 2004. In addition, the FASB issued proposed FSP EITF 03-1-a, which provides guidance on the application of EITF 03-01 to debt securities that are impaired as a result of interest rate and/or sector spread increases, and is expected to be discussed and issued in final form in the fourth quarter of 2004.

Paragraphs 10 through 20 of EITF 03-01 provide guidance on when impairment of debt and equity securities is considered other-than-temporary. This guidance generally states impairment is considered other-than-temporary unless the holder of the security has both the intent and the ability to hold the security until the fair value recovers and evidence supporting the recovery outweighs evidence to the contrary. We are currently evaluating the impact that implementation of this guidance could have on our consolidated financial position or results of operations.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Market Risk and Asset-Liability Management” in Item 2, 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.

ITEM 4. 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 spec ified 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 calendar quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


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SUMMIT FINANCIAL CORPORATION

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings.
	The Corporation and its subsidiaries from time to time may be involved as plaintiff or defendant in various legal actions incident to its business. There are no material actions currently pending.

Item 2.	Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securitites.
	None.

Item 3.	Defaults Upon Senior Securities.
	None.

Item 4.	Results of Votes of Security Holders.
	None.

Item 5.	Other Information.
	None.

Item 6.	Exhibits and Reports on Form 8-K.

(a)	Exhibits:
	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.

(b)	Reports on Form 8-K:
	On October 20, 2004, the Company filed a Form 8-K related to the earnings press release dated October 19, 2004, which included selected financial data for the three month and nine month periods ended September 30, 2004 and for other selected periods.


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SUMMIT FINANCIAL CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SUMMIT FINANCIAL CORPORATION

Date: November 1, 2004
	J. Randolph Potter, President and Chief Executive Officer

Date: November 1, 2004
	Blaise B. Bettendorf, Senior Vice President and Chief Financial Officer


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