Edgar Filing: SUMMIT FINANCIAL GROUP INC

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.

[ ] 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.

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

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

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

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

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

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

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

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”).

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

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.

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.

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.

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

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

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

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

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

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%

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	%

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.

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.

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.

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.

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	%

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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

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.

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.

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.

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.

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

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