f10q207.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10 – Q/A
Amendment No. 1
                            
                               [X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
                                                                                                EXCHANGE ACT OF 1934                                                              

For the quarterly period ended June 30, 2007.
or
[  ]       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 þ
No o
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o             Accelerated filerþ                    Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o
No þ
 

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

Common Stock, $2.50 par value
7,084,980 shares outstanding as of August 6, 2007

 

 

 
 EXPLANATORY NOTE

Summit Financial Group, Inc. (“Company” or “Summit”) is filing this amendment to its Quarterly Report on From 10-Q for the quarter ended June 30, 2007 to amend and restate financial statements and other financial information filed with the Securities and Exchange Commission (“SEC”).  This amendment is being filed to correct errors in the originally filed Quarterly Report on Form 10-Q related to the Company’s derivative accounting under Statement of Financial Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS No. 133”).
 
In 2003, we entered into four interest rate swap agreements on certain convertible rate advances from the Federal Home Loan Bank(“FHLB”) that were designated as fair value hedges.  The terms of the FHLB convertible rate advances include an option of the FHLB to convert the debt’s fixed interest rate to a variable rate on a quarterly basis.  We evaluated these hedging relationships and concluded that the short-cut method of hedge accounting could be applied and the assumption of no ineffectiveness was valid based upon:  (a) the criteria in paragraph 68 of SFAS 133 were met, and (b) the conversion options in the FHLB advances were mirrored in the interest rate swaps.
 
Based on comments received from the Securities and Exchange Commission, we learned that the above interpretation of paragraph 68 is incorrect.  The conversion is not specifically listed in paragraph 68, and the presence of that term prohibits the application of the short-cut method of hedge accounting, even if the terms are mirrored between the interest rate swap and the hedged item.  Eliminating the application of fair value hedge accounting reverses the fair value adjustments that have been made to the advances and results in all fair value changes for the interest rate swaps being recognized in noninterest income.  Additionally, the net cash settlement payments received/paid during each period for these interest rate swaps were reclassified from interest expense on long-term borrowings to noninterest income.
 
See Note 1, Restatement, in the Notes to Consolidated Financial Statements for a summary of the effects of this restatement.
 
We have also updated information relative to material subsequent events and legal matters in Note 4 of the Notes to Consolidated Financial Statements and Part II Other Information Item 1. Legal Proceedings to reflect the current status of such items through the filing date of this Form 10-Q/A.

 
2
      
  Summit Financial Group, Inc. and Subsidiaries                  
  Table of Contents               
      


     
Page
PART  I.
FINANCIAL INFORMATION
 
       
 
Item 1.
Financial Statements
 
       
   
Consolidated balance sheets June 30, 2007 (unaudited), December 31, 2006, and June 30, 2006 (unaudited)
5
       
   
Consolidated statements of income for the three months and six months ended June 30, 2007 and 2006 (unaudited)
6
       
   
Consolidated statements of shareholders’ equity for the six months ended June 30, 2007 and 2006 (unaudited)
7
       
   
Consolidated statements of cash flows for the six months ended June 30, 2007 and 2006 (unaudited)
8-9
       
   
Notes to consolidated financial statements (unaudited)
10-25
       
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
26-36
       
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
35
       
 
Item 4.
Controls and Procedures
36

3
      
        
 Summit Financial Group, Inc. and Subsidiaries                   
Table of Contents                     
        
      
    


       
PART  II.
OTHER INFORMATION
 
 
 
Item 1.
Legal Proceedings
37
       
 
Item 1A.
Risk Factors
38
       
 
Item 2.
Changes in Securities and Use of Proceeds
None
       
 
Item 3.
Defaults upon Senior Securities
None
       
 
Item 4.
Submission of Matters to a Vote of Security Holders
38
       
 
Item 5.
Other Information
None
       
 
Item 6.
Exhibits
 
       
   
Exhibits
 
 
   
Exhibit 11
Statement re:  Computation of Earnings per Share – Information contained in Note 6 to the Consolidated Financial Statements on page 12 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
 
39



4
      
        
 Summit Financial Group, Inc. and Subsidiaries                   
 Consolidated Balance Sheets (unaudited)                   

 

 
   
June 30,
   
December 31,
   
June 30,
 
   
2007
   
2006
   
2006
 
   
(unaudited)
     
(*)
   
(unaudited)
 
 (dollars in thousands)
 
(Restated)
   
(Restated)
   
(Restated)
 
 ASSETS
                   
 Cash and due from banks
  $
15,198
    $
12,031
    $
12,530
 
 Interest bearing deposits with other banks
   
105
     
271
     
123
 
 Federal funds sold
   
1,717
     
517
     
1,590
 
 Securities available for sale
   
259,526
     
247,874
     
238,382
 
 Loans held for sale, net
   
2,337
     
-
     
-
 
 Loans, net
   
949,175
     
916,045
     
866,170
 
 Property held for sale
   
850
     
41
     
283
 
 Premises and equipment, net
   
22,133
     
22,446
     
22,870
 
 Accrued interest receivable
   
6,812
     
6,352
     
5,018
 
 Intangible assets
   
3,121
     
3,196
     
3,272
 
 Other assets
   
19,118
     
17,031
     
18,720
 
 Assets related to discontinued operations
   
336
     
9,715
     
11,632
 
 Total assets
  $
1,280,428
    $
1,235,519
    $
1,180,590
 
                         
 LIABILITIES AND SHAREHOLDERS' EQUITY
                       
 Liabilities
                       
     Deposits
                       
         Non interest bearing
  $
64,373
    $
62,592
    $
66,071
 
         Interest bearing
   
786,016
     
826,096
     
695,492
 
 Total deposits
   
850,389
     
888,688
     
761,563
 
     Short-term borrowings
   
100,901
     
60,428
     
164,185
 
     Long-term borrowings
   
216,758
     
176,109
     
150,057
 
     Subordinated debentures owed to unconsolidated subsidiary trusts
   
19,589
     
19,589
     
19,589
 
     Other liabilities
   
10,359
     
9,844
     
9,844
 
     Liabilities realted to discontinued operations
   
522
     
2,109
     
329
 
 Total liabilities
   
1,198,518
     
1,156,767
     
1,105,567
 
                         
 Commitments and Contingencies
                       
                         
 Shareholders' Equity
                       
     Common stock and related surplus, $2.50 par value;
                       
        authorized 20,000,000 shares, issued and outstanding
                       
        2007 and December 2006 - 7,084,980 shares;
                       
         issued June 2006 -  7,135,120 shares
   
18,037
     
18,021
     
18,914
 
     Retained earnings
   
65,479
     
61,083
     
59,142
 
     Accumulated other comprehensive income
    (1,606 )     (352 )     (3,033 )
 Total shareholders' equity
   
81,910
     
78,752
     
75,023
 
                         
 Total liabilities and shareholders' equity
  $
1,280,428
    $
1,235,519
    $
1,180,590
 
                         
(*) - December 31, 2006 financial information has been extracted from audited consolidated financial statements
         
                         
 See Notes to Consolidated Financial Statements
                       

 
5
      
        
 Summit Financial Group, Inc. and Subsidiaries                   
 Consolidated Statements of Income (unaudited)                   

 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
   
June 30,
   
June 30,
 
   
2007
   
2006
   
2007
   
2006
 
 (dollars in thousands, except per share amounts)
 
(Restated)
   
(Restated)
   
(Restated)
   
(Restated)
 
 Interest income
                       
     Interest and fees on loans
                       
         Taxable
  $
18,958
    $
16,508
    $
37,555
    $
31,648
 
         Tax-exempt
   
121
     
102
     
236
     
202
 
     Interest and dividends on securities
                               
         Taxable
   
2,739
     
2,250
     
5,318
     
4,385
 
         Tax-exempt
   
524
     
537
     
1,068
     
1,049
 
     Interest on interest bearing deposits with other banks
   
6
     
4
     
9
     
20
 
     Interest on Federal funds sold
   
21
     
8
     
25
     
16
 
 Total interest income
   
22,369
     
19,409
     
44,211
     
37,320
 
 Interest expense
                               
     Interest on deposits
   
8,882
     
6,408
     
17,910
     
11,561
 
     Interest on short-term borrowings
   
960
     
1,831
     
1,918
     
3,795
 
     Interest on long-term borrowings and subordinated debentures
   
3,000
     
2,370
     
5,653
     
4,705
 
 Total interest expense
   
12,842
     
10,609
     
25,481
     
20,061
 
 Net interest income
   
9,527
     
8,800
     
18,730
     
17,259
 
 Provision for loan losses
   
390
     
330
     
780
     
655
 
 Net interest income after provision for loan losses
   
9,137
     
8,470
     
17,950
     
16,604
 
 Other income
                               
     Insurance commissions
   
209
     
247
     
416
     
477
 
     Service fees
   
736
     
726
     
1,353
     
1,356
 
     Securities gains (losses)
   
-
     
-
     
-
     
-
 
     Net cash settlement on interest rate swaps
    (179 )     (111 )     (363 )     (182 )
     Change in fair value of interest rate swap
    (273 )     (246 )     (47 )     (719 )
     Gain (loss) on sale of assets
    (33 )    
-
      (32 )     (4 )
     Other
   
236
     
133
     
426
     
273
 
 Total other income
   
696
     
749
     
1,753
     
1,201
 
 Other expense
                               
     Salaries and employee benefits
   
3,238
     
3,049
     
6,463
     
6,104
 
     Net occupancy expense
   
408
     
390
     
826
     
791
 
     Equipment expense
   
493
     
496
     
940
     
946
 
     Supplies
   
197
     
222
     
370
     
388
 
     Professional fees
   
193
     
245
     
367
     
452
 
     Amortization of intangibles
   
38
     
38
     
76
     
76
 
     Other
   
1,151
     
1,232
     
2,326
     
2,276
 
 Total other expense
   
5,718
     
5,672
     
11,368
     
11,033
 
 Income before income taxes
   
4,115
     
3,547
     
8,335
     
6,772
 
 Income tax expense
   
1,135
     
1,086
     
2,421
     
2,015
 
 Income from continuing operations
  $
2,980
    $
2,461
    $
5,914
    $
4,757
 
  Discontinued Operations
                               
        Exit costs
   
43
     
-
     
123
     
-
 
       Operating income(loss)
    (227 )    
74
      (598 )    
683
 
  Income from discontinued operations before income tax expense(benefit)
    (184 )    
74
      (475 )    
683
 
