Edgar Filing: SUMMIT FINANCIAL GROUP INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10 – Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES

EXCHANGE ACT OF 1934 For the transition period from ___________ to __________.

Commission File Number 0-16587

Summit Financial Group, Inc.

(Exact name of registrant as specified in its charter)



West Virginia	55-0672148
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)



300 North Main Street
Moorefield, West Virginia	26836
(Address of principal executive offices)	(Zip Code)

(304) 530-1000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes þ	No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



Yes þ	No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Smaller reporting company o Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes o	No þ

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock as of the latest practicable date.

Common Stock, $2.50 par value

12,428,342 shares outstanding as of November 1, 2017

Table of Contents



			Page
PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements

		Consolidated balance sheets September 30, 2017 (unaudited), December 31, 2016 and September 30, 2016 (unaudited)	3

		Consolidated statements of income for the three months and nine months ended September 30, 2017 and 2016 (unaudited)	4

		Consolidated statements of comprehensive income for the three months and nine months ended September 30, 2017 and 2016 (unaudited)	5

		Consolidated statements of shareholders’ equity for the nine months ended September 30, 2017 and 2016 (unaudited)	6

		Consolidated statements of cash flows for the nine months ended September 30, 2017 and 2016 (unaudited)	7

		Notes to consolidated financial statements (unaudited)	9

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	42

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	54

	Item 4.	Controls and Procedures	55
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	56

	Item 1A.	Risk Factors	56

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	None

	Item 3.	Defaults upon Senior Securities	None

	Item 4.	Mine Safety Disclosures	None

	Item 5.	Other Information	None

	Item 6.	Exhibits	56

EXHIBIT INDEX			57

SIGNATURES			58

Item 1. Financial Statements

Consolidated Balance Sheets (unaudited)



	September 30, 2017			December 31, 2016			September 30, 2016
Dollars in thousands, except per share amounts	(unaudited)			(*)			(unaudited)
ASSETS
Cash and due from banks	$	9,220		$	4,262		$	25,067
Interest bearing deposits with other banks	41,994			42,354			9,432
Cash and cash equivalents	51,214			46,616			34,499
Securities available for sale	328,726			266,542			262,102
Other investments	12,170			12,942			13,182
Loans held for sale	220			176			—
Loans, net	1,559,328			1,307,862			1,234,605
Property held for sale	22,622			24,504			24,767
Premises and equipment, net	34,220			23,737			21,802
Accrued interest receivable	7,979			6,167			5,470
Goodwill and other intangible assets	27,879			13,652			7,348
Cash surrender value of life insurance policies	41,076			39,143			38,504
Other assets	15,702			17,306			15,357
Total assets	$	2,101,136		$	1,758,647		$	1,657,636

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non interest bearing	$	215,910		$	149,737		$	122,652
Interest bearing	1,400,858			1,145,782			1,034,132
Total deposits	1,616,768			1,295,519			1,156,784
Short-term borrowings	202,988			224,461			234,657
Long-term borrowings	45,755			46,670			74,146
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589			19,589			19,589
Other liabilities	17,254			17,048			18,640
Total liabilities	1,902,354			1,603,287			1,503,816

Commitments and Contingencies

Shareholders' Equity
Preferred stock, $1.00 par value, authorized 250,000 shares	—			—			—
Common stock and related surplus, $2.50 par value; authorized 20,000,000 shares; issued: 2017 - 12,428,342 shares, December 2016 - 10,883,509 shares and September 2016 - 10,857,801 shares; outstanding: 2017 - 12,311,723 shares, December 2016 - 10,736,970 shares and September 2016 - 10,701,841 shares	80,496			46,757			46,114
Unallocated common stock held by Employee Stock Ownership Plan - 2017 - 116,619 shares, December 2016 - 146,539 shares and September 2016 - 155,960 shares	(1,260		)	(1,583		)	(1,684		)
Retained earnings	119,157			113,448			109,808
Accumulated other comprehensive income (loss)	389			(3,262		)	(418		)
Total shareholders' equity	198,782			155,360			153,820

