Summit Financial Corporation ("the Company"), headquartered in Greenville, South Carolina, was incorporated as a bank holding company under the Bank Holding Company Act of 1956, as amended, and under the laws of the State of South Carolina on May 26, 1989. The Company became a financial holding company on March 23, 2000 as provided by the "Gramm-Leach-Bliley" Financial Services Modernization Act of 1999. Subsidiaries of the Company are Summit National Bank ("the Bank" or "Summit"), a national bank organized in 1990, and Freedom Finance, Inc. ("the Finance Company" or "Freedom"), a consumer finance company organized in 1994. In 1997, the Bank incorporated Summit Investment Services, Inc., an investment and financial planning company, as a wholly- owned subsidiary. The Company has no foreign operations.
The principal role of the Company is to supervise and coordinate the activities of its subsidiaries and to provide them with capital and services of various kinds. The Company derives substantially all of its income from management fees for services performed, interest on invested funds, interest on intercompany loans, and other intercompany payments as appropriate from the subsidiaries. The Company conducts its business from four banking offices and 11 consumer finance offices throughout South Carolina.
At December 31, 2003, the Company had total assets of $343.9 million, total deposits of $257.0 million, loans, net of unearned income, of $231.8 million and shareholders’ equity of $32.2 million. This compares with total assets of $302.2 million, total deposits of $230.5 million, loans of $218.8 million and shareholders’ equity of $28.7 million at December 31, 2002. The operating results and key financial measures of the Company and its subsidiaries are discussed more fully in "Management’s Discussion and Analysis of Financial Condition and Results of Operations", included under Item 7 below.
Summit National Bank, headquartered in Greenville, South Carolina, commenced operations in July 1990. The Bank targets individuals and small-to-medium-sized businesses in the Upstate of South Carolina that require a full range of quality banking services typically provided by the larger regional banking concerns, but who prefer the personalized service offered by a locally-based institution. The Bank currently has its headquarters and four full-service branch locations in Greenville and Spartanburg, South Carolina.Summit provides a full range of d eposit services that are typically available in most banks and savings and loan associations including checking accounts, NOW accounts, individual retirement accounts, savings and other time deposits of various types ranging from daily money market accounts to longer-term certificates of deposit.
Deposits of the Bank are insured up to $100,000 by the Federal Deposit Insurance Corporation ("the FDIC"). The Company has no material concentration of deposits from any single customer or group of customers. Other services which the Bank offers include safe deposit boxes, bank money orders, wire transfer facilities, remote internet banking and various cash management and electronic banking programs.
The Bank also offers a full range of short to intermediate-term, secured and unsecured commercial and personal loans for business, real estate, home improvement, automobiles, letters of credit, personal investments and home equity lines of credit. It is the Bank’s intent to originate quality, profitable loans which will benefit the area’s economy, provide a reasonable return to our shareholders, and promote the growth of the Bank. Management strives to maintain quality in the loan portfolio and to accept only those credit risks which meet the Bank's underwriting standards. No significant portion of the Bank’s loan portfolio is concentrated within a single industry or group of related industries.
Summit Investment Services, Inc. commenced operations in November 1997. It provides a full range of nondeposit investment products including annuities and mutual funds, full and discount brokerage services, and financial management services. Summit Investment Services has offices in Greenville and Spartanburg, South Carolina.
The Finance Company makes and services installment loans to individuals with loan principal amounts generally not exceeding $2,000 and with maturities ranging from three to 18 months. The Finance Company, which is headquartered in Greenville, South Carolina, currently has 11 branch offices throughout South Carolina. The Finance Company's loan customers are primarily in the low-to-moderate income brackets and are engaged in widely diverse occupations. A loan investigation and credit history review is made for each borrower, either through credit reporting agencies or directly by Freedom’s employees. Freedom also makes available to borrowers credit life, accident and health, and property insurance directly related to the extension of credit t o the individual. The business of the Finance Company is rather seasonal and the amount of loans outstanding increases significantly at the end of each calendar year due to the seasonal loan demand, while the first quarter of the calendar year often results in substantial loan paydowns.
