UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 (Mark
One)
 x
    **Quarterly
      report under Section 13 or 15(d) of the Securities Exchange Act of
      1934**For
      the quarterly period endedMarch
      31, 2005
 
 o
    Transition
      report under Section 13 or 15(d) of the Securities Exchange Act of
      1934For
      the transition period from ___________ to _____________
 
 Commission
File Number: 000-19235
    
 SUMMIT
FINANCIAL CORPORATION
 (Exact
name of registrant as specified in its charter)
 
 
 SOUTH
      CAROLINA
      (State
      or other jurisdiction
      of
      incorporation or organization)
    57-0892056
      (I.R.S.
      Employer
      Identification
      No.)
 
 Post
Office Box 1087
 937 North
Pleasantburg Drive
 Greenville,
South Carolina 29602
 (Address,
including zip code, of principal executive offices)
 
 (Registrant’s
telephone number, including area code) (864)
242-2265
 
 
 Not
applicable
 (Former
name or former address, if changed since last report)
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities 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 x NO o
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Exchange Act). YES o NO x
 
 Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. As of May 11, 2005, 4,527,406 shares
of $1.00 par value common stock were outstanding.
 
  
  SUMMIT
FINANCIAL CORPORATION
 FORM 10-Q
FOR QUARTER ENDED MARCH 31, 2005
 TABLE OF
CONTENTS OF INFORMATION REQUIRED IN REPORT
 
 
 PART
      I. FINANCIAL INFORMATIONItem
      1.Consolidated
      Balance SheetsMarch 31, 2005 and December 31,
      2004
    3Consolidated
      Statements of IncomeThree months ended March 31, 2005 and
      2004
    4Consolidated
      Statements of Shareholders' Equity and Comprehensive Income Three
      months ended March 31, 2005 and 2004
    5Consolidated Statements of Cash Flows Three months ended March
      31, 2005 and 2004
    6Condensed Notes to Consolidated Financial Statements March
      31, 2005
    7Item
      2.Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
    11Item
      3.Quantitative and Qualitative Disclosures About Market
      Risk
    24Item
      4.Controls and Procedures
    25PART II. OTHER INFORMATION
    26SIGNATURES
    27EXHIBITS:Exhibit 2.1 - Agreement and Plan of
      Reorganization and Merger dated as of March 7, 2005 by and among Summit
      Financial Corporation, Summit National Bank, and First Citizens Bank and
      Trust Company, Inc., and joined in by First Citizens Bancorporation,
      Inc.Exhibit 10.1 - Employment Agreement of James B.
      Schwiers dated March 7, 2005Exhibit 31.1 - Rule 13a-14(a) Certification of Chief
      Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act of
      2002Exhibit 31.2 - Rule 13a-14(a) Certification of Chief
      Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act of
      2002Exhibit 32.1 - Section 1350 Certification of Chief
      Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002Exhibit 32.2 - Section 1350 Certification of Chief
      Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
 
 
 
 
 **SUMMIT FINANCIAL CORPORATION AND
      SUBSIDIARIES****CONSOLIDATED
      BALANCE SHEETS**(Dollars
      in Thousands)(Unaudited)March
      31,
    
    
    December
      31,2005
    
    
    2004ASSETSCash
      and due from banks
    
    $
    9,112
    
    $
    6,548Interest-bearing
      bank balances
    
    
    2,538
    
    
    147Federal
      funds sold
    
    
    4,792
    
    
    218Investments
      available for sale
    
    
    55,706
    
    
    59,838Investment
      in Federal Home Loan Bank and other stock
    
    
    3,078
    
    
    3,326Loans,
      net of unearned income and net ofallowance
      for loan losses of $3,711 and $3,649
    
    
    244,059
    
    
    238,811Premises
      and equipment, net
    
    
    5,209
    
    
    4,805Accrued
      interest receivable
    
    
    1,509
    
    
    1,430Other
      assets
    
    
    6,357
    
    
    5,815$
    332,360
    
    $
    320,938LIABILITIES
      AND SHAREHOLDERS' EQUITYDeposits:Noninterest-bearing
      demand
    
    $
    28,787
    
    $
    36,897Interest-bearing
      demand
    
    
    41,585
    
    
    32,478Savings
      and money market
    
    
    73,543
    
    
    81,896Time
      deposits, $100,000 and over
    
    
    55,886
    
    
    38,925Other
      time deposits
    
    
    47,015
    
    
    41,522246,816
    
    
    231,718Federal
      Home Loan Bank advances
    
    
    45,401
    
    
    50,134Accrued
      interest payable
    
    
    758
    
    
    581Other
      liabilities
    
    
    1,511
    
    
    1,240294,486
    
    
    283,673Shareholders'
      equity:Common
      stock, $1.00 par value; 20,000,000shares
      authorized; issued andoutstanding
      4,525,855 and 4,515,553 shares
    
    
    4,526
    
    
    4,516Additional
      paid-in capital
    
    
    27,023
    
    
    26,993Retained
      earnings
    
    
    7,027
    
    
    5,868Accumulated
      other comprehensive income, net of tax
    
    
    (507
    )
    
    98Nonvested
      resticted stock
    
    
    (195
    )
    
    (210
    )Total
      shareholders' equity
    
    
    37,874
    
    
    37,265$
    332,360
    
    $
    320,938SEE
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 3
 
   **SUMMIT FINANCIAL CORPORATION AND
      SUBSIDIARIES************************CONSOLIDATED
      STATEMENTS OF INCOME**(Dollars,
      except per share data, in Thousands)(Unaudited)For
      the Three Months Ended March
      31,2005
    
    
    2004Interest
      Income:Loans
    
    $
    4,142
    
    $
    3,538Taxable
      investment securities
    
    
    408
    
    
    622Nontaxable
      investment securities
    
    
    213
    
    
    250Federal
      funds sold
    
    
    12
    
    
    2Other
    
    
    42
    
    
    314,817
    
    
    4,443Interest
      Expense:Deposits
    
    
    922
    
    
    763Federal
      Home Loan Bank advances
    
    
    379
    
    
    410Other
      borrowings
    
    
    7
    
    
    61,308
    
    
    1,179Net
      interest income
    
    
    3,509
    
    
    3,264Provision
      for loan losses
    
    
    102
    
    
    210Net
      interest income afterprovision for loan
    losses
    
    
    3,407
    
    
    3,054Noninterest
      Income:Service
      charges and fees on deposit accounts
    
    
    96
    
    
    133Insurance
      commission fee income
    
    
    145
    
    
    139Gain
      on sale of investment securities
    
    
    -
    
    
    22Other
      income
    
    
    210
    
    
    326451
    
    
    620Noninterest
      Expense:Salaries,
      wages and benefits
    
    
    1,400
    
    
    1,361Occupancy
    
    
    187
    
    
    174Furniture,
      fixtures and equipment
    
    
    152
    
    
    158Other
      operating expenses
    
    
    429
    
    
    5492,168
    
    
    2,242Income
      before income taxes
    
    
    1,690
    
    
    1,432Income
      taxes
    
    
    531
    
    
    445Net
      income
    
    $
    1,159
    
    $
    987Net
      income per share:Basic
    
    $
    .26
    
    $
    .23Diluted
    
    $
    .23
    
    $
    .20Average
      shares outstanding:Basic
    
    
    4,513,851
    
    
    4,319,720Diluted
    
    
    5,000,213
    
    
    4,857,367SEE
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4


**SUMMIT FINANCIAL CORPORATION AND
      SUBSIDIARIES********************************************************CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE
      INCOME********************************************************FOR
      THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004**(Dollars
      in Thousands)(Unaudited)AccumulatedAdditional
    
    
    
    other
    
    Nonvested
    
    TotalCommon
    
    paid-in
    
    Retained
    
    comprehensive
    
    restricted
    
    shareholders'stock
    
    capital
    
    earnings
    
    income
      (loss), net
    
    stock
    
    equityBalance
      at December 31, 2003
    
    $
    4,313
    
    $
    25,791
    
    $
    2,102
    
    $
    28
    
    
    ($29
    )
    $
    32,205Net
      income for the three monthsended March 31,
    2004
    
    
    -
    
    
    -
    
    
    987
    
    
    -
    
    
    -
    
    
    987Other
      comprehensive income:Unrealized
      holding gains arising during the period, net of tax of
    ($415)
    
    
    -
    
    
    -
    
    
    -
    
    
    677
    
    
    -
    
    
    -Less:
      reclassification adjustment for gains included in net income, net
      of tax of ($8)
    
    
    -
    
    
    -
    
    
    -
    
    
    (14
    )
    
    -
    
    
    -Other
      comprehensive income
    
    
    -
    
    
    -
    
    
    -
    
    
    663
    
    
    -
    
    
    663Comprehensive
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    1,650Stock
      options exercised
    
    
    87
    
    
    327
    
    
    -
    
    
    -
    
    
    -
    
    
    414Stock
      issued purshant to restricted stock plan
    
    
    14
    
    
    238
    
    
    -
    
    
    -
    
    
    (252
    )
    
    -Amortization
      of deferredcompensation on restricted stock
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    14
    
    
    14Balance
      at March 31, 2003
    
    $
    4,414
    
    $
    26,356
    
    $
    3,089
    
    $
    691
    
    
    ($267
    )
    $
    34,283Balance
      at December 31, 2004
    
    $
    4,516
    
    $
    26,993
    
    $
    5,868
    
    $
    98
    
    
    ($210
    )
    $
    37,265Net
      income for the three monthsended March 31,
    2005
    