Total liabilities and shareholders' equity	$	2,101,136		$	1,758,647		$	1,657,636

(*) - Derived from audited consolidated financial statements

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Income (unaudited)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
Dollars in thousands, (except per share amounts)	2017			2016			2017			2016
Interest income
Interest and fees on loans
Taxable	$	19,387		$	14,009		$	54,487		$	40,788
Tax-exempt	103			133			391			412
Interest and dividends on securities
Taxable	1,283			1,138			3,742			3,284
Tax-exempt	1,114			621			2,855			1,857
Interest on interest bearing deposits with other banks	149			5			466			13
Total interest income	22,036			15,906			61,941			46,354
Interest expense
Interest on deposits	2,963			2,209			7,987			6,533
Interest on short-term borrowings	1,160			675			3,233			1,334
Interest on long-term borrowings and subordinated debentures	681			985			2,012			2,937
Total interest expense	4,804			3,869			13,232			10,804
Net interest income	17,232			12,037			48,709			35,550
Provision for loan losses	375			—			875			500
Net interest income after provision for loan losses	16,857			12,037			47,834			35,050
Noninterest income
Insurance commissions	1,043			1,016			3,000			3,030
Trust and wealth management fees	589			126			1,284			358
Service fees related to deposit accounts	1,863			1,138			4,737			3,175
Realized securities gains, net	26			61			58			836
Bank owned life insurance income	255			258			758			772
Other	224			150			659			430
Total noninterest income	4,000			2,749			10,496			8,601
Noninterest expenses
Salaries, commissions and employee benefits	6,610			4,819			18,555			14,265
Net occupancy expense	847			525			2,239			1,576
Equipment expense	1,093			716			2,859			2,059
Professional fees	373			270			1,012			1,171
Advertising and public relations	137			93			393			280
Amortization of intangibles	448			50			974			150
FDIC premiums	310			200			815			800
Merger-related expenses	11			80			1,575			345
Foreclosed properties expense	171			100			397			317
Gain on sales of foreclosed properties, net	(29		)	(169		)	(111		)	(451		)
Write-downs of foreclosed properties	91			134			538			503
Litigation settlement	—			—			9,900			—
Other	2,385			1,601			6,253			4,395
Total noninterest expenses	12,447			8,419			45,399			25,410
Income before income tax expense	8,410			6,367			12,931			18,241
Income tax expense	2,480			2,086			3,339			5,655
Net income	$	5,930		$	4,281		$	9,592		$	12,586

Basic earnings per common share	$	0.48		$	0.40		$	0.81		$	1.18
Diluted earnings per common share	$	0.48		$	0.40		$	0.81		$	1.18

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Comprehensive Income (unaudited)



	For the Three Months Ended September 30,
Dollars in thousands	2017		2016
Net income	$	5,930	$	4,281
Other comprehensive income (loss):
Net unrealized gain on cashflow hedge of: 2017 - $497, net of deferred taxes of $184; 2016 - $965, net of deferred taxes of $357	313		608
Net unrealized gain (loss) on securities available for sale of: 2017 - $608, net of deferred taxes of $225 and reclassification adjustment for net realized gains included in net income of $26, net of tax of $10; 2016 - ($1,437), net of deferred taxes of ($532) and reclassification adjustment for net realized gains included in net income of $61, net of tax of $23	383		(905		)
Total other comprehensive income (loss)	696		(297		)
Total comprehensive income	$	6,626	$	3,984



	For the Nine Months Ended September 30,
Dollars in thousands	2017		2016
Net income	$	9,592	$	12,586
Other comprehensive income:
Net unrealized gain (loss) on cashflow hedge of: 2017 - $1,556, net of deferred taxes of $576; 2016 - ($2,114), net of deferred taxes of ($782)	980		(1,332		)
Net unrealized gain on securities available for sale of: 2017 - $3,892, net of deferred taxes of $1,440 and reclassification adjustment for net realized gains included in net income of $58, net of tax of $21; 2016 - $2,175, net of deferred taxes of $805 and reclassification adjustment for net realized gains included in net income of $836, net of tax of $309	2,452		1,370
Net unrealized gain on other post-retirement benefits of: 2017 - $348, net of deferred taxes of $129	219		—
Total other comprehensive income	3,651		38
Total comprehensive income	$	13,243	$	12,624

