ACQUISITIONS

Highland County Bankshares, Inc.

On October 1, 2016, Summit Community Bank, Inc. ("SCB"), a wholly-owned subsidiary of Summit, acquired 100% of the ownership of Highland County Bankshares, Inc. ("HCB") and its subsidiary First and Citizens Bank, headquartered in Monterey, Virginia. With this transaction, Summit expands its footprint into the Virginia counties of Highland, Bath and Augusta, each of which are contiguous with counties where Summit has existing offices. Pursuant to the Agreement and Plan of Merger dated February 29, 2016, HCB's shareholders received $38.00 for each share of HCB common stock they owned, or approximately $21.8 million in the aggregate. HCB's assets and liabilities approximated $123 million and $107 million, respectively, at September 30, 2016.

We accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations and accordingly, the assets and liabilities of HCB were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate the estimated fair values. The fair values are preliminary and subject to refinement for up to one year after the acquisition date as additional information relative to the acquisition date fair values becomes available. We recognized preliminary goodwill of $4.79 million in connection with the acquisition, which is not amortized for financial reporting purposes but is subject to annual impairment testing. The core deposit intangible represents the value of long-term deposit relationships acquired in this transaction and will be amortized over an estimated weighted average life of 16 years using an accelerated method which approximates the estimated run-off of the acquired deposits. The following table details the total consideration paid on October 1, 2016 in connection with the acquisition of HCB, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill.



(Dollars in thousands)	As Recorded by HCB			Estimated Fair Value Adjustments			Estimated Fair Values as Recorded by Summit
Cash consideration paid							$	21,826

Identifiable assets acquired:
Cash and cash equivalents	$	53,235		$	—		$	53,235
Securities available for sale, at fair value	5,932			—			5,932
Loans
Purchased performing	58,931			(467		)	58,464
Purchased credit impaired	2,910			(528		)	2,382
Allowance for loan losses	(1,040		)	1,040			—
Premises and equipment	1,925			(307		)	1,618
Property held for sale	41			(18		)	23
Core deposit intangibles	—			1,610			1,610
Other assets	906			(41		)	865
Total identifiable assets acquired	$	122,840		$	1,289		$	124,129

Identifiable liabilities assumed:
Deposits	106,907			(145		)	106,762
Other liabilities	332			—			332
Total identifiable liabilities assumed	$	107,239		$	(145	)	$	107,094

Net identifiable assets acquired	$	15,601		$	1,434		$	17,035

Preliminary goodwill resulting from acquisition							$	4,791

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above.

Cash and cash equivalents: The carrying amount of these assets approximates their fair value based on the short-term nature of these assets.

Securities: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair value estimates are based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market.

Loans: Fair values for loans are based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, collectibility, fixed or variable interest rate, term of loan, amortization status and current market rates. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns, if any.

Premises and equipment: The fair value of HCB's real property was determined based upon appraisals by licensed appraisers. The fair value of tangible personal property, which is not material, was assumed to equal the carrying value by HCB.

Core deposit intangible: This intangible asset represents the value of the relationships with deposit customers. The fair value was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, reserve requirements and the net maintenance cost attributable to customer deposits.

Deposits: The fair values of the demand and savings deposits by definition equal the amount payable on demand at the acquisition date. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered to the contractual interest rates on such time deposits.

Loans acquired in a business combinationare recorded at estimated fair value on the date of acquisition without the carryover of the related allowance for loan losses. Purchased credit-impaired (PCI) loans are those for which there is evidence of credit deterioration since origination and for which it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments. When determining fair value, PCI loans are identified as of the date of acquisition based upon evidence of credit quality such as internal risk grades and past due and nonaccrual status. The difference between contractually required payments of principal and interest at acquisition and the cash flows expected to be collected at acquisition is accounted for as a"nonaccretable difference," and is available to absorb future credit losses on those loans. For purposes of determining the nonaccretable difference, no prepayments are generally assumed in determining contractually required payments of principal and interest or cash flows expected to be collected. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent significant increases in cash flows may result in a reversal of the provision for loan losses to the extent of prior charges, or a transfer from nonaccretable difference to accretable yield. Further, any excess of cash flows expected at acquisition over the estimated fair value is accounted for as accretable yield and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows.