       Income tax expense(benefit)
    (66 )    
33
      (162 )    
259
 
              Income from discontinued operations
    (118 )    
41
      (313 )    
424
 
                                   Net Income
  $
2,862
    $
2,502
    $
5,601
    $
5,181
 
                                 
  Basic earnings from continuing operations per common share
  $
0.42
    $
0.34
    $
0.83
    $
0.67
 
  Basic earnings per common share
  $
0.40
    $
0.35
    $
0.79
    $
0.73
 
  Diluted earnings from continuing operations per common share
  $
0.42
    $
0.34
    $
0.83
    $
0.66
 
  Diluted earnings per common share
  $
0.40
    $
0.35
    $
0.78
    $
0.72
 
  Dividends per common share
  $
0.17
    $
0.16
    $
0.17
    $
0.16
 
                                 
 See Notes to Consolidated Financial Statements
                               


6
      
        
 Summit Financial Group, Inc. and Subsidiaries                   
 Statement of Shareholders' Equity (unaudited)                   


 
                         
               
Accumulated
   
Total
 
   
Common
         
Other
   
Share-
 
   
Stock and
   
Retained
   
Compre-
   
holders'
 
   
Related
   
Earnings
   
hensive
   
Equity
 
 (dollars in thousands, except per share amounts)
 
Surplus
   
(Restated)
   
Income
   
(Restated)
 
                         
 Balance, December 31, 2006
  $
18,021
    $
61,083
    $ (352 )   $
78,752
 
 Six Months Ended June 30, 2007
                               
     Comprehensive income:
                               
       Net income
   
-
     
5,601
     
-
     
5,601
 
       Other comprehensive income,
                               
         net of deferred tax benefit
                               
         of ($769):
                               
         Net unrealized loss on
                               
           securities of ($1,254)
   
-
     
-
      (1,254 )     (1,254 )
     Total comprehensive income
                           
4,347
 
     Stock compensation expense
   
16
     
-
     
-
     
16
 
     Cash dividends declared ($0.17 per share)
   
-
      (1,205 )    
-
      (1,205 )
                                 
 Balance, June 30, 2007
  $
18,037
    $
65,479
    $ (1,606 )   $
81,910
 
                                 
                                 
 Balance, December 31, 2005
  $
18,857
    $
55,102
    $ (1,268 )   $
72,691
 
 Six Months Ended June 30, 2006
                               
     Comprehensive income:
                               
       Net income
   
-
     
5,181
     
-
     
5,181
 
       Other comprehensive income,
                               
         net of deferred tax benefit
                               
         of ($909):
                               
         Net unrealized (loss) on
                               
           securities of ($1,765)
   
-
     
-
      (1,765 )     (1,765 )
     Total comprehensive income
                           
3,416
 
     Exercise of stock options
   
44
     
-
     
-
     
44
 
     Stock compensation expense
   
13
                     
13
 
     Cash dividends declared ($0.16 per share)
   
-
      (1,141 )    
-
      (1,141 )
                                 
 Balance, June 30, 2006
  $
18,914
    $
59,142
    $ (3,033 )   $
75,023
 
                                 
                                 
                                 
                                 
                                 
                                 
 See Notes to Consolidated Financial Statements
                               



7
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Consolidated Statements of Cash Flows (unaudited)               
         
 


   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2007
   
2006
 
 (dollars in thousands)
 
(Restated)
   
(Restated)
 
 Cash Flows from Operating Activities
           
     Net income
  $
5,601
    $
5,181
 
     Adjustments to reconcile net earnings to net cash
               
         provided by operating activities:
               
         Depreciation
   
763
     
853
 
         Provision for loan losses
   
1,030
     
875
 
         Stock compensation expense
   
16
     
13
 
         Deferred income tax (benefit)
   
210
      (452 )
         Loans originated for sale
    (12,695 )     (140,305 )
         Proceeds from loans sold
   
19,348
     
152,290
 
         (Gain) on sales of loans held for sale
    (562 )     (5,102 )
         Securities (gains)
   
-
     
-
 
         Change in fair value of derivative instruments
   
47
     
719
 
         Exit costs related to discontinued operations
    (123 )    
-
 
         Loss on disposal of other assets
   
32
     
4
 
         Amortization of securities premiums, net
    (37 )    
101
 
         Amortization of goodwill and purchase accounting
               
             adjustments, net
   
81
     
81
 
         (Decrease) in accrued interest receivable
    (465 )     (189 )
         (Increase) in other assets
    (810 )     (271 )
         Increase(decrease)  in other liabilities
    (947 )    
95
 
 Net cash provided by (used in) operating activities
   
11,489
     
13,893
 
 Cash Flows from Investing Activities
               
     Net (increase) decrease in interest bearing deposits
               
        with other banks
   
166
     
1,414
 
     Proceeds from maturities and calls of securities available for sale
   
12,404
     
3,500
 
     Proceeds from sales of securities available for sale
   
7,141
     
8,623
 
     Principal payments received on securities available for sale
   
14,098
     
11,954
 
     Purchases of securities available for sale
    (47,265 )     (41,579 )
     Net (increase) decrease in Federal funds sold
    (1,200 )    
2,060
 
     Net loans made to customers
    (34,832 )     (73,832 )
     Purchases of premises and equipment
    (488 )     (1,317 )
     Proceeds from sales of other assets
   
86
     
26
 
     Purchase of life insurance contracts
   
-
      (880 )
 Net cash provided by (used in) investing activities
    (49,890 )     (90,031 )
 Cash Flows from Financing Activities
               
     Net increase in demand deposit, NOW and
               
         savings accounts
   
6,047
     
11,137
 
     Net increase(decrease) in time deposits
    (44,395 )    
76,599
 
     Net increase(decrease) in short-term borrowings
   
40,473
      (17,843 )
     Proceeds from long-term borrowings
   
50,000
     
17,801
 
     Repayment of long-term borrowings
    (9,352 )     (20,465 )
     Exercise of stock options
   
-
     
44
 
     Dividends paid
    (1,205 )     (1,141 )
 Net cash provided by financing activities
   
41,568
     
66,132
 
 Increase (decrease) in cash and due from banks
   
3,167
      (10,006 )
 Cash and due from banks:
               
         Beginning
   
12,031
     
22,536
 
         Ending
  $
15,198
    $
12,530
 
                 
(Continued)
 
                 
 See Notes to Consolidated Financial Statements
               


8
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Consolidated Statements of Cash Flows (unaudited)               
         



   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2007
   
2006
 
 (dollars in thousands)
 
(Restated)
   
(Restated)
 
             
 Supplemental Disclosures of Cash Flow Information
           
     Cash payments for:
           
         Interest
  $
25,414
    $
19,832
 
         Income taxes
  $
2,190
    $
2,641
 
                 
Supplemental Schedule of Noncash Investing and Financing Activities
         
     Other assets acquired in settlement of loans
  $
852
    $
44
 
 
 
 
 
 
 
 
 
 See Notes to Consolidated Financial Statements

 
9
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         

 
Note 1. Restatement

Summit Financial Group, Inc. (“We”, “Company”, or “Summit”) is restating its consolidated financial statements and other financial information to correct errors related to our derivative accounting under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS. No. 133”).

In 2003, we entered into four interest rate swap agreements on certain convertible rate advances from the Federal Home Loan Bank(“FHLB”) that were designated as fair value hedges.  The terms of the FHLB convertible rate advances include an option of the FHLB to convert the debt’s fixed interest rate to a variable rate on a quarterly basis.  We evaluated these hedging relationships and concluded that the short-cut method of hedge accounting could be applied and the assumption of no ineffectiveness was valid based upon:  (a) the criteria in paragraph 68 of SFAS 133 were met, and (b) the conversion options in the FHLB advances were mirrored in the interest rate swaps.
 
Recently, we learned that the above interpretation of paragraph 68 is incorrect.  The conversion is not specifically listed in paragraph 68, and the presence of that term prohibits the application of the short-cut method of hedge accounting, even if the terms are mirrored between the interest rate swap and the hedged item.  Eliminating the application of fair value hedge accounting reverses the fair value adjustments that have been made to the advances and results in all fair value changes for the interest rate swaps being recognized in noninterest income.  Additionally, the net cash settlement payments received/paid during each period for these interest rate swaps were reclassified from interest expense on long-term borrowings to noninterest income.
 
The following tables reflect a summary of both the originally reported and restated amounts:
 


Consolidated Balance Sheets
                                   
(dollars in thousands)
                                   
   
June 30, 2007
   
December 31, 2006
   
June 30, 2006
 
   
As Previously Reported
   
As Restated
   
As Previously Reported
   
As Restated
   
As Previously Reported
   
As Restated
 
Other assets
  $
18,410
    $
19,118
    $
16,343
    $
17,031
    $
17,778
    $
18,720
 
Total assets
   
1,279,720
     
1,280,428
     
1,234,831
     
1,235,519
     
1,179,648
     
1,180,590
 
Long-term borrowings
   
214,887
     
216,758
     
174,292
     
176,109
     
147,579
     
150,057
 
Total liabilities
   
1,196,653
     
1,198,518
     
1,154,956
     
1,156,767
     
1,103,089
     
1,105,567
 
Retained earnings
   
66,636
     
65,479
     
62,206
     
6,183
     
60,678
     
59,142
 
Total shareholders' equity
   
83,067
     
81,910
     
79,875
     
78,752
     
76,559
     
75,023
 
Total liabilities and shareholders' equity
   
1,279,720
     
1,280,428
     
1,234,831
     
1,235,519
     
1,179,648
     
1,180,590
 

10
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         
 


Consolidated Statements of Income
                                           
(dollars in thousands)
                                               
   
Three Months Ended June 30,
   
Six Months Ended March 31,
 
   
2007
   
2006
   
2007
   
2006
 
   
As Previously Reported
   
As Restated
   
As Previously Reported
   
As Restated
   
As Previously Reported
   
As Restated
   
As Previously Reported
   
As Restated
 
Interest income
  $
22,369
    $
22,369
    $
19,409
    $
19,409
    $
44,211
    $
44,211
    $
37,320
    $
37,320
 