SFAS 131, "Disclosures about Segments of an Enterprise and Related Information" establishes standards for the way that public businesses report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company has two reportable operating business segments, Summit National Bank and Freedom Finance, Inc. Item 8, Note 20 to the Consolidated Financial Statements discusses the Company’s business segments, which information is incorporated herein by reference.
THE BANK: Summit National Bank and its subsidiary, Summit Investment Services, Inc., are located in the Upstate of South Carolina, with offices in Greenville and Spartanburg. The extended market area encompasses Greenville and Spartanburg Counties, with the principal market area being the urban areas of these counties. The Upstate of South Carolina is a highly competitive commercial banking market in which all of the largest banks in the region are represented. The Bank competes with other major financial institutions, including commercial banks, investment banks, mutual savings banks, savings and loan associations, and credit unions, as well as other non-bank institutions, such as insurance companies, brokerage firms, and investment companies. The competition among the various financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans, credit and service charges, the quality and range of services rendered, the convenience of banking facilities, and, in the case of loans to large commercial borrowers, relative lending limits.
Many of the competitor banks in the Bank’s market area are subsidiaries of bank holding companies which own banks in other southeastern states. In the conduct of certain areas of business, the Bank may also compete with savings and loan associations, credit unions, insurance companies, securities firms, leasing companies and other financial institutions, some of which are not subject to the same degree of regulation and restrictions as the Bank. The Bank may also compete with out-of-state financial institutions which operate loan production offices, originate mortgages, accept money market deposits, and provide other financial services. The Bank’s investment subsidiary competes with larger brokerage houses and financial planners, disco unt brokers and internet brokerage service providers.
Many of these competitors may have substantially greater resources and lending abilities than the Bank due to their size and these competitors may offer services, such as international banking and trust services, that the Bank is not currently providing. Moreover, most of the competitors have multiple branch networks located throughout the extended market area, while the Bank currently has only four locations, which could be a competitive disadvantage. As a result, the Bank does not generally attempt to compete for the banking relationships of larger corporations, but concentrates its efforts on small and medium-sized businesses and individuals. The Company believes that the Bank is able to compete effectively in this market segment by offering competitive pricing of services and quality, experience and personal treatment in the execution of services.
The Bank and its subsidiary are not dependent upon a single or a very few customers, the loss of which would have a material adverse effect.
THE FINANCE COMPANY: Freedom Finance, Inc. serves its customers from 11 locations throughout South Carolina. Competition between consumer finance companies is not generally as intense as that among banks; however, this segment of the market has become over-served in areas of South Carolina. The amounts, rates, and fees charged on consumer finance loans are regulated by state law according to the type of license granted by the South Carolina State Board of Financial Institutions. Numerous other finance companies which offer similar types of loans are located in the areas served by Freedom.
The Finance Company competes directly with national, regional, and local consumer finance companies. The principal areas of competition in the consumer finance industry are convenience of services to customers, effectiveness of advertising, effectiveness of administration of loans, and the cost of borrowed money. Many of the finance companies competing with Freedom may have substantially greater resources and lending abilities than the Finance Company and may have more branches within the specific market areas in which they and the Finance Company compete. The Company believes that the Finance Company is able to compete effectively in its current markets.
As of December 31, 2003 the Company and its subsidiaries employed a total of 95 full-time equivalent employees. The Company and its subsidiaries provide a variety of benefit programs including retirement and stock ownership plans as well as health, life, disability, and other insurance. Summit also maintains training, educational, and affirmative action programs designed to prepare employees for positions of increasing responsibility. The Company believes that its relations with its employees are good.
The earnings of the Company and it’s bank subsidiary may be affected significantly by the monetary policies of the Federal Reserve Board which regulates the money supply in order to mitigate recessionary and inflationary pressures. Among the techniques used to implement these objectives are open market operations in United States Government securities, changes in the discount rate paid by member banks on borrowings, changes in the reserve requirements against bank deposits and limitations on interest rates which banks may pay on time and savings deposits. The Federal Reserve uses these techniques in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may also affect intere st rates charged on loans or paid on deposits.
The monetary policies of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. Due to the changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, the Company can make no prediction as to the future impact that changes in interest rates, deposit levels, or loan demand may have on its business and earnings.
Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company’s bank subsidiary are primarily monetary in nature. As a result, interest rates generally have a more significant impact on the performance of a financial institution than the effects of general levels of inflation. The Company believes that the effects of inflation are generally manageable through asset-liability management.
