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 September 30, 2004. 
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 	 	55-0672148	
(State or other jurisdiction of 	 	(IRS Employer	
incorporation or organization) 	 	Identification No.)	
 	 	 	
300 North Main Street	 	 	
Moorefield, West Virginia 	 	26836	
(Address of principal executive offices) 	 	(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 o No ☒ 
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
3,514,570 shares outstanding as of November 4, 2004 

Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Table of Contents 

 	 	Page
	
PART I. FINANCIAL INFORMATION	 	 	 	 	
Item 1. Financial Statements	 	 	 	 	
Consolidated balance sheets September 30, 2004 (unaudited), December 31, 2003, and September 30, 2003 (unaudited)	 	 	4	 	
Consolidated statements of income for the three months and nine months ended September 30, 2004 and 2003 (unaudited)	 	 	5	 	
Consolidated statements of shareholders’ equity for the nine months ended September 30, 2004 and 2003 (unaudited)	 	 	6	 	
Consolidated statements of cash flows for the nine months ended September 30, 2004 and 2003 (unaudited)	 	 	7-8	 	
Notes to consolidated financial statements (unaudited)	 	 	9-23	 	
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	 	24-32	 	
Item 3. Quantitative and Qualitative Disclosures about Market Risk	 	 	32	 	
Item 4. Controls and Procedures	 	 	32	 	
2 

Table of Contents

Summit Financial Group, Inc. and Subsidiaries	 	 	 	 		
 	 	 	 	 		
Table of Contents	 	 	 	 		
 	 	 	 	 		
PART II. OTHER INFORMATION	 	 	 	 		
Item 1. Legal Proceedings	 	 	33	 		
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	 	 	34	 		
 Exhibit 31.1	
 Exhibit 31.2	
 Exhibit 32.1	
 Exhibit 32.2	
3 

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Summit Financial Group, Inc. and Subsidiaries 
Consolidated Balance Sheets 
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	September 30,	 	December 31,	 	September 30,	
 	 	2004	 	2003	 	2003	
 	 	(unaudited)
	 	(*)
	 	(unaudited)
	
ASSETS	 	 	 	 	 	 	 	 	 	 	 	 	
Cash and due from banks	 	$	12,372,452	 	 	$	14,412,120	 	 	$	11,370,800	 	
Interest bearing deposits with other banks	 	 	3,163,714	 	 	 	3,141,092	 	 	 	3,681,418	 	
Federal funds sold	 	 	1,000	 	 	 	244,000	 	 	 	99,000	 	
Securities available for sale	 	 	209,702,259	 	 	 	235,409,228	 	 	 	223,606,544	 	
Loans held for sale	 	 	12,096,649	 	 	 	6,352,836	 	 	 	709,400	 	
Loans, net	 	 	586,200,670	 	 	 	498,340,211	 	 	 	473,779,481	 	
Property held for sale	 	 	756,181	 	 	 	480,000	 	 	 	1,276,798	 	
Premises and equipment, net	 	 	20,438,860	 	 	 	17,846,269	 	 	 	14,476,797	 	
Accrued interest receivable	 	 	3,762,409	 	 	 	3,778,139	 	 	 	3,564,869	 	
Goodwill	 	 	2,088,030	 	 	 	1,488,030	 	 	 	1,488,030	 	
Other intangible assets	 	 	1,448,583	 	 	 	1,561,946	 	 	 	1,599,734	 	
Other assets	 	 	10,215,068	 	 	 	8,411,333	 	 	 	8,630,058	 	

 	 	 	 	
 	 	
Total assets	 	$	862,245,875	 	 	$	791,465,204	 	 	$	744,282,929	 	

 	 	 	 	
 	 	
LIABILITIES AND SHAREHOLDERS’ EQUITY	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	
Deposits	 	 	 	 	 	 	 	 	 	 	 	 	
Non interest bearing	 	$	50,884,765	 	 	$	51,004,403	 	 	$	47,034,511	 	
Interest bearing	 	 	484,936,943	 	 	 	460,797,017	 	 	 	427,920,074	 	

 	 	 	 	
 	 	
Total deposits	 	 	535,821,708	 	 	 	511,801,420	 	 	 	474,954,585	 	

 	 	 	 	
 	 	
Short-term borrowings	 	 	77,518,423	 	 	 	49,714,246	 	 	 	41,049,045	 	
Long-term borrowings	 	 	166,992,593	 	 	 	164,646,208	 	 	 	165,526,033	 	
Subordinated debentures owed to unconsolidated subsidiary trusts	 	 	11,341,000	 	 	 	3,609,000	 	 	 	3,609,000	 	
Other liabilities	 	 	5,282,750	 	 	 	4,506,787	 	 	 	3,642,742	 	

 	 	 	 	
 	 	
Total liabilities	 	 	796,956,474	 	 	 	734,277,661	 	 	 	688,781,405	 	

 	 	 	 	
 	 	
Commitments and Contingencies	 	 	 	 	 	 	 	 	 	 	 	 	
Shareholders’ Equity	 	 	 	 	 	 	 	 	 	 	 	 	
Preferred stock, $1.00 par value; authorized 250,000 shares, issued 2004 - 33,400 shares	 	 	33,400	 	 	 	—	 	 	 	—	 	
Common stock, $2.50 par value; authorized 20,000,000 shares, issued 2004 -3,572,510 shares; December 2003 - 3,566,960 shares; September 2003 - 3,562,760 shares	 	 	8,931,275	 	 	 	8,917,400	 	 	 	8,906,900	 	
Capital surplus	 	 	5,022,151	 	 	 	3,845,906	 	 	 	3,814,906	 	
Retained earnings	 	 	50,800,508	 	 	 	43,427,000	 	 	 	41,741,298	 	
Less cost of shares acquired for the treasury - 57,940 shares	 	 	(627,659	)	 	 	(627,659	)	 	 	(627,659	)	
Accumulated other comprehensive income	 	 	1,129,726	 	 	 	1,624,896	 	 	 	1,666,079	 	

 	 	 	 	
 	 	
Total shareholders’ equity	 	 	65,289,401	 	 	 	57,187,543	 	 	 	55,501,524	 	

 	 	 	 	
 	 	
Total liabilities and shareholders’ equity	 	$	862,245,875	 	 	$	791,465,204	 	 	$	744,282,929	 	

 	 	 	 	
 	 	
(*) — December 31, 2003 financial information has been extracted from audited consolidated financial statements 
See Notes to Consolidated Financial Statements 
4 

Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Consolidated Statements of Income (unaudited) 
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended
	 	Nine Months Ended
	
 	 	September 30,	 	September 30,	 	September 30,	 	September 30,	
 	 	2004
	 	2003
	 	2004
	 	2003
	
Interest income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest and fees on loans	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Taxable	 	$	9,217,361	 	 	$	7,797,099	 	 	$	26,068,692	 	 	$	22,827,468	 	
Tax-exempt	 	 	117,153	 	 	 	79,868	 	 	 	323,839	 	 	 	242,412	 	
Interest and dividends on securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Taxable	 	 	1,721,219	 	 	 	1,888,120	 	 	 	5,459,491	 	 	 	5,948,662	 	
Tax-exempt	 	 	545,597	 	 	 	486,581	 	 	 	1,649,723	 	 	 	1,442,439	 	
Interest on interest bearing deposits with other banks	 	 	32,063	 	 	 	37,868	 	 	 	94,858	 	 	 	115,199	 	
Interest on Federal funds sold	 	 	1,074	 	 	 	3,985	 	 	 	2,377	 	 	 	17,660	 	

 	 	 	 	

Total interest income	 	 	11,634,467	 	 	 	10,293,521	 	 	 	33,598,980	 	 	 	30,593,840	 	

 	 	 	 	

Interest expense	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest on deposits	 	 	2,450,508	 	 	 	2,466,649	 	 	 	7,254,208	 	 	 	7,608,580	 	
Interest on short-term borrowings	 	 	317,243	 	 	 	113,039	 	 	 	692,043	 	 	 	285,848	 	
Interest on long-term borrowings and subordinated debentures	 	 	1,805,352	 	 	 	1,771,798	 	 	 	5,191,979	 	 	 	5,387,835	 	

 	 	 	 	

Total interest expense	 	 	4,573,103	 	 	 	4,351,486	 	 	 	13,138,230	 	 	 	13,282,263	 	

 	 	 	 	

Net interest income	 	 	7,061,364	 	 	 	5,942,035	 	 	 	20,460,750	 	 	 	17,311,577	 	
Provision for loan losses	 	 	292,500	 	 	 	232,500	 	 	 	757,500	 	 	 	682,500	 	

 	 	 	 	

Net interest income after provision for loan losses	 	 	6,768,864	 	 	 	5,709,535	 	 	 	19,703,250	 	 	 	16,629,077	 	

 	 	 	 	

Other income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Insurance commissions	 	 	184,329	 	 	 	64,963	 	 	 	344,889	 	 	 	149,832	 	
Service fees	 	 	574,949	 	 	 	403,188	 	 	 	1,646,494	 	 	 	1,131,137	 	
Mortgage origination revenue	 	 	7,732,451	 	 	 	210,789	 	 	 	18,665,770	 	 	 	533,564	 	
Securities gains (losses)	 	 	(35,657	)	 	 	—	 	 	 	1,403	 	 	 	106,410	 	
Gain (loss) on sale of assets	 	 	(17,002	)	 	 	4,388	 	 	 	(29,183	)	 	 	2,747	 	
Other	 	 	105,440	 	 	 	126,604	 	 	 	289,253	 	 	 	256,303	 	

 	 	 	 	

Total other income	 	 	8,544,510	 	 	 	809,932	 	 	 	20,918,626	 	 	 	2,179,993	 	

 	 	 	 	

