SUMMIT FINANCIAL GROUP INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005.


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to .

Commission File Number 0-16587

Summit Financial Group, Inc.

(Exact name of registrant as specified in its charter)


West Virginia (State or other jurisdiction of incorporation or organization)		55-0672148 (IRS Employer Identification No.)


300 North Main Street Moorefield, West Virginia (Address of principal executive offices)		26836 (Zip Code)

(304) 530-1000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities and 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 þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date.

Common Stock, $2.50 par value
7,039,840 shares outstanding as of May 6, 2005

Summit Financial Group, Inc. and Subsidiaries

Table of Contents


PART II.	OTHER INFORMATION

	Item 1. Legal Proceedings		35

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	None

	Item 3 . Defaults upon Senior Securities	None

	Item 4. Submission of Matters to a Vote of Security Holders	None

	Item 5. Other Information	None

	Item 6. Exhibits

	Exhibits


	Exhibit 11.	Statement re: Computation of Earnings per Share – Information contained in Note 3 to the Consolidated Financial Statements on page 10 of this Quarterly Report is incorporated herein by reference.

	Exhibit 31.1	Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer

	Exhibit 31.2	Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer

	Exhibit 32.1	Sarbanes-Oxley Act Section 906 Certification of Chief Executive Officer

	Exhibit 32.2	Sarbanes-Oxley Act Section 906 Certification of Chief Financial Officer

SIGNATURES			36

Summit Financial Group, Inc. and Subsidiaries

Consolidated Balance Sheets


	March 31,			December 31,			March 31,
	2005			2004			2004
	(unaudited)			*()**			(unaudited)
ASSETS
Cash and due from banks	$	13,243,838		$	19,416,219		$	9,584,246
Interest bearing deposits with other banks		2,161,772			2,338,698			3,223,383
Federal funds sold		1,615,000			48,000			1,048,000
Securities available for sale		209,223,443			211,361,504			215,732,183
Loans held for sale		15,766,266			14,273,916			9,595,896
Loans, net		623,862,573			602,727,975			532,854,898
Property held for sale		593,137			593,137			475,000
Premises and equipment, net		20,690,209			20,776,007			19,458,692
Accrued interest receivable		3,942,548			3,651,907			3,771,963
Intangible assets		3,461,036			3,498,824			3,612,188
Other assets		12,703,790			10,802,330			9,760,944

Total assets	$	907,263,612		$	889,488,517		$	809,117,393


LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits
Non interest bearing	$	57,008,292		$	55,401,552		$	48,916,332
Interest bearing		480,403,692			469,212,146			481,421,526

Total deposits		537,411,984			524,613,698			530,337,858

Short-term borrowings		129,696,988			120,629,214			42,546,950
Long-term borrowings		154,042,527			160,860,182			158,266,552
Subordinated debentures owed to unconsolidated subsidiary trusts		11,341,000			11,341,000			11,341,000
Other liabilities		8,371,156			6,336,402			5,951,531

Total liabilities		840,863,655			823,780,496			748,443,891


Commitments and Contingencies

Shareholders’ Equity
Preferred stock and related surplus, $1.00 par value; authorized 250,000 shares, issued 2005 and December 2004 - 33,400 shares		1,158,471			1,158,471			—
Common stock and realted surplus, $2.50 par value; authorized 20,000,000 shares, issued 2005 -7,039,840 shares ; December 2004 - 7,155,420 shares; March 2004 - 7,137,120 shares		17,501,134			18,123,492			12,780,249
Retained earnings		49,519,803			47,108,898			45,878,181
Less cost of shares acquired for the treasury - 2004 - 115,880 shares		—			(627,659	)		(627,659	)
Accumulated other comprehensive income		(1,779,451	)		(55,181	)		2,642,731

Total shareholders’ equity		66,399,957			65,708,021			60,673,502


Total liabilities and shareholders’ equity	$	907,263,612		$	889,488,517		$	809,117,393

(*) - December 31, 2004 financial information has been extracted from audited consolidated financial statements

See Notes to Consolidated Financial Statements

Summit Financial Group, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)


	Three Months Ended
	March 31,			March 31,
	2005			2004
Interest income
Interest and fees on loans
Taxable	$	9,901,344		$	8,216,886
Tax-exempt		108,396			97,292
Interest and dividends on securities
Taxable		1,729,715			1,974,939
Tax-exempt		528,602			551,562
Interest on interest bearing deposits with other banks		22,568			31,180
Interest on Federal funds sold		2,433			921

Total interest income		12,293,058			10,872,780

Interest expense
Interest on deposits		2,516,673			2,414,093
Interest on short-term borrowings		754,027			171,909
Interest on long-term borrowings and subordinated debentures		1,867,330			1,685,420

Total interest expense		5,138,030			4,271,422

Net interest income		7,155,028			6,601,358
Provision for loan losses		330,000			232,500

Net interest income after provision for loan losses		6,825,028			6,368,858

Other income
Insurance commissions		148,039			23,096
Service fees		546,559			509,409
Mortgage origination revenue		5,856,149			4,319,358
Securities gains (losses)		—			19,928
Gain (loss) on sale of assets		(2,325	)		(1,615	)
Other		119,032			72,255

Total other income		6,667,454			4,942,431

Other expense
Salaries and employee benefits		4,542,210			3,685,959
Net occupancy expense		429,153			303,888
Equipment expense		493,022			429,027
Supplies		91,990			140,362
Professional fees		226,926			170,646
Postage		1,567,124			1,352,973
Advertising		1,325,040			961,636
Amortization of intangibles		37,788			37,788
Other		1,341,844			756,579

Total other expense		10,055,097			7,838,858

Income before income taxes		3,437,385			3,472,431
Income tax expense		1,026,480			1,021,250

Net income	$	2,410,905		$	2,451,181


Basic earnings per common share	$	0.34		$	0.35

Diluted earnings per common share	$	0.34		$	0.35


Average common shares outstanding
Basic		7,039,783			7,020,126

Diluted		7,171,099			7,084,970


Dividends per common share	$	—		$	—

See Notes to Consolidated Financial Statements

Summit Financial Group, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity (unaudited)


											Accumulated
	Preferred		Common								Other			Total
	Stock and		Stock and								Compre-			Share-
	Related		Related			Retained		Treasury			hensive			holders’
	Surplus		Surplus			Earnings		Stock			Income			Equity

Balance, December 31, 2004	$	1,158,471	$	18,123,492		$	47,108,898	$	(627,659	)	$	(55,181	)	$	65,708,021

Three Months Ended March 31, 2005
Comprehensive income:
Net income		—		—			2,410,905		—			—			2,410,905
Other comprehensive income, net of deferred tax benefit of ($1,056,811):
Net unrealized (loss) on securities of ($1,724,270)		—		—			—		—			(1,724,270	)		(1,724,270	)

Total comprehensive income															686,635

Exercise of stock options		—		5,301			—		—			—			5,301
Cancellation of treasury shares		—		(627,659	)		—		627,659			—			—


Balance, March 31, 2005	$	1,158,471	$	17,501,134		$	49,519,803	$	—		$	(1,779,451	)	$	66,399,957


Balance, December 31, 2003	$	—	$	17,862,255		$	38,328,051	$	(627,659	)	$	1,624,896		$	57,187,543

Three Months Ended March 31, 2004
Comprehensive income:
Net income		—		—			2,451,181		—			—			2,451,181
Other comprehensive income, net of deferred taxes of $623,834:
Net unrealized (loss) on securities of $1,030,190, net of reclassification adjustment for gains included in net income of $12,355		—		—			—		—			1,017,835			1,017,835

