EMPLOYEE BENEFITS

Retirement Plans: We have defined contribution profit-sharing plans with 401(k) provisions covering substantially all employees. Contributions to the plans are at the discretion of the Board of Directors. Contributions made to the plans and charged to expense were $360,000, $362,000, and $354,000 for the years ended December 31, 2015, 2014, and 2013, respectively.

Employee Stock Ownership Plan: We have an Employee Stock Ownership Plan (“ESOP”), which enables eligible employees to acquire shares of our common stock. The cost of the ESOP is borne by us through annual contributions to an Employee Stock Ownership Trust in amounts determined by the Board of Directors.

The expense recognized by us is based on cash contributed or committed to be contributed by us to the ESOP during the year. Contributions to the ESOP for the years ended December 31, 2015, 2014 and 2013 were $429,000, $714,000, and $173,000 respectively. Dividends paid by us to the ESOP are reported as a reduction to retained earnings. The ESOP owned 588,193 and 321,449 shares of our common stock at December 31, 2015 and 2014, respectively, all of which were purchased at the prevailing market price and all but 181,822 unallocated shares at December 31, 2015 are considered outstanding for earnings per share computations.

On July 30, 2015, our ESOP purchased 225,000 shares of Summit Financial Group Inc. common stock in a privately negotiated transaction, at $10.80 per share for a total purchase price of $2,430,000. On July 21, 2015, our Board of Directors approved the company lending to our ESOP $2,250,000 to partially finance the purchase, and was used to purchase 208,333 unallocated shares.

In accordance with ASC 718, Compensation - Stock Compensation, this purchase of unallocated ESOP shares will be shown as a reduction of shareholders' equity, similar to a purchase of treasury stock. The loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP reported as a liability on the Company's Consolidated Balance Sheets. Cash dividends on allocated shares (those credited to ESOP participants' accounts) are recorded as a reduction of shareholders' equity and distributed directly to participants' accounts. Cash dividends on unallocated shares (those held by the ESOP not yet credited to participants' accounts) are used to pay a portion of the ESOPs debt service requirements.

Unallocated ESOP shares will be allocated to ESOP participants ratably as the ESOP's loan is repaid. When the shares are committed to be released and become available for allocation to plan participants, the then fair value of such shares will be charged to compensation expense. Unallocated shares owned by the Company’s ESOP are not considered to be outstanding for the purpose of computing earnings per share.

The ESOP shares as of December 31 are as follows:



ESOP Shares	At December 31,
	2015		2014
Allocated shares	379,860		321,449
Shares committed to be released	26,511		—
Unallocated shares	181,822		—
Total ESOP shares	588,193		321,449

Market value of unallocated shares (in thousands)	$	2,160	$	—

Supplemental Executive Retirement Plan: In May 1999, Summit Community Bank entered into a non-qualified Supplemental Executive Retirement Plan (“SERP”) with certain senior officers, which provides participating officers with an income benefit payable at retirement age or death. During 2000, Shenandoah Valley National Bank adopted a similar plan and during 2002, Summit Financial Group, Inc. adopted a similar plan. The liabilities accrued for the SERP’s at December 31, 2015 and 2014 were $4.3 million and $3.9 million, respectively, which are included in other liabilities.

Share Based Compensation: The 2014 Long-Term Incentive Plan (“2014 LTIP”) was adopted by our shareholders in May 2014 to enhance the ability of the Company to attract and retain exceptionally qualified individuals to serve as key employees. The LTIP provides for the issuance of up to 500,000 shares of common stock, in the form of equity awards including stock options, restricted stock, restricted stock units, stock appreciation rights ("SARs"), performance units, other stock-based awards or any combination thereof, to our key employees.

Stock options awarded under the 2009 Officer Stock Option Plan and the 1998 Officer Stock Option Plan (collectively, the “Plans”) were not altered by the 2014 LTIP, and remain subject to the terms of the Plans. However, under the terms of the 2014 LTIP, all shares of common stock remaining issuable under the Plans at the time the 2014 LTIP was adopted ceased to be available for future issuance.

Under the 2014 LTIP and the Plans, stock options and SARs have generally been granted with an exercise price equal to the fair value of Summit's common stock on the grant date. We periodically grant share based compensation to individual employees. During second quarter 2015, we granted 166,717 SARs that become exercisable ratably over five years (20% per year) and expire ten years after the grant date. There were no grants of stock options in 2015 and no grants of stock options or SARs in 2014.

The fair value of our employee stock options and SARs granted under the Plans is estimated at the date of grant using the Black-Scholes option-pricing model. This model requires the input of highly subjective assumptions, changes to which can materially affect the fair value estimate. Additionally, there may be other factors that would otherwise have a significant effect on the value of employee stock options and SARs granted but are not considered by the model. Because our employee stock options and SARs have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and SARs at the time of grant. The assumptions used to value SARs issued during 2015 were a risk-free interest rate of 1.96%, an expected dividend yield of 2.75%, an expected common stock volatility of 61.84%, and an expected life of 10 years.

We recognize compensation expense based on the estimated number of stock awards expected to actually vest, exclusive of the awards expected to be forfeited. During 2013, 2014, and 2015, our stock compensation expense and related deferred taxes were insignificant.

A summary of activity in our Plans during 2013, 2014 and 2015 is as follows:



	Options / SARs		Weighted- Average Exercise Price (WAEP)
Outstanding, December 31, 2012	249,700		$	18.98
Granted	—		—
Exercised	(17,800	)	5.37
Forfeited	(1,750	)	19.69
Expired	(44,740	)	21.83
Outstanding, December 31, 2013	185,410		$	19.59
Granted	—		—
Exercised	(10,160	)	6.98
Forfeited	(6,500	)	24.44
Expired	(11,580	)	16.64
Outstanding, December 31, 2014	157,170		$	20.43
Granted	166,717		12.01
Exercised	(6,560	)	7.87
Forfeited	—		—
Expired	(73,180	)	23.67
Outstanding, December 31, 2015	244,147		$	14.05

Exercisable Options/SARs:
December 31, 2015	77,430		$	18.43
December 31, 2014	156,170		$	20.54
December 31, 2013	182,810		$	19.24

Other information regarding awards outstanding and exercisable at December 31, 2015 is as follows:



	Options/SARs Outstanding						Options/SARs Exercisable
				Wted. Avg. Remaining	Aggregate Intrinsic					Aggregate Intrinsic
Range of	# of			Contractual	Value		# of			Value
exercise price	awards	WAEP		Life (yrs)	(in thousands)		awards	WAEP		(in thousands)
$ 2.54 - $ 6.00	7,750	$	3.75	5.18	$	63	7,750	$	3.75	$	63
6.01 - 10.00	12,680	8.71		2.65	40		12,680	8.71		40
10.01 - 17.50	166,717	12.01		9.32	—		—	—		—
17.51 - 20.00	23,400	17.80		2.00	—		23,400	17.80		—
20.01 - 25.93	33,600	25.93		2.44	—		33,600	25.93		—
	244,147	$	14.05		$	103	77,430	$	18.43	$	103