Other expense	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Salaries and employee benefits	 	 	5,054,952	 	 	 	2,141,611	 	 	 	13,480,698	 	 	 	5,940,432	 	
Net occupancy expense	 	 	408,402	 	 	 	223,188	 	 	 	1,098,845	 	 	 	628,324	 	
Equipment expense	 	 	432,551	 	 	 	326,401	 	 	 	1,302,995	 	 	 	937,238	 	
Supplies	 	 	176,601	 	 	 	119,873	 	 	 	472,263	 	 	 	351,795	 	
Professional fees	 	 	188,067	 	 	 	151,351	 	 	 	569,653	 	 	 	427,507	 	
Postage	 	 	1,702,901	 	 	 	102,966	 	 	 	4,490,669	 	 	 	203,714	 	
Advertising	 	 	1,228,655	 	 	 	88,836	 	 	 	3,493,981	 	 	 	201,153	 	
Amortization of intangibles	 	 	37,788	 	 	 	37,788	 	 	 	113,364	 	 	 	113,364	 	
Other	 	 	1,537,324	 	 	 	604,621	 	 	 	3,752,081	 	 	 	1,772,890	 	

 	 	 	 	

Total other expense	 	 	10,767,241	 	 	 	3,796,635	 	 	 	28,774,549	 	 	 	10,576,417	 	

 	 	 	 	

Income before income taxes	 	 	4,546,133	 	 	 	2,722,832	 	 	 	11,847,327	 	 	 	8,232,653	 	
Income tax expense	 	 	1,420,115	 	 	 	879,675	 	 	 	3,596,065	 	 	 	2,517,075	 	

 	 	 	 	

Net income	 	$	3,126,018	 	 	$	1,843,157	 	 	$	8,251,262	 	 	$	5,715,578	 	

 	 	 	 	

Basic earnings per common share	 	$	0.89	 	 	$	0.53	 	 	$	2.35	 	 	$	1.63	 	

 	 	 	 	

Diluted earnings per common share	 	$	0.87	 	 	$	0.52	 	 	$	2.30	 	 	$	1.61	 	

 	 	 	 	

Average common shares outstanding	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic	 	 	3,513,086	 	 	 	3,504,820	 	 	 	3,511,317	 	 	 	3,504,373	 	

 	 	 	 	

Diluted	 	 	3,606,290	 	 	 	3,554,700	 	 	 	3,581,763	 	 	 	3,549,988	 	

 	 	 	 	

Dividends per common share	 	$	—	 	 	$	—	 	 	$	0.25	 	 	$	0.20	 	

 	 	 	 	

See Notes to Consolidated Financial Statements 
5 

Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Consolidated Statements of Shareholders’ Equity (unaudited) 
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Accumulated	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Other	 	Total	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Compre-	 	Share-	
 	 	Preferred	 	Common	 	Capital	 	Retained	 	Treasury	 	hensive	 	holders’	
 	 	Stock
	 	Stock
	 	Surplus
	 	Earnings
	 	Stock
	 	Income
	 	Equity
	
Balance, December 31, 2003	 	$	—	 	 	$	8,917,400	 	 	$	3,845,906	 	 	$	43,427,000	 	 	$	(627,659	)	 	$	1,624,896	 	 	$	57,187,543	 	
Nine Months Ended September 30, 2004	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	8,251,262	 	 	 	—	 	 	 	—	 	 	 	8,251,262	 	
Other comprehensive income, net of deferred tax benefit of ($303,491):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net unrealized (loss) on securities of ($496,040), net of reclassification adjustment for gains included in net income of $870	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(495,170	)	 	 	(495,170	)	

Total comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	7,756,092	 	

Exercise of stock options	 	 	—	 	 	 	13,875	 	 	 	51,174	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	65,049	 	
Issuance of preferred shares	 	 	33,400	 	 	 	—	 	 	 	1,125,071	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	1,158,471	 	
Cash dividends declared ($.25 per share)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(877,754	)	 	 	—	 	 	 	—	 	 	 	(877,754	)	

 	 	 	 	

 	 	 	 	

Balance, September 30, 2004	 	$	33,400	 	 	$	8,931,275	 	 	$	5,022,151	 	 	$	50,800,508	 	 	$	(627,659	)	 	$	1,129,726	 	 	$	65,289,401	 	

 	 	 	 	

 	 	 	 	

Balance, December 31, 2002	 	$	—	 	 	$	8,904,150	 	 	$	3,805,891	 	 	$	36,726,583	 	 	$	(619,711	)	 	$	3,262,883	 	 	$	52,079,796	 	
Nine Months Ended September 30, 2003	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	 	—	 	 	 	—	 	 	 	—	 	 	 	5,715,578	 	 	 	—	 	 	 	—	 	 	 	5,715,578	 	
Other comprehensive income, net of deferred taxes of ($978,686):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net unrealized (loss) on securities of ($1,530,830), net of reclassification adjustment for gains included in net income of $65,974	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(1,596,804	)	 	 	(1,596,804	)	

Total comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	4,118,774	 	

Exercise of stock options	 	 	—	 	 	 	2,750	 	 	 	9,015	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	11,765	 	
Purchase of treasury shares	 	 	—	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(7,948	)	 	 	—	 	 	 	(7,948	)	
Cash dividends declared ($.20 per share)	 	 	—	 	 	 	—	 	 	 	—	 	 	 	(700,863	)	 	 	—	 	 	 	—	 	 	 	(700,863	)	

 	 	 	 	

 	 	 	 	

Balance, September 30, 2003	 	$	—	 	 	$	8,906,900	 	 	$	3,814,906	 	 	$	41,741,298	 	 	$	(627,659	)	 	$	1,666,079	 	 	$	55,501,524	 	

 	 	 	 	

 	 	 	 	

See Notes to Consolidated Financial Statements 
6 

Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Consolidated Statements of Cash Flows (unaudited) 
 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended
	
 	 	September 30,	 	September 30,	
 	 	2004
	 	2003
	
Cash Flows from Operating Activities	 	 	 	 	 	 	 	 	
Net income	 	$	8,251,262	 	 	$	5,715,578	 	
Adjustments to reconcile net earnings to net cash provided by operating activities:	 	 	 	 	 	 	 	 	
Depreciation	 	 	1,101,384	 	 	 	767,878	 	
Provision for loan losses	 	 	757,500	 	 	 	682,500	 	
Deferred income tax (benefit)	 	 	(435,650	)	 	 	(238,050	)	
Loans originated for sale	 	 	(195,059,386	)	 	 	(30,712,570	)	
Proceeds from loans sold	 	 	189,315,573	 	 	 	30,910,070	 	
Securities (gains)	 	 	(1,403	)	 	 	(106,410	)	
Loss on disposal of other assets	 	 	30,739	 	 	 	(2,747	)	
Amortization of securities premiums, net	 	 	636,999	 	 	 	1,110,682	 	
Amortization of goodwill and purchase accounting adjustments, net	 	 	134,253	 	 	 	128,160	 	
Increase in accrued interest receivable	 	 	15,730	 	 	 	461,141	 	
(Increase) in other assets	 	 	(805,846	)	 	 	(545,021	)	
Increase (decrease) in other liabilities	 	 	551,543	 	 	 	310,704	 	

 	 	
Net cash provided by operating activities	 	 	4,492,698	 	 	 	8,481,915	 	

 	 	
Cash Flows from Investing Activities	 	 	 	 	 	 	 	 	
Net (increase) in interest bearing deposits with other banks	 	 	(22,623	)	 	 	(1,496,049	)	
Proceeds from maturities and calls of securities available for sale	 	 	21,021,403	 	 	 	23,361,500	 	
Proceeds from sales of securities available for sale	 	 	46,731,835	 	 	 	6,485,830	 	
Principal payments received on securities available for sale	 	 	28,521,445	 	 	 	77,349,314	 	
Purchases of securities available for sale	 	 	(71,980,456	)	 	 	(121,902,748	)	
Net decrease in Federal funds sold	 	 	243,000	 	 	 	3,291,135	 	
Net loans made to customers	 	 	(88,980,707	)	 	 	(61,006,768	)	
Purchases of premises and equipment	 	 	(3,720,962	)	 	 	(4,694,493	)	
Proceeds from sales of other assets	 	 	283,250	 	 	 	2,021,251	 	
Net cash paid in acquisition of Sager Insurance Agency	 	 	(850,000	)	 	 	—	 	

 	 	
Net cash (used in) investing activities	 	 	(68,753,815	)	 	 	(76,591,028	)	

 	 	
Cash Flows from Financing Activities	 	 	 	 	 	 	 	 	
Net increase (decrease) in demand deposit, NOW and savings accounts	 	 	15,115,420	 	 	 	3,283,990	 	
Net increase in time deposits	 	 	8,904,869	 	 	 	13,085,239	 	
Net increase in short-term borrowings	 	 	27,804,177	 	 	 	20,857,942	 	
Proceeds from long-term borrowings	 	 	21,585,000	 	 	 	40,000,000	 	
Repayment of long-term borrowings	 	 	(18,940,033	)	 	 	(8,520,523	)	
Exercise of stock options	 	 	65,049	 	 	 	11,765	 	
Dividends paid	 	 	(877,754	)	 	 	(700,863	)	
Purchase of treasury stock	 	 	—	 	 	 	(7,948	)	
Net proceeds from issuance of trust preferred securities	 	 	7,406,250	 	 	 	—	 	
Net proceeds from issuance of preferred stock	 	 	1,158,471	 	 	 	—	 	