Interest expense
   
13,023
     
12,842
     
10,756
     
10,609
     
25,841
     
25,481
     
20,288
     
20,061
 
Net interest income
   
9,346
     
9,527
     
8,653
     
8,800
     
18,370
     
18,730
     
17,032
     
17,259
 
Provision for loan losses
   
390
     
390
     
330
     
330
     
780
     
780
     
655
     
655
 
Noninterest income:
                                                               
   Net cash settlement
                                                               
      on derivative instruments
   
-
      (179 )    
-
      (111 )    
-
      (363 )    
-
      (182 )
   Change in fair value of
           
-
                                                 
      derivative instruments
   
-
      (273 )    
-
      (246 )    
-
      (47 )    
-
      (719 )
   Other noninterest income
   
1,154
     
1,148
     
1,109
     
1,106
     
2,166
     
2,163
     
2,112
     
2,102
 
Noninterest expense
   
5,718
     
5,718
     
5,672
     
5,672
     
11,368
     
11,368
     
11,033
     
11,033
 
Income from continuing operations
                                                               
   before income taxes
   
4,392
     
4,115
     
3,760
     
3,547
     
8,388
     
8,335
     
7,456
     
6,772
 
Income tax expense
   
1,240
     
1,135
     
1,167
     
1,086
     
2,441
     
2,421
     
2,275
     
2,015
 
Income from continuing operations
                                                               
Income (loss) from discontinued
   
3,152
     
2,980
     
2,593
     
2,461
     
5,947
     
5,914
     
5,181
     
4,757
 
   operations, net of income taxes
    (118 )     (118 )    
41
     
41
      (313 )     (313 )    
424
     
424
 
Net income
  $
3,034
    $
2,862
    $
2,634
    $
2,502
    $
5,634
    $
5,601
    $
5,605
    $
5,181
 
                                                                 
Diluted earnings per share:
                                                               
   Income from continuing operations
  $
0.44
    $
0.42
    $
0.36
    $
0.34
    $
0.83
    $
0.83
    $
0.72
    $
0.66
 
   Net income
  $
0.42
    $
0.40
    $
0.37
    $
0.35
    $
0.79
    $
0.78
    $
0.78
    $
0.72
 
Average diluted shares outstanding
   
7,148,241
     
7,148,241
     
7,189,644
     
7,189,644
     
7,148,241
     
7,148,241
     
7,189,644
     
7,187,644
 



Consolidated Statements of Shareholders' Equity
                   
(dollars in thousands)
                       
   
June 30,
 
   
2007
   
2006
 
   
As Previously Reported
   
As Restated
   
As Previously Reported
   
As Restated
 
Balance, beginning of period
  $
79,875
    $
78,752
    $
73,804
    $
72,691
 
Increase attributable to net income
   
5,634
     
5,601
     
5,605
     
5,181
 
Balance, end of period
   
83,067
     
81,910
     
76,559
     
75,023
 
                                 

 
In addition, the following Notes to Consolidated Financial Statements have been restated:  6, 12 and 15.

11
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         


Note 2.  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/A 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 six months ended June 30, 2007 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 2006 audited financial statements and Annual Report on Form 10-K/A.  Certain accounts in the consolidated financial statements for December 31, 2006 and June 30, 2006, as previously presented, have been reclassified to conform to current year classifications.

Note 3.  Significant New Accounting Pronouncements

 In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting and disclosure for uncertain tax positions, as defined. FIN 48 requires that a tax position meet a "probable recognition threshold" for the benefit of the uncertain tax position to be recognized in the financial statements. A tax position that fails to meet the probable recognition threshold will result in either reduction of a current or deferred tax asset or receivable, or recording a current or deferred tax liability. FIN 48 also provides guidance on measurement, derecognition of tax benefits, classification, interim period accounting disclosure, and transition requirements in accounting for uncertain tax positions. This interpretation is effective for fiscal years beginning after December 15, 2006. The Company will be required to apply the provisions of FIN 48 to all tax positions upon initial adoption with any cumulative effect adjustment to be recognized as an adjustment to retained earnings. We adopted the provisions of this statement January 1, 2007, which has not had a material effect on our financial statements.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements, but does not require any new fair value measurements.  This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and early application is encouraged.  We are currently evaluating the adoption of this statement and have not determined the impact it will have on our financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standard No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115.” The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are to be reported in earnings at each subsequent reporting date.  The fair value option (i) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method , (ii) is irrevocable (unless a new election date occurs), and (iii) is applied only to entire instruments and not to portions of instruments.  This statement becomes effective for us January 1, 2008.  We are currently evaluating the adoption of this statement and have not determined the impact it will have on our financial statements.
12
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         

Note 4.  Acquisition and Subsequent Event
 
Effective July 2, 2007, we acquired Kelly Insurance Agency, Inc. and Kelly Property and Casualty, Inc., two Virginia corporations located in Leesburg, Virginia, which were merged into Summit Insurance Services, LLC, our wholly owned subsidiary.  We have deemed this transaction to be an immaterial acquisition.

As announced on April 12, 2007, we entered into an Agreement and Plan of Reorganization (the “Agreement”) with Greater Atlantic Financial Corporation, Inc. (“Greater Atlantic”), headquartered in Reston, Virginia.

Under the terms of the Agreement, we will pay $4.60 per share in cash and stock for the outstanding common stock of Great Atlantic, subject to adjustment based on Greater Atlantic’s shareholders’ equity at the end of the month in which the sale of the Pasadena branch office is completed.  If, at that month-end, Greater Atlantic’s shareholders’ equity, as adjusted in accordance with the terms of the Agreement, is less than $6.7 million, then the total aggregate value of the transaction consideration will be decreased dollar-for-dollar.  If Greater Atlantic’s month end adjusted shareholders’ equity exceeds $6.7 million, then the aggregate value of the transaction consideration will be increased dollar-for-dollar, but only to the extent that the amount in excess of $6.7 million is attributable to the sale of the Pasadena branch office, net of all taxes, if any, Greater Atlantic would be required to pay.  Greater Atlantic has entered into a definitive agreement with another financial institution to sell its Pasadena, Maryland branch office for a deposit premium of 8.5%, prior to the close to of its transaction with Summit.  This branch sale closed on August 24, 2007, at which time the deposits at the Pasadena branch office approximated $51.5 million, resulting in a deposit premium of $4.3 million.  The aggregate value of the final transaction consideration will be determined before proxy solicitation materials are sent to Greater Atlantic’s shareholders for purposes of soliciting their vote on the transaction.

 
The final transaction consideration will be paid 70% in the form of Summit common stock and 30% in cash.  The exchange ratio for determining the number of shares of Summit common stock to be issued for each share of Greater Atlantic’s common stock will be based on the average closing price of Summit’s common stock for the twenty trading days before the closing date of the transaction (“Summit’s Average Closing Stock Price”), subject to a “collar”.   The collar ranges from $17.82 per share to $24.10 per share.  If Summit’s Average Closing Stock Price falls within this range, then Greater Atlantic shareholders will receive shares of Summit’s common stock based on an exchange ratio equal to 70% of the final per share transaction consideration divided by Summit’s Average Closing Stock Price.  However, if Summit’s Average Closing Stock Price is less than $17.82 per share, the exchange ratio will equal 70% of the final per share transaction consideration divided by $17.82; and if Summit’s Average Closing Stock Price is more than $24.10 per share, then the exchange ratio will equal 70% of the final per share transaction consideration divided by $24.10.
 
Consummation of the Merger is subject to approval of the shareholders of Greater Atlantic and the receipt of all required regulatory approvals, as well as other customary conditions.   This acquisition is expected to close during fourth quarter of this year.
 
13
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         

Note 5.  Discontinued Operations

The following table lists the assets and liabilities of Summit Mortgage included in the balance sheet as assets and liabilities related to discontinued operations.
 


   
June 30,
   
December 31,
   
June 30,
 
(dollars in thousands)
 
2007
   
2006
   
2006
 
Assets:
                 
Loans held for sale, net
  $
-
    $
8,428
    $
9,702
 
Loans, net
   
-
     
180
     
510
 
Premises and equipment, net
   
-
     
-
     
683
 
Property held for sale
   
-
     
75
     
75
 
Other assets
   
336
     
1,032
     
662
 
Total assets
  $
336
    $
9,715
    $
11,632
 
Liabilities:
                       
Accrued expenses and other liabilities
  $
522
    $
2,109
    $
329
 
Total liabilities
  $
522
    $
2,109
    $
329
 

The results of Summit Mortgage are presented as discontinued operations in a separate category on the income statements following the results from continuing operations.  The income (loss) from discontinued operations for the periods ended June 30, 2007 and 2006 is presented below.
 


Statements of Income from Discontinued Operations
                   
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
(dollars in thousands)
 
2007
   
2006
   
2007
   
2006
 
Interest income
  $
22
    $
411
    $
134
    $
974
 
Interest expense
   
-
     
234
     
45
     
545
 
Net interest income
   
22
     
177
     
89
     
429
 
Provision for loan losses
   
-
     
150
     
250
     
220
 
Net interest income after provision for loan losses
   
22
     
27
      (161 )    
209
 
                                 
Noninterest income
                               
   Mortgage origination revenue
   
13
     
5,946
     
816
     
12,529
 
   (Loss) on sale of assets
   
-
     
-
      (51 )    
-
 
Total noninterest income
   
13
     
5,946
     
765
     
12,529
 
Noninterest expense
                               
   Salaries and employee benefits
   
100
     
1,806
     
542
     
3,908
 
   Net occupancy expense
   
13
     
180
     
9
     
349
 
   Equipment expense
   
1
     
79
     
23
     
150
 
   Professional fees
   
100
     
244
     
197
     
322
 
   Postage
   
-
     
1,690
     
-
     
3,426
 
   Advertising
   
-
     
1,163
     
98
     
2,453
 
   Impairment of long-lived assets
   
-
     
-
     
-
     
-
 
   Exit costs
    (43 )    
-
      (123 )    
-
 
   Other
   
48
     
737
     
334
     
1,447
 
Total noninterest expense
   
219
     
5,899
     
1,080
     
12,055
 
Income (loss) before income tax expense
    (184 )    
74
      (476 )    
683
 
   Income tax expense (benefit)
    (66 )    
33
      (163 )    
259
 
Income (loss) from discontinued operations
  $ (118 )   $
41
    $ (313 )   $
424
 