Total comprehensive income															3,469,016

Exercise of stock options		—		16,943			—		—			—			16,943


Balance, March 31, 2004	$	—	$	17,879,198		$	40,779,232	$	(627,659	)	$	2,642,731		$	60,673,502

See Notes to Consolidated Financial Statements

Summit Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)


	Three Months Ended
	March 31,			March 31,
	2005			2004
Cash Flows from Operating Activities
Net income	$	2,410,905		$	2,451,181
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		415,827			341,131
Provision for loan losses		330,000			232,500
Deferred income tax (benefit)		(129,320	)		(145,250	)
Loans originated for sale		(68,939,267	)		(44,941,003	)
Principal payments on and proceeds from loans sold		69,752,985			43,376,927
(Gains) on loans sold		(2,306,068	)		(1,678,984	)
Securities (gains)		—			(19,928	)
Loss on disposal of other assets		2,324			1,615
Amortization of securities premiums, net		192,265			142,402
Amortization of goodwill and purchase accounting adjustments, net		40,671			43,086
(Increase)decrease in accrued interest receivable		(290,642	)		6,176
(Increase) in other assets		(678,286	)		(1,014,566	)
Increase in other liabilities		1,010,150			1,444,744

Net cash provided by operating activities		1,811,544			240,031

Cash Flows from Investing Activities
Net (increase) decrease in interest bearing deposits with other banks		176,926			(82,292	)
Proceeds from maturities and calls of securities available for sale		2,957,625			6,439,500
Proceeds from sales of securities available for sale		2,321,100			28,823,935
Principal payments received on securities available for sale		7,331,803			11,622,069
Purchases of securities available for sale		(13,401,766	)		(25,715,293	)
Net (increase)decrease in Federal funds sold		(1,567,000	)		(804,000	)
Net loans made to customers		(21,479,998	)		(34,762,187	)
Purchases of premises and equipment		(330,029	)		(1,706,885	)
Proceeds from sales of other assets		52,700			21,000
Net cash paid in acquisition of Sager Insurance Agency		—			(850,000	)

Net cash (used in) investing activities		(23,938,639	)		(17,014,153	)

Cash Flows from Financing Activities
Net increase (decrease) in demand deposit, NOW and savings accounts		13,971,073			6,266,654
Net increase (decrease) in time deposits		(1,172,786	)		12,269,784
Net increase (decrease) in short-term borrowings		9,067,774			(7,167,296	)
Proceeds from long-term borrowings		718,000			7,763,250
Repayment of long-term borrowings		(6,634,648	)		(7,203,087	)
Exercise of stock options		5,301			16,943

Net cash provided by financing activities		15,954,714			11,946,248

Increase (decrease) in cash and due from banks		(6,172,381	)		(4,827,874	)
Cash and due from banks:
Beginning		19,416,219			14,412,120

Ending	$	13,243,838		$	9,584,246

(Continued)

See Notes to Consolidated Financial Statements

Summit Financial Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows — continued (unaudited)


	Three Months Ended
	March 31,		March 31,
	2005		2004

Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	4,994,309	$	4,385,047

Income taxes	$	—	$	25,000


Supplemental Schedule of Noncash Investing and Financing Activities
Other assets acquired in settlement of loans	$	15,400	$	14,000


Acquisition of Sager Insurance Agency:
Net cash and cash equivalents paid in acquisition of Sager Insurance Agency	$	—	$	850,000

Fair value of assets acquired (principally building and land)	$	—	$	250,000
Goodwill		—		600,000

	$	—	$	850,000

See Notes to Consolidated Financial Statements

Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

Note 1. Basis of Presentation

We, Summit Financial Group, Inc. and subsidiaries, prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual year end financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature.

The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates.

The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements and notes included herein should be read in conjunction with our 2004 audited financial statements and Annual Report on Form 10-K. Certain accounts in the consolidated financial statements for December 31, 2004 and March 31, 2004, as previously presented, have been reclassified to conform to current year classifications.

Note 2. Significant New Accounting Pronouncements

Stock-based compensation: In December 2004, the Financial Accounting Standards Board (FASB) issued revised statement 123, Share-Based Payment (Revised 2004). SFAS 123R establishes accounting requirements for share-based compensation to employees. SFAS 123R eliminates our ability to account for stock-based compensation using APB 25 effective July 1, 2005 for all equity awards granted after the effective date. SFAS 123R requires us to recognize compensation expense based on the estimated number of stock awards expected to actually vest, exclusive of the awards expected to be forfeited. On April 14, 2005, the SEC announced an amendment to the compliance dates of SFAS 123R, delaying our required implementation until January 1, 2006. The adoption of this standard is not expected to have a material impact on our financial condition, results of operations, or liquidity.

Other than temporary impairment: In March 2004, the Financial Accounting Standards Board (FASB) Emerging Issues Task Force (EITF) released Issue 03-01, Meaning of Other Than Temporary Impairment, which addressed other-than-temporary impairment for certain debt and equity investments. The recognition and measurement requirements of Issue 03-01, and other disclosure requirements not already implemented, were effective for periods beginning after June 15, 2004. In September 2004, the FASB staff issued FASB Staff Position (FSP) EITF 03-1-1, which delayed the effective date for certain measurement and recognition guidance contained in Issue 03-01. The FSP requires the application of pre-existing other-than-temporary guidance during the period of delay until a final consensus is reached.

Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

Note 3. Earnings per Share

The computations of basic and diluted earnings per share follow:


	Three Months Ended March 31,
	2005		2004
Numerator:
Net Income	$	2,410,905	$	2,451,181


Denominator:
Denominator for basic earnings per share - weighted average common shares outstanding		7,039,784		7,020,126

Effect of dilutive securities:
Convertible preferred stock		39,445		—
Stock options		91,870		64,844

		131,315		64,844


Denominator for diluted earnings per share - weighted average common shares outstanding and assumed conversions		7,171,099		7,084,970


Basic earnings per share	$	0.34	$	0.35


Diluted earnings per share	$	0.34	$	0.35

Note 4. Securities

The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at March 31, 2005 and December 31, 2004, and March 31, 2004 are summarized as follows:

Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)


	March 31, 2005
	Amortized		Unrealized				Estimated
	Cost		Gains		Losses		Fair Value
Available for Sale
Taxable:
U. S. Government agencies and corporations	$	23,773,908	$	78,764	$	282,784	$	23,569,888
Mortgage-backed securities		116,243,844		243,813		2,550,706		113,936,951
State and political subdivisions		3,744,254		3,876		—		3,748,130
Corporate debt securities		5,000,123		106,583		461		5,106,245
Federal Reserve Bank stock		436,500		—		—		436,500
Federal Home Loan Bank stock		14,289,100		—		—		14,289,100
Other equity securities		175,535		—		—		175,535

Total taxable		163,663,264		433,036		2,833,951		161,262,349

Tax-exempt:
State and political subdivisions		40,915,050		1,135,196		116,551		41,933,695
Other equity securities		7,481,530		—		1,454,131		6,027,399

Total tax-exempt		48,396,580		1,135,196		1,570,682		47,961,094

Total	$	212,059,844	$	1,568,232	$	4,404,633	$	209,223,443


	December 31, 2004
	Amortized		Unrealized				Estimated
	Cost		Gains		Losses		Fair Value

Available for Sale
Taxable:
U. S. Government agencies and corporations	$	21,429,728	$	154,012	$	37,242	$	21,546,498
Mortgage-backed securities		118,872,576		513,765		1,029,288		118,357,053
State and political subdivisions		3,745,196		8,954		—		3,754,150
Corporate debt securities		5,000,328		180,939		—		5,181,267
Federal Reserve Bank stock		436,500		—		—		436,500
Federal Home Loan Bank stock		13,843,100		—		—		13,843,100
Other equity securities		175,535		—		—		175,535