 	 	
Net cash provided by financing activities	 	 	62,221,449	 	 	 	68,009,602	 	

 	 	
Increase (decrease) in cash and due from banks	 	 	(2,039,668	)	 	 	(99,511	)	
Cash and due from banks:	 	 	 	 	 	 	 	 	
Beginning	 	 	14,412,120	 	 	 	11,470,311	 	

 	 	
Ending	 	$	12,372,452	 	 	$	11,370,800	 	

 	 	
(Continued) 
See Notes to Consolidated Financial Statements 
7 

Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Consolidated Statements of Cash Flows — continued (unaudited) 
 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended
	
 	 	September 30,	 	September 30,	
 	 	2004
	 	2003
	
Supplemental Disclosures of Cash Flow Information	 	 	 	 	 	 	 	 	
Cash payments for:	 	 	 	 	 	 	 	 	
Interest	 	$	13,221,052	 	 	$	13,250,968	 	

 	 	
Income taxes	 	$	4,065,534	 	 	$	2,420,000	 	

 	 	
Supplemental Schedule of Noncash Investing and Financing Activities	 	 	 	 	 	 	 	 	
Other assets acquired in settlement of loans	 	$	354,756	 	 	$	787,871	 	

 	 	
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	 	 	$	—	 	

 	 	
Noncash investment in unconsolidated subsidiary trust	 	$	232,000	 	 	$	—	 	

 	 	
See Notes to Consolidated Financial Statements 
8 

Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements (unaudited) 
Note 1. Basis of Presentation 
We, Summit Financial Group, Inc. and subsidiaries, prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual year end financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. 
The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates. 
The results of operations for the nine months ended September 30, 2004 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 2003 audited financial statements and Annual Report on Form 10-K. Certain accounts in the consolidated financial statements for December 31, 2003 and September 30, 2003, as previously presented, have been reclassified to conform to current year classifications. 
Note 2. Significant New Accounting Pronouncements 
Variable interest entities: In December 2003 the Financial Accounting Standards Board (FASB) issued revised Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46-R”). In accordance with FIN 46-R, business enterprises that represent the primary beneficiary of another entity by retaining a controlling interest in that entity’s assets, liabilities and results of operations must consolidate that entity in its financial statements. Prior to the issuance of FIN 46-R, consolidation generally occurred when an enterprise controlled another entity through voting interests. If applicable, transition rules allow the restatement of financial statements or prospective application with a cumulative effect adjustment. We have determined that the provisions of FIN 46-R require deconsolidation of subsidiary trusts which issued guaranteed preferred beneficial interests in subordinated debentures (Trust Preferred Securities). Prior to the adoption of FIN 46-R, we consolidated the trust and the balance sheet included the guaranteed beneficial interests in the subordinated debentures of the trust. Upon adoption of FIN 46-R at December 31, 2003, the trust has been deconsolidated and the junior subordinated debentures of the Company owned by the trust are being disclosed. The Trust Preferred Securities continue to qualify as Tier 1 capital for regulatory purposes. The banking regulatory agencies have not issued any guidance which would change the regulatory capital treatment for the Trust Preferred Securities based on the adoption of FIN 46-R. The adoption of the provisions of FIN 46-R has had no material impact on our results of operations, financial condition, or liquidity. See Note 9 of our Notes to Consolidated Financial Statements for a discussion of our subordinated debentures. 
Loan commitments: During 2003, we adopted the provisions of Statement of Financial Accounting Standards No. 149 (“SFAS 149”), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS 149 requires that commitments to make mortgage loans should be accounted for as derivatives if the loans are to be held for sale, because the commitment represents a written option and accordingly is recorded at the fair value of the option liability. The adoption of SFAS 149 did not have a material impact on our results of operations, financial position, or liquidity. 
9 

Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements (unaudited) 
Note 3. Earnings per Share 
The computations of basic and diluted earnings per share follow: 
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Three Months Ended September 30,
	 	Nine Months Ended September 30,
	
 	 	2004
	 	2003
	 	2004
	 	2003
	
Numerator:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Income	 	$	3,126,018	 	 	$	1,843,157	 	 	$	8,251,262	 	 	$	5,715,578	 	

 	 	 	 	

Denominator:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Denominator for basic earnings per share — weighted average common shares outstanding	 	 	3,513,086	 	 	 	3,504,820	 	 	 	3,511,317	 	 	 	3,504,373	 	
Effect of dilutive securities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Convertible preferred stock	 	 	37,730	 	 	 	—	 	 	 	18,865	 	 	 	—	 	
Stock options	 	 	55,474	 	 	 	49,880	 	 	 	51,581	 	 	 	45,615	 	

 	 	 	 	

 	 	 	93,204	 	 	 	49,880	 	 	 	70,446	 	 	 	45,615	 	

 	 	 	 	

Denominator for diluted earnings per share — weighted average common shares outstanding and assumed conversions	 	 	3,606,290	 	 	 	3,554,700	 	 	 	3,581,763	 	 	 	3,549,988	 	

 	 	 	 	

Basic earnings per share	 	$	0.89	 	 	$	0.53	 	 	$	2.35	 	 	$	1.63	 	

 	 	 	 	

Diluted earnings per share	 	$	0.87	 	 	$	0.52	 	 	$	2.30	 	 	$	1.61	 	

 	 	 	 	

10 

Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements (unaudited) 
Note 4. Securities 
The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at September 30, 2004 and December 31, 2003, and September 30, 2003 are summarized as follows: 
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	September 30, 2004
	
 	 	Amortized	 	Unrealized
	 	Estimated	
 	 	Cost
	 	Gains
	 	Losses
	 	Fair Value
	
Available for Sale	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Taxable:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
U. S. Government agencies and corporations	 	$	17,742,890	 	 	$	269,508	 	 	$	22,231	 	 	$	17,990,167	 	
Mortgage-backed securities	 	 	119,555,229	 	 	 	820,559	 	 	 	510,271	 	 	 	119,865,517	 	
State and political subdivisions	 	 	3,746,155	 	 	 	15,130	 	 	 	—	 	 	 	3,761,285	 	
Corporate debt securities	 	 	5,000,672	 	 	 	256,419	 	 	 	—	 	 	 	5,257,091	 	
Federal Reserve Bank stock	 	 	526,000	 	 	 	—	 	 	 	—	 	 	 	526,000	 	
Federal Home Loan Bank stock	 	 	12,453,200	 	 	 	—	 	 	 	—	 	 	 	12,453,200	 	
Other equity securities	 	 	175,535	 	 	 	—	 	 	 	—	 	 	 	175,535	 	

 	 	 	 	

Total taxable	 	 	159,199,681	 	 	 	1,361,616	 	 	 	532,502	 	 	 	160,028,795	 	

 	 	 	 	

Tax-exempt:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
State and political subdivisions	 	 	41,219,731	 	 	 	1,691,544	 	 	 	7,788	 	 	 	42,903,487	 	
Federal Reserve Bank stock	 	 	8,400	 	 	 	—	 	 	 	—	 	 	 	8,400	 	
Other equity securities	 	 	7,490,763	 	 	 	—	 	 	 	729,186	 	 	 	6,761,577	 	

 	 	 	 	

Total tax-exempt	 	 	48,718,894	 	 	 	1,691,544	 	 	 	736,974	 	 	 	49,673,464	 	

 	 	 	 	

Total	 	$	207,918,575	 	 	$	3,053,160	 	 	$	1,269,476	 	 	$	209,702,259	 	

 	 	 	 	

11 

Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements (unaudited) 
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	December 31, 2003
	
 	 	Amortized	 	Unrealized
	 	Estimated	
 	 	Cost
	 	Gains
	 	Losses
	 	Fair Value
	
Available for Sale	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Taxable:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
U. S. Government agencies and corporations	 	$	21,323,741	 	 	$	556,785	 	 	$	37,831	 	 	$	21,842,695	 	
Mortgage-backed securities	 	 	132,030,288	 	 	 	959,890	 	 	 	532,445	 	 	 	132,457,733	 	
State and political subdivisions	 	 	4,008,910	 	 	 	24,685	 	 	 	—	 	 	 	4,033,595	 	
Corporate debt securities	 	 	16,516,090	 	 	 	774,306	 	 	 	—	 	 	 	17,290,396	 	
Federal Reserve Bank stock	 	 	436,000	 	 	 	—	 	 	 	—	 	 	 	436,000	 	
Federal Home Loan Bank stock	 	 	10,319,400	 	 	 	—	 	 	 	—	 	 	 	10,319,400	 	
Other equity securities	 	 	175,535	 	 	 	—	 	 	 	—	 	 	 	175,535	 	

 	 	 	 	

Total taxable	 	 	184,809,964	 	 	 	2,315,666	 	 	 	570,276	 	 	 	186,555,354	 	

 	 	 	 	

Tax-exempt:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
State and political subdivisions	 	 	40,510,819	 	 	 	1,448,023	 	 	 	31,757	 	 	 	41,927,085	 	
Federal Reserve Bank stock	 	 	8,400	 	 	 	—	 	 	 	—	 	 	 	8,400	 	
Other equity securities	 	 	7,519,216	 	 	 	—	 	 	 	600,827	 	 	 	6,918,389	 	

 	 	 	 	

Total tax-exempt	 	 	48,038,435	 	 	 	1,448,023	 	 	 	632,584	 	 	 	48,853,874	 	

 	 	 	 	

