ACQUISITIONS

First Century Bankshares, Inc.

On April 1, 2017, Summit Community Bank, Inc. ("SCB"), a wholly-owned subsidiary of Summit, acquired 100% of the ownership of First Century Bankshares, Inc. ("FCB") and its subsidiary First Century Bank, headquartered in Bluefield, West Virginia. Partnering with FCB not only expanded Summit’s community banking footprint into southwest West Virginia and southwestern Virginia, it also notably provided us the opportunity to offer trust services throughout our Bank’s market area, a capability which we previously did not possess. Pursuant to the Agreement and Plan of Merger dated June 1, 2016, FCB's shareholders received cash in the amount of $22.50 per share or 1.2433 shares of Summit 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. Total stock consideration was $33.1 million or 1,537,912 shares of Summit common stock and cash consideration was $15.0 million. FCB's assets and liabilities approximated $406 million and $361 million, respectively, at March 31, 2017.

The assets and liabilities of FCB 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 $4.25 million in connection with the acquisition (not deductible for income tax purposes), 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 15 years using an accelerated method which approximates the estimated run-off of the acquired deposits. The following table details the total consideration paid on April 1, 2017 in connection with the acquisition of FCB, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill.



Dollars in thousands	As Recorded by FCB			Estimated Fair Value Adjustments			Estimated Fair Values as Recorded by Summit
Cash consideration							$	14,989
Stock consideration							33,127
Total consideration							48,116

Identifiable assets acquired:
Cash and cash equivalents	$	54,042		$	—		$	54,042
Securities available for sale, at fair value	101,022			295			101,317
Loans
Purchased performing	224,809			(2,693		)	222,116
Purchased credit impaired	4,167			(540		)	3,627
Allowance for loan losses	(2,511		)	2,511			—
Premises and equipment	10,396			(4,222		)	6,174
Property held for sale	4,596			(2,219		)	2,377
Goodwill	5,183			(5,183		)	—
Core deposit intangibles	—			10,916			10,916
Other assets	4,450			652			5,102
Total identifiable assets acquired	406,154			(483		)	405,671

Identifiable liabilities assumed:
Deposits	349,726			807			350,533
Other liabilities	11,216			58			11,274
Total identifiable liabilities assumed	360,942			865			361,807

Net identifiable assets acquired	$	45,212		$	(1,348	)	$	43,864

Preliminary goodwill resulting from acquisition							$	4,252

The following is a description of the methods used to determine the fair values of significant assets and liabilities in both the FCB and HCB acquisitions.

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 FCB'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 FCB.

Property held for sale: The fair value of FCB's property held for sale was determined on a property by property basis based upon the lessor of the properties present asking price or its appraised value by licensed appraisers, less estimated costs to sell.

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 combination are 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". 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 amount paid is the 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 as 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 additional deterioration in these loans subsequent to the acquisition.

The PCI loan portfolio acquired in the FCB acquisition was recorded at estimated fair value on the date of acquisition, April 1, 2017, as follows:



Dollars in thousands	Acquired Loans -PCI
Contractual principal and interest due	$	4,885
Nonaccretable difference	(597		)
Expected cash flows	4,288
Accretable yield	(661		)
Purchase credit impaired loans - estimated fair value	$	3,627

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 expanded 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 recognized goodwill of $4.82 million in connection with the acquisition (deductible for income tax purposes), 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 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	—			1,612			1,612
Other assets	906			(41		)	865
Total identifiable assets acquired	$	122,840		$	1,291		$	124,131

Identifiable liabilities assumed:
Deposits	106,907			(112		)	106,795
Other liabilities	332			—			332
Total identifiable liabilities assumed	$	107,239		$	(112	)	$	107,127

Net identifiable assets acquired	$	15,601		$	1,403		$	17,004

Goodwill resulting from acquisition							$	4,822

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

Pro Forma Results of Operations

The following table estimates the pro forma revenue, net income and diluted earnings per share of the combined entities of Summit, FCB and HCB as if the acquisitions had taken place on January 1, 2015. The pro forma revenue, net income and diluted earnings per share combines the historical results of FCB and 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 acquisitions actually taken place on January 1, 2015. Acquisition related expenses of $1,589,000 and $933,000 were included in our actual consolidated statements of income for the years ended December 31, 2017 and 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. 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 acquisitions which are not reflected in the pro forma amounts below.



	Summit, FCB & HCB Pro Forma
	For the Year Ended December 31,
Dollars in thousands	2017		2016		2015
Total revenues, net of interest expense	$	85,470	$	82,634	$	81,706
Net income	$	13,029	$	20,312	$	18,915
Diluted earnings per share	$	1.09	$	1.66	$	1.54

It is impracticable for us to provide total revenue, net income and diluted earnings per share attributable to the operations of FCB and HCB that were included in our consolidated statement of income from April 1, 2017 (date of FCB acquisition) and October 1, 2016 (date of FCB acquisition) through December 31, 2017, since their 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.

The following presents the financial effects of adjustments recognized in the statements of income for the years ended December 31, 2017 and 2016 related to business combinations that occurred during 2017 or 2016.



	Income increase (decrease)
Dollars in thousands	December 31, 2017			December 31, 2016
Interest and fees on loans	$	825		$	66
Interest expense on deposits	237			(10		)
Amortization of intangibles	(1,210		)	(47		)
Income before income tax expense	$	(148	)	$	9