    
    -
    
    
    -
    
    
    1,159
    
    
    -
    
    
    -
    
    
    1,159Other
      comprehensive loss:Unrealized
      holding losses arising duringthe period, net of tax of
      $370
    
    
    -
    
    
    -
    
    
    -
    
    
    (605
    )
    
    -
    
    
    -Less:
      reclassification adjustment for gainsincluded in net income, net
      of tax
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Other
      comprehensive loss
    
    
    -
    
    
    -
    
    
    -
    
    
    (605
    )
    
    -
    
    
    (605
    )Comprehensive
      income
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    554Stock
      options exercised
    
    
    10
    
    
    30
    
    
    -
    
    
    -
    
    
    -
    
    
    40Amortization
      of deferredcompensation on restricted stock
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    15
    
    
    15Balance
      at March 31, 2005
    
    $
    4,526
    
    $
    27,023
    
    $
    7,027
    
    
    ($507
    )
    
    ($195
    )
    $
    37,874SEE
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS






5






**SUMMIT FINANCIAL CORPORATION AND
      SUBSIDIARIES************************CONSOLIDATED
      STATEMENTS OF CASH FLOWS**(Dollars
      in Thousands)(Unaudited)For
      the Three Months Ended March 31,2005
    
    
    2004Cash
      flows from operating activities:Net
      income
    
    $
    1,159
    
    $
    987Adjustments
      to reconcile net income to net cashprovided by operating
      activities:Provision
      for loan losses
    
    
    102
    
    
    210Depreciation
      and amortization
    
    
    105
    
    
    106Net
      gain on sale of and disposal of equipment and vehicles
    
    
    -
    
    
    (22
    )Net
      gain on sale of investments available for sale
    
    
    -
    
    
    (22
    )Net
      amortization of net premium on investments
    
    
    21
    
    
    30Amortization
      of deferred compensation on restricted stock
    
    
    15
    
    
    14Increase
      in other assets
    
    
    (260
    )
    
    (162
    )Increase
      in other liabilities
    
    
    448
    
    
    152Deferred
      income taxes
    
    
    9
    
    
    (36
    )Net
      cash provided by operating activities
    
    
    1,599
    
    
    1,257Cash
      flows from investing activities:Purchases
      of securities available for sale
    
    
    (2,913
    )
    
    (2,268
    )Proceeds
      from maturities of securitiesavailable for
    sale
    
    
    1,300
    
    
    5,025Proceeds
      from sales of securities available for sale
    
    
    4,749
    
    
    18,715Purchases
      of investments in FHLB and other stock
    
    
    -
    
    
    (66
    )Redeemption
      of FHLB stock
    
    
    248
    
    
    -Net
      increase in loans
    
    
    (5,350
    )
    
    (8,339
    )Purchases
      of premises and equipment
    
    
    (509
    )
    
    (67
    )Proceeds
      from sale of equipment and vehicles
    
    
    -
    
    
    22Net
      cash (used) provided by investing activities
    
    
    (2,475
    )
    
    13,022Cash
      flows from financing activities:Net
      increase (decrease) in deposit accounts
    
    
    15,098
    
    
    (8,500
    )Proceeds
      from Federal Home Loan Bank advances
    
    
    -
    
    
    4,000Repayments
      of Federal Home Loan Bank advances
    
    
    (4,733
    )
    
    (2,683
    )Proceeds
      from employee stock options exercised
    
    
    40
    
    
    414Net
      cash provided (used) by financing activities
    
    
    10,405
    
    
    (6,769
    )Net
      increase in cash and cash equivalents
    
    
    9,529
    
    
    7,510Cash
      and cash equivalents, beginning of period
    
    
    6,913
    
    
    10,396Cash
      and cash equivalents, end of period
    
    $
    16,442
    
    $
    17,906SUPPLEMENTAL
      INFORMATION:Cash
      paid during the period for interest
    
    $
    1,131
    
    $
    1,358Cash
      paid during the period for income taxes
    
    $
    605
    
    $
    455Change
      in market value of investment securitiesavailable for sale, net of
      income taxes
    
    $
    (605
    )
    $
    663SEE
      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS






6


**SUMMIT FINANCIAL CORPORATION**


**CONDENSED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**


**MARCH
31, 2005**





NOTE 1 -
BASIS OF PRESENTATION:


The
unaudited consolidated financial statements include the accounts of Summit
Financial Corporation (the “Company”), a South Carolina corporation, and its
wholly-owned subsidiaries, Summit National Bank (the “Bank”), a nationally
chartered bank, and Freedom Finance, Inc. (the “Finance Company”), a consumer
finance company. Also included are the accounts of Summit Investment Services,
Inc. (the “Investment Company”) which is a wholly-owned subsidiary of the Bank.
All significant intercompany items related to the consolidated subsidiaries have
been eliminated.





Through
its bank subsidiary, which commenced operations in July 1990, the Company
provides a full range of banking services, including the taking of demand and
time deposits and the making of commercial and consumer loans. The Bank
currently has four full service branch locations in Greenville and Spartanburg,
South Carolina. In 1997, the Bank incorporated the Investment Company as a
wholly-owned subsidiary to offer nondeposit products and financial management
services. The Finance Company commenced operations in November 1994 and makes
and services small installment loans to individuals from its eleven offices
throughout South Carolina.





The
consolidated financial statements are prepared in conformity with U.S. generally
accepted accounting principles (“GAAP”) which requires management to make
estimates and assumptions. These estimates and assumptions affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements. In addition, the estimates
affect the reported income and expense during the reporting period. Actual
results could differ from these estimates and assumptions.





The
significant accounting policies followed by the Company for interim reporting
are consistent with the accounting policies followed for annual financial
reporting. The unaudited consolidated financial statements of the Company at
March 31, 2005 and for the three month periods ended March 31, 2005 and 2004
were prepared in accordance with the instructions for Form 10-Q. In the opinion
of management, all adjustments (consisting only of items of a normal recurring
nature) necessary for a fair presentation of the financial position at March 31,
2005, and the results of operations and cash flows for the periods ended March
31, 2005 and 2004 have been included. The information contained in the footnotes
included in the Company’s latest annual report on Form 10-K for the year ended
December 31, 2004 should be referred to in connection with the reading of these
unaudited interim consolidated financial statements. Certain interim 2004
amounts have been reclassified to conform with the statement presentations for
the interim 2005. The results for the three month period ended March 31, 2005
are not necessarily indicative of the results that may be expected for the full
year or any other interim period.





NOTE 2 -
MERGER AGREEMENT:


On March
7, 2005, the Company entered into a definitive agreement to merge with First
Citizens Bank and Trust Company, Inc., a South Carolina state bank (“First
Citizens”), under which the Company and the Bank will be merged with and into
First Citizens, with First Citizens continuing after the merger as the surviving
corporation.





Under the
terms of the agreement, each shareholder of the Company will receive $22.00 per
share in cash upon consummation of the proposed merger. In addition, in exchange
for signing an option release, holders of the Company’s stock options will
receive for each share that may be acquired pursuant to their options, a cash
payment equal to the difference between $22.00 per share and the exercise price
per share of the Company’s stock covered by the option. The transaction has been
unanimously approved by the board of directors of each company and is subject to
the approval of the shareholders of Summit, receipt of required regulatory
approvals, and other customary closing conditions.





7





NOTE 3 -
SUBSEQUENT EVENTS:


On May 5,
2005, the Company entered into a letter of intent (the “Letter”) to sell
substantially all the assets of the Finance Company. The Letter specifies the
assets to be sold, the purchase price, non-competition provisions for the
Company, and other customary closing conditions. The sale of the Finance
Company’s assets is expected to close prior to the consummation of the Company’s
merger with First Citizens.





NOTE 4 -
CASH FLOW INFORMATION:


For the
purposes of reporting cash flows, cash includes currency and coin, cash items in
process of collection and due from banks. Included in cash and cash equivalents
are federal funds sold and overnight investments. The Company considers the
amounts included in the balance sheet line items, “Cash and due from banks”,
“Interest-bearing bank balances” and “Federal funds sold” to be cash and cash
equivalents. These accounts totaled $16,442,000 and $17,906,000 at March 31,
2005 and 2004, respectively.





NOTE 5 -
NONPERFORMING ASSETS:


Loans
past due in excess of 90 days at March 31, 2005 were $103,000, compared to
$156,000 at December 31, 2004, and $144,000 at March 31, 2004. Total
nonperforming assets, including loans past due in excess of 90 days, nonaccrual
loans and other real estate owned (“OREO”), at March 31, 2005 were $709,000,
compared to $904,000 at December 31, 2004, and $795,000 at March 31, 2004. There
were no impaired loans at March 31, 2005, December 31, 2004 or March 31, 2004.





NOTE 6 -
INTANGIBLE ASSETS:


As of
January 1, 2002, the Company adopted SFAS 142, *“Goodwill
and Other Intangible Assets”* . SFAS
142 requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually in
accordance with the provisions of SFAS 142. The Company’s intangible assets
consist of goodwill resulting from the Finance Company’s branch acquisitions and
are included in “Other assets” on the accompanying consolidated balance sheets.
The balance of goodwill at March 31, 2005 and December 31, 2004 was $187,000.
There was no impairment expense charged in any period presented.