Total taxable		163,502,963		857,670		1,066,530		163,294,103


Tax-exempt:
State and political subdivisions		40,475,405		1,508,540		24,043		41,959,902
Other equity securities		7,482,503		—		1,375,004		6,107,499

Total tax-exempt		47,957,908		1,508,540		1,399,047		48,067,401

Total	$	211,460,871	$	2,366,210	$	2,465,577	$	211,361,504

Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)


	March 31, 2004
	Amortized		Unrealized				Estimated
	Cost		Gains		Losses		Fair Value

Available for Sale
Taxable:
U. S. Government agencies and corporations	$	17,794,757	$	479,850	$	—	$	18,274,607
Mortgage-backed securities		117,221,262		1,572,589		194,851		118,599,000
State and political subdivisions		3,748,011		28,149		—		3,776,160
Corporate debt securities		12,601,813		623,458		—		13,225,271
Federal Reserve Bank stock		436,000		—		—		436,000
Federal Home Loan Bank stock		10,499,000		—		—		10,499,000
Other equity securities		175,535		—		—		175,535

Total taxable		162,476,378		2,704,046		194,851		164,985,573


Tax-exempt:
State and political subdivisions		41,561,208		2,173,834		20,029		43,715,013
Federal Reserve Bank stock		8,400		—		—		8,400
Other equity securities		7,509,726		9,873		496,402		7,023,197

Total tax-exempt		49,079,334		2,183,707		516,431		50,746,610

Total	$	211,555,712	$	4,887,753	$	711,282	$	215,732,183

The maturities, amortized cost and estimated fair values of securities at March 31, 2005, are summarized as follows:


	Available for Sale
	Amortized		Estimated
	Cost		Fair Value

Due in one year or less	$	44,188,709	$	43,703,594
Due from one to five years		89,796,220		88,175,397
Due from five to ten years		24,613,788		24,626,734
Due after ten years		31,078,463		31,789,184
Equity securities		22,382,665		20,928,534

	$	212,059,845	$	209,223,443

Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

Note 5. Loans

Loans are summarized as follows:


	March 31,		December 31,		March 31,
	2005		2004		2004
Commerical	$	56,393,600	$	53,225,840	$	47,178,262
Commercial real estate		296,910,832		279,631,237		235,565,159
Real estate - construction		3,805,511		3,916,361		2,697,409
Real estate - mortgage		226,866,186		223,689,617		203,224,889
Consumer		37,066,130		38,947,775		41,059,663
Other		9,458,326		9,604,693		8,968,088

Total loans		630,500,585		609,015,523		538,693,470
Less unearned fees and interest		1,322,218		1,214,262		1,117,909

Total loans net of unearned fees and interest		629,178,367		607,801,261		537,575,561
Less allowance for loan losses		5,315,794		5,073,286		4,720,663

Loans, net	$	623,862,573	$	602,727,975	$	532,854,898

Note 6. Allowance for Loan Losses

An analysis of the allowance for loan losses for the three month periods ended March 31, 2005 and 2004, and for the year ended December 31, 2004 is as follows:


	Three Months Ended				Year Ended
	March 31,				December 31,
	2005		2004			2004
Balance, beginning of period	$	5,073,286	$	4,680,625		$	4,680,625
Losses:
Commercial		19,759		136,766			141,815
Commercial real estate		—		6,862			335,777
Real estate - mortgage		50,200		—			5,199
Consumer		32,427		42,657			208,391
Other		54,731		71,694			285,671

Total		157,117		257,979			976,853

Recoveries:
Commercial		—		184			18,702
Commercial real estate		6,577		6,000			27,302
Real estate - mortgage		—		9,413			9,413
Consumer		17,979		31,658			109,211
Other		45,069		18,262			154,886

Total		69,625		65,517			319,514

Net losses		87,492		192,462			657,339
Provision for loan losses		330,000		232,500			1,050,000

Balance, end of period	$	5,315,794	$	4,720,663		$	5,073,286

Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

Note 7. Goodwill and Other Intangible Assets

The following tables present our goodwill at March 31, 2005 and other intangible assets at March 31, 2005, December 31, 2004, and March 31, 2004.


	Goodwill Activity by Operating Segment
	Community		Mortgage		Parent and
	Banking		Banking		Other		Total

Balance, January 1, 2005	$	1,488,030	$	—	$	600,000	$	2,088,030
Acquired goodwill, net		—		—		—		—


Balance, March 31, 2005	$	1,488,030	$	—	$	600,000	$	2,088,030


	Unidentifiable Intangible Assets
	March 31,		December 31,		March 31,
	2005		2004		2004

Unidentifiable intangible assets
Gross carrying amount	$	2,267,323	$	2,267,323	$	2,267,323
Less: accumulated amortization		894,317		856,529		743,165

Net carrying amount	$	1,373,006	$	1,410,794	$	1,524,158

We recorded amortization expense of approximately $38,000 for the three months ended March 31, 2005 relative to our unidentifiable intangible assets. Annual amortization is expected to be approximately $151,000 for each of the years ending 2005 through 2009.

Note 8. Deposits

The following is a summary of interest bearing deposits by type as of March 31, 2005 and 2004 and December 31, 2004:


	March 31,		December 31,		March 31,
	2005		2004		2004
Interest bearing demand deposits	$	134,500,291	$	122,355,331	$	119,924,697
Savings deposits		50,646,930		50,427,556		48,497,876
Certificates of deposit		269,845,854		271,130,829		286,663,692
Individual retirement accounts		25,410,617		25,298,430		26,335,261

Total	$	480,403,692	$	469,212,146	$	481,421,526

Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

Included in certificates of deposit are brokered certificates of deposit, which totaled $54,716,000, $53,268,000, and $43,639,000 at March 31, 2005, December 31, 2004, and March 31, 2004, respectively. Brokered deposits represent certificates of deposit acquired through a third party. The following is a summary of the maturity distribution of certificates of deposit and Individual Retirement Accounts in denominations of $100,000 or more as of March 31, 2005:


	Amount		Percent
Three months or less	$	14,623,687		12.1	%
Three through six months		16,562,102		13.7	%
Six through twelve months		37,643,519		31.1	%
Over twelve months		52,031,166		43.1	%

Total	$	120,860,474		100.0	%

A summary of the scheduled maturities for all time deposits as of March 31, 2005 is as follows:


Nine month period ending December 31, 2005	$	131,191,114
Year Ending December 31, 2006		87,511,711
Year Ending December 31, 2007		39,242,536
Year Ending December 31, 2008		17,368,583
Year Ending December 31, 2009		14,671,601
Thereafter		5,270,926

	$	295,256,471

Note 9. Borrowed Funds

Short-term borrowings: A summary of short-term borrowings is presented below:


	Quarter Ended March 31, 2005
							Federal Funds
	Short-term						Purchased
	FHLB			Repurchase			and Lines
	Advances			Agreements			of Credit
Balance at March 31	$	118,115,800		$	10,881,188		$	700,000
Average balance outstanding for the period		105,859,989			10,561,099			506,293
Maximum balance outstanding at any month end during period		118,115,800			10,881,188			700,000
Weighted average interest rate for the period		2.65	%		1.88	%		2.88	%
Weighted average interest rate for balances outstanding at March 31		2.91	%		2.13	%		5.00	%

Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)


	Year Ended December 31, 2004
							Federal Funds
	Short-term						Purchased
	FHLB			Repurchase			and Lines
	Advances			Agreements			of Credit
Balance at December 31	$	109,798,900		$	10,830,314		$	—
Average balance outstanding for the year		59,498,008			9,739,367			1,076,402
Maximum balance outstanding at any month end during year		109,798,900			11,098,557			1,173,000
Weighted average interest rate for the year		1.72	%		1.59	%		2.11	%
Weighted average interest rate for balances outstanding at December 31		2.31	%		1.85	%		—


	Quarter Ended March 31, 2004
							Federal Funds
	Short-term						Purchased
	FHLB			Repurchase			and Lines
	Advances			Agreements			of Credit
Balance at March 31	$	32,421,900		$	10,125,050		$	—
Average balance outstanding for the quarter		42,532,134			9,973,395			1,694,341
Maximum balance outstanding at any month end during quarter		52,721,900			10,524,126			945,000
Weighted average interest rate for the quarter		1.18	%		1.50	%		2.16	%
Weighted average interest rate for balances outstanding at March 31		1.26	%		1.53	%		—

Long-term borrowings: Our long-term borrowings of $154,042,527, $160,860,182 and $158,266,552 at March 31, 2005, December 31, 2004, and March 31, 2004 respectively, consisted primarily of advances from the Federal Home Loan Bank (“FHLB”).