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Shareholders’ Equity (unaudited)



Dollars in thousands (except per share amounts)	Common Stock and Related Surplus		Unallocated Common Stock Held by ESOP			Retained Earnings			Accumulated Other Compre- hensive Income (Loss)			Total Share- holders' Equity

Balance, December 31, 2016	$	46,757	$	(1,583	)	$	113,448		$	(3,262	)	$	155,360

Nine Months Ended September 30, 2017
Net income	—		—			9,592			—			9,592
Other comprehensive income	—		—			—			3,651			3,651
Exercise of stock options - 2,000 shares	12		—			—			—			12
Share-based compensation expense	285		—			—			—			285
Unallocated ESOP shares committed to be released - 29,920 shares	358		323			—			—			681
Acquisition of First Century Bankshares, Inc. - 1,537,912 shares, net of issuance costs	32,968		—			—			—			32,968
Common stock issuances from reinvested dividends - 4,921 shares	116		—			—			—			116
Common stock cash dividends declared ($0.33 per share)	—		—			(3,883		)	—			(3,883		)
Balance, September 30, 2017	$	80,496	$	(1,260	)	$	119,157		$	389		$	198,782

Balance, December 31, 2015	$	45,741	$	(1,964	)	$	100,423		$	(456	)	$	143,744

Nine Months Ended September 30, 2016
Net income	—		—			12,586			—			12,586
Other comprehensive income	—		—			—			38			38
Share-based compensation expense	150		—			—			—			150
Unallocated ESOP shares committed to be released - 25,862 shares	148		280			—			—			428
Common stock issuances from reinvested dividends - 4,235 shares	75		—			—			—			75
Common stock cash dividends declared ($0.30 per share)	—		—			(3,201		)	—			(3,201		)
Balance, September 30, 2016	$	46,114	$	(1,684	)	$	109,808		$	(418	)	$	153,820

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Cash Flows (unaudited)



	Nine Months Ended
Dollars in thousands	September 30, 2017			September 30, 2016
Cash Flows from Operating Activities
Net income	$	9,592		$	12,586
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	1,364			884
Provision for loan losses	875			500
Share-based compensation expense	285			150
Deferred income tax benefit	(364		)	(235		)
Loans originated for sale	(11,305		)	(7,068		)
Proceeds from sale of loans	11,492			8,001
Gains on loans held for sale	(231		)	(154		)
Realized securities gains, net	(58		)	(836		)
Gain on disposal of assets	(93		)	(480		)
Write-downs of foreclosed properties	538			503
Amortization of securities premiums, net	3,125			3,329
(Accretion) amortization related to acquisitions, net	(870		)	9
Amortization of intangibles	974			150
Earnings on bank owned life insurance	(425		)	(772		)
(Increase) decrease in accrued interest receivable	(752		)	75
Decrease (increase) in other assets	1,539			(762		)
(Decrease) increase in other liabilities	(221		)	673
Net cash provided by operating activities	15,465			16,553
Cash Flows from Investing Activities
Proceeds from maturities and calls of securities available for sale	2,610			630
Proceeds from sales of securities available for sale	131,345			63,641
Principal payments received on securities available for sale	24,349			27,696
Purchases of securities available for sale	(118,346		)	(73,595		)
Purchases of other investments	(13,116		)	(15,389		)
Proceeds from redemptions of other investments	13,274			10,942
Net loan originations	(26,099		)	(156,744		)
Purchases of premises and equipment	(5,672		)	(1,199		)
Proceeds from disposal of premises and equipment	—			43
Proceeds from sales of repossessed assets & property held for sale	4,463			3,659
Cash and cash equivalents acquired in acquisition, net of $14,989 cash consideration paid	39,053			—
Net cash provided by (used in) investing activities	51,861			(140,316		)
Cash Flows from Financing Activities
Net (decrease) increase in demand deposit, NOW and savings accounts	(9,812		)	54,830
Net (decrease) increase in time deposits	(19,305		)	35,243
Net (decrease) increase in short-term borrowings	(28,782		)	63,263
Repayment of long-term borrowings	(915		)	(1,435		)
Net proceeds from issuance of common stock	(43		)	75
Exercise of stock options	12			—
Dividends paid on common stock	(3,883		)	(3,201		)
Net cash provided by (used in) financing activities	(62,728		)	148,775
Increase in cash and cash equivalents	4,598			25,012
Cash and cash equivalents:
Beginning	46,616			9,487
Ending	$	51,214		$	34,499