The businesses in which the Company and its subsidiaries are engaged are subject to extensive supervision, regulation and examination by various bank regulatory authorities and other governmental agencies in the state where the Company and its subsidiaries operate. The supervision, regulation and examination to which the Company and its subsidiaries are subject are intended primarily for the protection of depositors or are aimed at carrying out broad public policy goals, rather than for the protection of security holders.
Several of the more significant regulatory provisions applicable to banks and bank holding companies to which the Company and its subsidiaries are subject are discussed below, along with certain regulatory matters concerning the Company and its subsidiaries. To the extent that the following information describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory provisions. Any change in applicable law or regulation may have a material effect on the business and prospects of the Company and its subsidiaries.
REGULATORY AGENCIES
Financial Holding Company: The Company elected to become a financial holding company on March 23, 2000 and continues to be subject to regulation under the Bank Holding Company Act of 1956, as amended ("the BHCA"), and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System ("the Federal Reserve"). As a bank holding company registered under the laws of the State of South Carolina, the Company is also subject to regulation by the South Carolina State Board of Financial Institutions ("the State Board"). Consequently, subject to certain exceptions, the Company must receive the approval of t he State Board prior to engaging in the acquisition of banking or nonbanking institutions or assets. The Company is also required to file annual reports and other information with the Federal Reserve and the State Board regarding its financial condition, results of operations, management and intercompany relationships and transactions between the Company and its subsidiaries.
Subsidiary Bank: The Company’s national bank subsidiary, Summit National Bank ("the Bank"), is subject to regulation and examination primarily by the Office of the Comptroller of Currency ("the OCC") and secondarily by the Federal Reserve and the FDIC. The Bank is subject to various statutory requirements, supervision and regulation promulgated and enforced by the OCC. These statutes, rules and regulations relate to insurance of deposits, required reserves, allowable investments, loans, mergers, consolidations, issuance of securities, payment of dividends, establishment of branches, and other aspects of the business of Summ it National Bank.
Nonbank Subsidiary: The Company’s nonbank subsidiary is subject to regulation by the Federal Reserve, the State Board, and other applicable state agencies.
THE COMPANY
The Sarbanes-Oxley Act of 2002:
The Sarbanes-Oxley Act of 2002 enacted on July 30, 2002, also known as the Public Company Accounting Reform and Investor Protection Act of 2002 ("the Act"), is the most far-reaching securities legislation passed since the New Deal. The stated goals of the Act are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws. The Act includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other relat ed rules and mandates further studies of certain issues by the SEC and the Comptroller General. The Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.
The Act effects sweeping changes in the responsibilities of officers and directors of public companies, and revisions to the corporate reporting obligations of these companies and of their external auditors. Among the requirements and prohibitions addressed by the Act are certifications required by CEOs and CFOs of periodic reports filed with the SEC; accelerated reporting of stock transactions on Form 4 by directors, officers and large shareholders; prohibitions against personal loans from companies to directors and officers, except loans made in the ordinary course of business; new requirements for public companies’ audit committees; auditor independence; prohibition of directors and executive officers from trading during a pension plan b lackout period;the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement;various increased criminal penalties for violations of securities laws;and the creation of a public company accounting oversight board.
Rules adopted by the SEC to implement provisions of the Act include CEO and CFO certifications related to the fair presentation of the financial statements and financial information in public filings as well as management’s evaluation of disclosure controls and procedures; disclosure of whether any audit committee members qualify as "financial experts" as defined; disclosures related to the audit committee composition and auditor pre-approval policies; disclosure related to the company’s written code of ethics; reconciling non-GAAP financial information with GAAP in public communications; disclosure of off-balance sheet transactions; and disclosures related to director independence and director nomination procedures.
Financial and Bank Holding Company Activities:
In November 1999, Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act ("the GLB Act") which repealed two provisions of the Glass-Stegall Act that previously separated banking, insurance, and securities activities. The purpose of this legislation is to modernize the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial services providers.Generally the GLB Act broadened the activities that may be conducted by national banks, banking subsidiaries of bank holding companies and their financial subsidi aries; provided an enhanced framework for protecting the privacy of consumer information; adopted a number of provisions related to the capitalization, membership, corporate governance and other measures designed to modernize the FHLB system; modified the laws governing the implementation of the CRA; and addressed a variety of other legal and regulatory issues affecting day-to-day operations and long-term activities of financial institutions.
