13. Regulatory Matters

9 Months Ended

Sep. 30, 2013

RegulatoryMattersAbstract

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 September 30, 2013, 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 September 30, 2013
Total Capital (to risk weighted assets)
Summit	$	143,494		14.5	%	$	79,423		8.0	%	$	99,279		10.0	%
Summit Community		154,155		15.5	%		79,497		8.0	%		99,371		10.0	%
Tier I Capital (to risk weighted assets)
Summit		120,221		12.1	%		39,712		4.0	%		59,567		6.0	%
Summit Community		141,682		14.3	%		39,748		4.0	%		59,623		6.0	%
Tier I Capital (to average assets)
Summit		120,221		8.9	%		54,291		4.0	%		67,863		5.0	%
Summit Community		141,682		10.4	%		54,336		4.0	%		67,920		5.0	%
As of December 31, 2012
Total Capital (to risk weighted assets)
Summit		138,593		14.0	%		79,391		8.0	%		99,238		10.0	%
Summit Community		148,803		15.0	%		79,484		8.0	%		99,354		10.0	%
Tier I Capital (to risk weighted assets)
Summit		115,221		11.6	%		39,695		4.0	%		59,543		6.0	%
Summit Community		136,231		13.7	%		39,742		4.0	%		59,613		6.0	%
Tier I Capital (to average assets)
Summit		115,221		8.3	%		55,591		4.0	%		69,489		5.0	%
Summit Community		136,231		9.8	%		55,581		4.0	%		69,476		5.0	%

Summit Financial Group, Inc. (“Summit”) and its bank subsidiary, Summit Community Bank, Inc. (the “Bank”), have entered into informal Memoranda of Understanding (“MOU’s”) with their 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.

 Under the Summit MOU, Summit has agreed among other things to:

§   Summit 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 not incurring any additional debt, other than trade payables, without the prior written consent of the principal banking regulators.

Additional information regarding Summit’s MOU is included in Part I. Item 1A – Risk Factors on our Form 10-K for the year ended December 31, 2012.

On October 25, 2012, the Bank entered into a revised MOU (“Bank MOU”) which replaced the Bank MOU effective September 24, 2009 and subsequently amended on February 1, 2011. In general, the Bank MOU includes provisions substantially similar to those in the prior Bank MOU with the exception that several provisions deemed no longer applicable by the regulatory authorities were removed and a provision relative to reducing the Bank’s levels of classified assets was added.

In summary, we have agreed, among other things, to address the following matters relative to the Bank:

§   maintaining a Board committee which monitors and promotes compliance with the provisions of the Bank MOU;

§   providing the Bank’s regulatory authorities with updated reports of criticized assets and/or formal workout plans for all nonperforming borrower relationships with an aggregate outstanding balance exceeding $1 million;

§   developing and submitting to regulatory authorities a written plan to reduce the Bank’s risk exposure in each adversely classified credit relationship in excess of $1 million and all OREO;

§   establishing procedures to report all loans with balances exceeding $500,000 that have credit weaknesses or that fall outside of the Bank’s policy;

§   annually reviewing the organizational structure and operations of the Bank’s loan department;

§   maintaining an adequate allowance for loan and lease losses through charges to current operating income;

§   reviewing overall liquidity objectives and developing and submitting to regulatory authorities plans and procedures aimed to improve liquidity and reduce reliance on volatile liabilities;

§   preparing comprehensive budgets and earnings forecasts for the Bank and submitting reports comparing actual performance to the budget plan;

§   maintaining a minimum Tier 1 Leverage Capital ratio of at least 8% and a Total Risk-based Capital ratio of at least 11%;

§   not paying any cash dividends without the prior written consent of the banking regulators; and,

§   providing quarterly progress reports to the Bank’s regulatory authorities detailing steps taken to comply with the Bank MOU.