These borrowings bear both fixed and variable rates and mature in varying amounts through the year 2016.

The average interest rate paid on long-term borrowings for the three month period ended March 31, 2005 was 4.27% compared to 4.04% for the first three months of 2004.

Subordinated Debentures: We have two statutory business trusts that were formed for the purpose of issuing mandatorily redeemable securities (the “capital securities”) for which we are obligated to third party investors and investing the proceeds from the sale of the capital securities in our junior subordinated debentures (the “debentures”). The debentures held by the trusts are their sole assets. Our subordinated debentures totaled $11,341,000 at March 31, 2005, December 31, 2004 and March 31, 2004.

In October 2002, we sponsored SFG Capital Trust I, and in March 2004, we sponsored SFG Capital Trust II, of which 100% of the common equity of both trusts is owned by us. SFG Capital Trust I issued $3,500,000 in capital securities and $109,000 in common securities and invested the proceeds in $3,609,000 of debentures. SFG Capital Trust II issued $7,500,000 in capital securities and $232,000 in common securities and invested the proceeds in

Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

$7,732,000 of debentures. Distributions on the capital securities issued by the trusts are payable quarterly at a variable interest rate equal to 3 month LIBOR plus 345 basis points for SFG Capital Trust I and 3 month LIBOR plus 280 basis points for SFG Capital Trust II, and equals the interest rate earned on the debentures held by the trusts, and is recorded as interest expense by us. The capital securities are subject to mandatory redemption in whole or in part, upon repayment of the debentures. We have entered into agreements which, taken collectively, fully and unconditionally guarantee the capital securities subject to the terms of the guarantee. The debentures of SFG Capital Trust I and SFG Capital Trust II are first redeemable by us in November 2007 and March 2009, respectively.

In fourth quarter 2003, as a result of applying the provisions of FIN 46-R, which governs when an equity interest should be consolidated, we were required to deconsolidate SFG Capital Trust I from our financial statements. The deconsolidation of the net assets and results of operations of the trust had virtually no impact on our financial statements or liquidity position, since we continue to be obligated to repay the debentures held by the trust and guarantee repayment of the capital securities issued by the trust. The consolidated debt obligation related to the trust increased from $3,500,000 to $3,609,000 upon deconsolidation with the difference representing our common ownership interest in the trust. The accompanying financial statements reflect the deconsolidation for all periods presented.

The capital securities held by SFG Capital Trust I and SFG Capital Trust II qualify as Tier 1 capital under Federal Reserve Board guidelines. As a result of the issuance of FIN 46-R, the Federal Reserve Board is currently evaluating whether deconsolidation of the trust will affect the qualification of the capital securities as Tier 1 capital.

A summary of the maturities of all long-term borrowings and subordinated debentures for the next five years and thereafter is as follows:


Year Ending
December 31,	Amount
2005	$	22,111,289
2006		16,948,442
2007		15,272,204
2008		16,085,851
2009		2,110,094
Thereafter		92,855,647

	$	165,383,527

Note 10. Stock Option Plan

In accordance with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, we have elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for our employee stock options.

The Officer Stock Option Plan, which provides for the granting of stock options for up to 960,000 shares of common stock to our key officers, was adopted in 1998 and expires in 2008. Each option granted under the plan vests according to a schedule designated at the grant date and shall have a term of no more than 10 years following the vesting date. Also, the option price per share shall not be less than the fair market value of our common stock on the date of grant. Accordingly, no compensation expense is recognized for options granted under the Plan.

Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

The following pro forma disclosures present for the quarters ended March 31, 2005 and 2004, our reported net income and basic and diluted earnings per share had we recognized compensation expense for our Officer Stock Option Plan based on the grant date fair values of the options (the fair value method described in Statement of Financial Accounting Standards No. 123).


	Quarter Ended March 31,
(in thousands, except per share data)	2005			2004

Net income:
As reported	$	2,411		$	2,451

Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(41	)		(34	)

Pro forma	$	2,370		$	2,417


Basic earnings per share:
As reported	$	0.34		$	0.35

Pro forma	$	0.33		$	0.34


Diluted earnings per share:
As reported	$	0.34		$	0.35

Pro forma	$	0.33		$	0.34

For purposes of computing the above pro forma amounts, we estimated the fair value of the options at the date of grant using a Black-Scholes option pricing model. There were no option grants during the first quarter of 2005. For purposes of the pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period.

Note 11. OFF-BALANCE SHEET ARRANGEMENTS

We are a party to certain financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. T he contract amounts of these instruments reflect the extent of involvement that we have in this class of financial instruments.

Many of our lending relationships contain both funded and unfunded elements. The funded portion is reflected on our balance sheet. The unfunded portion of these commitments is not recorded on our balance sheet until a draw is made under the loan facility. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.

Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

A summary of the total unfunded, or off-balance sheet, credit extension commitments follows:


	March 31,
	2005

Commitments to extend credit:
Revolving home equity and credit card lines	$	25,409,078
Construction loans		83,609,825
Other loans		34,360,841
Standby letters of credit		4,866,840

Total	$	148,246,584

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. We evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if we deem necessary upon extension of credit, is based on our credit evaluation. Collateral held varies but may include accounts receivable, inventory, equipment or real estate.

Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

Note 12. Issuance of Preferred Stock

On April 23, 2004, the Board of Directors approved an amendment to our Articles of Incorporation establishing the Rockingham National Bank Series Convertible Preferred Stock (“Preferred Stock”) and authorizing up to 40,000 shares of its issuance. On May 17, 2004, we completed the sale of 33,400 shares of Preferred Stock in a private placement. The Preferred Stock was sold to potential investors that we believed would be beneficial to the development and support of the Rockingham National Bank, a division of Summit’s subsidiary, Shenandoah Valley National Bank, and to the outside directors of Shenandoah Valley National Bank. The offering price for each share of the Preferred Stock was the mean of the closing prices of Summit’s common stock reported on the last five (5) business days on which the stock traded prior to and inclusive of May 10, 2004, which was $35.28 per share, and aggregate offering proceeds were $1,158,471, net of related issuance costs. The shares of Preferred Stock will convert automatically into a maximum of 41,750 shares of our common stock on May 15, 2005 based on the total loans and deposits of the Rockingham National Bank division of Shenandoah Valley National Bank on that date.

Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

Note 13. Restrictions on Capital

We and our subsidiaries are subject to various regulatory capital requirements administered by the banking regulatory agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we and each of our subsidiaries must meet specific capital guidelines that involve quantitative measures of our and our subsidiaries’ assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. We and each of our subsidiaries’ capital amounts and classifications 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 us and each of our subsidiaries to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). We believe, as of March 31, 2005, that we and each of our subsidiaries met all capital adequacy requirements to which they were subject.

The most recent notifications from the banking regulatory agencies categorized us and each of our subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, we and each of our subsidiaries must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below.