The GLB Act created a new financial services structure, the financial holding company, under the BHCA. Financial holding companies may engage in any activity that is deemed (1) financial in nature, (2) incidental to any such financial activity, or (3) complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. As a financial holding company, the Company may engage in, and acquire companies engaged in, activities that are considered "financial in nature," as defined by the GLB Act and Federal Reserve interpretations. These activities include, among other things, lending, exchanging, transferring, investing for others, or safeguarding mon ey or securities; securities underwriting; dealing in or market-making in securities; insurance underwriting and agency activities; providing financial, investment, or economic advisory services; merchant banking; and any activity currently permitted for bank holding companies by the Federal Reserve Board under section 4(c)(8) of the Bank Holding Company Act. The GLB Act does not authorize banks or their affiliates to engage in commercial activities that are not financial in nature. A bank holding company may elect to be treated as a financial holding company only if all depository institution subsidiaries of the holding company are well capitalized, well managed and have at least a satisfactory rating under the Community Reinvestment Act.
If any banking subsidiary of the Company ceases to be "well capitalized" or "well managed" under applicable regulatory standards, the Federal Reserve may, among other things, place limitations on the Company’s ability to conduct the broader financial activities permissible for financial holding companies or, if the deficiencies persist, require the Company to divest the banking subsidiary. In addition, if any banking subsidiary of the Company receives a Community Reinvestment Act rating of less than satisfactory, the Company would be prohibited from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies. The Company may engage directly or indirectly in activitie s considered financial in nature, either de novo or by acquisition, as long as it gives the Federal Reserve after-the-fact notice of the new activities. The GLB Act also permits national banks, such as Summit National Bank, to engage in activities considered financial in nature through a financial subsidiary, subject to certain conditions and limitations and with the approval of the OCC.
The GLB Act adopts a system of functional regulation where the primary regulator is determined by the nature of the activity rather than the type of institution. Although the Federal Reserve is the umbrella supervisor of financial holding companies, the GLB Act limits the Federal Reserves’s power to supervise and conduct examinations of affiliated companies of the financial holding company. Rather, under the provisions of the GLB Act, the securities activities would be regulated by the SEC and other securities regulators, insurance activities by the state insurance authorities, and banking activities by the appropriate bank regulator.
The GLB Act also imposes certain obligations on financial institutions to develop privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer’s request, and establish procedures and practices to protect and secure customer data. These privacy provisions were implemented by regulations that were effective on November 12, 2000. Compliance with the privacy provisions was required by July 1, 2001. Additional customer privacy considerations are discussed below under "The Bank".
Control Acquisitions:
The BHCA requires prior Federal Reserve approval for, among other things, the acquisition by a bank holding company of direct or indirect ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank, or for a merger or consolidation of a bank holding company with another bank holding company. The Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company, unless the Federal Reserve has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as the Company, would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company.
Liability for Banking Subsidiaries
Under the policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. This support may be required at times when the bank holding company may not have the resources to provide it. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a U.S. federal bank regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to priority of payment. If a default occurred with respect to a bank, any capi tal loans to the bank from its parent holding company would be subordinate in right of payment to payment of the bank’s depositors and certain of its other obligations.
FDICIA
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), and the regulations promulgated under FDICIA, among other things, established five capital categories for insured depository institutions which are well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. FDICIA requires federal bank regulatory agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements based on these categories. FDICIA requires that a bank holding company guarantee that any "undercapitalized" (as defined in the statute) insured depository institution subsidiary will comply with the terms of any capital r estoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the institution’s total assets at the time the institution became undercapitalized, or (ii) the amount that is necessary (or would be necessary) to bring the institution into compliance with all applicable capital standards as of the time the institution fails to comply with such capital restoration plan.
Under Section 5(e) of the BHCA, the Federal Reserve has the authority to terminate any activity of a bank holding company that constitutes a serious risk to the financial safety, soundness, or stability of any subsidiary depository institution or to terminate its control of such subsidiary. Further, FDICIA grants federal bank regulatory authorities additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divesture may aid the depository institution's financial condition.