NOTE 7 -
PER SHARE INFORMATION:


The
following is a reconciliation of the denominators of the basic and diluted per
share computations for net income for the three months ended March 31, 2005 and
2004. There is no required reconciliation of the numerator from the net income
reported on the accompanying statements of income.


Three
      Months Ended March 31,2005
    
    
    2005
    
    
    2004
    
    
    2004BASIC
    
    
    DILUTED
    
    
    BASIC
    
    
    DILUTEDNet
      Income
    
    $
    1,159,000
    
    $
    1,159,000
    
    $
    987,000
    
    $
    987,000Average
      shares outstanding
    
    
    4,513,851
    
    
    4,513,851
    
    
    4,319,720
    
    
    4,319,720Effect
      of Dilutive Securities:Stock
      options
    
    
    -
    
    
    475,162
    
    
    -
    
    
    520,730Unvested
      restricted stock
    
    
    -
    
    
    11,200
    
    
    -
    
    
    16,9174,513,851
    
    
    5,000,213
    
    
    4,319,720
    
    
    4,857,367Per-share
      amount
    
    $
    0.26
    
    $
    0.23
    
    $
    0.23
    
    $
    0.20
   8


NOTE 8 -
STOCK COMPENSATION PLANS:


At March
31, 2005, the Company had three stock-based employee and director option plans,
which are described more fully in Note 13 of the Notes to Consolidated Financial
Statements included in the Company’s Annual Report on Form 10-K for December 31,
2004. The Company reports stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board (“APB”) Opinion 25,
“ *Accounting
for Stock Issued to Employees* ”, which
measures compensation expense as the excess, if any, of the quoted market price
of the Company’s stock at the date of the grant over the amount an employee must
pay to acquire the stock. SFAS 123, “ *Accounting
for Stock-Based Compensation* ”,
encourages but does not require companies to record compensation cost for
stock-based compensation plans at fair value. Accordingly, no compensation cost
has been recognized for the stock-based option plans as all options granted
under the plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions of SFAS 123 to stock-based employee and
non-employee compensation.




For
      the Quarter Ended March
      31,*(dollars,
      except per share, in thousands)*
    
    
    2005
    
    
    2004Net
      income, as reported
    
    $
    1,159
    
    $
    987Less
      - total stock-based employeecompensation expense determined under
      fair value based method, net of taxes
    
    
    27
    
    
    31Proforma
      net income
    
    $
    1,132
    
    $
    956Earnings
      per share:Basic
      - as reported
    
    $
    0.26
    
    $
    0.23Basic
      – proforma
    
    $
    0.25
    
    $
    0.22Diluted
      - as reported
    
    $
    0.23
    
    $
    0.20Diluted
      – proforma
    
    $
    0.23
    
    $
    0.19


9


NOTE 9 -
SEGMENT INFORMATION:
 The
Company reports information about its operating segments in accordance with SFAS
131, “Disclosures about Segments of an Enterprise and Related Information”.
Summit Financial Corporation is the parent holding company for Summit National
Bank (“Bank”), a nationally chartered bank, and Freedom Finance, Inc.
(“Finance”), a consumer finance company. The Company considers the Bank and the
Finance Company separate business segments.
 
 Financial
performance for each segment is detailed in the following tables. Included in
the “Corporate” column are amounts for general corporate activities and
eliminations of intersegment transactions.
 
   **At
      and for the three months ended March 31, 2005**Bank
    
    
    Finance
    
    
    Corporate
    
    
    TotalInterest
      income
    
    $
    4,371
    
    $
    446
    
    $
    0
    
    $
    4,817Interest
      expense
    
    
    1,308
    
    
    36
    
    
    (36
    )
    
    1,308Net
      interest income
    
    
    3,063
    
    
    410
    
    
    36
    
    
    3,509Provision
      for loan losses
    
    
    65
    
    
    37
    
    
    0
    
    
    102Other
      income
    
    
    358
    
    
    108
    
    
    (15
    )
    
    451Other
      expenses
    
    
    1,780
    
    
    345
    
    
    43
    
    
    2,168Income
      before taxes
    
    
    1,576
    
    
    136
    
    
    (22
    )
    
    1,690Income
      taxes
    
    
    488
    
    
    51
    
    
    (8
    )
    
    531Net
      income
    
    $
    1,088
    
    $
    85
    
    
    ($14
    )
    $
    1,159Net
      loans
    
    $
    241,545
    
    $
    2,514
    
    $
    0
    
    $
    244,059Total
      assets
    
    $
    329,408
    
    $
    2,999
    
    
    ($47
    )
    $
    332,360**At
      and for the three months ended March 31, 2004**Bank
    
    
    Finance
    
    
    Corporate
    
    
    TotalInterest
      income
    
    $
    3,991
    
    $
    455
    
    
    ($3
    )
    $
    4,443Interest
      expense
    
    
    1,178
    
    
    32
    
    
    (31
    )
    
    1,179Net
      interest income
    
    
    2,813
    
    
    423
    
    
    28
    
    
    3,264Provision
      for loan losses
    
    
    145
    
    
    65
    
    
    0
    
    
    210Other
      income
    
    
    537
    
    
    98
    
    
    (15
    )
    
    620Other
      expenses
    
    
    1,896
    
    
    339
    
    
    7
    
    
    2,242Income
      before taxes
    
    
    1,309
    
    
    117
    
    
    6
    
    
    1,432Income
      taxes
    
    
    401
    
    
    42
    
    
    2
    
    
    445Net
      income
    
    $
    908
    
    $
    75
    
    $
    4
    
    $
    987Net
      loans
    
    $
    233,914
    
    $
    2,617
    
    
    ($37
    )
    $
    236,494Total
      assets
    
    $
    335,941
    
    $
    3,078
    
    
    ($51
    )
    $
    338,968
 
  10
  
 SUMMIT FINANCIAL CORPORATION
 
 **PART
I. FINANCIAL INFORMATION**
 
 **ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS**
 **OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS**
 
 The
following information presents management’s discussion and analysis of the
financial condition and results of operations of Summit Financial Corporation
(“the Company” or “Summit Financial”), a financial holding company, and its
wholly-owned subsidiaries, Summit National Bank (“the Bank” or “Summit”) and
Freedom Finance, Inc. (“the Finance Company” or “Freedom”). The Bank, which is
the principal subsidiary, owns all the outstanding shares of Summit Investment
Services, Inc. Throughout this discussion and analysis, the term “the Company”
refers to Summit Financial Corporation and its subsidiaries.
 
 This
discussion and analysis should be read in conjunction with the consolidated
financial statements and related notes and with the statistical information and
financial data appearing in this report as well as the Annual Report of Summit
Financial Corporation (the “Company”) on Form 10-K for the year ended December
31, 2004. Certain reclassifications have been made to prior years’ financial
data to conform to current financial statement. Results of operations for the
three month period ended March 31, 2005 are not necessarily indicative of
results to be attained for any other period.
 
 FORWARD-LOOKING
STATEMENTS AND NON-GAAP FINANCIAL INFORMATION
 Certain
statements contained herein are “forward-looking statements” identified as such
for purposes of the safe harbor provided in Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements include, but are not limited to,
statements as to industry trends, future results of operations or financial
position, borrowing capacity and future liquidity, future investment results,
future credit exposure, future loan losses and plans and objectives for future
operations, and other statements that do not relate strictly to historical
facts. These statements are not historical facts, but instead are based on
current expectations, estimates and projections about the Company, are subject
to numerous assumptions, risks and uncertainties, and represent only
management’s belief regarding future events, many of which, by their nature, are
inherently uncertain and outside the Company’s control. Any forward-looking
statements made speak only as of the date on which such statements are made. The
Company disclaims any obligation to update any forward-looking statements.
Forward-looking statements are not guarantees of future performance and it is
possible that actual results and financial position may differ, possibly
materially, from the anticipated results and financial condition indicated in or
implied by these forward-looking statements.
 
 Factors
that could cause actual results to differ from those indicated by any
forward-looking statements include, but are not limited to, the following:
 ·
    Inflation,
      interest rates, market and monetary
fluctuations;
·
    Geopolitical
      developments and any future acts or threats of war or terrorism;
·
    The
      effects of, and changes in trade, monetary and fiscal policies and laws,
      including interest policies of the Federal Reserve;
·
    A
      decline in general economic conditions and the strength of the local
      economies in which the Company operates;
·
    The
      financial condition of the Company’s borrowers and potential deterioration
      of credit quality;
·
    Competitive
      pressures on loan and deposit pricing and demand;
·
    Changes
      in technology and their impact on the marketing of products and services;
·
    The
      timely development and effective marketing of competitive new products and
      services;
·
    The
      impact of changes in financial service laws and regulations, including
      laws concerning taxes, banking, securities and
  insurance;
·
    Changes
      in accounting principles, policies, and guidelines;
·
    The
      Company’s success at managing the risks involved in the foregoing as well
      as other risks and uncertainties detailed from time to time in press
      releases and other public filings.