(Continued)




See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Cash Flows (unaudited) - continued



	Nine Months Ended
Dollars in thousands	September 30, 2017		September 30, 2016
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest	$	13,055	$	10,889
Income taxes	$	3,557	$	5,768

Supplemental Disclosures of Noncash Investing and Financing Activities
Real property and other assets acquired in settlement of loans	$	289	$	2,053

See Notes to Consolidated Financial Statements

Table of Contents

NOTE 1. BASIS OF PRESENTATION

We, Summit Financial Group, Inc. and subsidiaries, prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for annual year end financial statements. In our opinion, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature.

The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from these estimates.

The results of operations for the nine months and quarter ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year. The consolidated financial statements and notes included herein should be read in conjunction with our 2016 audited financial statements and Annual Report on Form 10-K.

NOTE 2. SIGNIFICANT NEW AUTHORITATIVE ACCOUNTING GUIDANCE

ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to securities available-for-sale. ASU 2016-01 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our financial statements.

ASU 2016-02, Leases (Topic 842) will, among other things, require lessees to recognize a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model and ASC Topic 606, Revenue from Contracts with Customers. ASU 2016-02 will be effective for us on January 1, 2019 and will require transition using a modified retrospective approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. While our full evaluation of the potential impact of ASU 2016-02 is ongoing, preliminarily, we expect that its adoption will not be significant to our financial statements.

ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 will be effective on January 1, 2020. An implementation committee has been formed and continues to plan for the standards' implementation and evaluate the impact of ASU 2016-13 on our financial statements.

ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments provides guidance related to certain cash flow issues in order to reduce the current and potential future diversity in practice. ASU 2016-15 will be effective for us on January 1, 2018 and is not expected to have a significant impact on our financial statements.

Table of Contents

ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business-inputs, processes, and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. We do not expect the adoption of ASU 2017-01 to have a material impact on our consolidated financial statements.

ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost requires an employer that offers defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715 to report the service cost component of net periodic benefit cost in the same line item(s) as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component. If the other components of net periodic benefit cost are not presented on a separate line or lines, the line item(s) used in the income statement must be disclosed. In addition, only the service cost component will be eligible for capitalization as part of an asset, when applicable. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. We do not expect the adoption of ASU 2017-07 to have a material impact on our consolidated financial statements.

ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities shortens the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. We are currently assessing the impact that ASU 2017-08 will have on our consolidated financial statements.

During May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting which provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The amendments are effective for all entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. We are currently assessing the impact that ASU 2017-09 will have on our consolidated financial statements.

During August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU modify the designation and measurement guidance for hedge accounting as well as provide for increased transparency regarding the presentation of economic results on both the financial statements and related footnotes. Certain aspects of hedge effectiveness assessments will also be simplified upon implementation of this update. The amendments are effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period. We do not expect the adoption of ASU 2017-12 to have a material impact on our consolidated financial statements.

NOTE 3. FAIR VALUE MEASUREMENTS

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis.



	Balance at		Fair Value Measurements Using:
Dollars in thousands	September 30, 2017		Level 1		Level 2		Level 3
Available for sale securities
U.S. Government sponsored agencies	$	24,135	$	—	$	24,135	$	—
Mortgage backed securities:
Government sponsored agencies	121,759		—		121,759		—
Nongovernment sponsored entities	2,755		—		2,755		—
State and political subdivisions	13,435		—		13,435		—
Corporate debt securities	16,190		—		16,190		—
Other equity securities	137		—		137		—
Tax-exempt state and political subdivisions	150,315		—		150,315		—
Total available for sale securities	$	328,726	$	—	$	328,726	$	—