14
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         

 
Included in liabilities related to discontinued operations in the accompanying consolidated financial statements is an accrual for exit costs related to the discontinuance of the mortgage banking segment.  During fourth quarter 2006, we accrued $1,859,000 for exit costs, which was comprised of costs related to operating lease terminations, vendor contract terminations, and severance payments.  The changes in that accrual are as follows:

 


(dollars in thousands)
 
Operating Lease Terminations
   
Vendor Contract Terminations
   
Severance Payments
   
Total
 
Balance, December 31, 2006
  $
734
    $
740
    $
385
    $
1,859
 
Less:
                               
   Payments from the accrual
    (379 )     (509 )     (305 )     (1,193 )
   Addition to the accrual
   
188
     
-
     
-
     
188
 
   Reversal of over accrual
   
-
      (231 )     (80 )     (311 )
Balance, June 30, 2007
  $
543
    $
-
    $
-
    $
543
 
 

Note 6.  Earnings per Share

The computations of basic and diluted earnings per share follow:
 
 

 
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
(Restated)
   
(Restated)
 
(dollars in thousands , except per share amounts)
 
2007
   
2006
   
2007
   
2006
 
Numerator for both basic and diluted earnings per share:
                       
    Income from continuing operations
  $
2,980
    $
2,461
    $
5,914
    $
4,757
 
    Income (loss) from discontinued operations
    (118 )    
41
      (313 )    
424
 
Net Income
  $
2,862
    $
2,502
    $
5,601
    $
5,181
 
                                 
Denominator
                               
    Denominator for basic earnings per share -
                               
    weighted average common shares outstanding
   
7,084,980
     
7,135,107
     
7,084,980
     
7,131,611
 
Effect of dilutive securities:
                               
    Stock options
   
63,261
     
58,300
     
62,904
     
61,588
 
     
63,261
     
58,300
     
62,904
     
61,588
 
Denominator for diluted earnings per share -
                               
    weighted average common shares outstanding and
                               
    assumed conversions
   
7,148,241
     
7,193,407
     
7,147,884
     
7,193,199
 
                                 
Basic earnings per share from continuing operations
  $
0.42
    $
0.34
    $
0.83
    $
0.67
 
Basic earnings per share from discontinued operations
    (0.02 )    
0.01
      (0.04 )    
0.06
 
Basic earnings per share
  $
0.40
    $
0.35
    $
0.79
    $
0.73
 
                                 
Diluted earnings per share from continuing operations
  $
0.42
    $
0.34
    $
0.83
    $
0.66
 
Diluted earnings per share from discontinued operations
    (0.02 )    
0.01
      (0.04 )    
0.06
 
Diluted earnings per share
  $
0.40
    $
0.35
    $
0.78
    $
0.72
 

15
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         

 
Note 7.  Securities

The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at June 30, 2007, December 31, 2006, and June 30, 2006 are summarized as follows:
 
 


   
June 30, 2007
 
   
Amortized
   
Unrealized
   
Estimated
 
 (dollars in thousands)
 
Cost
   
Gains
   
Losses
   
Fair Value
 
 Available for Sale
                       
     Taxable:
                       
         U. S. Government agencies
                       
             and corporations
  $
35,662
    $
1
    $
408
    $
35,254
 
         Mortgage-backed securities
   
161,547
     
190
     
3,381
     
158,357
 
         State and political subdivisions
   
3,759
     
18
     
-
     
3,777
 
         Corporate debt securities
   
1,677
     
12
     
16
     
1,674
 
         Federal Home Loan Bank stock
   
13,403
     
-
     
-
     
13,403
 
         Other equity securities
   
677
     
-
     
-
     
677
 
 Total taxable
   
216,725
     
221
     
3,805
     
213,142
 
     Tax-exempt:
                               
         State and political subdivisions
   
40,900
     
685
     
256
     
41,329
 
         Other equity securities
   
4,473
     
594
     
12
     
5,055
 
 Total tax-exempt
   
45,373
     
1,279
     
268
     
46,384
 
 Total
  $
262,098
    $
1,500
    $
4,073
    $
259,526
 



   
December 31, 2006
 
   
Amortized
   
Unrealized
   
Estimated
 
 (dollars in thousands)
 
Cost
   
Gains
   
Losses
   
Fair Value
 
 Available for Sale
                       
     Taxable:
                       
         U. S. Government agencies
                       
             and corporations
  $
37,671
    $
3
    $
334
    $
37,340
 
         Mortgage-backed securities
   
146,108
     
470
     
2,262
     
144,316
 
         State and political subdivisions
   
3,759
     
25
     
-
     
3,784
 
         Corporate debt securities
   
1,682
     
19
     
2
     
1,699
 
         Federal Reserve Bank stock
   
669
     
-
     
-
     
669
 
         Federal Home Loan Bank stock
   
12,094
     
-
     
-
     
12,094
 
         Other equity securities
   
151
     
-
     
-
     
151
 
 Total taxable
   
202,134
     
517
     
2,598
     
200,053
 
     Tax-exempt:
                               
         State and political subdivisions
   
40,329
     
1,026
     
68
     
41,287
 
         Other equity securities
   
5,975
     
573
     
14
     
6,534
 
 Total tax-exempt
   
46,304
     
1,599
     
82
     
47,821
 
 Total
  $
248,438
    $
2,116
    $
2,680
    $
247,874
 


16
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         




   
June 30, 2006
 
   
Amortized
   
Unrealized
   
Estimated
 
 (dollars in thousands)
 
Cost
   
Gains
   
Losses
   
Fair Value
 
 Available for Sale
                       
     Taxable:
                       
         U. S. Government agencies
                       
             and corporations
  $
40,448
    $
2
    $
830
    $
39,620
 
         Mortgage-backed securities
   
131,993
     
35
     
4,693
     
127,335
 
         State and political subdivisions
   
3,759
     
-
     
37
     
3,722
 
         Corporate debt securities
   
2,537
     
15
     
5
     
2,547
 
         Federal Reserve Bank stock
   
639
     
-
     
-
     
639
 
         Federal Home Loan Bank stock
   
15,769
     
-
     
-
     
15,769
 
         Other equity securities
   
151
     
-
     
-
     
151
 
 Total taxable
   
195,296
     
52
     
5,565
     
189,783
 
     Tax-exempt:
                               
         State and political subdivisions
   
41,911
     
645
     
334
     
42,222
 
         Other equity securities
   
5,977
     
430
     
30
     
6,377
 
 Total tax-exempt
   
47,888
     
1,075
     
364
     
48,599
 
 Total
  $
243,184
    $
1,127
    $
5,929
    $
238,382
 

The maturities, amortized cost and estimated fair values of securities at June 30, 2007, are summarized as follows:

 


   
Available for Sale
 
   
Amortized
   
Estimated
 
 (dollars in thousands)
 
Cost
   
Fair Value
 
             
 Due in one year or less
  $
54,515
    $
53,643
 
 Due from one to five years
   
113,797
     
111,492
 
 Due from five to ten years
   
39,912
     
39,670
 
 Due after ten years
   
35,321
     
35,586
 
 Equity securities
   
18,553
     
19,135
 
    $
262,098
    $
259,526
 

17
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         


Note 8.  Loans

Loans are summarized as follows:
 


   
June 30,
   
December 31,
   
June 30,
 
 (dollars in thousands)
 
2007
   
2006
   
2006
 
 Commercial
  $
81,292
    $
69,470
    $
64,341
 
 Commercial real estate
   
354,833
     
314,198
     
296,681
 
 Construction and development
   
198,721
     
215,820
     
182,000
 
 Residential real estate
   
283,821
     
282,512
     
288,316
 
 Consumer
   
33,937
     
36,455
     
37,040
 
 Other
   
7,111
     
6,969
     
6,188
 
      Total loans
   
959,715
     
925,424
     
874,566
 
 Less unearned income
   
1,772
     
1,868
     
1,767
 
 Total loans net of unearned income
   
957,943
     
923,556
     
872,799
 
 Less allowance for loan losses
   
8,768
     
7,511
     
6,629
 
       Loans, net
  $
949,175
    $
916,045
    $
866,170
 


Note 9.  Allowance for Loan Losses

An analysis of the allowance for loan losses for the six month periods ended June 30, 2007 and 2006, and for the year ended December 31, 2006 is as follows:
 
 


   
Six Months Ended
   
Year Ended
 
   
June 30,
   
December 31,
 
(dollars in thousands)
 
2007
   
2006
   
2006
 
 Balance, beginning of period
  $
7,511
    $
6,112
    $
6,112
 
 Losses:
                       
     Commercial
   
50
     
32
     
32
 
     Commercial real estate
   
40
     
19
     
185
 
     Construction and development
   
-
     
-
     
-
 
     Real estate - mortgage
   
77
     
-
     
35
 
     Consumer
   
82
     
81
     
200
 
     Other
   
98
     
202
     
289
 
 Total
   
347
     
334
     
741
 
 Recoveries:
                       
     Commercial
   
21
     
1
     
1
 
     Commercial real estate
   
7
     
37
     
46
 
     Construction and development
   
-
     
-
     
-
 
     Real estate - mortgage
   
5
     
6
     
6
 
     Consumer
   
27
     
26
     
63
 
     Other
   
72
     
126
     
179
 
 Total
   
132
     
196
     
295
 
    Net losses
   
215
     
138
     
446
 
Provision for loan losses
   
1,030
     
655
     
1,845
 
Reclassification of reserves related to loans previously reflected in discontinued operations
   
442
     
-
     
-
 
                         
 Balance, end of period
  $
8,768
    $
6,629
    $
7,511
 

18
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         


Note 10.  Goodwill and Other Intangible Assets

The following tables present our goodwill at June 30, 2007 and other intangible assets at June 30, 2007, December 31, 2006, and June 30, 2006.
 


(dollars in thousands)
 
Goodwill Activity
 
Balance, January 1, 2007
  $
2,088
 
   Acquired goodwill, net
   
-
 
         
Balance, June 30, 2007
  $
2,088
 

 


   
Unidentifiable Intangible Assets
 
   
June 30,
   
December 31,
   
June 30,
 
 (dollars in thousands)
 
2007
   
2006
   
2006
 
 Unidentifiable intangible assets
                 
    Gross carrying amount
  $
2,267
    $
2,267
    $
2,267
 
    Less:  accumulated amortization
   
1,234
     
1,159
     
1,083
 
        Net carrying amount
  $
1,033
    $
1,108
    $
1,184
 


We recorded amortization expense of approximately $76,000 for the six months ended June 30, 2007 relative to our unidentifiable intangible assets.  Annual amortization is expected to be approximately $151,000 for each of the years ending 2007 through 2011.