Loans not designated PCI loans as of the acquisition date are designated purchased performing loans. We account for purchased performing loans using the contractual cash flows method of recognizing discount accretion based on the acquired loans’ contractual cash flows. Purchased performing loans are recorded at fair value, including a credit discount. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. There is no allowance for loan losses established at the acquisition date for purchased performing loans. A provision for loan losses is recorded for any deterioration in these loans subsequent to the acquisition.

The PCI loan portfolio related to the HCB acquisition was accounted for at estimated fair value on the date of acquisition, October 1, 2016, as follows:



Dollars in thousands	Acquired Loans -PCI
Contractual principal and interest due	$	3,301
Nonaccretable difference	(586		)
Expected cash flows	2,715
Accretable yield	(333		)
Purchase credit impaired loans - estimated fair value	$	2,382

The following table estimates the pro forma revenue, net income and diluted earnings per share of the combined entities of Summit and HCB as if the acquisition taken place on January 1, 2014. The pro forma revenue, net income and diluted earnings per share combines the historical results of HCB with Summit's consolidated statements of income for the periods below and, while certain adjustments were made for the estimated effect of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition actually taken place on January 1, 2014. Acquisition related expenses of $933,000 were included in our actual consolidated statement of income for the year ended December 31, 2016, but were excluded from the pro forma information listed below. Additionally, HCB incurred acquisition related expenses of $405,000 in 2016 which were also excluded. We expect to achieve operational cost savings and other efficiencies as a result of the acquisition which are not reflected in the pro forma amounts below.



	Summit & HCB Pro Forma
	For the Year Ended December 31,
Dollars in thousands	2016		2015		2014
Total revenues, net of interest expense	$	64,149	$	62,684	$	58,400
Net income	$	18,042	$	16,861	$	11,271
Diluted earnings per share	$	1.68	$	1.57	$	1.24

It is impracticable for us to provide total revenue, net income and diluted earnings per share attributable to the operations of HCB that were included in our consolidated statement of income from October 1, 2016 (date of acquisition) through December 31, 2016, since HCB's operations were merged and fully integrated into Summit's bank subsidiary operations upon acquisition and meaningful financial information relative to those operations is not available.

First Century Bankshares, Inc.

On June 1, 2016, we entered into a Definitive Merger Agreement between SCB and First Century Bankshares, Inc. ("FCB"). Pursuant to the terms of the merger agreement, SCB will acquire all of the outstanding shares of common stock of FCB in exchange for cash in the amount of $22.50 per share or 1.2433 shares of Summit common stock. FCB shareholders will have a right to receive cash, Summit's common stock, or a combination of cash and Summit stock, subject to proration to result in approximately 35% cash and 65% stock consideration in the aggregate, subject to an adjustment if FCB’s adjusted shareholders’ equity as of the effective date of the merger deviates materially from the target determined by the parties. FCB's assets approximated $405 million at December 30, 2016. FCB's shareholders and all regulatory agencies have approved and we anticipate the acquisition will close early 2017, subject to customary closing conditions.

The following table illustrates the pro forma revenue, net income and diluted earnings per share of the combined entities of Summit, HCB and FCB had the acquisitions taken place on January 1, 2014. The pro forma revenue, net income and diluted earnings per share combines the historical results of HCB and FCB with Summit's consolidated statements of income for the periods below and, while certain adjustments were made for the estimated effect of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition actually taken place on January 1, 2014. Acquisition related expenses of $933,000 were included in our actual consolidated statement of net income for the year ended December 31, 2016, but were excluded from the pro forma information listed below. HCB and FCB incurred acquisition related expenses of $405,000 and $400,000, respectively, in 2016 which were also excluded. In addition and also excluded, was a 2016 charge of $5.46 million by FCB relative to the termination of its defined benefit plan, which was required in conjunction with the merger. We expect to achieve operational cost savings and other efficiencies as a result of the acquisition which are not reflected in the pro forma amounts below.



	Summit, HCB & FCB Pro Forma
	For the Year Ended December 31,
Dollars in thousands	2016		2015		2014
Total revenues, net of interest expense	$	83,239	$	82,191	$	77,894
Net income	$	21,259	$	19,874	$	15,133
Diluted earnings per share	$	1.73	$	1.62	$	1.41