Interstate Banking and Branching
As a bank holding company, the Company is required to obtain prior Federal Reserve approval before acquiring more than 5% of the voting shares, or substantially all of the assets, of a bank holding company, bank or savings association. The passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("the Riegle-Neal Act") has increased the ability of bank holding companies and banks to operate across state lines. Under the Riegle-Neal Act, with the approval of the Federal Reserve, and subject to nationwide and statewide concentration limits, the Company and any other bank holding company located in South Carolina may acquire or merge with a bank located in any other state and a bank holding company located outside of South Carolina may acquire or merge with any South Carolina-based bank, provided the acquirer is adequately capitalized and adequately managed, as defined in the Riegle-Neal Act. The Riegle-Neal Act also permits de novo branching provisions. The legislation preserves the state laws which require that a bank must be in existence for a minimum period of time before being acquired, as long as the requirement is five years or less.
In July 1996, South Carolina enacted the South Carolina Banking and Branching Efficiency Act of 1996 ("the Act") which provides that, except as otherwise expressly permitted by federal law and in limited circumstances specified in the Act, a company may not acquire a South Carolina bank holding company (as defined in the Act) or a bank chartered under the laws of South Carolina unless the company obtains prior approval from the State Board. The company proposing to make the acquisition must file with the State Board a notice or application that the company filed with the responsible federal bank supervisory agency and pay the fee, if any, prescribed by the State Board. In addition, the company must publish prior notice of the application once in a daily newspaper of general circulation in South Carolina and provide an opportunity for public comment. If the company proposing to make the acquisition is an out-of-state bank holding company, it must qualify to do business in South Carolina or appoint an agent for service of process in South Carolina. The Act also provides that approval of the State Board must be obtained before an interstate bank merger involving a South Carolina bank may be consummated.
Affiliate Transactions
The Company is an "affiliate" of the Bank within the meaning of the Federal Reserve Act, which imposes restrictions on loans by the Bank to the Company, on investments by the Bank in the stock or securities of the Company, and on the use of such stock or securities as collateral for loans by the Bank to any borrower. The Company and the Bank are subject to Section 23A of the Federal Reserve Act. Section 23A defines "covered transaction", which includes an extension of credit, and limits a bank’s covered transactions with any affiliate to 10% of such bank’s capital and surplus. All covered transactions with all affiliates cannot in the aggregate exceed 20% of a bank’s capital and surplus. All covered and exempt transactions between a bank and its affiliates must be on terms and conditions consistent with safe and sound banking practices, and banks and their subsidiaries are prohibited from purchasing low-quality assets from the bank’s affiliates. Finally, Section 23A requires that all of a bank’s extensions of credit to an affiliate be appropriately secured by acceptable and adequate collateral, as set forth in the regulation. The Company and the Bank are also subject to Section 23B of the Federal Reserve Act, which generally limits covered and other transactions among affiliates to terms and circumstances, including credit standards, that are substantially the same or at least as favorable to a bank holding company, a bank or a subsidiary of either as prevailing at the time for comparable transactions with or involving unaffiliated companies.
THE BANK
General
The OCC is responsible for overseeing the affairs of all national banks and periodically examines national banks to determine their compliance with law and regulations. The OCC monitors all areas of the Bank’s operations, including loans, mortgages, issuance of securities, capital adequacy, risk management, payment of dividends, and establishment of branches. In addition, the OCC has authority to issue cease and desist orders against national banks which are engaged in unsafe or unsound practice in the conduct of their business. Federal banking laws applicable to all depository financial institutions, among other things, (i) afford federal bank regulatory agencies with powers to prevent unsafe and unsound banking practices; (ii) restrict pr eferential loans by banks to "insiders" of banks; (iii) require banks to keep information on loans to "insiders", including shareholders, executive officers, and directors; and (iv) bar certain director and officer interlocks between financial institutions.