Note 11.  Deposits

The following is a summary of interest bearing deposits by type as of June 30, 2007 and 2006 and December 31, 2006:
 


   
June 30,
   
December 31,
   
June 30,
 
 (dollars in thousands)
 
2007
   
2006
   
2006
 
 Interest bearing demand deposits
  $
230,509
    $
220,167
    $
214,279
 
 Savings deposits
   
41,910
     
47,984
     
38,737
 
 Retail time deposits
   
289,826
     
278,322
     
251,644
 
 Brokered time deposits
   
223,771
     
279,623
     
190,832
 
 Total
  $
786,016
    $
826,096
    $
695,492
 


Brokered deposits represent certificates of deposit acquired through a third party.  The following is a summary of the maturity distribution of certificates of deposit in denominations of $100,000 or more as of June 30, 2007:
 


(dollars in thousands)
 Amount
 Percent
 Three months or less
 $                   59,544
20.7%
 Three through six months
                      53,013
18.4%
 Six through twelve months
                      83,012
28.9%
 Over twelve months
                      92,162
32.0%
 Total
 $                  287,731
100.0%

19
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         


A summary of the scheduled maturities for all time deposits as of June 30, 2007 is as follows:



(dollars in thousands)
     
 Six month period ending December 31, 2007
  $
252,926
 
 Year ending December 31, 2008
   
189,059
 
 Year ending December 31, 2009
   
43,695
 
 Year ending December 31, 2010
   
23,336
 
 Year ending December 31, 2011
   
2,169
 
 Thereafter
   
2,412
 
    $
513,597
 


Note 12.  Borrowed Funds

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



   
Six Months Ended June 30, 2007
 
               
Federal Funds
 
   
Short-term
         
Purchased
 
   
FHLB
   
Repurchase
   
and Lines
 
 (dollars in thousands)
 
Advances
   
Agreements
   
of Credit
 
 Balance at June 30
  $
93,659
    $
5,654
    $
1,588
 
 Average balance outstanding for the period
   
63,636
     
6,409
     
1,886
 
 Maximum balance outstanding at
                       
     any month end during period
   
93,659
     
7,358
     
2,669
 
 Weighted average interest rate for the period
    5.39 %     4.10 %     7.66 %
 Weighted average interest rate for balances
                       
     outstanding at June 30
    5.30 %     4.11 %     7.75 %



   
Year Ended December 31, 2006
 
               
Federal Funds
 
   
Short-term
         
Purchased
 
   
FHLB
   
Repurchase
   
and Lines
 
 (dollars in thousands)
 
Advances
   
Agreements
   
of Credit
 
 Balance at December 31
  $
54,765
    $
4,731
    $
932
 
 Average balance outstanding for the period
   
123,953
     
5,793
     
1,026
 
 Maximum balance outstanding at
                       
     any month end during period
   
175,408
     
7,037
     
1,171
 
 Weighted average interest rate for the period
    5.08 %     4.03 %     7.49 %
 Weighted average interest rate for balances
                       
     outstanding at December 31
    5.39 %     4.08 %     7.75 %


20
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         



   
Six Months Ended June 30, 2006
 
               
Federal Funds
 
               
Purchased
 
   
Short-term
         
and
 
   
FHLB
   
Repurchase
   
Lines of
 
 (dollars in thousands)
 
Advances
   
Agreements
   
Credit
 
 Balance at June 30
  $
157,796
    $
5,749
    $
640
 
 Average balance outstanding for the period
   
151,199
     
6,334
     
832
 
 Maximum balance outstanding at
                       
     any month end during period
   
175,408
     
7,037
     
1,164
 
 Weighted average interest rate for the period
    4.82 %     3.92 %     7.03 %
 Weighted average interest rate for balances
                       
     outstanding at June 30
    5.36 %     4.17 %     7.75 %

 
Long-term borrowings:  Our long-term borrowings of $216,758,000, $176,109,000 and $150,057,000 at June 30, 2007, December 31, 2006, and June 30, 2006 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 six month period ended June 30, 2007 was 5.51% compared to 5.19% for the first six months of 2006.

Subordinated Debentures: We have three 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 $19,589,000 at June 30, 2007, December 31, 2006, and June 30, 2006.

In October 2002, we sponsored SFG Capital Trust I, in March 2004, we sponsored SFG Capital Trust II, and in December 2005, we sponsored SFG Capital Trust III, of which 100% of the common equity of each trust 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. SFG Capital Trust III issued $8,000,000 in capital securities and $248,000 in common securities and invested the proceeds in $8,248,000 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, 3 month LIBOR plus 280 basis points for SFG Capital Trust II, and 3 month LIBOR plus 145 basis points for SFG Capital Trust III, 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, SFG Capital Trust II, and SFG Capital Trust III are first redeemable by us in November 2007, March 2009, and March 2011, respectively.

 The capital securities held by SFG Capital Trust I, SFG Capital Trust II, and SFG Capital Trust III qualify as Tier 1 capital under Federal Reserve Board guidelines.  In accordance with these Guidelines, trust preferred securities generally are limited to 25% of Tier 1 capital elements, net of goodwill.  The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital.
 
21
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         

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




(dollars in thousands)
     
       
Year Ending
 
Amount
 
December 31,
 
Restated
 
2007
  $
13,968
 
2008
   
52,377
 
2009
   
28,911
 
2010
   
54,533
 
2011
   
2,466
 
Thereafter
   
84,092
 
    $
236,347
 


Note 13.  Stock Option Plan

On January 1, 2006, we adopted SFAS No. 123R, Share-Based Payment (Revised 2004), which is a revision of SFAS No. 123, Accounting for Stock Issued for Employees.  SFAS No. 123R establishes accounting requirements for share-based compensation to employees and carries forward prior guidance on accounting for awards to non-employees. Prior to the adoption of SFAS No. 123R, we reported employee compensation expense under stock option plans only if options were granted below market prices at grant date in accordance with the intrinsic value method of Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and related interpretations. In accordance with APB No. 25, we reported no compensation expense on options granted as the exercise price of the options granted always equaled the market price of the underlying stock on the date of grant. SFAS No. 123R eliminates the ability to account for stock-based compensation using APB No. 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the measurement date, which is generally the date of the grant.

We transitioned to SFAS No. 123R using the modified prospective application method ("modified prospective application"). As permitted under modified prospective application, SFAS No. 123R applies to new awards and to awards modified, repurchased, or cancelled after January 1, 2006. Additionally, compensation cost for non-vested awards that were outstanding as of January 1, 2006 will be recognized as the remaining requisite service is rendered during the period of and/or the periods after the adoption of SFAS No. 123R, adjusted for estimated forfeitures. The recognition of compensation cost for those earlier awards is based on the same method and on the same grant-date fair values previously determined for the pro forma disclosures reported by us for periods prior to January 1, 2006.

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

The fair value of our employee stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options granted but are not considered by the model. Because our employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options at the time of grant.  There were no option grants during the first six months of 2007or 2006.
 
22
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         

 
During the first six months of 2007, we recognized $16,000 of compensation expense for share-based payment arrangements in our income statement, with a deferred tax asset of $6,000, compared to $13,200 compensation expense for the first six months of 2006 with a deferred tax asset of $5,000.  At June 30, 2007, we had approximately $28,000 total compensation cost related to nonvested awards not yet recognized and we expect to recognize it over the next eighteen months.

A summary of activity in our Officer Stock Option Plan during the first six months of 2007 and 2006 is as follows:
 
 


   
For the Six Months Ended
 
   
June 30, 2007
   
June 30, 2006
 
         
Weighted-
         
Weighted-
 
         
Average
         
Average
 
         
Exercise
         
Exercise
 
   
Options
   
Price
   
Options
   
Price
 
 Outstanding, January 1
   
349,080
    $
17.83
     
361,740
    $
17.41
 
     Granted
   
-
     
-
     
-
     
-
 
     Exercised
   
-
     
-
      (8,900 )    
4.89
 
     Forfeited
   
-
     
-
     
-
     
-
 
 Outstanding, June 30
   
349,080
    $
17.83
     
352,840
    $
17.73
 


Other information regarding options outstanding and exercisable at June 30, 2007 is as follows:



                                             
     
Options Outstanding
   
Options Exercisable
 
                 
Wted. Avg.
   
Aggregate
               
Aggregate
 
                 
Remaining
   
Intrinsic
               
Intrinsic
 
Range of
   
# of
         
Contractual
   
Value
   
# of
         
Value
 
exercise price
   
shares
   
WAEP
   
Life (yrs)
   
(in thousands)
   
shares
   
WAEP
   
(in thousands)
 
 
$4.63 - $6.00
     
83,600
    $
5.34
     
5.35
    $
1,213
     
83,600
    $
5.34
    $
1,213
 
 
6.01 - 10.00
     
31,680
     
9.49
     
8.51
     
328
     
24,480
     
9.49
     
254
 
 
10.01 - 17.50
     
3,500
     
17.43
     
6.67
     
8
     
3,500
     
17.43
     
8
 
 
17.51 - 20.00
     
51,800
     
17.79
     
9.47
     
107
     
31,000
     
17.79
     
64
 
 
20.01 - 25.93
     
178,500
     
25.19
     
8.07
     
-
     
178,500
     
25.19
     
-
 
                                                             
         
349,080
     
17.83
            $
1,656
     
321,080
     
18.02
    $
1,539
 

 
Note 14.     Commitments and Contingencies

Off-Balance Sheet Arrangements

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

Many of our lending relationships contain both funded and unfunded elements.  The funded portion is reflected on our balance sheet.  The unfunded portion of these commitments is not recorded on our balance sheet until a draw is made under the loan facility.  Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.
 
 
23
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         
 
 
A summary of the total unfunded, or off-balance sheet, credit extension commitments follows:
 

   
June 30,
 
(dollars in thousands)
 
2007
 
Commitments to extend credit:
     
    Revolving home equity and
     
        credit card lines
  $
34,713
 
    Construction loans
   
81,354
 
    Other loans
   
39,209
 
Standby letters of credit
   
11,747
 
Total
  $
167,023
 
 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  We evaluate each customer's credit worthiness on a case-by-case basis.  The amount of collateral obtained, if we deem necessary upon extension of credit, is based on our credit evaluation.  Collateral held varies but may include accounts receivable, inventory, equipment or real estate.