Derivative financial assets
Interest rate swaps	$	125	$	—	$	125	$	—

Derivative financial liabilities
Interest rate swaps	$	3,056	$	—	$	3,056	$	—



	Balance at		Fair Value Measurements Using:
Dollars in thousands	December 31, 2016		Level 1		Level 2		Level 3
Available for sale securities
U.S. Government sponsored agencies	$	15,174	$	—	$	15,174	$	—
Mortgage backed securities:
Government sponsored agencies	138,846		—		138,846		—
Nongovernment sponsored entities	4,653		—		4,653		—
Corporate debt securities	18,170		—		18,170		—
Other equity securities	137		—		137		—
Tax-exempt state and political subdivisions	89,562		—		89,562		—
Total available for sale securities	$	266,542	$	—	$	266,542	$	—

Derivative financial assets
Interest rate swaps	$	200	$	—	$	200	$	—

Derivative financial liabilities
Interest rate swaps	$	4,611	$	—	$	4,611	$	—

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis are included in the table below.

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	Balance at		Fair Value Measurements Using:
Dollars in thousands	September 30, 2017		Level 1		Level 2		Level 3
Residential mortgage loans held for sale	$	220	$	—	$	220	$	—

Collateral-dependent impaired loans
Commercial real estate	$	518	$	—	$	518	$	—
Construction and development	945		—		945		—
Residential real estate	203		—		203		—
Total collateral-dependent impaired loans	$	1,666	$	—	$	1,666	$	—

Property held for sale
Commercial real estate	$	1,476	$	—	$	1,292	$	184
Construction and development	16,627		—		16,627		—
Residential real estate	352		—		352		—
Total property held for sale	$	18,455	$	—	$	18,271	$	184



	Balance at		Fair Value Measurements Using:
Dollars in thousands	December 31, 2016		Level 1		Level 2		Level 3
Residential mortgage loans held for sale	$	176	$	—	$	176	$	—

Collateral-dependent impaired loans
Construction and development	$	945	$	—	$	945	$	—
Residential real estate	130		—		130		—
Total collateral-dependent impaired loans	$	1,075	$	—	$	1,075	$	—

Property held for sale
Commercial real estate	$	976	$	—	$	976	$	—
Construction and development	19,327		—		19,327		—
Residential real estate	279		—		279		—
Total property held for sale	$	20,582	$	—	$	20,582	$	—

The following summarizes the methods and significant assumptions we used in estimating our fair value disclosures for financial instruments, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis.

Cash and cash equivalents: The carrying values of cash and cash equivalents approximate their estimated fair value.

Securities: Estimated fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, estimated fair values are based on quoted market prices of comparable securities.

Other investments: Other investments consists of FHLB stock, which does not have readily determinable fair values and is carried at cost and an investment in a limited partnership which owns interests in a diversified portfolio of qualified affordable housing projects which is reflected at its carrying value.

Loans held for sale: The carrying values of loans held for sale approximate their estimated fair values.

Loans: The estimated fair values for loans are computed based on scheduled future cash flows of principal and interest, discounted at interest rates currently offered for loans with similar terms to borrowers of similar credit quality. No prepayments of principal are assumed.

Accrued interest receivable and payable: The carrying values of accrued interest receivable and payable approximate their estimated fair values.

Deposits: The estimated fair values of demand deposits (i.e. non-interest bearing checking, NOW, money market and savings accounts) and other variable rate deposits approximate their carrying values. Fair values of fixed maturity deposits are

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estimated using a discounted cash flow methodology at rates currently offered for deposits with similar remaining maturities. Any intangible value of long-term relationships with depositors is not considered in estimating the fair values disclosed.

Short-term borrowings: The carrying values of short-term borrowings approximate their estimated fair values.

Long-term borrowings: The fair values of long-term borrowings are estimated by discounting scheduled future payments of principal and interest at current rates available on borrowings with similar terms.

Subordinated debentures owed to unconsolidated subsidiary trusts: The carrying values of subordinated debentures owed to unconsolidated subsidiary trusts approximate their estimated fair values.

Derivative financial instruments: The fair value of the interest rate swaps is valued using independent pricing models.

Off-balance sheet instruments: The fair values of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit standing of the counter parties. The amounts of fees currently charged on commitments and standby letters of credit are deemed insignificant and therefore, the estimated fair values and carrying values are not shown below.