11


This report contains
certain financial information determined by methods other than in accordance
with U.S. generally accepted accounting principles (“GAAP”). The Company’s
management uses these non-GAAP measures to analyze the Company’s performance. In
particular, net interest income and net interest margin ratios are presented on
a fully tax-equivalent basis. Management believes that the presentation of net
interest margin on a fully tax-equivalent basis aids in the comparability of net
interest margin arising from both taxable and tax-exempt sources. These
disclosures should not be viewed as a substitute for GAAP measures, and
furthermore, the Company’s non-GAAP measures may not necessarily be comparable
to non-GAAP performance measures of other companies.





COMPANY
BUSINESS


The
Company is headquartered in Greenville, South Carolina. Through its primary
subsidiary, the Bank, the Company offers a full range of financial products and
services, including business and consumer loans, commercial and residential
mortgage lending and brokerage, asset-based financing, corporate and consumer
deposit services, and investment management services. The Bank currently has
four full service offices in Greenville and Spartanburg, South Carolina. Freedom
is a consumer finance company headquartered in Greenville, South Carolina. The
Finance Company primarily makes and services installment loans to individuals
with loan principal amounts generally not exceeding $2,000 and with maturities
ranging from three to 18 months. Freedom operates 11 branches throughout South
Carolina.





CRITICAL
ACCOUNTING POLICIES


The
preparation of consolidated financial statements requires management to make
estimates and assumptions in the application of certain of its accounting
policies about the effect of matters that are inherently uncertain. These
estimates and assumptions affect the reported amounts of certain assets,
liabilities, revenues and expenses. Different amounts could be reported under
different conditions, or if different assumptions were used in the application
of these accounting policies. The Company’s accounting policies are discussed in
Note 1 under Notes to Consolidated Financial Statements included in the
Company’s Form 10-K for December 31, 2004. Of these significant accounting
policies, the Company has determined that accounting for the allowance for loan
losses and income taxes are deemed critical because of the valuation techniques
used, and the sensitivity of these financial statement amounts to the methods,
assumptions and estimates underlying these balances. Accounting for these
critical areas requires the most subjective and complex judgments that could be
subject to revision as new information becomes available.





The
allowance for loan losses represents management’s estimate of probable credit
losses inherent in the loan portfolio. This estimate is based on the current
economy’s impact on the timing and expected amounts of future cash flows on
problem or impaired loans, as well as historical loss experience associated with
homogenous pools of loans. The Company’s assessments may be impacted in future
periods by changes in economic conditions, the impact of regulatory
examinations, and the discovery of information with respect to borrowers, which
is not known to management at the time of the issuance of the consolidated
financial statements.





The
income tax calculations reflect the current period income tax expense for all
periods shown, as well as future tax liabilities associated with differences in
the timing of expenses and income recognition for book and tax accounting
purposes. The income tax returns, usually filed three months after year-end, are
subject to review and possible revision by the tax authorities up until the
statute of limitations has expired. These statutes usually expire three years
after the time the respective tax returns have been filed.





BALANCE
SHEET ACTIVITY


Total
assets increased $11.4 million or 4% from December 31, 2004 to March 31, 2005 to
total $332.4 million. Total deposits increased $15.1 million or 7% from December
31, 2004, primarily in the certificates of deposit categories related to deposit
campaigns during the first quarter of 2005. During the first quarter of 2005,
there was a shift in deposits between noninterest-bearing demand and
interest-bearing demand related to a change in South Carolina law related to
attorney trust accounts. As a result, trust accounts with balance of
approximately $8 million which previously had been in noninterest-bearing type
accounts, were required to be transferred to interest-bearing
accounts.





The
increase in deposits funded loan growth of $5.3 million, or 2%, and maturities
of FHLB advances totaling $4.7 million. Deposit growth also contributed to the
increase in liquidity. Loans totaled $247.8 million as of the end of the first
quarter of 2005, while advances from the FHLB were $45.4 million at March 31,
2005. Liquidity was further enhanced by the reduction in investment securities
of $4.1 million to total $55.7 million at March 31, 2005 as management
positioned the balance sheet for rising interest rates. Total equity increased
$609,000 related to the retention of earnings, which was offset by the increase
in unrealized loss on investment securities related to changes in market values
due to treasury yield curve movement during the quarter.





12





ALLOWANCE
FOR LOAN LOSSES AND NON-PERFORMING ASSETS


The
allowance for loan losses is established through charges in the form of a
provision for loan losses based on management’s periodic evaluation of the loan
portfolio. Loan losses and recoveries are charged or credited directly to the
allowance. The amount of the allowance reflects management’s opinion of an
adequate level to absorb probable losses inherent in the loan portfolio at March
31, 2005. In assessing the adequacy of the allowance and the amount charged to
the provision, management relies predominately on its ongoing review of the loan
portfolio, which is undertaken both to ascertain whether there are losses which
must be charged-off, and to assess the risk characteristics of the portfolio in
the aggregate as well as the credit risk associated with particular loans. The
Company’s methodology for evaluating the adequacy of the allowance for loan
losses incorporates management’s current judgments about the credit quality of
the loan portfolio through a disciplined and consistently applied process. The
methodology includes segmentation of the loan portfolio into reasonable
components based on loan purpose for calculation of the most accurate reserve.
Appropriate reserve estimates are determined for each segment based on a review
of individual loans, application of historical loss factors for each segment,
and adjustment factors applied as considered necessary. The adjustment factors
are applied consistently and are quantified for consideration of national and
local economic conditions; exposure to concentrations that may exist in the
portfolio; impact of off-balance sheet risk; alterations of lending policies and
procedures; the total amount of and changes in trends of past due loans,
nonperforming loans, problem loans and charge-offs; the total amount of and
changes in trends of the Bank’s internally graded “watch list” loans which
include classified loans; variations in the nature, maturity, composition, and
growth of the loan portfolio; changes in trends of collateral value; entry into
new markets; and other factors which may impact the current credit quality of
the loan portfolio.





Management
maintains an allowance for loan losses which it believes adequate to cover
probable losses in the loan portfolio. It must be emphasized, however, that the
determination of the allowance for loan losses using the Company’s procedures
and methods rests upon various judgments and assumptions about future economic
conditions, events, and other factors affecting loans which are believed to be
reasonable, but which may or may not prove valid. While it is the Company’s
policy to provide for the loan losses in the current period in which a loss is
considered probable, there are additional risks of future losses which cannot be
quantified precisely or attributed to particular loans or classes of loans.
Because these risks include the state of the economy, industry trends, and
conditions affecting individual borrowers, management’s judgment of the
allowance is necessarily approximate and imprecise. No assurance can be given
that the Company will not in any particular period sustain loan losses which
would be sizable in relationship to the amount reserved or that subsequent
evaluation of the loan portfolio, in light of conditions and factors then
prevailing, will not require significant changes in the allowance for loan
losses or future charges to earnings. The allowance for loan losses is also
subject to review by various regulatory agencies through their periodic
examinations of the Company’s subsidiaries. Such examination could result in
required changes to the allowance for loan losses. No adjustment in the
allowance or significant adjustments to the Bank’s internal classified loans
were made as a result of the Bank’s most recent examination performed by the
Office of the Comptroller of the Currency.





13





The following
table sets forth certain information with respect to changes in the Company’s
allowance for loan losses for each period presented.






*(dollars
      in thousands)*
    
    ****At
      and For**the Three Months
    Ended**
    
    **At
      and For the Year Ended**
    
    ********At
      and For**the Three Months
      Ended******March
      31, 2005
    
    
    **December
      31, 2004**
    
    
    **March
      31, 2004**Balance
      at beginning of period
    
    $
    3,649
    
    $
    3,437
    
    $
    3,437*Charge-offs:*Commercial
      and industrial
    
    
    6
    
    
    37
    
    
    -Commercial
      real estate
    
    
    15
    
    
    95
    
    
    -Installment
      and consumer
    
    
    93
    
    
    444
    
    
    127114
    
    
    576
    
    
    127*Recoveries:*Commercial
      and industrial
    
    
    14
    
    
    89
    
    
    29Commercial
      real estate
    
    
    23
    
    
    130
    
    
    115Installment
      and consumer
    
    
    37
    
    
    133
    
    
    3574
    
    
    352
    
    
    179Net
      charge-offs (recoveries)
    
    
    40
    
    
    224
    
    
    -52Provision
      charged to expense
    
    
    102
    
    
    436
    
    
    210Balance
      at end of period
    
    $
    3,711
    
    $
    3,649
    
    $
    3,699Net
      charge-offs (recoveries) to average loans0.07
    %
    
    0.10
    %
    
    -0.09
    %Allowance
      to loans, period end
    
    
    1.50
    %
    
    1.51
    %
    
    1.54
    %


The
allowance for loan losses totaled $3.7 million, or 1.50% of total loans, at
March 31, 2005. This is compared to a $3.6 million allowance, or 1.51% of total
loans, at December 31, 2004, and a $3.7 million, or 1.54% of total loans, at
March 31, 2004. Changes in the allowance for loan losses as a percent of loans
between periods is reflective of the factors discussed previously as well as
under the “Provision for Loan Losses” section below, primarily related to the
trends in the level classified and watch list loans, changes in economic
factors, and the overall quality of the loan portfolio.
 
