Regulatory Matters

6 Months Ended

Jun. 30, 2011

Regulatory Matters

Regulatory Matters

NOTE 13.  REGULATORY MATTERS

We and our subsidiaries are subject to various regulatory capital requirements administered by the banking regulatory agencies.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we and each of our subsidiaries must meet specific capital guidelines that involve quantitative measures of our and our subsidiaries' assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.  We and each of our subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require us and each of our subsidiaries to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined).  We believe, as of June 30, 2011, that we and each of our subsidiaries met all capital adequacy requirements to which they were subject.

The most recent notifications from the banking regulatory agencies categorized us and each of our subsidiaries as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized, we and each of our subsidiaries must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below.

Our actual capital amounts and ratios as well as our subsidiary, Summit Community Bank's ("Summit Community") are presented in the following table.

											To be Well Capitalized
						Minimum Required					under Prompt Corrective
	Actual					Regulatory Capital					Action Provisions
Dollars in thousands	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of June 30, 2011
Total Capital (to risk weighted assets)
Summit	$	126,858		11.9	%	$	85,063		8.0	%	$	106,329		10.0	%
Summit Community		136,133		12.8	%		85,039		8.0	%		106,298		10.0	%
Tier I Capital (to risk weighted assets)
Summit		98,562		9.3	%		42,532		4.0	%		63,798		6.0	%
Summit Community		122,637		11.5	%		42,519		4.0	%		63,779		6.0	%
Tier I Capital (to average assets)
Summit		98,562		6.7	%		44,130		3.0	%		73,549		5.0	%
Summit Community		122,637		8.3	%		44,093		3.0	%		73,488		5.0	%
As of December 31, 2010
Total Capital (to risk weighted assets)
Summit		129,610		11.8	%		87,543		8.0	%		109,428		10.0	%
Summit Community		138,164		12.6	%		87,558		8.0	%		109,447		10.0	%
Tier I Capital (to risk weighted assets)
Summit		100,840		9.2	%		43,771		4.0	%		65,657		6.0	%
Summit Community		124,192		11.3	%		43,779		4.0	%		65,668		6.0	%
Tier I Capital (to average assets)
Summit		100,840		6.9	%		43,869		3.0	%		73,116		5.0	%
Summit Community		124,192		8.5	%		43,851		3.0	%		73,085		5.0	%

We, Summit Financial Group, Inc. ("Summit") and our bank subsidiary, Summit Community (the "Bank"), have entered into informal Memoranda of Understanding ("MOU's") with our respective regulatory authorities.  A memorandum of understanding is characterized by the regulatory authorities as an informal action that is not published or publicly available and that is used when circumstances warrant a milder form of action than a formal supervisory action, such as a formal written agreement or order.  Among other things, under the MOU's, our management team has agreed to:

§   The Bank achieving and maintaining a minimum Tier 1 leverage capital ratio of at least 8% and a total risk-based capital ratio of at least 11%;

§   The Bank providing 30 days prior notice of any declaration of intent to pay cash dividends to provide the Bank's regulatory authorities an opportunity to object;

§   Summit (parent holding company only) suspending all cash dividends on its common stock until further notice.  Dividends on all preferred stock, as well as interest payments on subordinated notes underlying Summit's trust preferred securities, continue to be permissible; and,

§   Summit (parent holding company only) not incurring any additional debt, other than trade payables, without the prior written consent of the principal banking regulators.

Additional information regarding the MOU's is included in Part I. Item 1A – Risk Factors on our Form 10-K for the year ended December 31, 2010.