Our actual capital amounts and ratios as well as our subsidiaries’, Summit Community Bank’s (“Summit Community”), and Shenandoah Valley National Bank’s (“Shenandoah”) are presented in the following table.

Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)


											To be Well Capitalized
						Minimum Required					under Prompt Corrective
	Actual					Regulatory Capital					Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of March 31, 2005

Total Capital (to risk weighted assets)
Summit	$	79,578		11.9	%	$	53,548		8.0	%	$	66,935		10.0	%
Summit Community		47,563		10.9	%		34,950		8.0	%		43,688		10.0	%
Shenandoah		24,656		11.0	%		17,940		8.0	%		22,425		10.0	%
Tier I Capital (to risk weighted assets)
Summit	$	74,263		11.1	%	$	26,774		4.0	%	$	40,161		6.0	%
Summit Community		43,932		10.1	%		17,475		4.0	%		26,213		6.0	%
Shenandoah		22,972		10.2	%		8,970		4.0	%		13,455		6.0	%
Tier I Capital (to average assets)
Summit	$	74,263		8.4	%	$	26,661		3.0	%	$	44,435		5.0	%
Summit Community		43,932		7.4	%		17,931		3.0	%		29,885		5.0	%
Shenandoah		22,972		8.2	%		8,451		3.0	%		14,085		5.0	%

As of December 31, 2004
Total Capital (to risk weighted assets)
Summit	$	77,301		11.9	%		51,863		8.0	%		64,829		10.0	%
Summit Community		45,672		10.8	%		33,817		8.0	%		42,271		10.0	%
Shenandoah		23,253		10.7	%		17,440		8.0	%		21,800		10.0	%
Tier I Capital (to risk weighted assets)
Summit		72,228		11.1	%		25,932		4.0	%		38,897		6.0	%
Summit Community		42,165		10.0	%		16,908		4.0	%		25,363		6.0	%
Shenandoah		21,687		9.9	%		8,720		4.0	%		13,080		6.0	%
Tier I Capital (to average assets)
Summit		72,228		8.3	%		26,256		3.0	%		43,761		5.0	%
Summit Community		42,165		7.1	%		17,739		3.0	%		29,565		5.0	%
Shenandoah		21,687		8.0	%		8,128		3.0	%		13,546		5.0	%

Note 14. Segment Information

We operate two major business segments: community banking and mortgage banking. These segments are primarily identified by the products or services offered and the channels through which they are offered. The community banking segment consists of our full service banks which offer customers traditional banking products and services through various delivery channels. The mortgage banking segment consists of our mortgage origination facilities that originate and sell mortgage products. Information for each of our segments is included below:

Summit Financial Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)


	For the Quarter Ended March 31, 2005
	Community			Mortgage			Insurance			Parent and
Dollars in thousands	Banking			Banking			Services			Other			Eliminations			Total

Condensed Statements of Income
Interest income	$	12,204		$	302		$	—		$	7		$	(220	)	$	12,293
Interest expense		4,971			218			—			169			(220	)		5,138

Net interest income		7,233			84			—			(162	)		—			7,155
Provision for loan losses		330			—			—			—			—			330

Net interest income after provision for loan losses		6,903			84			—			(162	)		—			6,825

Noninterest income		689			5,856			122			1,176			(1,176	)		6,667
Noninterest expense		4,198			5,597			134			1,302			(1,176	)		10,055

Income before income taxes		3,394			343			(12	)		(288	)		—			3,437
Income taxes		1,028			117			(5	)		(114	)		—			1,026

Net income	$	2,366		$	226		$	(7	)	$	(174	)	$	—		$	2,411

Intersegment revenue (expense)	$	(906,060	)	$	(262,540	)	$	(7,500	)	$	1,176,100		$	—		$	—

Average assets	$	866,756		$	19,386		$	983		$	78,370		$	(73,334	)	$	892,161


	For the Quarter Ended March 31, 2004
	Community			Mortgage			Insurance			Parent and
Dollars in thousands	Banking			Banking			Services			Other			Eliminations			Total

Condensed Statements of Income
Interest income	$	10,755		$	207		$	—		$	3		$	(92	)	$	10,873
Interest expense		4,169			89			—			105			(92	)		4,271

Net interest income		6,586			118			—			(102	)		—			6,602
Provision for loan losses		233			—			—			—			—			233

Net interest income after provision for loan losses		6,353			118			—			(102	)		—			6,369

Noninterest income		624			4,318			—			888			(888	)		4,942
Noninterest expense		3,600			4,062			7			1,058			(888	)		7,839

Income before income taxes		3,377			374			(7	)		(272	)		—			3,472
Income taxes		999			130			(2	)		(106	)		—			1,021

Net income	$	2,378		$	244		$	(5	)	$	(166	)	$	—		$	2,451

Intersegment revenue (expense)	$	(759,493	)	$	(128,957	)	$	—		$	888,450		$	—		$	—

Average assets	$	790,425		$	9,417		$	296		$	68,282		$	(71,397	)	$	797,023

Summit Financial Group, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

The following discussion and analysis focuses on significant changes in our financial condition and results of operations of Summit Financial Group, Inc. (“Company” or “Summit”) and our wholly owned subsidiaries, Summit Community Bank (“Summit Community”), Shenandoah Valley National Bank (“Shenandoah”), Summit Mortgage, and Summit Insurance Services, LLC for the periods indicated. This discussion and analysis should be read in conjunction with our 2004 audited financial statements and Annual Report on Form 10-K.

The Private Securities Litigation Act of 1995 indicates that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by us. Our following discussion and analysis of financial condition and results of operations contains certain forward-looking statements that involve risk and uncertainty. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in those forward-looking statements.

OVERVIEW

Our primary source of income is net interest income from loans and deposits. Business volumes tend to be influenced by the overall economic factors including market interest rates, business spending, and consumer confidence, as well as competitive conditions within the marketplace.

As interest margins remain narrow, we continue to seek other business opportunities which earn non interest income. Our mortgage banking segment contributed $226,000 to our first three months 2005 earnings. During the first quarter of 2004, we acquired an insurance agency located in Moorefield, West Virginia. This acquisition has had no material impact on our results of operations, financial condition, or liquidity.

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the financial services industry. Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in our financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.

Our most significant accounting policies are presented in Note 1 to the consolidated financial statements of our 2004 Annual Report on Form 10-K. These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, we have identified the determination of the allowance for loan losses and the valuation of goodwill to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

Summit Financial Group, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The allowance for loan losses represents our estimate of probable credit losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan portfolio also represents the largest asset type on our consolidated balance sheet. To the extent actual outcomes differ from our estimates, additional provisions for loan losses may be required that would negatively impact earnings in future periods. Note 1 to the consolidated financial statements of our 2004 Annual Report on Form 10-K describes the methodology used to determine the allowance for loan losses and a discussion of the factors driving changes in the amount of the allowance for loan losses is included in the Asset Quality section of the financial review of the 2004 Annual Report on Form 10-K.

With the adoption of SFAS No. 142 on January 1, 2002, we discontinued the amortization of goodwill resulting from acquisitions. Goodwill is now subject to impairment testing at least annually to determine whether write-downs of the recorded balances are necessary. A fair value is determined based on at least one of three various market valuation methodologies. If the fair value equals or exceeds the book value, no write-down of recorded goodwill is necessary. If the fair value is less than the book value, an expense may be required on our books to write down the goodwill to the proper carrying value. During the third quarter, we will complete the required annual impairment test for 2005. We cannot assure you that future goodwill impairment tests will not result in a charge to earnings. See Notes 1 and 7 of the consolidated financial statements of our Annual Report on Form 10-K for further discussion of our intangible assets, which include goodwill.