 The
Company’s nonperforming assets consist of loans on nonaccrual basis, loans which
are contractually past due 90 days or more on which interest is still being
accrued, troubled debt restructurings, and other real estate owned (“OREO”).
Generally, loans of the Bank are placed on nonaccrual status at the earlier of
when they are 90 days past due or when the collection of the loan becomes
doubtful. Loans of the Finance Company are not classified as nonaccrual, but are
charged-off when such become 150 days contractually past due or earlier if the
loan is deemed uncollectible. T here were
no loans considered to be impaired under Statement of Financial Accounting
Standards (“SFAS”) 114, *“Accounting
by Creditors for Impairment of a Loan”* for any
period presented.
  14
 The
following table summarizes the nonperforming assets for each period
presented.
  *(dollars
      in thousands)*
    
    
    **March
      31, 2005**
    
    
    **December
      31, 2004**
    
    
    **March
      31, 2004**Loans
      past due 90 days or more, still accruing
    
    $
    103
    
    $
    156
    
    $
    144Nonaccrual
      loans
    
    
    259
    
    
    531
    
    
    268Troubled
      debt restructurings
    
    
    -
    
    
    -
    
    
    -Other
      real estate owned
    
    
    347
    
    
    217
    
    
    383Total
      nonperforming assets
    
    $
    709
    
    $
    904
    
    $
    795Nonperforming
      assets to total loans and OREO
    
    
    0.29
    %
    
    0.37
    %
    
    0.33
    %
 
 Management
maintains a list of potential problem loans which includes nonaccrual loans,
loans past due in excess of 90 days which are still accruing interest, and other
loans which are credit graded (either graded internally, by independent review
or regulatory examinations) as “OAEM”, "substandard”, “doubtful”, or “loss”. A
loan is added to the list when management becomes aware of information about
possible credit problems of borrowers that causes doubts as to the ability of
such borrowers to comply with the current loan repayment terms. The total amount
of classified loans (i.e., defined as loans with a credit grade of
“substandard”, “doubtful”, or “loss”) at March 31, 2005, based upon management’s
internal designations, was $8.8 million or 3.6% of the loan portfolio, compared
to $4.1 million or 1.7% of the loan portfolio at December 31, 2004, and $8.9
million or 3.8% of the loan portfolio at March 31, 2004. The amount of potential
problem loans at March 31, 2005 does not represent management’s estimate of
potential losses since the majority of such loans are considered adequately
secured by real estate or other collateral. The increase in classified loans
since year end is related primarily to two commercial relationships which are
being closely monitored by management and which are currently anticipated to be
collected in total. Management believes that the allowance for loan losses as of
March 31, 2005 is adequate to absorb any losses related to the nonperforming
loans and potential problem loans as of that date. Management continues to
monitor closely the levels of nonperforming and potential problem loans, and
will address the weaknesses in these credits to enhance the amount of ultimate
collection or recovery on these assets. Should increases in the overall level of
nonperforming and potential problem loans accelerate from the current trend,
management will adjust the methodology for determining the allowance for loan
losses and will increase the provision for loan losses accordingly. This would
likely decrease net income.
 
 EARNINGS
REVIEW FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
 
 GENERAL
 The
Company reported consolidated net income for the three months ended March 31,
2005 of $1,159,000, compared to net income of $987,000 for the three months
ended March 31, 2004, or an improvement of approximately $172,000 or 17%. The
primary contributor to increased earnings for the first quarter of 2005 was the
8% growth in net interest income resulting from the 50 basis point increase in
net interest margin related to the higher interest rate environment. Also adding
to the higher net income was the lower provision for loan losses of 51%
resulting from the improvement in the overall quality of the loan portfolio and
lower net originations in the first quarter of 2005 compared to 2004. Reductions
in overhead expenses, primarily in merchant discount fees and consultant fees,
were more than offset by lower other income related to reduced gain on sale of
investment securities, and lower service charges and merchant discount income
for the quarter ended March 31, 2005 as compared to the prior year.
 
 NET
INTEREST INCOME
 Net
interest income, the difference between the interest earned and interest paid,
is the largest component of the Company’s earnings and changes in it have the
greatest impact on net income. Variations in the volume and mix of assets and
liabilities and their relative sensitivity to interest rate movements determine
changes in net interest income. During the three months ended March 31, 2005,
the Company recorded net interest income of $3.5 million, an 8% increase from
the net interest income of $3.3 million for the three months ended March 31,
2004. The increase in this amount is directly related to the 50 basis point
increase in the net interest margin for the Company. Also contributing to the
higher net interest income is fluctuations in the volume of average earning
assets, which declined only 4%, while interest-bearing liabilities decreased
nearly 7% and offset the increase in cost of funds.
 15
   For the
three months ended March 31, 2005 and 2004, the Company’s net interest margin
was 4.76% and 4.26%, respectively. The net interest margin is calculated as
annualized net interest income divided by year-to-date average earning assets.
The increase in net interest margin is related primarily to the 74 basis point
increase in the average yield on assets, offset somewhat by the 35 basis point
increase in the average cost of funds. Rates on both assets and liabilities
increased in 2005 due to the rising interest rate environment as the Federal
Reserve began increasing short-term rates in mid-2004. During the period between
the first quarter of 2004 and 2005, the average prime rate increased 143 basis
points resulting in an average prime rate of 5.43% for the first quarter of 2005
compared to 4.00% for the first quarter of the prior year.
 
 INTEREST
INCOME
 For the
three months ended March 31, 2005, the Company’s earning assets averaged $308.3
million and had an average yield of 6.48%. This compares to average earning
assets of $320.0 million for the first three months of 2004, yielding
approximately 5.74%. Thus, the 4% decrease in volume of average earning assets
slightly offset the 74 basis point increase in average yield, accounting for the
$374,000 (8%) increase in interest income between the first quarters of 2004 and
2005.
 
 Gross
loans comprised approximately 79% of the Company’s average earning assets for
the first three months of 2005 and compared to 74% for the first quarter of
2004. The majority of the Company’s loans are tied to the prime rate (over 75%
of the Bank’s loan portfolio is at floating rates at March 31, 2005), which
averaged 5.43% and 4.00% for the three months ended March 31, 2005 and 2004,
respectively. During the first three months of 2005, loans averaged $244.8
million, yielding an average of 6.86%, compared to $235.9 million, yielding an
average of 6.03% for the first three months of 2004. The 83 basis point increase
in the average yield on loans is directly related to the higher general interest
rate environment and prime lending rate increases starting in the latter half of
2004. The higher level of average loans (which increased 4%), combined with the
higher average yields, resulted in the increase in interest income on loans of
$604,000 or 17%.
 
 Investment
securities averaged $57.2 million and yielded 5.10% (tax equivalent basis)
during the first three months of 2005, compared to average securities of $79.2
million yielding 5.05% (tax equivalent basis) for the three months ended March
31, 2004. The increase in the average yield of the investment portfolio is
related to the general increases in market interest rates, the portfolio mix,
and the timing of security sales, calls and maturities which were reinvested at
higher current market rate instruments. During 2004, t he
Company implemented a strategic decision to realign
the balance sheet in anticipation of rising rates, resulting in a reduction in securities which had increased during 2003 from the investment of
excess liquidity in
higher yielding, cash flowing securities and returning the level of investment
securities back to more historical levels of investments as a percent of total
assets. This strategy resulted in the $22.0 million decline in average
investment securities between the two quarterly periods. The 28% decrease in
average securities, offset slightly by the increase in yield, resulted in the
decrease of interest income on securities of $251,000 or 29%.
 
 INTEREST
EXPENSE
 The
Company’s interest expense for the three months ended March 31, 2005 was $1.3
million. The increase in interest expense of $129,000, or 11%, from the
comparable three months in 2004 of $1.2 million was related to the 35 basis
point increase in the average rate on liabilities, offset somewhat by the 7%
decrease in the level of average interest-bearing liabilities. Interest-bearing
liabilities averaged $250.3 million for the first three months of 2005 with an
average rate of 2.12%. This is compared to average interest-bearing liabilities
of $268.3 million with an average rate of 1.77% for the three months ended March
31, 2004. The increase in average rate on liabilities is directly related to the
rising market interest rates and the maturities of fixed rate deposits and
borrowings which were renewed at higher current market rates.
 
 16
 
 PROVISION
FOR LOAN LOSSES
 The
provision for loan losses was $102,000 for the first quarter of 2005, compared
to $210,000 for the comparable period of 2004. As discussed further under the
“Allowance for Loan Losses” section above, in addition to the level of net
originations, other factors influencing the amount charged to the provision each
period include (1) trends in and the total amount of past due, nonperforming,
and classified loans; (2) trends in and the total amount of net chargeoffs, (3)
concentrations of credit risk in the loan portfolio, and (4) local and national
economic conditions and anticipated trends. Thus, the $108,000 or 51% decrease
in the provision for loan losses is primarily related to the lower level of net
originations of $5.4 million for the first quarter of 2005 as compared to $8.3
million for the first quarter of 2004. In addition, the overall improvement in
the quality of the loan portfolio contributed to the lower provision for the
first quarter of 2005. Loans past due in excess of 90 days at March 31, 2005
decreased to $103,000 or 0.04% of gross loans from $156,000 at December 31,
2004. Total nonperforming assets at March 31, 2005 declined to $709,000 or 0.29%
of gross loans plus OREO, compared to $904,000 or 0.37% at December 31, 2004.
Total classified loans where down somewhat from March 31, 2004 and loans graded
OAEM decreased significantly from $8.5 million at March 31, 2004 to $924,000 at
March 31, 2005. Estimates charged to the provision for loan losses are based on
management’s judgment as to the amount required to cover probable losses in the
loan portfolio and are adjusted as necessary based on a calculated model
quantifying the estimated required balance in the allowance.
 