Total	 	$	232,848,399	 	 	$	3,763,689	 	 	$	1,202,860	 	 	$	235,409,228	 	

 	 	 	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	September 30, 2003
	
 	 	Amortized	 	Unrealized
	 	Estimated	
 	 	Cost
	 	Gains
	 	Losses
	 	Fair Value
	
Available for Sale	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Taxable:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
U. S. Government agencies and corporations	 	$	29,190,922	 	 	$	674,663	 	 	$	25,599	 	 	$	29,839,986	 	
Mortgage-backed securities	 	 	113,335,764	 	 	 	924,851	 	 	 	854,787	 	 	 	113,405,828	 	
State and political subdivisions	 	 	4,602,024	 	 	 	32,371	 	 	 	—	 	 	 	4,634,395	 	
Corporate debt securities	 	 	20,796,792	 	 	 	1,063,383	 	 	 	—	 	 	 	21,860,175	 	
Federal Reserve Bank stock	 	 	436,000	 	 	 	—	 	 	 	—	 	 	 	436,000	 	
Federal Home Loan Bank stock	 	 	10,257,400	 	 	 	—	 	 	 	—	 	 	 	10,257,400	 	
Other equity securities	 	 	175,535	 	 	 	—	 	 	 	—	 	 	 	175,535	 	

 	 	 	 	

Total taxable	 	 	178,794,437	 	 	 	2,695,268	 	 	 	880,386	 	 	 	180,609,319	 	

 	 	 	 	

Tax-exempt:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
State and political subdivisions	 	 	34,805,206	 	 	 	1,238,243	 	 	 	51,308	 	 	 	35,992,141	 	
Federal Reserve Bank stock	 	 	8,400	 	 	 	—	 	 	 	—	 	 	 	8,400	 	
Other equity securities	 	 	7,528,703	 	 	 	—	 	 	 	532,019	 	 	 	6,996,684	 	

 	 	 	 	

Total tax-exempt	 	 	42,342,309	 	 	 	1,238,243	 	 	 	583,327	 	 	 	42,997,225	 	

 	 	 	 	

Total	 	$	221,136,746	 	 	$	3,933,511	 	 	$	1,463,713	 	 	$	223,606,544	 	

 	 	 	 	

12 

Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements (unaudited) 
The maturities, amortized cost and estimated fair values of securities at September 30, 2004, are summarized as follows: 
 	 	 	 	 	 	 	 	 	
 	 	Available for Sale
	
 	 	Amortized	 	Estimated	
 	 	Cost
	 	Fair Value
	
Due in one year or less	 	$	43,781,230	 	 	$	43,996,489	 	
Due from one to five years	 	 	88,195,718	 	 	 	88,702,186	 	
Due from five to ten years	 	 	25,155,519	 	 	 	25,756,396	 	
Due after ten years	 	 	30,132,210	 	 	 	31,322,476	 	
Equity securities	 	 	20,653,898	 	 	 	19,924,712	 	

 	 	
 	 	$	207,918,575	 	 	$	209,702,259	 	

 	 	
Note 5. Loans 
Loans are summarized as follows: 
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	September 30,	 	December 31,	 	September 30,	
 	 	2004
	 	2003
	 	2003
	
Commercial	 	$	49,630,140	 	 	$	46,860,481	 	 	$	43,887,181	 	
Commercial real estate	 	 	271,096,757	 	 	 	209,391,036	 	 	 	201,011,465	 	
Real estate — construction	 	 	3,351,168	 	 	 	2,368,552	 	 	 	4,042,282	 	
Real estate — mortgage	 	 	218,117,609	 	 	 	196,134,926	 	 	 	183,141,730	 	
Consumer	 	 	40,558,484	 	 	 	41,112,132	 	 	 	40,846,458	 	
Other	 	 	9,784,308	 	 	 	8,223,033	 	 	 	6,330,576	 	

 	 	 	 	
 	 	
Total loans	 	 	592,538,466	 	 	 	504,090,160	 	 	 	479,259,692	 	
Less unearned fees and interest	 	 	1,199,675	 	 	 	1,069,324	 	 	 	995,948	 	

 	 	 	 	
 	 	
Total loans net of unearned fees and interest	 	 	591,338,791	 	 	 	503,020,836	 	 	 	478,263,744	 	
Less allowance for loan losses	 	 	5,138,121	 	 	 	4,680,625	 	 	 	4,484,263	 	

 	 	 	 	
 	 	
Loans, net	 	$	586,200,670	 	 	$	498,340,211	 	 	$	473,779,481	 	

 	 	 	 	
 	 	
Note 6. Allowance for Loan Losses 
An analysis of the allowance for loan losses for the nine month periods ended September 30, 2004 and 2003, and for the year ended December 31, 2003 is as follows: 
13 

Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements (unaudited) 
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended	 	 	
 	 	September 30,
	 	Year Ended
December 31,	
 	 	2004
	 	2003
	 	2003
	
Balance, beginning of period	 	$	4,680,625	 	 	$	4,053,131	 	 	$	4,053,131	 	
Losses:	 	 	 	 	 	 	 	 	 	 	 	 	
Commercial	 	 	118,635	 	 	 	1,308	 	 	 	1,308	 	
Commercial real estate	 	 	6,862	 	 	 	96,640	 	 	 	96,640	 	
Real estate — mortgage	 	 	5,199	 	 	 	59,952	 	 	 	59,952	 	
Consumer	 	 	163,304	 	 	 	150,378	 	 	 	178,305	 	
Other	 	 	235,373	 	 	 	42,333	 	 	 	72,539	 	

 	 	 	 	
 	 	
Total	 	 	529,373	 	 	 	350,611	 	 	 	408,744	 	

 	 	 	 	
 	 	
Recoveries:	 	 	 	 	 	 	 	 	 	 	 	 	
Commercial	 	 	184	 	 	 	1,583	 	 	 	1,805	 	
Commercial real estate	 	 	21,301	 	 	 	—	 	 	 	2,602	 	
Real estate — mortgage	 	 	9,413	 	 	 	300	 	 	 	413	 	
Consumer	 	 	77,683	 	 	 	65,638	 	 	 	78,515	 	
Other	 	 	120,788	 	 	 	31,722	 	 	 	37,903	 	

 	 	 	 	
 	 	
Total	 	 	229,369	 	 	 	99,243	 	 	 	121,238	 	

 	 	 	 	
 	 	
Net losses	 	 	300,004	 	 	 	251,368	 	 	 	287,506	 	
Provision for loan losses	 	 	757,500	 	 	 	682,500	 	 	 	915,000	 	

 	 	 	 	
 	 	
Balance, end of period	 	$	5,138,121	 	 	$	4,484,263	 	 	$	4,680,625	 	

 	 	 	 	
 	 	
Note 7. Goodwill and Other Intangible Assets 
The following tables present our goodwill at September 30, 2004 and other intangible assets at September 30, 2004, December 31, 2003, and September 30, 2003. There was no goodwill activity during 2003. 
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Goodwill Activity by Operating Segment
	
 	 	Community	 	Mortgage	 	Parent and	 	 	
 	 	Banking
	 	Banking
	 	Other
	 	Total
	
Balance, January 1, 2004	 	$	1,488,030	 	 	$	—	 	 	$	—	 	 	$	1,488,030	 	
Acquired goodwill, net	 	 	—	 	 	 	—	 	 	 	600,000	 	 	 	600,000	 	

 	 	 	 	

Balance, September 30, 2004	 	$	1,488,030	 	 	$	—	 	 	$	600,000	 	 	$	2,088,030	 	

 	 	 	 	

 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Unidentifiable Intangible Assets
	
 	 	September 30,	 	December 31,	 	September 30,	
 	 	2004
	 	2003
	 	2003
	
Unidentifiable intangible assets	 	 	 	 	 	 	 	 	 	 	 	 	
Gross carrying amount	 	$	2,267,323	 	 	$	2,267,323	 	 	$	2,267,323	 	
Less: accumulated amortization	 	 	818,740	 	 	 	705,377	 	 	 	667,589	 	

 	 	 	 	
 	 	
Net carrying amount	 	$	1,448,583	 	 	$	1,561,946	 	 	$	1,599,734	 	

 	 	 	 	
 	 	
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Summit Financial Group, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements (unaudited) 
We recorded amortization expense of approximately $113,000 for the nine months ended September 30, 2004 relative to our unidentifiable intangible assets. Annual amortization is expected to be approximately $151,000 for each of the years ending 2004 through 2008. 
Note 8. Deposits 
The following is a summary of interest bearing deposits by type as of September 30, 2004 and 2003 and December 31, 2003: 
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	September 30,	 	December 31,	 	September 30,	
 	 	2004
	 	2003
	 	2003
	
Interest bearing demand deposits	 	$	123,686,663	 	 	$	112,670,844	 	 	$	101,739,751	 	
Savings deposits	 	 	51,616,243	 	 	 	47,397,004	 	 	 	47,306,731	 	
Certificates of deposit	 	 	283,649,197	 	 	 	274,543,713	 	 	 	252,405,795	 	
Individual retirement accounts	 	 	25,984,840	 	 	 	26,185,456	 	 	 	26,467,797	 	

 	 	 	 	
 	 	
Total	 	$	484,936,943	 	 	$	460,797,017	 	 	$	427,920,074	 	

 	 	 	 	
 	 	
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 September 30, 2004: 
 	 	 	 	 	 	 	 	 	
 	 	Amount
	 	Percent
	
Three months or less	 	$	24,886,451	 	 	 	21.0	%	
Three through six months	 	 	21,748,115	 	 	 	18.3	%	
Six through twelve months	 	 	27,091,593	 	 	 	22.8	%	
Over twelve months	 	 	44,919,794	 	 	 	37.9	%	

 	 	
Total	 	$	118,645,953	 	 	 	100.0	%	

 	 	
A summary of the scheduled maturities for all time deposits as of September 30, 2004 is as follows: 
 	 	 	 	 	