National banks are authorized by the GLB Act to engage, through "financial subsidiaries," in any activity that is permissible for a financial holding company (as described above) and any activity that the Secretary of the Treasury, in consultation with the Federal Reserve, determines is financial in nature or incidental to any such financial activity, except (1) insurance underwriting, (2) real estate development or real estate investment activities (unless otherwise permitted by law), (3) insurance company portfolio investments and (4) merchant banking. The authority of a national bank to invest in a financial subsidiary is subject to a number of conditions, including, among other things, requirements that the bank must be well managed and well capitalized (after deducting from the bank's capital outstanding investments in financial subsidiaries).
Community Reinvestment Act
Summit National Bank is subject to the requirements of the Community Reinvestment Act of 1977 ("CRA"). CRA requires that, in connection with its examinations of financial institutions, the OCC shall evaluate the record of the Bank in meeting the credit needs of the local community, including low and moderate income neighborhoods, consistent with the safe and sound operation of the Bank. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch facility. The federal banking agencies, including the OCC, issued a new joint rule which became effective for the Bank in 1997 related to evaluating an institution’s CRA performance. The new rule evaluates institutions based on their actual performance (r ather than efforts) in meeting community credit needs. Subject to certain exceptions, the OCC assesses the CRA performance of a bank by applying lending, investment, and service tests. The OCC assigns a rating to a bank based on the bank’s performance under the tests. To evaluate compliance with the lending, investment, and service tests, subject to certain exceptions, banks are required to collect and report to the OCC extensive demographic and loan data. Summit National Bank received a "satisfactory" rating in its most recent CRA examination.
Federal Home Loan Bank Membership
The Bank is a member of the Federal Home Loan Bank of Atlanta ("FHLB") which provides a central credit facility primarily for member institutions. Members of the FHLB are required to acquire and hold shares of capital stock in, and may obtain advances from, the FHLB. The amount of stock owned is based on the Bank’s balance of residential mortgages and the balance of outstanding advances from the FHLB. The FHLB makes advances to members in accordance with policies and procedures established by its Board of Directors. The Bank is authorized to borrow funds from the FHLB to meet demands for withdrawals of deposit accounts, to meet seasonal requirements, to fund expansion of the loan portfolio, or for general asset/liability management. Advance s are made on a secured basis. Collateral on advances may be in the form of first mortgages on 1-4 family real estate or commercial real estate, government securities, or other assets acceptable to the FHLB. Interest rates charged for advances vary depending upon maturity, the cost of funds to the FHLB, and general market conditions.
Deposit Insurance Assessments
The Bank is also a member of the FDIC, which currently insures the deposits of each member bank to a maximum of $100,000 per depositor. For this protection, each bank pays a semiannual statutory deposit insurance assessment to maintain the Bank Insurance Fund and is subject to the rules and regulations of the FDIC. Further, the FDIC is authorized to impose one or more special assessments in any amount deemed necessary to enable repayment of amounts borrowed by the FDIC from the United Stated Department of the Treasury. The FDIC has broad authority to prohibit Summit National Bank from engaging in unsafe or unsound banking practices and may remove or suspend officers or directors of a bank to protect its soundness. The FDIC requires insured banks to maintain specified levels of capital, maintain certain security devices and procedures and to file quarterly reports and other information regarding its operations. The FDIC requires assessment to be paid by each FDIC-insured institution based on the institution’s assessment risk classification, which is determined based on whether the institution is considered "well capitalized", "adequately capitalized", or "undercapitalized", as such terms have been defined in applicable federal regulations, and whether such institution is considered by its supervisory agency to be financially sound or to have supervisory concerns.
Brokered Deposits
Current federal law regulates the acceptance of brokered deposits by insured depository institutions to permit only "well capitalized" depository institutions to accept brokered deposits without prior regulatory approval.
Prompt Corrective Action
Pursuant to the authority granted under FDICIA, U.S. bank regulatory agencies were empowered to take prompt corrective action to resolve problems of insured depository institutions and impose progressively more restrictive constraints on operations, management and capital. The extent of these powers depends upon whether the institution is "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized", or "critically undercapitalized". Under uniform regulations defining such capital levels issued by each of the federal banking agencies, a bank is considered "well capitalized" if it has (1) a total risk-based capital ratio of 10% or greater; (2) a Tier I risk-based capital ratio of 6% or greater; (3) a leverage ratio of 5% or greater; and (4) is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.