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

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

Note 15.  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 June 30, 2007, 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 subsidiary, Summit Community Bank’s (“Summit Community”) are presented in the following table.
 
24
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Notes to Consolidated Financial Statements (unaudited)               
         

 


                           
To be Well Capitalized
 
               
Minimum Required
   
under Prompt Corrective
 
   
Actual
   
Regulatory Capital
   
Action Provisions
 
   
Amount
   
Ratio
   
Amount
         
Amount
       
 (dollars in thousands)
 
(Restated)
   
(Restated)
   
(Restated)
   
Ratio
   
(Restated)
   
Ratio
 
 As of June 30, 2007
                                   
 Total Capital (to risk weighted assets)
                                   
     Summit
  $
108,424
      11.0 %   $
79,038
      8.0 %   $
98,798
      10.0 %
     Summit Community
   
106,370
      10.9 %    
78,333
      8.0 %    
97,916
      10.0 %
 Tier I Capital (to risk weighted assets)
                                               
     Summit
  $
99,394
      10.1 %    
39,519
      4.0 %    
59,279
      6.0 %
     Summit Community
   
97,340
      9.9 %    
39,166
      4.0 %    
58,750
      6.0 %
 Tier I Capital (to average assets)
                                               
     Summit
  $
99,394
      7.9 %    
37,600
      3.0 %    
62,667
      5.0 %
     Summit Community
   
97,340
      7.8 %    
37,588
      3.0 %    
62,647
      5.0 %
                                                 
 As of December 31, 2006
                                               
 Total Capital (to risk weighted assets)
                                               
     Summit
  $
103,102
      10.7 %    
77,086
      8.0 %    
96,357
      10.0 %
     Summit Community
   
59,684
      10.4 %    
45,911
      8.0 %    
57,388
      10.0 %
     Shenandoah
   
41,243
      10.9 %    
30,355
      8.0 %    
37,944
      10.0 %
 Tier I Capital (to risk weighted assets)
                                               
     Summit
   
94,899
      9.9 %    
38,343
      4.0 %    
57,515
      6.0 %
     Summit Community
   
55,041
      9.6 %    
22,934
      4.0 %    
34,401
      6.0 %
     Shenandoah
   
37,683
      9.9 %    
15,178
      4.0 %    
22,766
      6.0 %
 Tier I Capital (to average assets)
                                               
     Summit
   
94,899
      7.8 %    
36,496
      3.0 %    
60,826
      5.0 %
     Summit Community
   
55,041
      7.4 %    
22,314
      3.0 %    
37,190
      5.0 %
     Shenandoah
   
37,683
      8.0 %    
14,097
      3.0 %    
23,495
      5.0 %



25
      
        
 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 operating units, Summit Community Bank (“Summit Community”), and Summit Insurance Services, LLC for the periods indicated.  This discussion and analysis should be read in conjunction with our 2006 audited financial statements and Annual Report on Form
10-K/A.

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.

RESTATEMENT

As discussed in Note 1, Restatement, in the Notes to Consolidated Financial Statements, we are restating financial statements and other financial information for the quarter ended and six months ended June 30, 2007 and all comparative financial information included herein.

In 2003, we entered into four interest rate swap agreements on certain convertible rate advances from the Federal Home Loan Bank(“FHLB”) that were designated as fair value hedges.  The terms of the FHLB convertible rate advances include an option of the FHLB to convert the debt’s fixed interest rate to a variable rate on a quarterly basis.  We evaluated these hedging relationships and concluded that the short-cut method of hedge accounting could be applied and the assumption of no ineffectiveness was valid based upon:  (a) the criteria in paragraph 68 of SFAS 133 were met, and (b) the conversion options in the FHLB advances were mirrored in the interest rate swaps.
 
Based on comments received from the Securities and Exchange Commission, we learned that the above interpretation of paragraph 68 is incorrect.  The conversion is not specifically listed in paragraph 68, and the presence of that term prohibits the application of the short-cut method of hedge accounting, even if the terms are mirrored between the interest rate swap and the hedged item.  Eliminating the application of fair value hedge accounting reverses the fair value adjustments that have been made to the advances and results in all fair value changes for the interest rate swaps being recognized in noninterest income.  Additionally, the net cash settlement payments received/paid during each period for these interest rate swaps were reclassified from interest expense on long-term borrowings to noninterest income.
 

OVERVIEW

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

Growth in our interest earning assets resulted in an increase of 6.32%, or $1,157,000 in our net interest earnings on a tax equivalent basis for the first six months in 2007 compared to the same period of 2006.
 
26
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Management’s Discussion and Analysis of Financial Condition and               
Results of Operations                   

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 2 to the consolidated financial statements of our 2006 Annual Report on Form 10-K/A.  These policies, along with the disclosures presented in the other financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

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

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 2 to the consolidated financial statements of our 2006 Annual Report on Form 10-K/A 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 2006 Annual Report on Form 10-K/A.

Goodwill is subject to impairment testing at least annually to determine whether write-downs of the recorded balances are necessary.  A fair value is determined based on at least one of three various market valuation methodologies.  If the fair value equals or exceeds the book value, no write-down of recorded goodwill is necessary.  If the fair value is less than the book value, an expense may be required on our books to write down the goodwill to the proper carrying value.  During the third quarter, we will complete the required annual impairment test for 2007.  We cannot assure you that future goodwill impairment tests will not result in a charge to earnings. See Notes 2 and 10of the consolidated financial statements of our Annual Report on Form 10-K/A for further discussion of our intangible assets, which include goodwill.


27
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Management’s Discussion and Analysis of Financial Condition and               
Results of Operations                   

RESULTS OF OPERATIONS

Earnings Summary

Income from continuing operations for the six months ended June 30, 2007 grew 24.32% to $5,914,000, or $0.83 per diluted share as compared to $4,757,000, or $0.66per diluted share for the six months ended June 30, 2006.  For the quarter ended June 30, 2007, income from continuing operations increased 21.56% to $2,980,000, or $0.42 per diluted share as compared to $2,461,000, or $0.34 per diluted share for the same period of 2006.  Consolidated net income, which includes the results of discontinued operations, grew to $5,601,000 for the six months ended June 30, 2007 compared to $5,181,000 for the same period of 2006.  On a quarterly basis, consolidated net income grew 14.39% to $2,862,000 for second quarter 2007 compared to $2,502,000 for the second quarter 2006.  Consolidated returns on average equity and assets for the first six months of 2007 were 13.45% and 0.89%, respectively, compared with 12.33% and 0.83% for the same period of 2006.

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 consolidated net interest income on a fully tax-equivalent basis totaled $19,468,000 for the six month period ended June 30, 2007 compared to $18,311,000 for the same period of 2006, representing an increase of $1,157,000 or 6.32%.  This increase resulted from growth in interest earning assets, primarily loans, which served to more than offset the 60 basis points increase in the cost of interest bearing liabilities during the same period.  Average interest earning assets grew 10.50% from $1,087,366,000 during the first six months of 2006 to $1,201,516,000 for the first six months of 2007.  Average interest bearing liabilities grew 10.69% from $992,532,000 at June 30, 2006 to $1,098,677,000 at June 30, 2007, at an average yield for the first six months of 2007 of 4.68% compared to 4.08% for the same period of 2006.

Our consolidated net interest margin decreased to 3.27% for the six month period ended June 30, 2007, compared to 3.40% for the same period in 2006.  On a quarterly basis, our net interest margin declined to 3.28% at June 30, 2007, from 3.38% for the quarter ended June 30, 2006. Our net interest margin remained stable compared to the linked quarter.  Our margin continues to be affected by our loan growth in an extremely competitive environment.  The current competitive pressures are causing loan rates to be lower.  Also, our loan growth is at a faster pace than we have been able to grow lower cost retail funds, causing us to rely more on higher cost, non-retail deposit funding vehicles.  The current competitive and market conditions are also causing deposit rates to be higher.  For the six months ended June 30, 2007 compared to June 30, 2006, the yields on earning assets increased 42 basis points, while the cost of our interest bearing funds increased by 60 basis points.

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.

28
      
        
 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 Six Months Ended
 
   
June 30, 2007
   
June 30, 2006
 
         
Earnings/
   
Yield/
   
Average
   
Earnings/
   
Yield/
 
   
Average
   
Expense
   
Rate
         
Expense
   
Rate
 
   
Balance
   
(Restated)
   
(Restated)
   
Balance
   
(Restated)
   
(Restated)
 
 Interest earning assets
                                   
     Loans, net of unearned income
                                   
         Taxable
  $
934,513
    $
37,645
      8.12 %   $
844,093
    $
32,077
      7.66 %
         Tax-exempt (1)
   
9,147
     
358
      7.89 %    
8,242
     
305
      7.46 %
     Securities
                                               
         Taxable
   
209,965
     
5,316
      5.11 %    
188,414
     
4,385
      4.69 %
         Tax-exempt (1)
   
46,433
     
1,597
      6.94 %    
44,988
     
1,568
      7.03 %
     Federal funds sold and interest
                                               
         bearing deposits with other banks
   
1,458
     
33
      4.56 %    
1,629
     
37
      4.58 %
 Total interest earning assets
   
1,201,516
     
44,949
      7.54 %    
1,087,366
     
38,372
      7.12 %
                                                 
 Noninterest earning assets
                                               
     Cash & due from banks
   
13,821
                     
14,259
                 
     Premises and equipment
   
22,260
                     
23,475
                 
     Other assets
   
27,452
                     
25,890
                 
     Allowance for loan losses
    (8,376 )                     (6,525 )                
 Total assets
  $
1,256,673
                    $
1,144,465
                 
                                                 
 Interest bearing liabilities
                                               
     Interest bearing demand deposits
  $
225,705
    $
4,150
      3.71 %   $
209,565
    $
3,366
      3.24 %
     Savings deposits
   
44,820
     
398
      1.79 %    
40,209
     
147
      0.74 %
     Time deposits
   
546,634
     
13,362
      4.93 %    
402,422
     
8,048
      4.03 %
     Short-term borrowings
   
71,930
     
1,918
      5.38 %    
158,365
     
3,795
      4.83 %
     Long-term borrowings
                                               
        and capital trust securities
   
209,588
     
5,653
      5.44 %    
181,971
     
4,705
      5.21 %
 Total interest bearing liabilities
   
1,098,677
     
25,481
      4.68 %    
992,532
     
20,061
      4.08 %
                                                 
 Noninterest bearing liabilities
                                               
     and shareholders' equity
                                               
     Demand deposits
   
62,986
                     
64,906
                 
     Other liabilities
   
11,722
                     
9,850
                 
     Shareholders' equity
   
83,288
                     
77,177
                 
 Total liabilities and
                                               
    shareholders' equity
  $
1,256,673
                    $
1,144,465
                 
 Net interest earnings
          $
19,468
                    $
18,311
         
Net yield on interest earning assets
              3.27 %                     3.40 %
                                                 
(1) - Interest income on tax-exempt securities has been adjusted assuming an effective tax rate of 34% for all periods presented.
 