Three month period ending December 31, 2004	 	$	71,534,779	 	
Year Ending December 31, 2005	 	 	153,835,371	 	
Year Ending December 31, 2006	 	 	42,865,655	 	
Year Ending December 31, 2007	 	 	16,843,610	 	
Year Ending December 31, 2008	 	 	15,542,605	 	
Thereafter	 	 	9,012,017	 	

 	 	$	309,634,037	 	

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Summit Financial Group, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements (unaudited) 
Note 9. Borrowed Funds 
Short-term borrowings: A summary of short-term borrowings is presented below: 
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended September 30, 2004
	
 	 	Federal Funds	 	 	 	 	 	Federal	
 	 	Purchased	 	 	 	 	 	Home	
 	 	and	 	 	 	 	 	Loan Bank	
 	 	Lines of	 	Repurchase	 	Short-term	
 	 	Credit
	 	Agreements
	 	Advances
	
Balance at September 30	 	$	127,000	 	 	$	10,289,823	 	 	$	67,101,600	 	
Average balance outstanding for the period	 	 	1,166,283	 	 	 	9,651,655	 	 	 	52,308,195	 	
Maximum balance outstanding at any month end during period	 	 	1,173,000	 	 	 	10,524,126	 	 	 	67,101,600	 	
Weighted average interest rate for the period	 	 	1.99	%	 	 	1.52	%	 	 	1.44	%	
Weighted average interest rate for balances outstanding at September 30	 	 	2.29	%	 	 	1.64	%	 	 	2.03	%	
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Year Ended December 31, 2003
	
 	 	Federal Funds	 	 	 	 	 	Federal	
 	 	Purchased	 	 	 	 	 	Home	
 	 	and	 	 	 	 	 	Loan Bank	
 	 	Lines of	 	Repurchase	 	Short-term	
 	 	Credit
	 	Agreements
	 	Advances
	
Balance at December 31	 	$	—	 	 	$	10,429,146	 	 	$	39,285,100	 	
Average balance outstanding for the year	 	 	1,191,013	 	 	 	8,419,384	 	 	 	22,177,797	 	
Maximum balance outstanding at any month end during year	 	 	6,851,000	 	 	 	10,429,146	 	 	 	39,285,100	 	
Weighted average interest rate for the year	 	 	2.37	%	 	 	1.55	%	 	 	1.27	%	
Weighted average interest rate for balances outstanding at December 31	 	 	—	 	 	 	1.59	%	 	 	1.07	%	
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Summit Financial Group, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements (unaudited) 
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Nine Months Ended September 30, 2003
	
 	 	Federal Funds	 	 	 	 	 	Federal	
 	 	Purchased	 	 	 	 	 	Home	
 	 	and	 	 	 	 	 	Loan Bank	
 	 	Lines of	 	Repurchase	 	Short-term	
 	 	Credit
	 	Agreements
	 	Advances
	
Balance at September 30	 	$	500,000	 	 	$	8,799,845	 	 	$	31,749,200	 	
Average balance outstanding for the period	 	 	968,949	 	 	 	8,365,447	 	 	 	17,019,751	 	
Maximum balance outstanding at any month end during period	 	 	6,851,000	 	 	 	9,002,590	 	 	 	31,749,200	 	
Weighted average interest rate for the period	 	 	3.50	%	 	 	1.62	%	 	 	1.28	%	
Weighted average interest rate for balances outstanding at September 30	 	 	2.61	%	 	 	1.55	%	 	 	1.33	%	
Long-term borrowings: Our long-term borrowings of $166,992,593, $164,646,208 and $165,526,033 at September 30, 2004, December 31, 2003, and September 30, 2003 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 nine month period ended September 30, 2004 was 4.02% compared to 4.63% for the first nine months of 2003. 
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 September 30, 2004, and $3,609,000 at both December 31, 2003 and September 30, 2003. 
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 $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 
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Summit Financial Group, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements (unaudited) 
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
	
2004	 	$	7,378,992	 	
2005	 	 	28,793,780	 	
2006	 	 	17,028,624	 	
2007	 	 	14,554,208	 	
2008	 	 	14,344,851	 	
Thereafter	 	 	96,233,138	 	

 	 	$	178,333,593	 	

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 480,000 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. 
The following pro forma disclosures present for the quarters ended and nine months ended September 30, 2004 and 2003, 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). 
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Summit Financial Group, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements (unaudited) 
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Quarter Ended September 30,
	 	Nine Months Ended September 30,
	
(in thousands, except per share data)	 	2004
	 	2003
	 	2004
	 	2003
	
Net income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
As reported	 	$	3,126	 	 	$	1,843	 	 	$	8,251	 	 	$	5,716	 	
Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	 	 	(23	)	 	 	(9	)	 	 	(80	)	 	 	(27	)	

 	 	 	 	

Pro forma	 	$	3,103	 	 	$	1,834	 	 	$	8,171	 	 	$	5,689	 	

 	 	 	 	

Basic earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
As reported	 	$	0.89	 	 	$	0.53	 	 	$	2.35	 	 	$	1.63	 	

 	 	 	 	

Pro forma	 	$	0.88	 	 	$	0.52	 	 	$	2.33	 	 	$	1.62	 	

 	 	 	 	

Diluted earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
As reported	 	$	0.87	 	 	$	0.52	 	 	$	2.30	 	 	$	1.61	 	

 	 	 	 	

Pro forma	 	$	0.86	 	 	$	0.52	 	 	$	2.28	 	 	$	1.60	 	

 	 	 	 	

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 using the following weighted-average assumptions for grants during the first nine months of 2004: risk free interest rate of 2.96%; dividend yield of 1.21%; volatility factor of the expected market price of our common stock of 22; and an expected option life of 5 years. The weighted-average grant date fair value of the options granted was $7.68. There were no option grants during the first nine months of 2003. 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. 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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Summit Financial Group, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements (unaudited) 
Note 12. Stock Split 
On October 29, 2004, our Board of Directors authorized a 2-for-1 split of our common stock to be effected in the form of a 100% stock dividend that will be distributed on December 15, 2004 to shareholders of record as of December 1, 2004. 
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 September 30, 2004, 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”), Capital State Bank, Inc.’s (“Capital State”) and Shenandoah Valley National Bank’s (“Shenandoah”) are presented in the following table. 
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Summit Financial Group, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements (unaudited) 
(Dollars in thousands) 
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	To be Well Capitalized	
 	 	 	 	 	 	 	 	 	 	Minimum Required	 	under Prompt Corrective	
 	 	Actual
	 	Regulatory Capital
	 	Action Provisions
	
 	 	Amount
	 	Ratio
	 	Amount
	 	Ratio
	 	Amount
	 	Ratio
	
As of September 30, 2004	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Capital (to risk weighted assets)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Summit	 	$	76,371	 	 	 	12.4	%	 	$	49,455	 	 	 	8.0	%	 	$	61,819	 	 	 	10.0	%	
Summit Community	 	 	31,168	 	 	 	11.1	%	 	 	22,541	 	 	 	8.0	%	 	 	28,176	 	 	 	10.0	%	
Capital State	 	 	14,339	 	 	 	11.2	%	 	 	10,223	 	 	 	8.0	%	 	 	12,779	 	 	 	10.0	%	
Shenandoah	 	 	22,520	 	 	 	11.2	%	 	 	16,015	 	 	 	8.0	%	 	 	20,019	 	 	 	10.0	%	
Tier I Capital (to risk weighted assets)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Summit	 	 	71,233	 	 	 	11.5	%	 	 	24,728	 	 	 	4.0	%	 	 	37,091	 	 	 	6.0	%	
Summit Community	 	 	28,727	 	 	 	10.2	%	 	 	11,271	 	 	 	4.0	%	 	 	16,906	 	 	 	6.0	%	
Capital State	 	 	13,110	 	 	 	10.3	%	 	 	5,111	 	 	 	4.0	%	 	 	7,667	 	 	 	6.0	%	
Shenandoah	 	 	21,052	 	 	 	10.5	%	 	 	8,008	 	 	 	4.0	%	 	 	12,011	 	 	 	6.0	%	
Tier I Capital (to average assets)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Summit	 	 	71,233	 	 	 	8.3	%	 	 	25,619	 	 	 	3.0	%	 	 	42,698	 	 	 	5.0	%	
Summit Community	 	 	28,727	 	 	 	7.2	%	 	 	11,970	 	 	 	3.0	%	 	 	19,951	 	 	 	5.0	%	
Capital State	 	 	13,110	 	 	 	7.1	%	 	 	5,502	 	 	 	3.0	%	 	 	9,170	 	 	 	5.0	%	
Shenandoah	 	 	21,052	 	 	 	8.1	%	 	 	7,815	 	 	 	3.0	%	 	 	13,026	 	 	 	5.0	%	
As of December 31, 2003	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total Capital (to risk weighted assets)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Summit	 	$	60,092	 	 	 	11.0	%	 	 	43,678	 	 	 	8.0	%	 	 	54,598	 	 	 	10.0	%	
Summit Community	 	 	28,449	 	 	 	10.9	%	 	 	20,791	 	 	 	8.0	%	 	 	25,989	 	 	 	10.0	%	
Capital State	 	 	12,843	 	 	 	10.7	%	 	 	9,621	 	 	 	8.0	%	 	 	12,026	 	 	 	10.0	%	
Shenandoah	 	 	16,650	 	 	 	10.4	%	 	 	12,780	 	 	 	8.0	%	 	 	15,975	 	 	 	10.0	%	
Tier I Capital (to risk weighted assets)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Summit	 	 	55,411	 	 	 	10.1	%	 	 	21,839	 	 	 	4.0	%	 	 	32,759	 	 	 	6.0	%	
Summit Community	 	 	26,032	 	 	 	10.0	%	 	 	10,396	 	 	 	4.0	%	 	 	15,593	 	 	 	6.0	%	
Capital State	 	 	11,830	 	 	 	9.8	%	 	 	4,810	 	 	 	4.0	%	 	 	7,216	 	 	 	6.0	%	
Shenandoah	 	 	15,399	 	 	 	9.6	%	 	 	6,390	 	 	 	4.0	%	 	 	9,585	 	 	 	6.0	%	
Tier I Capital (to average assets) 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Summit	 	 	55,411	 	 	 	7.3	%	 	 	22,692	 	 	 	3.0	%	 	 	37,820	 	 	 	5.0	%	
Summit Community	 	 	26,032	 	 	 	7.0	%	 	 	11,184	 	 	 	3.0	%	 	 	18,639	 	 	 	5.0	%	
Capital State	 	 	11,830	 	 	 	7.0	%	 	 	5,064	 	 	 	3.0	%	 	 	8,440	 	 	 	5.0	%	
Shenandoah	 	 	15,399	 	 	 	7.1	%	 	 	6,472	 	 	 	3.0	%	 	 	10,786	 	 	 	5.0	%	
Note 14. Segment Information 
We operate two 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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Summit Financial Group, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements (unaudited) 
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	For the Quarter Ended September 30, 2004
	