Unless a banking institution is well capitalized, it is subject to restrictions on certain aspects of its operations. An undercapitalized banking institution must develop a capital restoration plan and its parent bank holding company must guarantee the bank’s compliance with the plan up to the lesser of 5% of the bank’s assets at the time it became undercapitalized and the amount needed to comply with the plan. As of December 31, 2003, the Bank was well capitalized, based on the prompt corrective action guidelines. It should be noted, however, that a bank’s capital category is determined solely for the purpose of applying the OCC’s prompt corrective action regulations and that the capital category may not constitute an accura te representation of the bank’s overall financial condition or prospects.
Privacy
The deposit operations of the Bank are also subject to the Right to Financial Privacy Act which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, and the Electronic Fund Transfer Act and Regulation E issued by the Federal Reserve to implement that act which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.
The GLB Act also contains a number of other provisions that will affect the Company’s operations and the operations of all financial institutions. One of the new provisions, which became effective on July 1, 2000, relates to the financial privacy of consumers. Federal banking regulators issued final regulations in November 2000 related to consumer privacy which limit the ability of banks and other financial entities to disclose non-public information about consumers to non-affiliated entities and establish practices and procedures to protect and secure customer data. The regulations require more disclosure to consumers, and in some circumstances, require consent by the consumer before information is allowed to be provided to a third party.
The USA Patriot Act
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, also known as the USA Patriot Act ("the Act"), was signed into law on October 26, 2001. The Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial instit utions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.
Among other requirements, Title III of the USA Patriot Act imposes the following requirements with respect to financial institutions:
Establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and controls; (ii) specific designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs; and (iv) an independent audit function to test the anti-money laundering program.
Establish policies and procedures to meet established standards with respect to customer identification at the time new accounts are opened.
Establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering with respect to private banking accounts or correspondent accounts for non-United States persons or their representatives (including foreign individuals visiting the United States).
Effective December 25, 2001, financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign banks that do not have a physical presence in any country, and will be subject to certain recordkeeping obligations with respect to correspondent accounts of foreign banks.
Other Regulations
Interest and certain other charges collected or contracted for by the Bank are subject to state usury laws and certain federal laws concerning interest rates. The Bank’s operations are also subject to certain federal laws applicable to credit transactions, such as the federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers; CRA requiring financial institutions to meet their obligations to provide for the total credit needs of the community; the Home Mortgage Disclosure Act of 1975 requiring financial institutions to provide information to enable the public to determine whether it is fulfilling its obligation to meet the housing needs of the community it serves; the Equal Credit Opportunity Act prohibiting di scrimination on the basis of race, creed, or other prohibited factors in extending credit; the Fair Credit Reporting Act of 1978 governing the use and provisions of information to credit reporting agencies; the Fair Debt Collection Act governing the manner in which consumer debts may be collected; and the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
THE FINANCE COMPANY
The Company's subsidiary finance company, Freedom Finance, Inc., is a consumer finance company licensed and regulated by the State Board. Accordingly, the Finance Company is subject to annual examinations by the State Board and various regulatory requirements, including annual reporting, annual license renewal, and other regulations pertaining to the extension of credit. Specifically, state laws and regulations apply to maximum loan amounts, terms, interest rates and credit insurance and other fee charges. These laws and regulations are subject to both repeal and revision from time to time, often in response to pressures exerted by consumer rights groups.
CAPITAL REQUIREMENTS
Pursuant to the general supervisory authority conferred by the BHCA and the directives set forth in the International Lending Supervision Act of 1983, the Federal Reserve and the OCC have adopted risk-based capital adequacy guidelines for banks and bank holding companies subject to their regulation as a means for determining the adequacy of capital based on the risks inherent in carrying various classes of assets and off-balance sheet items. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material adverse effect on the financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective a ction, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total capital to risk-weighted assets (as defined in the regulation) and Tier 1 capital (as defined in the regulation) to total assets. Management believes, as of December 31, 2003, that the Company and the Bank meet all capital adequacy requirements to which they are subject. At December 31, 2003 and 2002, the Bank was categorized as "well capitalized" under the regulatory framework for prompt corrective action as described above. There are no current conditions or events that management believes would change the Company's or the Bank's category.