 NONINTEREST
INCOME AND EXPENSES
 Noninterest
income, which is primarily related to service charges on customers’ deposit
accounts; credit card merchant discount fees; commissions on nondeposit
investment product sales and insurance product sales; mortgage origination fees;
and gains on sales of investment securities, was $451,000 for the three months
ended March 31, 2005 compared to $620,000 for the first three months of 2004, or
a decrease of 27%. The decrease is related to (1) lower service charge income of
$37,000 due to changes in transaction accounts and a reduction in NSF fee income
related to numerous accounts with recurring overdrafts being closed during the
year; (2) lower gain on sale of available for sale investment securities, which
decreased $22,000; (3) $22,000 lower gains on sale of vehicles compared to the
first quarter of 2004; and (4) the decline of $80,000 in merchant discount and
transaction fees related to the Company’s sale of the merchant portfolio in
mid-2004 and thereafter, receiving a residual net revenue amount.
 
 For both
the three months ended March 31, 2005 and 2004, noninterest expense was $2.2
million. The decrease of $74,000 or 3% is primarily related to lower merchant
expenses and consultant expenses. The most significant item included in
noninterest expense is salaries, wages and benefits, which totaled $1.4 million
for both the three months ended March 31, 2005 and 2004. The increase of $39,000
or 3% is primarily a result of normal annual raises. Occupancy expenses
increased a total of $13,000 or 7% between the first three months of 2004 and
2005 related primarily to the completion of and move into a new branch location
in February 2005.
 
 Included
in the line item “other operating expenses”, which decreased $120,000 or 22%
from the comparable period of 2004, are charges for OCC assessments; property
and bond insurance; ATM switch fees; professional services; education and
seminars; advertising and public relations; and other branch and customer
related expenses. The decrease is primarily related to (1) a decline in merchant
processing transaction expense of $86,000 due to the Company’s selling the
merchant portfolio in mid-2004 and thereafter, receiving a residual net revenue
amount; (2) $30,000 reduction in consultant fees related to fewer contracted
services and projects in 2005; and (3) lower advertising and public relations
expense of $13,000 related to fewer promotional campaigns as compared to the
prior year.
 
 INCOME
TAXES
 For the
three months ended March 31, 2005, the Company reported $531,000 in income tax
expense, or an effective tax rate of 31.4%. This is compared to income tax
expense of $445,000 for the same period of the prior year, or an effective tax
rate of 31.1%. The slight increase in effective tax rate is primarily related to
the level of tax-free municipal securities in each period.
 
 17
 
 CAPITAL
MANAGEMENT
 The
Company’s capital serves to support asset growth and provides protection against
loss to depositors and creditors. The Company strives to maintain an optimal
level of capital, commensurate with its risk profile, on which an attractive
return to shareholders will be realized over both the short and long-term, while
serving depositors’, creditors’ and regulatory needs. Total shareholders’ equity
amounted to $37.9 million, or 11.4% of total assets, at March 31, 2005. This is
compared to $37.3 million, or 11.6% of total assets, at December 31, 2004. The
$609,000 increase in total shareholders’ equity resulted from retention of
earnings, offset by the $605,000 increase in unrealized loss on investment
securities available for sale during the year. The Company’s unrealized loss on
securities, net of tax, which is included in accumulated other comprehensive
income, was ($507,000) as of March 31, 2005 as compared to an unrealized gain of
$98,000 as of December 31, 2004. Book value per share at March 31, 2005 and
December 31, 2004 was $8.37 and $8.25, respectively.
 
 The
Company and its bank subsidiary are subject to certain regulatory restrictions
on the amount of dividends they are permitted to pay. The Company paid
semi-annual cash dividends totaling $0.15 per share during 2004. The Company
presently intends to pay a semi-annual cash dividend on the common stock;
however, future dividends will depend upon the Company’s earnings, financial
condition, capital position, and such other factors as the Board may deem
relevant. Further, the ability of the Company to pay cash dividends is dependent
upon its receiving cash in the form of dividends from the Bank. The dividends
that may be paid by the Bank to the Company are subject to legal limitations and
regulatory capital requirements. The approval of the Comptroller of the Currency
is required if the total of all dividends declared by a national bank in any
calendar year exceeds that bank’s net profits (as defined by the Comptroller)
for that year combined with its retained net profits (as defined by the
Comptroller) for the two preceding calendar years. It is currently the Bank’s
intention to pay all dividends only from the net income of the current year.
 
 To date,
the capital needs of the Company have been met through the retention of
earnings, from the proceeds of its initial offering of common stock, and from
the proceeds of stock issued pursuant to the Company’s stock option plans. The
Company believes that the rate of asset growth will not negatively impact the
capital base. The Company has no commitments or immediate plans for any
significant capital expenditures outside of the normal course of business. The
Company’s management does not know of any trends, events or uncertainties that
may result in the Company’s capital resources materially increasing or
decreasing.
 
 The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. The purpose of these regulations
is to quantitatively measure capital against risk-weighted assets, including
certain off-balance sheet items. These regulations define the elements of total
capital and establish minimum ratios for capital adequacy purposes. To be
categorized as “well capitalized”, as defined in the Federal Deposit Insurance
Corporation Improvement Act of 1991 (“FDICIA”), Summit Financial and its banking
subsidiary must maintain a risk-based Total Capital ratio of at least 10%, a
risk-based Tier 1 Capital ratio of at least 6%, and a Tier 1 Leverage ratio of
at least 5%, and not be subject to a written agreement, order, or capital
directive with any of its regulators. At March 31, 2005, the Company and the
Bank exceeded all regulatory required minimum capital ratios, and satisfied the
requirements of the well capitalized category established by FDICIA. There are
no current conditions or events that management believes would change the
Company’s or the Bank’s category. The
following table summarizes capital ratios for the Company and the Bank at March
31, 2005 and December 31, 2004.
  18
  
 **RISK-BASED
CAPITAL CALCULATION**
 
 ******ACTUAL**
    
    **FOR
      CAPITAL ADEQUACY PURPOSES**
    
    ****TO
      BE
      CATEGORIZED**"WELL-CAPITALIZED"****AMOUNT**
    
    
    **RATIO**
    
    
    **AMOUNT**
    
    
    **RATIO**
    
    
    **AMOUNT**
    
    
    **RATIO****As
      of March 31, 2005**THE
      COMPANYTotal
      capital to risk-weighted assets
    
    $
    41,827
    
    
    15.22
    %
    $
    21,981
    
    
    8.00
    %
    
    N.A.Tier
      1 capital to risk-weighted assets
    
    $
    38,389
    
    
    13.97
    %
    $
    10,991
    
    
    4.00
    %
    
    N.A.Tier
      1 capital to average assets
    
    $
    38,389
    
    
    11.78
    %
    $
    13,031
    
    
    4.00
    %
    
    N.A.THE
      BANKTotal
      capital to risk-weighted assets
    
    $
    35,452
    
    
    13.03
    %
    $
    21,759
    
    
    8.00
    %
    $
    27,199
    
    
    10.00
    %Tier
      1 capital to risk-weighted assets
    
    $
    32,051
    
    
    11.78
    %
    $
    10,880
    
    
    4.00
    %
    $
    16,319
    
    
    6.00
    %Tier
      1 capital to average assets
    
    $
    32,051
    
    
    9.93
    %
    $
    12,910
    
    
    4.00
    %
    $
    16,137
    
    
    5.00
    %**As
      of December 31, 2004**THE
      COMPANYTotal
      capital to risk-weighted assets
    
