8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

__________________________________

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

Date of Report (Date of earliest event reported):

December 14, 2006

Summit Financial Group, Inc.

(Exact name of registrant as specified in its charter)

West Virginia  No. 0-16587  55-0672148        

          (State or other jurisdiction of                 (Commission File Number)                             (I.R.S. Employer

                                                                                         incorporation or organization)                              Identification No.)

300 North Main Street

Moorefield, West Virginia 26836

(Address of Principal Executive Offices)

(304) 530-1000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name or address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[ ]Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[ ]Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[ ]Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[ ]Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Section 5 - Corporate Governance and Management

ITEM 5.02.Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

On December 14, 2006, the Compensation and Nominating Committee of the Board of Directors (the “Committee”) of Summit Financial Group, Inc. (the “Company”) met to review the performance of the Company in 2006, to establish the President and Chief Executive Officer’s base salary and the other named executed officer’s base salaries for 2007, to determine the bonuses for the Company’s named executive officers under the Company’s Incentive Compensation Plan for 2007, and to determine the number of options to grant the Company’s named executive officers under the Company’s Officer Stock Option Plan.

The Company and its Chief Executive Officer, H. Charles Maddy, III, extended the term of Mr. Maddy’s Employment Agreement dated March 4, 2005, for an additional year until March 4, 2010. On December 20, 2006, Mr. Maddy and the Company executed a Second Amendment to the Employment Agreement (the “Amendment”) providing for the extension in writing.

The Company’s named executive officers are: Mr. H. Charles Maddy, III, President and Chief Executive Officer; Mr. C. David Robertson, President and Chief Executive Officer of Summit Community Bank; Mr. Patrick N. Frye, Senior Vice President and Chief Credit Officer; Mr. Ronald F. Miller, President and Chief Executive Officer of Shenandoah Valley National Bank; and Robert S. Tissue, Senior Vice President and Chief Financial Officer. The Company reported all of these individuals as named executive officers in its 2006 proxy statement. The Company anticipates that each of these individuals will be disclosed as a named executive officer in its 2007 proxy statement.

The Company’s Executive Compensation program consists of three basic components: (1) salaries; (2) annual incentive compensation; and (3) long-term incentive compensation pursuant to the Officer Stock Option Plan. The Committee is responsible for the administration of the Company’s Executive Compensation programs, which includes establishing base salary levels, awarding bonuses under the Company’s incentive compensation plans and awarding stock options under the Company’s Officer Stock Option Plan. The Company’s compensation policies will be discussed in detail in the Compensation Discussion & Analysis (CD&A) included in the Company’s 2007 proxy statement.

Base Salaries

The Company has entered into employment agreements with Messrs. Maddy, Miller, Robertson, Frye and Tissue (the “Employment Agreements”). The Employment Agreements establish a base salary for each individual and the Committee has the authority to annually adjust such base salaries based upon an evaluation of each individual’s performance.

On December 14, 2006, the Committee reviewed recommendations by the President and Chief Executive Officer for the other named executive officer’s base salaries for 2007. In reviewing the recommendations, the Committee considered (i) the financial performance of the Company and (ii) a presentation by the President and Chief Executive Officer regarding each named executive officer. The President and Chief Executive Officer based his presentation and recommendations on an analysis of Company performance and peer group comparisons. Based on this analysis, the Committee set the base salaries of the named executive officers, other than the President and Chief Executive Officer, for 2007 as follows: Mr. Robertson - $183,900; Mr. Frye - $166,000; Mr. Miller - $183,900; and Mr. Tissue - $166,000.

In determining the base salary for Mr. Maddy, the Committee considered base salary information at comparable companies, cash equivalent compensation data at comparable companies, the perquisites provided to Mr. Maddy, the complexity of job duties of Mr. Maddy as compared to the perceived complexity of the duties of similar executives at other comparable companies, the Company’s financial performance and Mr. Maddy’s individual job performance. Based on this analysis, the Committee set Mr. Maddy’s base salary for 2007 at $387,500.