The Company’s and the Bank’s actual capital amounts and ratios at December 31, 2003 and 2002 as well as the minimum calculated amounts for each regulatory defined category are included in this report under Part II, Item 8. "Financial Statements and Supplementary Data" as Note 16 to the Notes to Consolidated Financial Statements.
DIVIDENDS
The holders of the Company’s common stock are entitled to receive cash dividends when and if declared by the Board of Directors out of the funds legally available therefore. The Company is a legal entity separate and distinct from its subsidiaries and depends in large part for its income available to distribute to shareholders on the payment of cash dividends from its subsidiaries. While the Company is not presently subject to any regulatory restrictions on dividends, the Bank is subject to such regulatory cash dividend restrictions.
Specifically, approval of the OCC will be required for any cash dividend to be paid to the Company by the Bank if the total of all dividends, including any proposed dividend, declared by the Bank in any calendar year exceeds the total of its retained net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus. Additionally, the National Bank Act provides that a national bank cannot pay cash dividends or other distributions to shareholders out of any portion of its common stock or preferred stock accounts and that a bank shall pay no cash dividend in an amount greater than its net profits then on hand, after deduction of its losses and bad debts. During 2003, the Bank paid i ts first annual cash dividend to the Company, its sole shareholder, totaling $0.51 per share or $434,000.It is currently the Bank’s intention to pay all dividends only from the net income of the current year.
FUTURE LEGISLATION
Changes to the laws and regulations in the state where the Company and its subsidiaries do business can affect the operating environment of financial and bank holding companies and their subsidiaries in substantial and unpredictable ways. The Company cannot accurately predict whether legislation will ultimately be enacted, and, if enacted, the ultimate effect that it, or implementing regulations, would have upon its or its subsidiaries’ financial condition or results of operations.
The operations of the Company and the Bank do not require any substantial investment in fixed assets. The principal executive offices for the Company, the Bank and the Finance Company are located at 937 North Pleasantburg Drive, Greenville, South Carolina. In addition, this site serves as the Bank’s main branch. The building at this location is approximately 7,500 square feet in area and is situated on a one-acre lot. The Company executed a lease for the land and building and assigned the lease to the Bank effective on the Bank's commencement of operations. The initial term of the lease commenced April 1, 1990 and renewal options were exercised in April 1995 and April 2000. The term on the renewal of the lease is five years under substantia lly the same terms. Under the terms of the original lease, the Company has one renewal option remaining. The lease provides that the Company will be responsible for real property taxes, insurance, utilities and maintenance with respect to the premises. During 1995, the Bank built its second full service bank branch on .63 acres of land in Greenville, South Carolina. The facility is approximately 6,500 square feet and is fully owned and occupied by the Bank. During April of 1998, the Company entered into an agreement to lease a facility for a branch located in Greenville, South Carolina. This facility, which was occupied in October 1998, serves as the third full service bank branch and as the Bank’s operations facility. The facility is approximately 8,000 square feet and has an initial lease term of seven years with a renewal option for an additional seven year period. In 2001, the Bank completed construction and occupied a 7,500 square feet branch facility on 1.1 acres of land in Spartanburg, South Caro lina. In January 2004, the Company entered into a contract to purchase one acre of land in Greenville County for a branch facility.
The eleven Finance Company branches throughout South Carolina are housed in leased facilities averaging 1,200 square feet each with lease terms from three to ten years. The lease agreements have various renewal options under substantially the same terms as the original agreements.
Refer to Note 17 to the Notes to Consolidated Financial Statements contained in Part II, Item 8. "Financial Statements and Supplementary Data" for information relating to minimum rental commitments under the Company’s leases for office facilities and to Note 6 for further details on the Company’s properties.
Although the Company is from time to time a party to various legal proceedings arising out of the ordinary course of business, management believes there is no litigation or proceeding threatened or pending against the Company that could reasonably be expected to result in a materially adverse change in the business or financial condition of the Company.
There were no matters submitted to a vote of the shareholders in the fourth quarter of the Company’s fiscal year ending December 31, 2003.
(a)Market information
Summit Financial Corporation’s common stock is traded in the Small-Cap market on the NASDAQ system under the symbol SUMM. The following table presents the high, low and closing sales prices for the Company’s common stock for each full quarterly period within the two most recent fiscal years. The source for the following information was the Nasdaq market.