The tax equivalent adjustment resulted in an increase in interest income of $649,000 and $623,000 for the periods ended
 
June 30, 2007 and June 30 2006, respectively.
                                         


29
      
        
 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 Six Months Ended
 
   
June 30, 2007 versus June 30, 2006
 
   
(Restated)
 
   
Increase (Decrease)
 
   
Due to Change in:
 
   
Volume
   
Rate
   
Net
 
Interest earned on:
 
 
   
 
   
 
 
Loans
 
 
   
 
   
 
 
  Taxable
  $
3,568
    $
2,000
    $
5,568
 
  Tax-exempt
   
34
     
19
     
53
 
Securities
                       
  Taxable
   
527
     
404
     
931
 
  Tax-exempt
   
50
      (21 )    
29
 
Federal funds sold and interest
                       
  bearing deposits with other banks
    (4 )    
-
      (4 )
Total interest earned on
                       
  interest earning assets
   
4,175
     
2,402
     
6,577
 
                         
Interest paid on:
                       
Interest bearing demand
                       
  deposits
   
272
     
512
     
784
 
Savings deposits
   
19
     
232
     
251
 
Time deposits
   
3,280
     
2,034
     
5,314
 
Short-term borrowings
    (2,265 )    
388
      (1,877 )
Long-term borrowings and capital
                       
   trust securities
   
738
     
210
     
948
 
  Total interest paid on
                       
    interest bearing liabilities
   
2,044
     
3,376
     
5,420
 
                         
Net interest income
  $
2,131
    $ (974 )   $
1,157
 

 
Noninterest Income

Total noninterest income from continuing operations increased to $1,753,000 for the six months ended June 30, 2007, compared to $1,201,000 for the same period of 2006.  Other income increased $153,000 for the six months ended June 30, 2007 compared to the same period of 2006 and increased $103,000 for the second quarter of 2007 compared to second quarter 2006 due to increases in financial services revenue and debit card income due to increased customer activity.  Further detail regarding noninterest income is reflected in the following table.


30
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Management’s Discussion and Analysis of Financial Condition and               
Results of Operations                   



 
Noninterest Income
                       
Dollars in thousands
 
For the Quarter Ended June 30,
   
For the Six Months Ended June 30,
 
   
2007
   
2006
   
2007
   
2006
 
   
(Restated)
   
(Restated)
   
(Restated)
   
(Restated)
 
Insurance commissions
  $
209
    $
247
    $
416
    $
477
 
Service fees
   
736
     
726
     
1,353
     
1,356
 
Net cash settlement on derivative instruments
    (179 )     (111 )     (363 )     (182 )
Change in fair value of derivative instruments
    (273 )     (246 )     (47 )     (719 )
(Loss) on sale of assets
    (33 )    
-
      (32 )     (4 )
Other
   
236
     
133
     
426
     
273
 
Total
  $
696
    $
749
    $
1,753
    $
1,201
 


Noninterest Expense

Total noninterest expense for continuing operations was well controlled, increasing approximately $335,000, or 3.0% during the first six months of 2007 as compared to the same period in 2006 and $46,000 or 0.8% for second quarter 2007 compared to second quarter 2006    Salaries and employee benefits expense represented the largest category of expense growth, which resulted primarily from general merit raises.  Table III below shows the breakdown of these increases.
 
 


Table III - Noninterest Expense
                                               
(dollars in thousands)
                                               
   
For the Quarter Ended June 30,
   
For the Six Months Ended June 30.
 
         
Change
               
Change
       
   
2007
   
 $
     
%
   
2006
   
2007
   
     $
     
%
   
2006
 
    Salaries and employee benefits
  $
3,238
    $
189
      6.2 %   $
3,049
    $
6,463
    $
359
      5.9 %   $
6,104
 
    Net occupancy expense
   
408
     
18
      4.6 %    
390
     
826
     
35
      4.4 %    
791
 
    Equipment expense
   
493
      (3 )     -0.6 %    
496
     
940
      (6 )     -0.6 %    
946
 
    Supplies
   
197
      (25 )     -11.3 %    
222
     
370
      (18 )     -4.6 %    
388
 
    Professional fees
   
193
      (52 )     -21.2 %    
245
     
367
      (85 )     -18.8 %    
452
 
    Amortization of intangibles
   
38
     
-
      0.0 %    
38
     
76
     
-
      0.0 %    
76
 
    Other
   
1,151
      (81 )     -6.6 %    
1,232
     
2,326
     
50
      2.2 %    
2,276
 
Total
  $
5,718
    $
46
      0.8 %   $
5,672
    $
11,368
    $
335
      3.0 %   $
11,033
 


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 $780,000 provision for loan losses for the first six months of 2007, compared to $655,000 for the same period in 2006.  Net loan charge offs for the first six months of 2007 were $215,000, as compared to $138,000 over the same period of 2006.  At June 30, 2007, the allowance for loan losses totaled $8,768,000 or 0.91% of
loans, net of unearned income, compared to $7,511,000 or 0.81% of loans, net of unearned income at December 31, 2006.

31
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Management’s Discussion and Analysis of Financial Condition and               
Results of Operations                   



As illustrated in Table IV below, our non-performing assets and loans past due 90 days or more and still accruing interest have increased during the past 12 months.
 


Table IV - Summary of Past Due Loans and Non-Performing Assets
 
(dollars in thousands)
       
   
June 30,
   
December 31,
 
   
2007
   
2006
   
2006
 
 Accruing loans past due 90 days or more
  $
5,631
    $
290
    $
4,638
 
 Nonperforming assets:
                       
     Nonaccrual loans
   
1,676
     
697
     
638
 
     Foreclosed properties
   
850
     
283
     
77
 
     Repossessed assets
   
1
     
15
     
-
 
 Total
  $
8,158
    $
1,285
    $
5,353
 
 Total nonperforming loans as a
                       
    percentage of total loans
    0.76 %     0.11 %     0.57 %
 Total nonperforming assets as a
                       
    percentage of total assets
    0.64 %     0.11 %     0.43 %

Relationships with three developers comprise in excess of 50 percent of total nonperforming assets.  Each of these loans is well-collateralized and adequate reserves are in place.  We have experienced an upward trend in our internally classified assets.  This trend has primarily been in residential real estate development loans due to the recent slowdown in the sales of newly constructed homes.

In addition, as a result of our internal loan review process, the ratio of internally classified loans to total loans increased from 4.12% at December 31, 2006 to 5.81% at June 30, 2007.  Our internal loan review process includes a watch list of loans that have been specifically identified through the use of various sources, including past due loan reports, previous internal and external loan evaluations, classified loans identified as part of regulatory agency loan reviews and reviews of new loans representative of current lending practices.  Once this watch list is reviewed to ensure it is complete, we review the specific loans for collectibility, performance and collateral protection.  In addition, a grade is assigned to the individual loans utilizing internal grading criteria, which is somewhat similar to the criteria utilized by each subsidiary bank's primary regulatory agency.  The increase in internally classified loans at June 30, 2007 is primarily due to two customer relationships.  Management downgraded these two relationships, as they fell outside of our internal lending policy guidelines and does not expect any material future losses related to these two relationships.  Refer to the Asset Quality section of the financial review of the 2006 Annual Report on Form 10-K/A for further discussion of the processes related to internally classified loans.


FINANCIAL CONDITION

Our total assets were $1,280,428,000 at June 30, 2007, compared to $1,235,519,000 at December 31, 2006, representing a 3.6% increase. Table V below serves to illustrate significant changes in our financial position between December 31, 2006 and June 30, 2007.

32
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Management’s Discussion and Analysis of Financial Condition and               
Results of Operations                   




Table V - Summary of Significant Changes in Financial Position
 
(dollars in thousands)
 
   
Balance
               
Balance
 
   
December 31,
   
Increase (Decrease)
   
June 30,
 
   
2006
   
Amount
   
Percentage
   
2007
 
   
(restated)
   
(restated)
   
(restated)
   
(restated)
 
 Assets
                       
   Securities available for sale
  $
247,874
     
11,652
      4.7 %   $
259,526
 
   Loans, net
   
916,045
     
33,130
      3.6 %    
949,175
 
                                 
 Liabilities
                               
   Deposits
  $
888,688
    $ (38,299 )     -4.3 %   $
850,389
 
   Short-term borrowings
   
60,428
     
40,473
      67.0 %    
100,901
 
   Long-term borrowings
                               
       and subordinated debentures
   
195,698
     
40,649
      20.8 %    
236,347
 


Loan growth during the first six months of 2007, occurring principally in the commercial real estate portfolio, was funded primarily by borrowings from the FHLB.

Deposits decreased approximately $38 million during the first half of 2007.  This decrease was primarily in brokered deposits, which were replaced with FHLB short-term borrowings, which is reflected in their $40 million increase.

Refer to Notes 7, 8, 11, and 12 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 June 30, 2007 and December 31, 2006.

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 $289 million, or 22.6% of total assets at  June 30, 2007 versus $275 million, or 22.3% of total assets at December 31, 2006.

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.

 
33
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Management’s Discussion and Analysis of Financial Condition and               
Results of Operations                   

 

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 June 30, 2007 totaled $81,910,000 compared to $78,752,000 at December 31, 2006.

During second quarter 2007, our Board of Directors declared and paid the first half 2007 cash dividend of $0.17 per share compared to $0.16 paid for the first half of 2006.  The first half 2007 dividend totaled $1,204,000, representing a 5.43% increase over the $1,142,000 paid during the first half 2006.

