Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C. 20549
FORM 10 – Q 
 	 	 	
☑	 	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the quarterly period ended March 31, 2005. 
or 
 	 	 	
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 ☑ No o 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ☑ 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
 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	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	
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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	 	
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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 
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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 
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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 
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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 
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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 
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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. 
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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: 
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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	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	
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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	 	
 	 	 	 	 	 	 	
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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	 		
 	 	 	 	 	 	 	 	 	 		
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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	 	
 	 	 	 	 	 	 	 	 	 	
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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	%	
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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 
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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. 
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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. 
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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. 
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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. 
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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: 
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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	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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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. 
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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	 	
 	 	 	
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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. 
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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.	
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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	 	
 	 	 	
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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. 
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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	 	
 	 	 	
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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. 
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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	 	
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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	 	
 	
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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. 
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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 
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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. 
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SIGNATURES 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. 
 	 	 	 	 	
 	SUMMIT FINANCIAL 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 	 	
 	
Date: May 6, 2005 
36 
 
Exhibit 31.1 
SARBANES-OXLEY ACT SECTION 302
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 
I, H. Charles Maddy, III, certify that: 
1.  	I have reviewed this quarterly report on Form 10-Q of Summit Financial Group, Inc.;		
 	
2.  	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;		
 	
3.  	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;		
 	
4.  	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:		
 	a)  	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;		
 	
 	b)  	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and		
 	
 	c)  	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and		
5.  	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):	
 	a)  	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and		
 	
 	b)  	Any fraud, whether or not material, that involves management or other employees who have a significant role in registrant’s internal control over financial reporting.		
Date: May 6, 2005 

 	/s/ H. Charles Maddy, III  	 	
 	H. Charles Maddy, III 	 	
 	President and Chief Executive Officer 	 	

 
Exhibit 31.2 
SARBANES-OXLEY ACT SECTION 302
CERTIFICATION OF CHIEF FINANCIAL OFFICER 
I, Robert S. Tissue, certify that: 
1.  	I have reviewed this quarterly report on Form 10-Q of Summit Financial Group, Inc.;		
 	
2.  	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;		
 	
3.  	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;		
 	
4.  	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:		
 	a)  	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;		
 	
 	b)  	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and		
 	
 	c)  	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and		
5.  	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):	
 	a)  	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and		
 	
 	b)  	Any fraud, whether or not material, that involves management or other employees who have a significant role in registrant’s internal control over financial reporting.		
Date: May 6, 2005 

 	/s/ Robert S. Tissue  	 	
 	Robert S. Tissue 	 	
 	Sr. Vice President and Chief Financial Officer 	 	

 	 	 	 	 	
Exhibit 32.1 
SARBANES-OXLEY ACT SECTION 906
CERTIFICATION OF CHIEF EXECUTIVE OFFICER 
In connection with the Quarterly Report of Summit Financial Group, Inc. (“Summit “) on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, H. Charles Maddy, III, President and Chief Executive Officer of Summit, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: 
 	(1)  	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and		
 	
 	(2)  	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of Summit.		

 	/s/ H. Charles Maddy, III  	 	
 	H. Charles Maddy, III, 	 	
 	President and Chief Executive Officer 	 	
 	
Date: May 6, 2005 
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document. 

Exhibit 32.2 
SARBANES-OXLEY ACT SECTION 906
CERTIFICATION OF CHIEF FINANCIAL OFFICER 
In connection with the Quarterly Report of Summit Financial Group, Inc. (“Summit “) on Form 10-Q for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert S. Tissue, Senior Vice President and Chief Financial Officer of Summit, certify pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: 
 	(1)  	The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and		
 	
 	(2)  	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of Summit.		

 	/s/ Robert S. Tissue  	 	
 	Robert S. Tissue, 	 	
 	Sr. Vice President and Chief Financial Officer 	 	
 	
Date: May 6, 2005 
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Report or as a separate disclosure document.