 	 	Community	 	Mortgage	 	Parent and	 	 	 	 	
Dollars in thousands
	 	Banking
	 	Banking
	 	Other
	 	Eliminations
	 	Total
	
Condensed Statements of Income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	11,399	 	 	$	421	 	 	$	5	 	 	$	(191	)	 	$	11,634	 	
Interest expense	 	 	4,436	 	 	 	189	 	 	 	139	 	 	 	(191	)	 	 	4,573	 	

 	 	 	 	

 	 	
Net interest income	 	 	6,963	 	 	 	232	 	 	 	(134	)	 	 	—	 	 	 	7,061	 	
Provision for loan losses	 	 	293	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	293	 	

 	 	 	 	

 	 	
Net interest income after provision for loan losses	 	 	6,670	 	 	 	232	 	 	 	(134	)	 	 	—	 	 	 	6,768	 	

 	 	 	 	

 	 	
Noninterest income	 	 	700	 	 	 	7,732	 	 	 	1,147	 	 	 	(1,034	)	 	 	8,545	 	
Noninterest expense	 	 	3,880	 	 	 	6,585	 	 	 	1,336	 	 	 	(1,034	)	 	 	10,767	 	

 	 	 	 	

 	 	
Income before income taxes	 	 	3,490	 	 	 	1,379	 	 	 	(323	)	 	 	—	 	 	 	4,546	 	
Income taxes	 	 	1,064	 	 	 	479	 	 	 	(123	)	 	 	—	 	 	 	1,420	 	

 	 	 	 	

 	 	
Net income	 	$	2,426	 	 	$	900	 	 	$	(200	)	 	$	—	 	 	$	3,126	 	

 	 	 	 	

 	 	
Average assets	 	$	846,824	 	 	$	20,185	 	 	$	75,311	 	 	$	(67,515	)	 	$	874,805	 	

 	 	 	 	

 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	For the Quarter Ended September 30, 2003
	
 	 	Community	 	Mortgage	 	Parent and	 	 	 	 	
Dollars in thousands
	 	Banking
	 	Banking
	 	Other
	 	Eliminations
	 	Total
	
Condensed Statements of Income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	10,298	 	 	$	—	 	 	$	2	 	 	$	(6	)	 	$	10,294	 	
Interest expense	 	 	4,292	 	 	 	—	 	 	 	66	 	 	 	(6	)	 	 	4,352	 	

 	 	 	 	

 	 	
Net interest income	 	 	6,006	 	 	 	—	 	 	 	(64	)	 	 	—	 	 	 	5,942	 	
Provision for loan losses	 	 	232	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	232	 	

 	 	 	 	

 	 	
Net interest income after provision for loan losses	 	 	5,774	 	 	 	—	 	 	 	(64	)	 	 	—	 	 	 	5,710	 	

 	 	 	 	

 	 	
Noninterest income	 	 	599	 	 	 	211	 	 	 	844	 	 	 	(844	)	 	 	810	 	
Noninterest expense	 	 	3,390	 	 	 	331	 	 	 	920	 	 	 	(844	)	 	 	3,797	 	

 	 	 	 	

 	 	
Income before income taxes	 	 	2,983	 	 	 	(120	)	 	 	(140	)	 	 	—	 	 	 	2,723	 	
Income taxes	 	 	938	 	 	 	(41	)	 	 	(17	)	 	 	—	 	 	 	880	 	

 	 	 	 	

 	 	
Net income	 	$	2,045	 	 	$	(79	)	 	$	(123	)	 	$	—	 	 	$	1,843	 	

 	 	 	 	

 	 	
Average assets	 	$	719,738	 	 	$	3,994	 	 	$	60,940	 	 	$	(58,962	)	 	$	725,710	 	

 	 	 	 	

 	 	
22 

Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Notes to Consolidated Financial Statements (unaudited) 
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	For the Nine Months Ended September 30, 2004
	
 	 	Community	 	Mortgage	 	Parent and	 	 	 	 	
Dollars in thousands
	 	Banking
	 	Banking
	 	Other
	 	Eliminations
	 	Total
	
Condensed Statements of Income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	33,095	 	 	$	930	 	 	$	11	 	 	$	(437	)	 	$	33,599	 	
Interest expense	 	 	12,790	 	 	 	432	 	 	 	353	 	 	 	(437	)	 	 	13,138	 	

 	 	 	 	

 	 	
Net interest income	 	 	20,305	 	 	 	498	 	 	 	(342	)	 	 	—	 	 	 	20,461	 	
Provision for loan losses	 	 	758	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	758	 	

 	 	 	 	

 	 	
Net interest income after provision for loan losses	 	 	19,547	 	 	 	498	 	 	 	(342	)	 	 	—	 	 	 	19,703	 	

 	 	 	 	

 	 	
Noninterest income	 	 	2,065	 	 	 	18,664	 	 	 	3,032	 	 	 	(2,842	)	 	 	20,919	 	
Noninterest expense	 	 	11,299	 	 	 	16,600	 	 	 	3,718	 	 	 	(2,842	)	 	 	28,775	 	

 	 	 	 	

 	 	
Income before income taxes	 	 	10,313	 	 	 	2,562	 	 	 	(1,028	)	 	 	—	 	 	 	11,847	 	
Income taxes	 	 	3,114	 	 	 	885	 	 	 	(403	)	 	 	—	 	 	 	3,596	 	

 	 	 	 	

 	 	
Net income	 	$	7,199	 	 	$	1,677	 	 	$	(625	)	 	$	—	 	 	$	8,251	 	

 	 	 	 	

 	 	
Average assets	 	$	805,533	 	 	$	15,376	 	 	$	72,352	 	 	$	(64,724	)	 	$	828,537	 	

 	 	 	 	

 	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	For the Nine Months Ended September 30, 2003
	
 	 	Community	 	Mortgage	 	Parent and	 	 	 	 	
Dollars in thousands
	 	Banking
	 	Banking
	 	Other
	 	Eliminations
	 	Total
	
Condensed Statements of Income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest income	 	$	30,603	 	 	$	—	 	 	$	6	 	 	$	(15	)	 	$	30,594	 	
Interest expense	 	 	13,125	 	 	 	—	 	 	 	172	 	 	 	(15	)	 	 	13,282	 	

 	 	 	 	

 	 	
Net interest income	 	 	17,478	 	 	 	—	 	 	 	(166	)	 	 	—	 	 	 	17,312	 	
Provision for loan losses	 	 	683	 	 	 	—	 	 	 	—	 	 	 	—	 	 	 	683	 	

 	 	 	 	

 	 	
Net interest income after provision for loan losses	 	 	16,795	 	 	 	—	 	 	 	(166	)	 	 	—	 	 	 	16,629	 	

 	 	 	 	

 	 	
Noninterest income	 	 	1,666	 	 	 	534	 	 	 	2,444	 	 	 	(2,464	)	 	 	2,180	 	
Noninterest expense	 	 	9,810	 	 	 	498	 	 	 	2,732	 	 	 	(2,464	)	 	 	10,576	 	

 	 	 	 	

 	 	
Income before income taxes	 	 	8,651	 	 	 	36	 	 	 	(454	)	 	 	—	 	 	 	8,233	 	
Income taxes	 	 	2,640	 	 	 	12	 	 	 	(135	)	 	 	—	 	 	 	2,517	 	

 	 	 	 	

 	 	
Net income	 	$	6,011	 	 	$	24	 	 	$	(319	)	 	$	—	 	 	$	5,716	 	

 	 	 	 	

 	 	
Average assets	 	$	703,576	 	 	$	3,280	 	 	$	58,786	 	 	$	(56,918	)	 	$	708,724	 	

 	 	 	 	