Annual Incentive Compensation

Bonuses are awarded primarily under the Company’s Incentive Compensation Plan based on a formula which primarily considers the return on average equity of the Company and its bank subsidiaries. With respect to Messrs. Miller and Robertson, the Company established an annual incentive compensation plan which includes specific performance goals and business criteria based on their achievement of the budgeted net income for their respective bank subsidiaries (the “Alternative Bonus Plan”). Messrs. Miller and Robertson are eligible to receive a bonus under the Incentive Compensation Plan if compensation calculated under the Incentive Compensation Plan exceeds compensation due under the Alternative Bonus Plan. In this case, Messrs. Miller and Robertson will only receive incentive compensation under the Incentive Compensation Plan. The Committee approved a similar bonus structure for 2007.

Long-Term Incentive Compensation

Under the Officer Stock Option Plan, the Company may award stock options for up to 960,000 shares of the Company’s common stock to qualified officers of the Company and its subsidiaries. Each option granted under the Plan must have an exercise price of no less than the fair market value of the Company’s common stock as of the date of the grant. In determining long-term incentive compensation of the CEO and the other Named Executive Officers, the Committee considered the Company’s financial performance, relative stockholder return, the additional expense that would be required to be recognized in accordance with Financial Accounting Standards Board Statement 123, Share-Based Payment (Revised 2004), the option adjusted total compensation awarded to CEO’s at comparable companies and the awards given to the CEO in the past years. After analyzing these factors, the Committee awarded no options to the CEO or the other Named Executive Officers for 2006 under the Stock Option Plan. The Committee approved 10,000 options to be awarded to any non-executive officers by the Chief Executive Officer, in his discretion.

2

Section 9 - Financial Statements and Exhibits

ITEM 9.01.Financial Statements and Exhibits

(d)   Exhibits

  10.1         Amendment to Employment Agreement between Summit Financial Group, Inc. and H. Charles Maddy, III.

  10.2Summit Financial Group, Inc. Incentive Plan

  10.3Shenandoah Valley National Bank Incentive Plan

  10.4Summit Community Bank Incentive Compensation Plan

3

SIGNATURES

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

        SUMMIT FINANCIAL GROUP, INC.

Date: December 20, 2006 By: /s/ Julie R. Cook

        0;           Julie R. Cook

        0;           Vice President &

                           Chief Accounting Officer

4

EX-10.1

EXHIBIT 10.1

SECOND AMENDMENT TO EMPLOYMENT AGREEMENT

THIS SECOND AMENDMENT TO EMPLOYMENT AGREEMENT(this “Agreement”), entered into as of the 20^th day of December, 2006, and effective as of December 14, 2006, by and between SUMMIT FINANCIAL GROUP, INC., a West Virginia corporation and bank holding company (“Summit”) and H. CHARLES MADDY, III, (“Maddy”).

W I T N E S S E T H:

WHEREAS, on March 4, 2005, Summit and Maddy entered into that certain Employment Agreement whereby Summit agreed to employ Maddy and Maddy accepted employment as the Chief Executive Officer of Summit (the “Employment Agreement”); and

WHEREAS, the term of the Employment Agreement commenced on March 4, 2005, and extends until March 4, 2008; and

WHEREAS, the Board of Directors of Summit or a committee designated by the Board of Directors of Summit is required by the terms of the Employment Agreement to review the Employment Agreement at least annually, and the Board of Directors of Summit may, with the approval of Maddy, extend the term of the Employment Agreement annually for one (1) year periods (so that the actual term of the Employment Agreement will always be between two and three years); and

WHEREAS, on December 6, 2005, the Compensation and Nominating Committee of the Board of Directors of Summit met to review the Employment Agreement and extended the term of the Employment Agreement for an additional one (1) year until March 4, 2009; and

WHEREAS, Maddy approved the extension of the Employment Agreement for an additional one (1) year until March 4, 2009; and

WHEREAS, on December 14, 2006, the Compensation and Nominating Committee of the Board of Directors of Summit met to review the Employment Agreement and extended the term of the Employment Agreement for an additional one (1) year until March 4, 2010; and

WHEREAS, Maddy approved the extension of the Employment Agreement for an additional one (1) year until March 4, 2010; and

WHEREAS, Maddy and Summit desire to enter into this Agreement to evidence the extension of the Employment Agreement for an additional one (1) year until March 4, 2010.

NOW THEREFORE, for in consideration of the premises and mutual covenants, agreements and undertakings, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties covenant and agree as follows:

1.Amendment to Employment Agreement. Effective as of the date of this Agreement, the term of the Employment Agreement shall be until March 4, 2010.