BUSINESS SEGMENT RESULTS

We are organized and managed along two major business segments, as described in Note 14 of the accompanying consolidated financial statements. The results of each business segment are intended to reflect each segment as if it were a stand alone business. Net income (loss) by segment follows:


	For the Quarter Ended
	March 31,
in thousands	2005			2004

Community Banking	$	2,366		$	2,378
Mortgage Banking		226			244
Parent and Other		(181	)		(171	)

Consolidated net income	$	2,411		$	2,451

Summit Financial Group, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Earnings Summary

Net income for the quarter ended March 31, 2005 was relatively unchanged at $2,411,000, or $0.34 per diluted share as compared to $2,451,000, or $0.35 per diluted share for the quarter ended March 31, 2004. Returns on average equity and assets for the first three months of 2005 were 14.53% and 1.08%, respectively, compared with 16.77% and 1.23% for the same period of 2004.

Net Interest Income

Net interest income is the principal component of our earnings and represents the difference between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as changes in the volume and mix of earning assets and interest bearing liabilities can materially impact net interest income. We seek to maximize our net interest income through management of our balance sheet components. This is accomplished by determining the optimal product mix with respect to yields on assets and costs of funds in light of projected economic conditions, while maintaining portfolio risk at an acceptable level.

Our net interest income on a fully tax-equivalent basis totaled $7,476,000 for the three month period ended March 31, 2005 compared to $6,924,000 for the same period of 2004, representing an increase of $552,000 or 7.97%. This increase resulted from substantial growth in interest earning assets, primarily loans, which served to more than offset the 23 basis points increase in the cost of funds during the same period. Average interest earning assets grew 12.17% from $753,894,000 during the first three months of 2004 to $845,667,000 for the first three months of 2005. Average interest bearing liabilities grew 11.69% from $684,309,000 at March 31, 2004 to $764,336,000 at March 31, 2005, at an average yield for the first three months of 2005 of 2.73% compared to 2.50% for the same period of 2004.

Our net yield on interest earning assets decreased to 3.59% for the three month period ended March 31, 2005, compared to 3.67% for the same period in 2004. The yields on earning assets increased only 11 basis points, while our total cost of funds increased 23 basis points. Despite the increases in rates by the Fed over the past year, assets that repriced during the first quarter of 2005 typically repriced downward, while at the same time, our cost of short term borrowings moved more proportionately with the rate increases.

We anticipate modest growth in our net interest income to continue over the near term as the growth in the volume of interest earning assets will more than offset the expected decline in our yield on earning assets. However, if market interest rates were to rise significantly over the next year, the spread between interest earning assets and interest bearing liabilities could decline more, such that its impact could not be offset by growth in earning assets. See the “Market Risk Management” section for further discussion of the impact changes in market interest rates could have on us. Further analysis of our yields on interest earning assets and interest bearing liabilities are presented in Tables I and II below.

Summit Financial Group, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Table I - Average Distribution Of Assets, Liabilities And Shareholders’

Equity, Interest Earnings & Expenses, and Average Yield/Rate


	For the Quarter Ended
	March 31, 2005								March 31, 2004
	AVERAGE			EARNINGS/		YIELD/			AVERAGE			EARNINGS/		YIELD/
(In thousands of dollars)	BALANCES			EXPENSE		RATE			BALANCES			EXPENSE		RATE

ASSETS
Interest earning assets
Loans, net of unearned interest
Taxable	$	623,652		$	9,902		6.44	%	$	522,007		$	8,217		6.30	%
Tax-exempt (1)		9,108			164		7.30	%		7,630			147		7.71	%
Securities
Taxable		162,314			1,729		4.32	%		172,397			1,975		4.58	%
Tax-exempt (1)		47,876			793		6.72	%		48,288			825		6.83	%
Interest bearing deposits other banks and Federal funds sold		2,717			26		3.88	%		3,572			31		3.47	%

Total interest earning assets		845,667			12,614		6.05	%		753,894			11,195		5.94	%


Noninterest earning assets
Cash & due from banks		14,513								9,965
Premises & equipment		20,740								18,777
Other assets		16,442								19,161
Allowance for loan losses		(5,201	)							(4,774	)

Total assets	$	892,161							$	797,023


LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities
Interest bearing liabilities
Interest bearing demand deposits	$	127,994		$	425		1.35	%	$	115,233		$	253		0.88	%
Savings deposits		50,727			79		0.63	%		48,053			56		0.47	%
Time deposits		298,514			2,013		2.73	%		301,375			2,105		2.79	%
Short-term borrowings		116,898			754		2.62	%		54,183			172		1.27	%
Long-term borrowings and subordinated debentures		170,203			1,867		4.45	%		165,465			1,685		4.07	%

		764,336			5,138		2.73	%		684,309			4,271		2.50	%
Noninterest bearing liabilities
Demand deposits		56,130								48,394
Other liabilities		5,316								5,847

Total liabilities		825,782								738,550

Shareholders’ equity		66,379								58,473

Total liabilities and shareholders’ equity	$	892,161							$	797,023


NET INTEREST EARNINGS				$	7,476							$	6,924

NET INTEREST YIELD ON EARNING ASSETS							3.59	%							3.67	%

(1)

- Interest income on tax-exempt loans and securities has been adjusted assuming an effective tax rate of 34% for both periods presented. The tax equivalent adjustment resulted in an increase in interest income of $321,000 and $322,000 for the quarters ended March 31, 2005 and 2004, respectively.

Summit Financial Group, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Table II - Changes in Interest Margin Attributable to Rate and Volume
(Dollars in thousands)


	For the Quarter Ended
	March 31, 2005 versus March 31, 2004
	Increase (Decrease)
	Due to Change in:
	Volume			Rate			Net
Interest earned on:
Loans
Taxable	$	1,509		$	176		$	1,685
Tax-exempt		377			(360	)		17
Securities
Taxable		(124	)		(122	)		(246	)
Tax-exempt		(11	)		(21	)		(32	)
Federal funds sold and interest bearing deposits with other banks		(151	)		146			(5	)

Total interest earned on interest earning assets		1,600			(181	)		1,419


Interest paid on:
Interest bearing demand deposits		30			142			172
Savings deposits		3			20			23
Time deposits		(28	)		(64	)		(92	)
Short-term borrowings		304			278			582
Long-term borrowings and subordinated debentures		43			139			182

Total interest paid on interest bearing liabilities		352			515			867


Net interest income	$	1,248		$	(696	)	$	552

Noninterest Income

On the strength of mortgage origination revenue, total noninterest income increased to $6,667,000 for the first quarter of 2005, compared to $4,942,000 for the same period of 2004. Further detail regarding noninterest income is reflected in the following table. Also, refer to Note 14 of the accompanying consolidated financial statements for our segment information.

Noninterest Income
Dollars in thousands


	For the Quarter Ended March 31,
	2005		2004

Insurance commissions	$	148	$	23
Service fees		546		509
Mortgage origination revenue		5,856		4,319
Securities gains (losses)		—		20
Other		117		71

Total	$	6,667	$	4,942

Summit Financial Group, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Insurance commissions: These commissions increased 543% over 2004 primarily due to Summit Insurance Services, LLC, which offers both commercial and personal lines of insurance.

Service fees: Total service fees increased 7.3% for the first quarter of 2005 compared to the same period of 2004. This increase was primarily attributable to an increase in overdraft and nonsufficient funds (NSF) fees due to increased overdrafts by customers.