 	 	
23 

Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Management’s Discussion and Analysis of Financial Condition and Results of Operations 
INTRODUCTION 
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”), Capital State Bank, Inc. (“Capital State”),Shenandoah Valley National Bank (“Shenandoah”), Summit Financial, LLC (“SFLLC”), and Summit Insurance Services, LLC for the periods indicated. This discussion and analysis should be read in conjunction with our 2003 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 AND 4TH QUARTER 2004 EARNINGS 
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. 
Strong growth in our interest earning assets resulted in an increase of 18.18%, or $3,298,000, in our net interest earnings on a tax equivalent basis for the first nine months in 2004 compared to the same period of 2003. Further, our mortgage banking segment, SFLLC, which began operations during third quarter 2003, contributed $1,684,000 to our first nine months 2004 earnings. Although we have experienced strong earnings momentum from SFLLC, there can be no assurances that SFLLC will continue to perform at this level in the near-term. Earnings derived from SFLLC in the short-term are expected to be tempered by seasonal factors, an overall slowing of consumer mortgage refinancings, and the intense competition that exists in the mortgage lending industry. Accordingly, we anticipate a reduction in the earnings contributed by SFLLC in fourth quarter of 2004, and we expect our consolidated diluted earnings per share for the fourth quarter 2004 to range between $0.65 and $0.70, less than an analyst’s most recent published estimate of $0.77 for the same period. 
During the first quarter of 2004, we acquired an insurance agency located in Moorefield, West Virginia. This acquisition 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 2003 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 
24 

Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Management’s Discussion and Analysis of Financial Condition and Results of Operations 
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. 
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 2003 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 2003 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 completed the required annual impairment test for 2004 and determined that no impairment write-offs were necessary. 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	 	For the Nine Months Ended	
 	 	September 30,
	 	September 30,
	
in thousands
	 	2004
	 	2003
	 	2004
	 	2003
	
Community Banking	 	$	2,426	 	 	$	2,045	 	 	$	7,199	 	 	$	6,011	 	
Mortgage Banking	 	 	900	 	 	 	(79	)	 	 	1,677	 	 	 	24	 	
Parent and Other	 	 	(200	)	 	 	(123	)	 	 	(625	)	 	 	(319	)	

 	 	 	 	

Consolidated net income	 	$	3,126	 	 	$	1,843	 	 	$	8,251	 	 	$	5,716	 	

 	 	 	 	

25 

Table of Contents
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 September 30, 2004 grew 69.61% to $3,126,000, or $0.87 per diluted share as compared to $1,843,000, or $0.52 per diluted share for the quarter ended September 30, 2003. Returns on average equity and assets for the first nine months of 2004 were 18.31% and 1.33%, respectively, compared with 14.06% and 1.08% for the same period of 2003. 
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. 
Our net interest income on a fully tax-equivalent basis totaled $21,443,000 for the nine months period ended September 30, 2004 compared to $18,145,000 for the same period of 2003, representing an increase of $3,298,000 or 18.18%. This increase resulted from growth in interest earning assets, primarily loans, which served to more than offset the 36 basis points decline in the yield on interest earning assets during the same period. Average interest earning assets grew 16.7% from $670,907,000 during the first nine months of 2003 to $782,780,000 for the first nine months of 2004. Average interest bearing liabilities grew 17.6% from $604,149,000 at September 30, 2003 to $710,441,000 at September 30, 2004, at an average yield for the first nine months of 2004 of 2.47% compared to 2.93% for the same period of 2003. 
Our net yield on interest earning assets increased to 3.65% for the nine month period ended September 30, 2004, compared to 3.61% for the same period in 2003. The yields on taxable loans declined 60 basis points during the period ended September 30, 2004, and during the same period, our cost of interest bearing funds also decreased by 46 basis points. Consistent with the experience of many other financial institutions, this margin compression is the result of earning assets repricing at historically low yields, while at the same time, we have limited ability to decrease correspondingly the rates paid on interest bearing liabilities. Further contributing to this situation are historically high prepayments of loans and mortgage-backed securities which necessitate the reinvestment of significant cash flows at rates well below each respective portfolio’s overall yield. 
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 continued decline in our net interest margin. However, if market interest rates remain significantly unchanged, or go lower over the next 12 to 18 months, the spread between interest earning assets and interest bearing liabilities could narrow 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. 
26 

Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Management’s Discussion and Analysis of Financial Condition and Results of Operations 
Table I — Average Balance Sheet and Net Interest Income Analysis
(Dollars in thousands) 
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	For the Nine Months Ended
	
 	 	September 30, 2004
	 	September 30, 2003
	
 	 	Average	 	Earnings/	 	Yield/	 	Average	 	Earnings/	 	Yield/	
 	 	Balance
	 	Expense
	 	Rate
	 	Balance
	 	Expense
	 	Rate
	
Interest earning assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loans, net of unearned income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Taxable	 	$	554,819	 	 	$	26,069	 	 	 	6.26	%	 	$	443,628	 	 	$	22,827	 	 	 	6.86	%	
Tax-exempt (1)	 	 	8,628	 	 	 	489	 	 	 	7.56	%	 	 	5,931	 	 	 	367	 	 	 	8.25	%	
Securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Taxable	 	 	167,446	 	 	 	5,459	 	 	 	4.35	%	 	 	174,554	 	 	 	5,949	 	 	 	4.54	%	
Tax-exempt (1)	 	 	48,344	 	 	 	2,468	 	 	 	6.81	%	 	 	40,934	 	 	 	2,151	 	 	 	7.01	%	
Federal funds sold and interest bearing deposits with other banks	 	 	3,543	 	 	 	97	 	 	 	3.65	%	 	 	5,860	 	 	 	133	 	 	 	3.03	%	

 	 	 	 	

 	 	 	 	
 	 	
Total interest earning assets	 	 	782,780	 	 	 	34,582	 	 	 	5.89	%	 	 	670,907	 	 	 	31,427	 	 	 	6.25	%	

 	 	 	 	 	 	 	 	

Noninterest earning assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash & due from banks	 	 	13,269	 	 	 	 	 	 	 	 	 	 	 	8,645	 	 	 	 	 	 	 	 	 	
Premises and equipment	 	 	19,803	 	 	 	 	 	 	 	 	 	 	 	13,091	 	 	 	 	 	 	 	 	 	
Other assets	 	 	17,577	 	 	 	 	 	 	 	 	 	 	 	20,321	 	 	 	 	 	 	 	 	 	
Allowance for loan losses	 	 	(4,892	)	 	 	 	 	 	 	 	 	 	 	(4,240	)	 	 	 	 	 	 	 	 	

 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	828,537	 	 	 	 	 	 	 	 	 	 	$	708,724	 	 	 	 	 	 	 	 	 	

 	 	 	 	 	 	 	 	 	 	
Interest bearing liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest bearing demand deposits	 	$	119,403	 	 	$	841	 	 	 	0.94	%	 	$	97,891	 	 	$	590	 	 	 	0.80	%	
Savings deposits	 	 	49,234	 	 	 	174	 	 	 	0.47	%	 	 	46,821	 	 	 	202	 	 	 	0.58	%	
Time deposits	 	 	307,334	 	 	 	6,240	 	 	 	2.71	%	 	 	278,648	 	 	 	6,816	 	 	 	3.26	%	
Short-term borrowings	 	 	63,120	 	 	 	692	 	 	 	1.46	%	 	 	26,407	 	 	 	286	 	 	 	1.44	%	
Long-term borrowings and capital trust securities	 	 	171,350	 	 	 	5,192	 	 	 	4.04	%	 	 	154,382	 	 	 	5,388	 	 	 	4.65	%	

 	 	 	 	

 	 	 	 	
 	 	
Total interest bearing liabilities	 	 	710,441	 	 	 	13,139	 	 	 	2.47	%	 	 	604,149	 	 	 	13,282	 	 	 	2.93	%	

 	 	 	 	 	 	 	 	

Noninterest bearing liabilities and shareholders’ equity	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Demand deposits	 	 	52,631	 	 	 	 	 	 	 	 	 	 	 	45,394	 	 	 	 	 	 	 	 	 	
Other liabilities	 	 	5,372	 	 	 	 	 	 	 	 	 	 	 	4,965	 	 	 	 	 	 	 	 	 	
Shareholders’ equity	 	 	60,093	 	 	 	 	 	 	 	 	 	 	 	54,216	 	 	 	 	 	 	 	 	 	

 	 	 	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	 	$	828,537	 	 	 	 	 	 	 	 	 	 	$	708,724	 	 	 	 	 	 	 	 	 	

 	 	 	 	 	 	 	 	 	 	
Net interest earnings	 	 	 	 	 	$	21,443	 	 	 	 	 	 	 	 	 	 	$	18,145	 	 	 	 	 	

 	 	 	 	 	 	
Net yield on interest earning assets	 	 	 	 	 	 	 	 	 	 	3.65	%	 	 	 	 	 	 	 	 	 	 	3.61	%	

 	 	
(1)	 	- Interest income on tax-exempt 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 $983,000 and $833,000 for the periods ended September 30, 2004 and 2003, respectively.	
27 

Table of Contents
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 Nine Months Ended	
 	 	September 30, 2004 versus September 30, 2003
	
 	 	Increase (Decrease)	
 	 	Due to Change in:
	
 	 	Volume
	 	Rate
	 	Net
	
Interest earned on:	 	 	 	 	 	 	 	 	 	 	 	 	
Loans	 	 	 	 	 	 	 	 	 	 	 	 	
Taxable	 	$	5,352	 	 	$	(2,110	)	 	$	3,242	 	
Tax-exempt	 	 	155	 	 	 	(33	)	 	 	122	 	
Securities	 	 	 	 	 	 	 	 	 	 	 	 	
Taxable	 	 	(237	)	 	 	(253	)	 	 	(490	)	
Tax-exempt	 	 	379	 	 	 	(62	)	 	 	317	 	
Federal funds sold and interest bearing deposits with other banks	 	 	(60	)	 	 	24	 	 	 	(36	)	

 	 	 	 	
 	 	
Total interest earned on interest earning assets	 	 	5,589	 	 	 	(2,434	)	 	 	3,155	 	

 	 	 	 	
 	 	