    $
    40,511
    
    
    15.27
    %
    $
    21,228
    
    
    8.00
    %
    
    N.A.Tier
      1 capital to risk-weighted assets
    
    $
    37,190
    
    
    14.02
    %
    $
    10,614
    
    
    4.00
    %
    
    N.A.Tier
      1 capital to average assets
    
    $
    37,190
    
    
    11.39
    %
    $
    13,061
    
    
    4.00
    %
    
    N.A.THE
      BANKTotal
      capital to risk-weighted assets
    
    $
    34,246
    
    
    13.05
    %
    $
    20,994
    
    
    8.00
    %
    $
    26,242
    
    
    10.00
    %Tier
      1 capital to risk-weighted assets
    
    $
    30,963
    
    
    11.80
    %
    $
    10,497
    
    
    4.00
    %
    $
    15,745
    
    
    6.00
    %Tier
      1 capital to average assets
    
    $
    30,963
    
    
    9.57
    %
    $
    12,939
    
    
    4.00
    %
    $
    16,174
    
    
    5.00
    %
 LIQUIDITY
 Liquidity
risk is defined as the risk of loss arising from the Company’s inability to meet
known near-term and projected long-term funding commitments and cash flow
requirements. The objective of liquidity risk management is to ensure the
ability of the Company to meet its financial obligations. These obligations are
the payment of deposits on demand or at their contractual maturity; the
repayment of borrowings as they mature; the payment of lease obligations as they
become due; the ability to fund new and existing loan and other commitments; the
payment of operating expenses; and the ability to take advantage of new business
opportunities. Liquidity is measured and monitored frequently at both the parent
company and the Bank levels, allowing management to better understand and react
to balance sheet trends. A comprehensive liquidity analysis provides a summary
of anticipated changes in loans, core deposits, and wholesale funds. Management
also maintains a detailed liquidity contingency plan designed to respond to an
overall decline in the condition of the banking industry or a problem specific
to the Company.
  Liquidity
is achieved by the maintenance of assets which can easily be converted to cash;
a strong base of core customer deposits; maturing short-term assets; the ability
to sell marketable securities; and access to borrowed funds and capital markets.
Historically, deposits
have been the primary source of funds for lending and investing activities. The
amortization and scheduled payment of loans and mortgage-backed securities and
maturities of investment securities provide a stable source of funds, while
deposit fluctuations and loan prepayments are significantly influenced by the
interest rate environment and other market conditions and competitive factors.
Management meets frequently and makes changes relative to the mix, maturity and
pricing of assets and liabilities in order to minimize the impact on earnings
from such external conditions. Deposits are attractive sources of liquidity
because of their stability and generally lower cost than other funding.
 19
   In
addition to deposits and normal cash flows, FHLB advances and short-term
borrowings (including purchasing federal funds from other financial institutions
or lines of credit through the Federal Reserve Bank) provide liquidity sources
based on specific needs or if management determines that these are the best
sources of funds to meet current requirements. At March 31, 2005, based on its
approved line of credit equal to 25% of total assets and limited to eligible
collateral available, the Bank had additional available credit of approximately
$4.8 million from the FHLB. Further, the Bank had short-term lines of credit to
purchase unsecured federal funds from unrelated correspondent banks with
available balances of $23.1 million at March 31, 2005. The Bank considers
advances from the FHLB to be a reliable and readily available source of funds
for both liquidity purposes and asset-liability management and interest rate
risk management strategies.
 
 Liquid
assets, consisting primarily of cash and due from banks, interest-bearing
deposits at banks, federal funds sold, and unpledged investment securities
available for sale, accounted for 9% and 17%, respectively, of average assets
for each of the three month period ended March 31, 2005 and 2004. The decline in
average liquid assets between the two periods is directly related to the
increase in public fund certificate of deposit accounts requiring pledges in the
first quarter of 2005. Investment securities are an important tool to the
Company’s liquidity management. Securities classified as available for sale may
be sold in response to changes in interest rates, liquidity needs, and/or
significant prepayment risk. In management’s opinion, the Company maintains
adequate levels of liquidity by retaining sufficient liquid assets and assets
which can be easily converted into cash and by maintaining access to various
sources of funds.
 
 As of
March 31, 2005, there was no substantial change from the future contractual
obligations as of December 31, 2004 as presented in the Company’s 2004 Annual
Report on Form 10-K. The foregoing disclosures related to the liquidity of the
Company should be read in conjunction with the Company’s audited consolidated
financial statements, related notes and management’s discussion and analysis of
financial condition and results of operations for the year ended December 31,
2004 included in the Company’s 2004 Annual Report on Form 10-K.
 
 Summit
Financial, the parent holding company, has limited liquidity needs required to
pay operating expenses and to provide funding to its consumer finance
subsidiary, Freedom Finance. Summit Financial has approximately $5.4 million in
available liquidity remaining from its initial public offering and the retention
of earnings. A total of $2.0 million of this liquidity was advanced to the
Finance Company in the form of an intercompany loan to fund its operations as of
March 31, 2005. This amount could be replaced by a loan from an unrelated source
to create additional liquidity for Summit Financial. Other sources of liquidity
for Summit Financial include borrowing funds from unrelated correspondent banks,
borrowing from individuals, and payments for management fees and debt service
which are made by the Company’s subsidiary on a monthly basis.
 
 Liquidity
needs of Freedom Finance, primarily for the funding of loan originations, paying
operating expenses, and servicing debt, have been met to date through the
initial capital investment of $500,000 made by Summit Financial, retention of
earnings, borrowings from unrelated private investors, and line of credit
facilities provided by Summit Financial and Summit National Bank. The Company’s
management believes its liquidity sources are adequate to meet its operating
needs.
 
  20
  OFF-BALANCE
SHEET ARRANGEMENTS
 The
Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the liquidity, credit enhancement, and
financing needs of its customers. These financial instruments include legally
binding commitments to extend credit and standby letters of credit and involve,
to varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the balance sheet. Credit risk is the principal risk
associated with these instruments. The contractual amounts of these instruments
represent the amount of credit risk should the instruments be fully drawn upon
and the customer defaults.
 
 To
control the credit risk associated with entering into commitments and issuing
letters of credit, the Company uses the same credit quality, collateral
policies, and monitoring controls in making commitments and letters of credit as
it does with its lending activities. The Company evaluates each customer’s
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management’s credit evaluation.
 
 Legally
binding 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. Since many of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Standby letters of credit obligate the
Company to meet certain financial obligations of its customers, if, under the
contractual terms of the agreement, the customers are unable to do so. The
financial standby letters of credit issued by the Company are irrevocable.
Payment is only guaranteed under these letters of credit upon the borrower’s
failure to perform its obligations to the beneficiary. As such, there are no
“stand-ready obligations” in any of the letters of credit issued by the Company
and the contingent obligations are accounted for in accordance with SFAS 5, *“Accounting
for Contingencies”* . At
March 31, 2005 and 2004, the Company has recorded no liability for the current
carrying amount of the obligation to perform as a guarantor, as such amounts are
not considered material.
 
 At March
31, the Company’s total contractual amounts of commitments and letters of credit
are as follows:
 
 *(dollars
      in thousands)*
    
    
    **2005**
    
    
    **2004**Legally
      binding commitments to extend credit:Commercial
      and industrial
    
    $
    16,415
    
    $
    15,446Residential
      real estate, including prime equity lines
    
    
    19,873
    
    
    18,916Construction
      and development
    
    
    28,618
    
    
    11,624Consumer
      and overdraft protection
    
    
    1,803
    
    
    2,24266,709
    
    
    48,228Standby
      letters of credit
    
    
    3,637
    
    
    2,763Total
      commitments
    
    $
    70,346
    
    $
    50,991
  21
  EFFECT OF
INFLATION AND CHANGING PRICES
 The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America which
require the measurement of financial position and results of operations in terms
of historical dollars, without consideration of changes in the relative
purchasing power over time due to inflation. Unlike most industries, virtually
all of the assets and liabilities of a financial institution are monetary in
nature. As a result, interest rates generally have a more significant effect in
the financial institution’s performance than does the effect of
inflation.
 
 The yield
on a majority of the Company’s earning assets adjusts simultaneously with
changes in the short-term rates established by the Federal Reserve Board of
Governors, specifically the discount rate, changes in which leads to a change in
the prime lending rate. Given the Company’s asset-sensitive balance sheet
position, assets reprice faster than liabilities, which generally results in
decreases in net interest income during periods of declining interest rates.
This may cause a decrease in the net interest margin until the fixed rate
deposits mature and are repriced at lower current market rates, thus narrowing
the difference between what the Company earns on its assets and what it pays on
its liabilities. The opposite effect (that is, an increase in net interest
income) is generally realized in a rising rate environment. The degree of
interest rate sensitivity of the Company’s assets and liabilities and the
differences in timing of repricing assets and liabilities provides an indication
of the extent to which the Company’s net interest income may be affected by
interest rate movements.
 
 MARKET
RISK AND ASSET-LIABILITY MANAGEMENT
 The
Company’s primary earnings source is its net interest income; therefore, the
Company devotes significant time and has invested in resources to assist in the
management of market risk. The Company’s net interest income is affected by
changes in market interest rates, and by the level and composition of earning
assets and interest-bearing liabilities. The Company’s objectives in its
asset-liability management are to utilize its capital effectively, to provide
adequate liquidity and enhance net interest income, without taking undue risks
or subjecting the Company unduly to interest rate fluctuations. The Company
takes a coordinated approach to the management of its capital, liquidity, and
interest rate risk.
 
 Market
risk is the risk of loss from adverse changes in market prices and rates. The
Company’s market risk arises principally from interest rate risk inherent in its
lending, investment, deposit, and borrowing activities. Management actively
monitors and manages its interest rate risk exposure. Other types of market
risks, such as foreign currency exchange rate risk, and equity and commodity
price risk, do not arise in the normal course of the Company’s business.
 
 Interest
rate risk is the exposure to changes in market interest rates. The major source
of the Company’s interest rate risk is the difference in the maturity and
repricing characteristics between core banking assets and liabilities — loans
and deposits. This difference, or mismatch, poses a risk to net interest income.
The Company attempts to control the mix and maturities of assets and liabilities
to maintain a reasonable balance between exposure to interest rate fluctuations
and earnings and to achieve consistent growth in net interest income, while
maintaining adequate liquidity and capital. A sudden and substantial increase or
decrease in interest rates may adversely impact the Company’s earnings to the
extent that the interest rates on earning assets and interest-bearing
liabilities do not change at the same speed, to the same extent, or on the same
basis.
 