2.Enforceable Documents. Except as modified herein, all terms and conditions of the Employment Agreement, as the same may be supplemented, modified, amended or extended from time to time, are and shall remain in full force and effect.

3.Authority. The undersigned are duly authorized by all required action or agreement to enter into this Agreement.

4.Modifications to Agreement. This Agreement may be amended or modified only by an instrument or document in writing signed by the person or entity against whom enforcement is sought.

5.Governing Law. This Agreement, and any documents executed in connection herewith or as required hereunder, and the rights and obligations of the undersigned hereto and thereto, shall be governed by, construed and enforced in accordance with the laws of the State of West Virginia.

IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the date first written above.

SUMMIT FINANCIAL GROUP, INC.

By:/s/ Oscar M. Bean                

Its:Chairman                              

        /s/ H. Charles Maddy, III              

H. Charles Maddy, III

EX-10.2

EXHIBIT 10.2

Summit Financial Group, Inc.

Incentive Compensation Plan

December 14, 2006

Introduction:

In order to provide management with incentive to assure that the company operates to its fullest potential, the Board of Directors of Summit Financial Group, Inc. (the “Company”) has implemented various incentive programs. The Board of Directors of the Company established the Incentive Compensation Plan to reward those officers who oversee the various facets of the entire company. The basic specific performance measure for the Incentive Compensation Plan is Return on Average Equity (ROAE). This performance measure was chosen because it is widely recognized as being a core measure of the Company’s performance and uses our shareholder’s equity as a base for measurement.

Incentive Compensation Plan Criteria and Method of Calculation:

At the end of each year, the Compensation and Nominating Committee will review data and determine the ROAE level at which officers will become eligible for a bonus. During this review, the Committee will consider, among other things, the Company’s peer group data.

After determining these levels, the Compensation and Nominating Committee will determine the percentage of earnings to allocate to the bonus pool for each bonus level.

The current ROAE levels at which bonuses will be paid and corresponding percentage allocation levels to the bonus pool are as follows:

*	*	*	*	*	*	*	*	*
*	*	*	*	*	*	*	*	*

Should the Company achieve an ROAE of *% to *%, then the allocation to the bonus pool will be calculated at *% of net earnings. An allocation of *% of earnings will be made for an ROAE of *% or greater.

The Company’s ROAE will be calculated on a quarterly basis. For bonus purposes, “other comprehensive income (loss)” will not be considered when calculating average equity. The bonus pool will be established by applying the appropriate percentage to the current earnings on a quarterly basis. The bonus pool will then be divided among plan participants using the percentages shown on “Exhibit A”*.

Attached to this policy as “Exhibit A*” is the chart which represents sample calculations that would be applicable based on the above guidelines. The sample calculation is shown on an annual basis for ease of illustration. However, the Company’s Board of Directors has approved the payment of bonuses under the Incentive Compensation Plan on a quarterly basis.

Payment:

The Board of Directors or Compensation and Nominating Committee shall approve the payments under this plan on a quarterly basis.

Any items that qualify as “Extraordinary” under Generally Accepted Accounting Principals (GAAP) shall not be considered when calculating bonuses, regardless of whether these items have a positive or negative affect.

With respect to Messrs. Miller and Robertson, the Company has established an annual incentive compensation plan which includes specific performance goals and business criteria based on their achievement of the net income budgets for their respective subsidiary banks. However, if the payments due to Messrs. Miller and Robertson under the Incentive Compensation Plan exceed those payments due under these plans, then Messrs. Miller and Robertson are entitled to receive only the payments under the Incentive Compensation Plan.

In addition to the bonus pool established based on the ROAE criteria discussed above, the Company has also established a discretionary bonus pool under the Incentive Compensation Plan. Bonuses paid from the discretionary pool are paid at the sole discretion of the Chief Executive Officer and may be awarded to any employee other than the Chief Executive Officer or any other Executive Officer.

Any conflicts, ambiguities or questions of interpretation will be resolved by the Company’s Board of Directors, in its sole discretion.

* Confidential, Business Proprietary Information

EX-10.3

EXHIBIT 10.3

Memorandum

To:	Ron Miller
From:	Charlie Maddy
Date:	December 1, 2006
Re:	Incentive Plan - SVNB

Here is the Incentive Plan for Shenandoah Valley National Bank’s community banking division, for the year ending December 31, 2007. It follows the same principles as last year’s plan.