Mortgage origination revenue: The following table shows our mortgage origination segment’s loan activity:


	For the Quarter Ended March 31,
Dollars in thousands	2005		2004

Loans originated
Amount	$	68,929	$	44,935
Number		1,308		931

Loans sold
Amount	$	66,761	$	41,376
Number		1,295		861

Summit Mortgage originates loans solely for the purpose of selling them. We do not service these loans, therefore there is no servicing intangible associated with this segment. Our mortgage banking revenue consists entirely of two components: 1) fees collected at the time of origination and 2) the gains we receive when selling the loans. The breakout of these fees and gains follows:

Mortgage origination revenue


	For the Quarter Ended
	March 31,
Dollars in thousands	2005		2004

Origination fees, net	$	3,550	$	2,640
Gains		2,306		1,679


Total	$	5,856	$	4,319

Although mortgage origination revenue increased for the first quarter of 2005, profitability was impacted by the continued change in the mix of loans originated. During first quarter 2005, 18.0% of the total dollar amount of loan originations were first mortgage loans as compared to 9.9% during the first quarter of 2004. Sales of first mortgage loans typically result in smaller margins than sales of second mortgage loans.

Other: Other income increased 64.8% for the first quarter of 2005 compared to 2004. This increase was primarily attributable to an increase in financial services revenue.

Summit Financial Group, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Noninterest Expense

Total noninterest expense increased approximately $2,216,000, or 28.3% to $10,055,000 during the first three months of 2005 as compared to the same period in 2004. Table III below shows the breakdown of these increases by segment. Also, refer to Note 14 of the accompanying consolidated financial statements for our segment information.

Table III - Noninterest Expense
Dollars in thousands


			Change
	2005		$			%			2004

Community Banking and Other
Salaries and employee benefits	$	2,514	$	334			15.3	%	$	2,180
Net occupancy expense		313		41			15.1	%		272
Equipment expense		448		65			17.0	%		383
Supplies		73		(41	)		-36.0	%		114
Professional fees		176		71			67.6	%		105
Postage		64		13			25.5	%		51
Advertising		72		18			33.3	%		54
Amortization of intangibles		38		—			0.0	%		38
Other		760		180			31.0	%		580

Total	$	4,458	$	681			18.0	%	$	3,777


			Change
	2005		$			%			2004

Mortgage Banking
Salaries and employee benefits	$	2,028	$	522			34.7	%	$	1,506
Net occupancy expense		116		84			262.5	%		32
Equipment expense		45		(1	)		-2.2	%		46
Supplies		19		(7	)		-26.9	%		26
Professional fees		51		(14	)		-21.5	%		65
Postage		1,503		201			15.4	%		1,302
Advertising		1,253		345			38.0	%		908
Other		582		405			228.8	%		177

Total	$	5,597	$	1,535			37.8	%	$	4,062


			Change
	2005		$			%			2004

Consolidated
Salaries and employee benefits	$	4,542	$	856			23.2	%	$	3,686
Net occupancy expense		429		125			41.1	%		304
Equipment expense		493		64			14.9	%		429
Supplies		92		(48	)		-34.3	%		140
Professional fees		227		57			33.5	%		170
Postage		1,567		214			15.8	%		1,353
Advertising		1,325		363			37.7	%		962
Amortization of intangibles		38		—			0.0	%		38
Other		1,342		585			77.3	%		757

Total	$	10,055	$	2,216			28.3	%	$	7,839

Summit Financial Group, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Community Banking, Parent and Other Segments

Total noninterest expense for our community banking segment, parent, and other increased $681,000, or 18.0% for the first quarter of 2005, compared to the same period of 2004. The major factors contributing to these increases follow.

Salaries and employee benefits: Salaries and employee benefits expense increased 15.3% for the quarter ended March 31, 2005 due to additional staffing requirements needed as a result of our growth, including opening a new community banking office in Harrisonburg, Virginia in late 2004, and staffing Summit Insurance Services, LLC. In the December-January timeframe, we added three seasoned lenders who will become increasingly productive over the remainder of the year. Also included in this increase are general merit raises.

Professional fees: The 67.6% increase in professional fees is primarily attributable to two items: 1) costs incurred in connection with implementing and complying with Sarbanes Oxley, and 2) fees in connection with the hiring of employees for the newly opened community banking office in Harrisonburg, Virginia.

Other: Other expenses increased $180,000 or 31.0% for the first quarter of 2005 compared to the first quarter of 2004. This increase includes the initial listing fee for NASDAQ.

Mortgage Banking Segment

Total noninterest expense for our mortgage banking segment increased 37.8% for the first quarter of 2005 over the same period of 2004. This increase is a result of the 40.5% increase in the number of loan originations for 2005, as these expenses are directly tied to loan originations.

Salaries and employee benefits: The increase of $522,000 in salaries and employee benefits reflects the additional staffing requirements needed as a result of increased production.

Net occupancy expense: Net occupancy expense increased $84,000 or 262.5% for the first quarter of 2005 due to the relocation of our Summit Mortgage headquarters in mid-2004, to support our growth in staffing needs.

Postage and Advertising expense: Postage expense and advertising expense, combined, increased 24.71% from 2004 to 2005. This increase reflects the costs incurred with the direct mail method of obtaining customers.

Credit Experience

The provision for loan losses represents charges to earnings necessary to maintain an adequate allowance for potential future loan losses. Our determination of the appropriate level of the allowance is based on an ongoing analysis of credit quality and loss potential in the loan portfolio, change in the composition and risk characteristics of the loan portfolio, and the anticipated influence of national and local economic conditions. The adequacy of the allowance for loan losses is reviewed quarterly and adjustments are made as considered necessary.

We recorded a $330,000 provision for loan losses for the first three months of 2005, compared to $233,000 for the same period in 2004. Net loan charge offs for the first three months of 2005 were $87,000, as compared to $192,000 over the same period of 2004. At March 31, 2005, the allowance for loan losses totaled $5,316,000 or 0.84% of loans, net of unearned income, compared to $5,073,000 or 0.83% of loans, net of unearned income at December 31, 2004.

Summit Financial Group, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our asset quality remains sound. As illustrated in Table III below, our non-performing assets and loans past due 90 days or more and still accruing interest have decreased during the past 12 months and remain at a historically moderate level.

Table III - Summary of Past Due Loans and Non-Performing Assets
(Dollars in thousands)


	March 31,						December 31,
	2005			2004			2004
Accruing loans past due 90 days or more	$	423		$	233		$	140
Nonperforming assets:
Nonaccrual loans		413			1,215			532
Nonaccrual securities		334			389			349
Foreclosed properties		593			475			593
Repossessed assets		15			14			53

Total	$	1,778		$	2,326		$	1,667

Total nonperforming loans as a percentage of total loans		0.13	%		0.27	%		0.11	%

Total nonperforming assets as a percentage of total assets		0.20	%		0.29	%		0.19	%

FINANCIAL CONDITION

Our total assets were $907,264,000 at March 31, 2005, compared to $889,489,000 at December 31, 2004, representing a 2.0% increase. Table IV below serves to illustrate significant changes in our financial position between December 31, 2004 and March 31, 2005.

Table IV - Summary of Significant Changes in Financial Position
(Dollars in thousands)


	Balance								Balance
	December 31,		Increase (Decrease)						March 31,
	2004		Amount			Percentage			2005
Assets
Securities available for sale	$	211,361	$	(2,138	)		-1.0	%	$	209,223
Loans, net of unearned income		622,075		22,869			3.7	%		644,944

Liabilities
Interest bearing deposits	$	469,212	$	11,192			2.4	%	$	480,404
Short-term borrowings		120,629		9,068			7.5	%		129,697
Long-term borrowings and subordinated debentures		172,201		(6,817	)		-4.0	%		165,384

Summit Financial Group, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Loan growth during the first three months of 2005, occurring principally in the commercial and real estate portfolios, was funded primarily by short-term borrowings from the FHLB.