  22
  The
Company monitors the interest rate sensitivity of its balance sheet position and
controls this risk by identifying and quantifying exposures in its near-term
sensitivity through the use of simulation and valuation models, as well as its
long-term gap position, reflecting the known or assumed maturity, repricing, and
other cash flow characteristics of assets and liabilities. The Company’s
simulation analysis involves dynamically modeling interest income and expense
from current assets and liabilities over a specified time period under various
interest rate scenarios and balance sheet structures, primarily to measure the
sensitivity of net interest income over relatively short (e.g., less than
2-year) time horizons. As the future path of interest rates cannot be known in
advance, management uses simulation analysis to project earnings under various
interest rate scenarios including reasonable or “most likely”, as well as
deliberately extreme and perhaps unlikely, scenarios. Key assumptions in these
simulation analyses relate to the behavior of interest rates and spreads,
changes in the mix and volume of assets and liabilities, repricing and/or runoff
of deposits, and, most importantly, the relative sensitivity of the Company’s
assets and liabilities to changes in market interest rates. This relative
sensitivity is important to consider as the Company’s core deposit base has not
been subject to the same degree of interest rate sensitivity as its assets, the
majority of which are based on external indices and change in concert with
market interest rates. According to the model, the Company is presently
positioned so that net interest income will increase in the short-term if
interest rates rise and will decrease in the short-term if interest rates
decline.
 
 A
traditional gap analysis is also prepared based on the maturity and repricing
characteristics of earning assets and interest-bearing liabilities for selected
time bands. The mismatch between repricings or maturities within a time band is
commonly referred to as the “gap” for that period. A positive gap (asset
sensitive) where interest rate sensitive assets exceed interest rate sensitive
liabilities generally will result in the net interest margin increasing in a
rising rate environment and decreasing in a falling rate environment. A negative
gap (liability sensitive) will generally have the opposite result on net
interest income. However, the traditional gap analysis does not assess the
relative sensitivity of assets and liabilities to changes in interest rates and
other factors that could have an impact on interest rate sensitivity or net
interest income, and is thus not, in management’s opinion, a true indicator of
the Company’s interest rate sensitivity position.
 
 The
Company’s balance sheet structure is primarily short-term in nature with a
substantial portion of assets and liabilities maturing within one year. The
Company’s gap analysis indicates an asset-sensitive position over the entire
lives of the assets and liabilities. For a 12 month period, the gap analysis
indicates a positive position as of March 31, 2005 of $18.0 million. When the
“effective change ratio” (the historical relative movement of each asset’s and
liability’s rates in relation to a 100 basis point change in the prime rate) is
applied to the interest gap position, the Company actually has a somewhat higher
asset sensitive position over a 12 month period and the entire repricing lives
of the assets and liabilities. This is primarily due to the fact that in excess
of 75% of the loan portfolio moves immediately on a one-to-one ratio with a
change in the prime lending rate, while the deposit rates do not increase or
decrease as much or as quickly relative to a prime rate movement. The Company’s
asset sensitive position means that assets reprice faster than the liabilities,
which causes a decrease in the short-term in the net interest income and net
interest margin in periods of declining rates until the fixed rate deposits
mature and are repriced at then lower current market rates, thus narrowing the
difference between what the Company earns on its assets and what it pays on its
liabilities. Given the Company’s current balance sheet structure, the opposite
effect (that is, an increase in net interest income and net interest margin) is
realized in the short-term in a rising rate environment.
 
  23
  The
Company monitors and considers methods of managing the rate sensitivity and
repricing characteristics of the balance sheet components in order to minimize
the impact of sudden and sustained changes in interest rates. Accordingly, the
Company also performs a valuation analysis involving projecting future cash
flows from current assets and liabilities to determine the Economic Value of
Equity (“EVE”) which is the estimated net present value of those discounted cash
flows. EVE represents the market value of equity and is equal to the market
value of assets minus the market value of liabilities, with adjustments made for
certain off-balance sheet items, over a range of assumed changes in market
interest rates. The sensitivity of EVE to changes in the level of interest rates
is a measure of the sensitivity of long-term earnings to changes in interest
rates, and is used primarily to measure the exposure of earnings and equity to
changes in interest rates over a relatively long (e.g., greater than 2 years)
time horizon.
 
 The
Company’s market risk exposure is measured using interest rate sensitivity
analysis by computing estimated changes in EVE in the event of a range of
assumed changes in market interest rates. This analysis assesses the risk of
loss in market risk sensitive instruments in the event of a sudden and sustained
100 - 300 basis points increase or decrease in the market interest rates. The
Company’s Board of Directors has adopted an interest rate risk policy which
establishes maximum allowable decreases in EVE in the event of a sudden and
sustained increase or decrease in market interest rates.
 
 At
December 31, 2004, the Company’s estimated changes in EVE were within the limits
established by the Board. As of
March 31, 2005, there was no substantial change from the interest rate
sensitivity analysis or the market value of portfolio equity for various changes
in interest rates calculated as of December 31, 2004. The foregoing disclosures
related to the market risk of the Company should be read in conjunction with the
Company’s audited consolidated financial statements, related notes and
management’s discussion and analysis of financial condition and results of
operations for the year ended December 31, 2004 included in the Company’s 2004
Annual Report on Form 10-K.
 
 ACCOUNTING,
REPORTING AND REGULATORY MATTERS
 In
December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123R (“SFAS 123R”), “ *Share-Based
Payment* ” as a
revision of SFAS No. 123, “ *Accounting
for Stock-Based Compensation* ” and
superseding APB Opinion No. 25, “ *Accounting
for Stock Issued to Employees,* ” and its
related implementation guidance. SFAS 123R establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services. This statement does not change the accounting guidance
for share-based payment transactions with parties other than employees provided
in SFAS 123, however non-employee directors are scoped into SFAS 123R. This
statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value of the award. SFAS 123R allows the use of valuation models other than
the Black-Scholes model prescribed in SFAS 123, specifically the Binomial
Lattice method. Therefore, the proforma costs of stock option expense estimated
in Note 5 to the foregoing Condensed Notes to Consolidated Financial Statements
using the Black-Scholes method may not be representative of the costs recognized
by the Company upon adoption of SFAS 123R. The Company is still in the process
of analyzing the cost of stock options under SFAS 123R. On April 14, 2005, the
Securities and Exchange Commission delayed the effective date for SFAS 123R,
which allows companies to implement the statement at the beginning of their
first fiscal year beginning after June 15, 2005, which would be January 1, 2006
for the Company.
 
 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 See
“Market Risk and Asset-Liability Management” in Item 2, Management’s Discussion
and Analysis of Financial Condition and Results of Operations for quantitative
and qualitative disclosures about market risk, which information is incorporated
herein by reference.
 
 24
 
 ITEM 4. CONTROLS AND PROCEDURES
 
 (a)
Evaluation of Disclosure Controls and Procedures
 
  The
Company’s principal executive officer and principal financial officer have
evaluated the effectiveness of the Company’s “disclosure controls and
procedures,” as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended, (“the Exchange Act”) as of the end of the
period covered by this report. Based upon this evaluation, the principal
executive officer and principal financial officer have concluded that the
Company’s disclosure controls and procedures are designed and effective to
provide reasonable assurance that information required to be disclosed by the
Company in the reports filed or submitted by it under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms, and to provide
reasonable assurance that information required to be disclosed by the Company in
such reports is accumulated and communicated to the Company’s management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
 
 (b)
Changes in Internal Controls
 
  There was
no significant change in the Company’s “internal control over financial
reporting” (as such term is defined in Rule 13a-15(f) under the Exchange Act)
that occurred during the last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
 
  25
  **SUMMIT FINANCIAL CORPORATION**
 
 **PART
II. OTHER INFORMATION**
 Item
      1.
    Legal
      Proceedings.The
      Corporation and its subsidiaries from time to time may be involved as
      plaintiff or defendant in various legal actions incident to its business.
      There are no material actions currently pending.Item
      2.
    Unregistered
      Sales of Equity Securities and Use of ProceedsNone.Item
      3.
    Defaults
      Upon Senior Securities.None.Item
      4.
    Submission
      of Matters to a Vote of Security Holders.No
      matters were submitted to the shareholders for a vote at any time during
      the first quarter of 2005.Item
      5.
    Other
      Information.None.Item
      6.
    Exhibits.2.1
      -
    Agreement
      and Plan of Reorganization and Merger dated as of March 7, 2005 by and
      among Summit Financial Corporation, Summit National Bank, and First
      Citizens Bank and Trust Company, Inc., and joined in by First Citizens
      Bancorporation, Inc.10.1
      -
    Employment
      Agreement of James B. Schwiers dated March 7, 200531.1
      -
    Rule
      13a - 14(a) Certification of Chief Executive Officer pursuant to Section
      302 of the Sarbanes Oxley Act of 2002.31.2
      -
    Rule
      13a - 14(a) Certification of Chief Financial Officer pursuant to Section
      302 of the Sarbanes Oxley Act of 2002.32.1
      -
    Section
      1350 Certificate of Chief Executive Officer furnished pursuant to Section
      906 of the Sarbanes Oxley Act of 2002.32.2
      -
    Section
      1350 Certificate of Chief Financial Officer furnished pursuant to Section
      906 of the Sarbanes Oxley Act of 2002.
 
  26
  **SUMMIT FINANCIAL CORPORATION**
 
 **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 CORPORATION
 
 
 Date:
      May 11, 2005J.
      Randolph Potter, President and Chief Executive
Officer
 
 
 Date:
      May 11, 2005Blaise
      B. Bettendorf, Senior Vice President and Chief Financial
      Officer










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