As you know, we have established a budget of $* in net income and approximately $* in total assets for the community banking division of Shenandoah Valley National Bank for year ended December 31, 2007. If we meet our operating plan budget and the average assets for December of 2007 are at least $*, yourself, Dawn and Cyndie would be paid the following bonus.

Ron Miller	$ *
Dawn Frye	$ *
Cyndie Layman	$ *

In addition, if net income exceeds the budgeted $*, we will reserve *% of the amount over the $* to a pool, which would be divided among the above key managers. In order to qualify for this additional amount, net income for Shenandoah Valley National Bank would have to be greater than $* after any and all bonuses (including the above “budget bonus”) were paid. The calculation would work as follows:

*	$*
*	*
*	*
*	*%
*	$*
*	*
*	$*
*	$*

The performance pool payment would be divided as follows:

Ron Miller	*%	$*
Dawn Frye	*%	*
Cyndie Layman	*%	*
Discretionary	*%	*
Reserved	*%	*

The President of Shenandoah Valley National Bank could award the discretionary amount to whatever Shenandoah Valley National Bank employee(s) he thought was deserving or could leave it in income, at his discretion.

To recap, in my example, if the bank were to make $* net in the year 2007, Ron Miller’s bonuses would be as follows:

Budget bonus	$ *
Performance bonus	*
Total bonus	$ *

The total performance pool total bonus cannot exceed $*. Securities gains and losses will be excluded for bonus calculation purposes. The operating plan and budget may be revised if significant structural changes occur such as the purchase of a new branch, merger, etc. Summit management and board of directors will have sole discretion as to whether these changes have occurred in amounts sufficient to make such changes and will advise Shenandoah Valley National Bank management if these changes are made. Any questions or “gray” areas will be resolved using the sole discretion of the Board of Summit or the President of Summit depending on the complexity of the matter in question.

Ron, as you are aware, you may receive quarterly “ROE bonus payments” this year. If these payments exceed the amount due to you under this plan, no payment will be awarded under this plan. So, in summary, you will receive the greater of the two amounts, but not both. Thanks for all your hard work and good luck.

* Confidential, Business Proprietary Information

EX-10.4

EXHIBIT 10.4

Memorandum

To:	Dave Robertson
From:	Charlie Maddy
Date:	December 1, 2006
Re:	2007 Incentive Plan - SCB

Here is the 2007 Incentive Bonus Plan for Summit Community Bank.

As you know, we have established a budget of approximately $* in net income and approximately $* in total assets for Summit Community Bank for year ended December 31, 2007. However, if we make at least $* and the average assets for December of 2007 are at least $*, management would be rewarded as follows:

Dave Robertson	$ *
Discretionary	$ *

In addition, if the budgeted $* net income is exceeded, we will reserve *% of the amount over the $* to a pool, which would be divided among key managers. In order to qualify for this additional amount, net income for Summit Community Bank would have to be greater than $* after any and all bonuses (including the above “budget bonus”) were paid. The calculation would work as follows:

*	$*
*	*
*	*
*	*%
*	$*
*	*
*	$*
*	$*

The performance pool payment would be divided as follows:

*	*%	$*
*	*%	$*
*	*%	$*

The President of Summit Community Bank could award the discretionary amount to whatever SCB employee(s) he thought was deserving.

To recap, in my example, if the bank were to make $* net in the year 2007 and December’s Total Average Assets are at least $*, Dave Robertson’s bonuses would be as follows:

Budget bonus	$ *
Performance bonus	*
Total bonus	$ *

The total performance pool total bonus cannot exceed $*. Securities gains and losses initiated by Summit management will be excluded for bonus calculation purposes. The operating plan and budget may be revised if significant structural changes occur such as the purchase of a new branch, merger, etc. Summit management and board of directors will have sole discretion as to whether these changes have occurred in amounts sufficient to make such changes and will advise SCB management if these changes are made.

Dave, as you are aware, you should receive quarterly “ROE bonus payments” this year. If these payments exceed the amount due to you under this plan, no payment will be awarded under this plan. So, in summary, you will receive the greater of the two amounts, but not both. Thanks for all your hard work and good luck.

* Confidential, Business Proprietary Information