Refer to Notes 4, 5, 8, and 9 of the notes to the accompanying consolidated financial statements for additional information with regard to changes in the composition of our securities, loans, deposits and borrowings between March 31, 2005 and December 31, 2004.

LIQUIDITY

Liquidity reflects our ability to ensure the availability of adequate funds to meet loan commitments and deposit withdrawals, as well as provide for other transactional requirements. Liquidity is provided primarily by funds invested in cash and due from banks, Federal funds sold, non-pledged securities, and available lines of credit with the FHLB, the total of which approximated $121 million, or 13.3% of total assets at March 31, 2005 versus $88 million, or 9.9% of total assets at December 31, 2004.

Our liquidity position is monitored continuously to ensure that day-to-day as well as anticipated funding needs are met. We are not aware of any trends, commitments, events or uncertainties that have resulted in or are reasonably likely to result in a material change to our liquidity.

CAPITAL RESOURCES

One of our continuous goals is maintenance of a strong capital position. Through management of our capital resources, we seek to provide an attractive financial return to our shareholders while retaining sufficient capital to support future growth. Shareholders’ equity at March 31, 2005 totaled $66,400,000 compared to $65,708,000 at December 31, 2004.

Refer to Note 13 of the notes to the accompanying consolidated financial statements for information regarding regulatory restrictions on our capital as well as our subsidiaries’ capital.

CONTRACTUAL CASH OBLIGATIONS

During our normal course of business, we incur contractual cash obligations. The following table summarizes our contractual cash obligations at March 31, 2005.


	Long
	Term		Subordinated		Operating
	Debt		Debentures		Leases

2004	$	22,111,289	$	—	$	661,316
2005		16,948,442		—		917,999
2006		15,272,204		—		877,659
2007		16,085,851		—		851,534
2008		2,110,094		—		428,100
Thereafter		81,514,647		11,341,000		384,340

Total	$	154,042,527	$	11,341,000	$	4,120,948

Summit Financial Group, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition and Results of Operations

OFF-BALANCE SHEET ARRANGEMENTS

We are involved with some off-balance sheet arrangements that have or are reasonably likely to have an effect on our financial condition, liquidity, or capital. These arrangements at March 31, 2005 are presented in the following table.


	March 31,
	2005

Commitments to extend credit:
Revolving home equity and credit card lines	$	25,409,078
Construction loans		83,609,825
Other loans		34,360,841
Standby letters of credit		4,866,840

Total	$	148,246,584

MARKET RISK MANAGEMENT

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. Interest rate risk is our primary market risk and results from timing differences in the repricing of assets, liabilities and off-balance sheet instruments, changes in relationships between rate indices and the potential exercise of imbedded options. The principal objective of asset/liability management is to minimize interest rate risk and our actions in this regard are taken under the guidance of our Asset/Liability Management Committee (“ALCO”), which is comprised of members of senior management and members of the Board of Directors. The ALCO actively formulates the economic assumptions that we use in our financial planning and budgeting process and establishes policies which control and monitor our sources, uses and prices of funds.

Some amount of interest rate risk is inherent and appropriate to the banking business. Our net income is affected by changes in the absolute level of interest rates. Our interest rate risk position is well matched in year one, with asset sensitivity over the longer period. That is, over the long term, assets are likely to reprice faster than liabilities, resulting in an increase in net income in a rising rate environment. Our net income would decline modestly in a falling interest rate environment. Net income is also subject to changes in the shape of the yield curve. In general, a flattening yield curve would result in a decline in our earnings due to the compression of earning asset yields and funding rates, while a steepening would result in increased earnings as margins widen.

Several techniques are available to monitor and control the level of interest rate risk. We primarily use earnings simulations modeling to monitor interest rate risk. The earnings simulation model forecasts the effects on net interest income under a variety of interest rate scenarios that incorporate changes in the absolute level of interest rates and changes in the shape of the yield curve. Each increase or decrease in interest rates is assumed to take place over the next 12 months, and then remain stable. Assumptions used to project yields and rates for new loans and deposits are derived from historical analysis. Securities portfolio maturities and prepayments are reinvested in like instruments. Mortgage loan prepayment assumptions are developed from industry estimates of prepayment speeds. Noncontractual deposit repricings are modeled on historical patterns.

Summit Financial Group, Inc. and Subsidiaries

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following table shows our projected earnings sensitivity as of March 31, 2005 which is well within our ALCO policy limit of +/- 10%:


Change in	Estimated % Change in Net
Interest Rates	Interest Income Over:
(basis points)	12 Months			24 Months

Down 100		-0.09	%		-2.44	%
Up 100		-0.15	%		1.12	%
Up 200		-0.67	%		0.93	%

CONTROLS AND PROCEDURES

Our management, including the Chief Executive Officer and Chief Financial Officer, have conducted as of March 31, 2005, an evaluation of the effectiveness of disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures as of March 31, 2005 were effective. There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting

Summit Financial Group, Inc. and Subsidiaries

Part II. Other Information

Item 1. Legal Proceedings

We are involved in various pending legal actions, all of which are regarded as litigation arising in the ordinary course of business and are not expected to have a materially adverse effect on our business or financial condition.

On December 26, 2003, two of our subsidiaries, Summit Financial, LLC and Shenandoah Valley National Bank, and various employees of Summit Financial, LLC were served with a Petition for Temporary Injunction and a Bill of Complaint filed in the Circuit Court of Fairfax County, Virginia by Corinthian Mortgage Corporation. The filings allege various claims against Summit Financial, LLC and Shenandoah Valley National Bank arising out of the hiring of former employees of Corinthian Mortgage Corporation and the alleged use of trade secrets. The individual defendants have also been sued based on allegations arising out of their former employment relationship with Corinthian Mortgage and their current employment with Summit Financial, LLC.

The plaintiff seeks damages in the amount proven at trial on each claim and punitive damages in the amount of $350,000 on each claim. Plaintiff also seeks permanent and temporary injunctive relief prohibiting the alleged use of trade secrets by Summit Financial and the alleged solicitation of Corinthian’s employees.

On January 22, 2004, we successfully defeated the Petition for Temporary Injunction brought against us by Corinthian Mortgage Corporation. The Circuit Court of Fairfax County, Virginia denied Corinthian’s petition.

We, after consultation with legal counsel, believe that Corinthian’s claims made in its recent lawsuit arising out of the hiring of former employees of Corinthian Mortgage Corporation and the alleged use of trade secrets are without foundation and that meritorious defenses exist as to all the claims. We will continue to evaluate the claims in the Corinthian lawsuit and intend to vigorously defend against them. We believe that the lawsuit is without merit and will have no material adverse effect on us. Management, at the present time, is unable to estimate the impact, if any, an adverse decision may have on our results of operations or financial condition.


			Page
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated balance sheets March 31, 2005 (unaudited), December 31, 2004, and March 31, 2004 (unaudited)		4

		Consolidated statements of income for the three months ended March 31, 2005 and 2004 (unaudited)		5

		Consolidated statements of shareholders’ equity for the three months ended March 31, 2005 and 2004 (unaudited)		6

		Consolidated statements of cash flows for the three months ended March 31, 2005 and 2004 (unaudited)		7-8

		Notes to consolidated financial statements (unaudited)		9-22

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23-34

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		33

	Item 4.	Controls and Procedures		34
EX-31.1
EX-31.2
EX-32.1
EX-32.2


	SUMMIT FINANCIAL GROUP, INC. (registrant)
	By:	/s/ H. Charles Maddy, III
		H. Charles Maddy, III,
		President and Chief Executive Officer



	By:	/s/ Robert S. Tissue
		Robert S. Tissue,
		Senior Vice President and Chief Financial Officer



	By:	/s/ Julie R. Cook
		Julie R. Cook,
		Vice President and Chief Accounting Officer