Refer to Note 15 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 June 30, 2007.
 


                   
   
Long
             
   
Term
   
Capital
       
   
Debt
   
Trust
   
Operating
 
(dollars in thousands)
 
(restated)
   
Securities
   
Leases
 
2007
  $
13,968
    $
-
    $
185
 
2008
   
52,377
     
-
     
259
 
2009
   
28,911
     
-
     
227
 
2010
   
54,533
     
-
     
123
 
2011
   
2,466
     
-
     
89
 
Thereafter
   
64,503
     
19,589
     
199
 
Total
  $
216,758
    $
19,589
    $
1,082
 


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 June 30, 2007 are presented in the following table.

 


   
June 30,
 
(dollars in thousands)
 
2007
 
Commitments to extend credit:
     
    Revolving home equity and
     
        credit card lines
  $
34,713
 
    Construction loans
   
81,354
 
    Other loans
   
39,209
 
Standby letters of credit
   
11,747
 
Total
  $
167,023
 


34
      
        
 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.  The nature of our lending and funding activities tends to drive our interest rate risk position to being liability sensitive in the intermediate term.  That is, absent any changes in the volumes of our interest earning assets or interest bearing liabilities, liabilities are likely to reprice faster than assets, resulting in a decrease in net income in a rising rate environment.  Net income would increase 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 gradually 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 June 30, 2007 which is well within our ALCO policy limit of a 10% reduction in net interest income over the ensuing twelve month period.
 


Change in
 
Estimated % Change in Net
 
Interest Rates
 
Interest Income Over:
 
(basis points)
 
0 - 12 Months
   
0 - 24 Months
 
Down 200 (1)
    1.32 %     5.79 %
Down 200, steepening yield curve (2)
    2.24 %     10.01 %
Up 100 (1)
    0.75 %     0.18 %
Up 200 (1)
    0.66 %     -4.21 %
                 
(1) assumes a parallel shift in the yield curve
         
(2) assumes steepening curve whereby short term rates decline by
 
200 basis points, while long term rates decline by 50 basis points
 


35
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
Management’s Discussion and Analysis of Financial Condition and               
Results of Operations                   

CONTROLS AND PROCEDURES

 
(a)  
Restatement

As a result of a review by the Staff of the Securities and Exchange Commission (the “Staff”) of Summit’s Form 10-K filed for the year ended December 31, 2006, the Company determined that its interpretation with respect to applying the short-cut method of hedge accounting under paragraph 68 of SFAS 133 to certain of its interest rate swaps was incorrect.

In August 2003, Summit entered into four interest rate swaps with notional values totaling $36 million that were designated as fair value hedges of certain convertible rate advances from the Federal Home Loan Bank (“FHLB”).  The terms of the FHLB convertible rate advances include an option of the FHLB to convert the debt’s fixed interest rate to a variable rate on a quarterly basis.  Summit evaluated these hedging relationships and concluded that the short-cut method of hedge accounting could be applied and the assumption of no ineffectiveness was valid based upon:  (a) the criteria in paragraph 68 of SFAS 133 were met, and (b) the conversion options in the FHLB advances were mirrored in the interest rate swaps.

Based on comments received from the Staff, Summit learned that the above interpretation of paragraph 68 is incorrect.  The conversion is not specifically listed in paragraph 68, and the presence of that term prohibits the application of the short-cut method of hedge accounting, even if the terms are mirrored between the interest rate swap and the hedged item. Although these hedging relationships would have qualified for hedge accounting if the “long haul” method had been applied, SFAS 133 does not permit the use of the “long haul” method retroactively. Consequently, the restatement assumes hedge accounting was not applied to these derivatives and the related hedged item during the periods under review.

On August 16, 2007, Management, the Audit Committee of the Board of Directors and the Executive Committee of the Board of Directors of Summit Financial Group, Inc. (“Summit” or the “Company”) concluded that a restatement of its financial statements and other financial information for the year ended December 31, 2006 and for the quarters ended March 31 and June 30 of 2007 (including the financial statements and other financial information for all comparative periods contained therein) with respect to the accounting for certain derivatives transactions under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS 133”) was necessary.

(b) Evaluation of Disclosure Controls and Procedures

In connection with the restatement, under the direction of our Chief Executive Officer and Chief Financial Officer, we reevaluated our disclosure controls and procedures. As a result we determined that a deficiency in processes and procedures over financial reporting of derivatives and hedging originally classified as effective at June 30, 2007 should have been classified as ineffective at March 31, 2007. Solely as a result of this condition, we concluded that our disclosure controls and procedures were not effective as of December 31, 2006, March 31, 2007 and June 30, 2007.

(c) Remediation of Material Weakness in Internal Control

We believe that we will have fully remediated the material weakness in our internal control over financial reporting with respect to accounting for derivative transactions used as hedges as of September 30, 2007. The remedial actions planned include:

 
implementing additional management and oversight controls to review and approve hedging strategies and related documentation to ensure hedge accounting is appropriately applied with respect to SFAS 133 and related guidance;

retesting our internal financial controls with respect to the deficiencies related to the material weakness to ensure they are operating effectively to ensure compliance with SFAS 133; and

improving training, education and accounting reviews to ensure that all relevant personnel involved in derivatives transactions understand and apply hedge accounting in compliance with generally accepted accounting principles, including SFAS 133 and its related interpretations.


Changes in Internal Control Over Financial Reporting: As previously reported, there were no changes in our internal control over financial reporting during the quarter ended June 30, 2007 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


36
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
 Part II.  Other Information                   
 


Item 1.  Legal Proceedings

We are involved in various legal actions arising in the ordinary course of business.  In the opinion of counsel, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements.  The Company is also involved in other legal proceedings described more fully below.
 
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 (“Corinthian “) and the alleged use of  its proprietary information.  The individual defendants have also been sued based on allegations arising out of their former employment relationship with Corinthian and their employment with Summit Financial, LLC. In an 8-K filed on November 15, 2006,   Summit announced it would close  its mortgage operations which at the time operated as Summit Mortgage, a division of Shenandoah Valley National Bank  .
 
The plaintiff seeks damages in the amount proven at trial on each claim and punitive damages in the amount of $350,000.  Plaintiff also seeks permanent and temporary injunctive relief prohibiting the alleged use of proprietary information by Summit Financial and the alleged solicitation of Corinthian’s employees.  On January 22, 2004, the Circuit Court of Fairfax County, Virginia denied Corinthian’s petition for a temporary injunction.
 
On November 20, 2006, Corinthian filed an Amended Complaint which joined Summit Financial Group as a defendant and requested damages in the amount of 20 million dollars.  Trial of this matter is currently scheduled to begin on January 14, 2008.
 
 After consultation with legal counsel, we believe that significant and meritorious defenses exist as to all the claims including with respect to plaintiff’s claim for damages.  We will continue to evaluate the claims in the Corinthian lawsuit and intend to vigorously defend against them.    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.   However, an adverse decision resulting in a large damage award could have a significant negative impact on Summit’s regulatory capital thereby limiting Summit’s near term growth and its ability to pay dividends to its shareholders.
 
On January 4, 2006, Mary Forrest, an individual, filed an alleged class action suit in the United States District Court for the Eastern District of Wisconsin, Milwaukee Division, against our subsidiary, Shenandoah Valley National Bank (“Shenandoah”).  Further, on May 19, 2006, Marti L. Klutho, an individual, filed an alleged class action suit in the United States District Court for the Eastern District of Missouri, Eastern Division, also against Shenandoah.  The plaintiffs in each case claimed that Shenandoah violated the Federal Fair Credit Reporting Act (“FCRA”) alleging that Shenandoah used information contained in their consumer reports, without extending a “firm offer of credit” within the meaning of the FCRA.
 
In the Klutho case the Company moved for judgment on the pleadings, claiming that plaintiff has no legally viable claim.  On May 22, 2007, Shenandoah's motion for judgment in the Klutho case was granted,  and the case was dismissed.   Plaintiff did not appeal, and the case has been concluded.
 
 On March 28, 2007,  plaintiff's motion for class certification in the Forrest case was denied.   Her subsequent petition for appeal to the Federal Seventh Circuit Court of Appeals was also denied.  The parties have since settled on a one plaintiff basis for an insignificant amount, and this case has also been concluded.
 



 
 
37
      
        
 Summit Financial Group, Inc. and Subsidiaries                  
 Part II.  Other Information                   


Item 1A.  Risk Factors
 
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K/A for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K/A are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
 

Item 4.  Submission of Matters to a Vote of Security Holders

On May 17, 2007, we held our Annual Meeting of Shareholders, and the shareholders took the following actions:

1.  
Elected as directors the following individuals to three year terms:

 
  
 
For
   
Withheld
 
Oscar M. Bean
   
5,597,219
     
42,793
 
Dewey F. Bensenhaver
   
5,609,833
     
30,179
 
John W. Crites
   
5,602,071
     
37,941
 
James P. Geary II
   
5,568,257
     
71,755
 
Phoebe F. Heishman
   
5,536,356
     
103,656
 
Charles S. Piccirillo
   
5,538,602
     
101,410
 


The following directors’ terms of office continued after the 2007 annual shareholders’ meeting:  Frank A. Baer, III, James M. Cookman, Patrick N. Frye, Thomas J. Hawse, III, Gary L. Hinkle, Gerald W. Huffman, H. Charles Maddy, III, Duke A. McDaniel, Ronald F. Miller, and G. R. Ours, Jr.

 
2.
Ratified Arnett & Foster, PLLC, to serve as our independent registered public accounting firm for the year ending December 31, 2007.

     For                                Against                                           Abstentions
5,523,335                                 8,091                                                42,712

 
 

 
38


 
SIGNATURES


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



 
SUMMIT FINANCIAL GROUP, INC.
 
(registrant)
       
       
       
       
 
By:
 /s/ H. Charles Maddy, III
 
 
                 H. Charles Maddy, III,
 
                 President and Chief Executive Officer
       
       
       
 
By:
 /s/ Robert S. Tissue
 
 
                 Robert S. Tissue,
 
                 Senior Vice President and Chief Financial Officer
       
       
       
 
By:
 /s/ Julie R. Cook
 
 
                 Julie R. Cook,
 
                 Vice President and Chief Accounting Officer
       
       
Date:  September  25, 2007
     


 

 
39