Interest paid on:	 	 	 	 	 	 	 	 	 	 	 	 	
Interest bearing demand deposits	 	 	142	 	 	 	109	 	 	 	251	 	
Savings deposits	 	 	10	 	 	 	(38	)	 	 	(28	)	
Time deposits	 	 	657	 	 	 	(1,233	)	 	 	(576	)	
Short-term borrowings	 	 	403	 	 	 	3	 	 	 	406	 	
Long-term borrowings and capital trust securities	 	 	557	 	 	 	(753	)	 	 	(196	)	

 	 	 	 	
 	 	
Total interest paid on interest bearing liabilities	 	 	1,769	 	 	 	(1,912	)	 	 	(143	)	

 	 	 	 	
 	 	
Net interest income	 	$	3,820	 	 	$	(522	)	 	$	3,298	 	

 	 	 	 	
 	 	
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 $758,000 provision for loan losses for the first nine months of 2004, compared to $683,000 for the same period in 2003. Net loan charge offs for the first nine months of 2004 were $300,000, as compared to $251,000 over the same period of 2003. At September 30, 2004, the allowance for loan losses totaled $5,138,000 or 0.87% of loans, net of unearned income, compared to $4,681,000 or 0.93% of loans, net of unearned income at December 31, 2003. 
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Summit Financial Group, Inc. and Subsidiaries 
Management’s Discussion and Analysis of Financial Condition and Results of Operations 
Our asset quality remains sound. As illustrated in Table III below, our non-performing assets and loans past due 90 days or more and still accruing interest have increased during the past 12 months, but still remain at a historically moderate level. 
Table III — Summary of Past Due Loans and Non-Performing Assets
(Dollars in thousands) 
 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	September 30,
	 	December 31,	
 	 	2004
	 	2003
	 	2003
	
Accruing loans past due 90 days or more	 	$	457	 	 	$	259	 	 	$	342	 	
Nonperforming assets:	 	 	 	 	 	 	 	 	 	 	 	 	
Nonaccrual loans	 	 	1,008	 	 	 	345	 	 	 	1,014	 	
Nonaccrual securities	 	 	363	 	 	 	399	 	 	 	396	 	
Foreclosed properties	 	 	756	 	 	 	560	 	 	 	497	 	
Repossessed assets	 	 	53	 	 	 	11	 	 	 	—	 	

 	 	 	 	
 	 	
Total	 	$	2,637	 	 	$	1,574	 	 	$	2,249	 	

 	 	 	 	
 	 	
Total nonperforming loans as a percentage of total loans	 	 	0.39	%	 	 	0.25	%	 	 	0.27	%	

 	 	 	 	
 	 	
Total nonperforming assets as a percentage of total assets	 	 	0.31	%	 	 	0.21	%	 	 	0.28	%	

 	 	 	 	
 	 	
Noninterest Income 
On the strength of mortgage origination revenue, total noninterest income increased to $8,544,000 for the third quarter of 2004, compared to $810,000 for the same period of 2003. Mortgage origination revenue grew to $7,732,000 for the third quarter of 2004, compared to $211,000 for the same period of 2003. This increase was due to the organization of SFLLC during the third quarter of 2003. This revenue includes mortgage loan origination and sales activity conducted through SFLLC. Refer to Note 14 of the accompanying consolidated financial statements for our segment information. 
Total noninterest income was $20,919,000 for the first nine months of 2004, compared to $2,180,000 in the same period of 2003. Mortgage origination revenue was $18,666,000 for the first nine months of 2004, compared to $534,000 for the same period of 2003. 
Noninterest Expense 
Total noninterest expense increased approximately $18,199,000, or 172.1% to $28,775,000 during the first nine months of 2004 as compared to the same period in 2003. The primary factor contributing to growth in noninterest expense was an increase in salaries and employee benefits expense due to the staffing requirements of SFLLC. Two other major contributors to the increase in total noninterest expense for the nine months ended September 30, 2004 were advertising and postage expense. These increased expenses resulted from SFLLC’s direct mail program utilized to obtain customers. Refer to Note 14 of the accompanying consolidated financial statements for our segment information. 
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Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Management’s Discussion and Analysis of Financial Condition and Results of Operations 
FINANCIAL CONDITION 
Our total assets were $862,246,000 at September 30, 2004, compared to $791,465,000 at December 31, 2003, representing an 8.9% increase. Table IV below serves to illustrate significant changes in our financial position between December 31, 2003 and September 30, 2004. 
Table IV — Summary of Significant Changes in Financial Position
(Dollars in thousands) 
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Balance
December 31,	 	Increase (Decrease)
	 	Balance
September 30,	
 	 	2003
	 	Amount
	 	Percentage
	 	2004
	
Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Securities available for sale	 	 	235,409	 	 	 	(25,707	)	 	 	-10.9	%	 	 	209,702	 	
Loans, net of unearned income	 	 	504,693	 	 	 	93,605	 	 	 	18.5	%	 	 	598,298	 	
Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest bearing deposits	 	$	460,797	 	 	$	24,140	 	 	 	5.2	%	 	$	484,937	 	
Short-term borrowings	 	 	49,714	 	 	 	27,804	 	 	 	55.9	%	 	 	77,518	 	
Long-term borrowings	 	 	168,255	 	 	 	10,079	 	 	 	6.0	%	 	 	178,334	 	
Loan growth during the first nine months of 2004, occurring principally in the commercial and real estate portfolios, was funded primarily by both long-term and 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 September 30, 2004 and December 31, 2003. 
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 $112 million, or 13.0% of total assets at September 30, 2004 versus $115 million, or 14.7% of total assets at December 31, 2003. 
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 September 30, 2004 totaled $65,289,000 compared to $57,188,000 at December 31, 2003, representing an increase of 14.2%. 
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Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Management’s Discussion and Analysis of Financial Condition and Results of Operations 
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 September 30, 2004. 
 	 	 	 	 	 	 	 	 	
 	 	Long	 	 	
 	 	Term	 	Subordinated	
 	 	Debt
	 	Debentures
	
2004	 	$	7,378,992	 	 	$	—	 	
2005	 	 	28,793,780	 	 	 	—	 	
2006	 	 	17,028,624	 	 	 	—	 	
2007	 	 	14,554,208	 	 	 	—	 	
2008	 	 	14,344,851	 	 	 	—	 	
Thereafter	 	 	84,892,138	 	 	 	11,341,000	 	

 	 	
Total	 	$	166,992,593	 	 	$	11,341,000	 	

 	 	
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 September 30, 2004 are presented in the following table. 
 	 	 	 	 	
 	 	September 30,	
 	 	2004
	
Commitments to extend credit:	 	 	 	 	
Revolving home equity and credit card lines	 	$	23,678,939	 	
Construction loans	 	 	52,910,895	 	
Other loans	 	 	28,507,982	 	
Standby letters of credit	 	 	4,909,491	 	

Total	 	$	110,007,307	 	

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Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Management’s Discussion and Analysis of Financial Condition and Results of Operations 
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 slightly asset sensitive; that is, assets are likely to reprice faster than liabilities, resulting in an increase in net income in a rising rate environment. Conversely, net income should decrease 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. 
The following table shows our projected earnings sensitivity as of September 30, 2004 which is well within our ALCO policy limit of +/- 10%: 
 	 	 	 	 	
Change in	 	Percentage	
Interest Rates	 	Change in Net	
(basis points)
	 	Interest Income
	
Down 100	 	 	-2.10	%	
Up 100	 	 	0.58	%	
Up 200	 	 	0.75	%	
CONTROLS AND PROCEDURES 
Our management, including the Chief Executive Officer and Chief Financial Officer, have conducted as of September 30, 2004, 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 September 30, 2004 were effective. There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting 
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Table of Contents
Summit Financial Group, Inc. and Subsidiaries 
Part II. Other Information 
Item 1. Legal Proceedings 
We are involved in various pending legal actions, all of which are regarded as litigation arising in the ordinary course of business and are not expected to have a materially adverse effect on our business or financial condition. 
On December 26, 2003, two of our subsidiaries, Summit Financial, LLC and Shenandoah Valley National Bank, and various employees of Summit Financial, LLC were served with a Petition for Temporary Injunction and a Bill of Complaint filed in the Circuit Court of Fairfax County, Virginia by Corinthian Mortgage Corporation. The filings allege various claims against Summit Financial, LLC and Shenandoah Valley National Bank arising out of the hiring of former employees of Corinthian Mortgage Corporation and the alleged use of trade secrets. The individual defendants have also been sued based on allegations arising out of their former employment relationship with Corinthian Mortgage and their current employment with Summit Financial, LLC. 
The plaintiff seeks damages in the amount proven at trial on each claim and punitive damages in the amount of $350,000 on each claim. Plaintiff also seeks permanent and temporary injunctive relief prohibiting the alleged use of trade secrets by Summit Financial and the alleged solicitation of Corinthian’s employees. 
On January 22, 2004, we successfully defeated the Petition for Temporary Injunction brought against us by Corinthian Mortgage Corporation. The Circuit Court of Fairfax County, Virginia denied Corinthian’s petition. 
We, after consultation with legal counsel, believe that Corinthian’s claims made in its recent lawsuit arising out of the hiring of former employees of Corinthian Mortgage Corporation and the alleged use of trade secrets are without foundation and that meritorious defenses exist as to all the claims. We will continue to evaluate the claims in the Corinthian lawsuit and intend to vigorously defend against them. We believe that the lawsuit is without merit and will have no material adverse effect on us. Management, at the present time, is unable to estimate the impact, if any, an adverse decision may have on our results of operations or financial condition. 
33 

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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	
Date: November 12, 2004 
34 
 
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: November 12, 2004 
 	 	 	
	 	/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: November 12, 2004 
 	 	 	
	 	/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: November 12, 2004 
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: November 12, 2004 
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.