The carrying values and estimated fair values of our financial instruments are summarized below:



	September 30, 2017				Fair Value Measurements Using:
Dollars in thousands	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	51,214	$	51,214	$	—	$	51,214	$	—
Securities available for sale	328,726		328,726		—		328,726		—
Other investments	12,170		12,170		—		12,170		—
Loans held for sale, net	220		220		—		220		—
Loans, net	1,559,328		1,557,227		—		1,666		1,555,561
Accrued interest receivable	7,979		7,979		—		7,979		—
Derivative financial assets	125		125		—		125		—
	$	1,959,762	$	1,957,661	$	—	$	402,100	$	1,555,561
Financial liabilities
Deposits	$	1,616,768	$	1,637,258	$	—	$	1,637,258	$	—
Short-term borrowings	202,988		202,988		—		202,988		—
Long-term borrowings	45,755		46,962		—		46,962		—
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589		19,589		—		19,589		—
Accrued interest payable	912		912		—		912		—
Derivative financial liabilities	3,056		3,056		—		3,056		—
	$	1,889,068	$	1,910,765	$	—	$	1,910,765	$	—

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	December 31, 2016				Fair Value Measurements Using:
Dollars in thousands	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	46,616	$	46,616	$	—	$	46,616	$	—
Securities available for sale	266,542		266,542		—		266,542		—
Other investments	12,942		12,942		—		12,942		—
Loans held for sale, net	176		176		—		176		—
Loans, net	1,307,862		1,321,235		—		1,075		1,320,160
Accrued interest receivable	6,167		6,167		—		6,167		—
Derivative financial assets	200		200		—		200		—
	$	1,640,505	$	1,653,878	$	—	$	333,718	$	1,320,160
Financial liabilities
Deposits	$	1,295,519	$	1,309,820	$	—	$	1,309,820	$	—
Short-term borrowings	224,461		224,461		—		224,461		—
Long-term borrowings	46,670		49,013		—		49,013		—
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589		19,589		—		19,589		—
Accrued interest payable	736		736		—		736		—
Derivative financial liabilities	4,611		4,611		—		4,611		—
	$	1,591,586	$	1,608,230	$	—	$	1,608,230	$	—

NOTE 4. EARNINGS PER SHARE

The computations of basic and diluted earnings per share follow:



	For the Three Months Ended September 30,
	2017					2016
Dollars in thousands, except per share amounts	Income (Numerator)		Common Shares (Denominator)	Per Share		Income (Numerator)		Common Shares (Denominator)	Per Share
Net income	$	5,930				$	4,281

Basic earnings per share	$	5,930	12,299,987	$	0.48	$	4,281	10,692,423	$	0.40

Effect of dilutive securities:
Stock options			10,911					12,865
Stock appreciation rights (SARs)			8,061					21,851

Diluted earnings per share	$	5,930	12,318,959	$	0.48	$	4,281	10,727,139	$	0.40



	For the Nine Months Ended September 30,
	2017					2016
Dollars in thousands, except per share amounts	Income (Numerator)		Common Shares (Denominator)	Per Share		Income (Numerator)		Common Shares (Denominator)	Per Share
Net income	$	9,592				$	12,586

Basic earnings per share	$	9,592	11,781,342	$	0.81	$	12,586	10,682,129	$	1.18

Effect of dilutive securities:
Stock options			11,336					8,774
Stock appreciation rights (SARs)			14,324					1,443

Diluted earnings per share	$	9,592	11,807,002	$	0.81	$	12,586	10,692,346	$	1.18

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Stock option and stock appreciation right (SAR) grants are disregarded in this computation if they are determined to be anti-dilutive. Our anti-dilutive stock options for the quarter and nine months ended September 30, 2017 were 23,400 shares, and totaled 33,600 for the three months ended September 30, 2016 and 57,000 for the nine months ended September 30, 2016. Our anti-dilutive SARs for three and nine months ended September 30, 2017 were 87,615.

NOTE 5. SECURITIES

The amortized cost, unrealized gains, unrealized losses and estimated fair values of securities at September 30, 2017, December 31, 2016, and September 30, 2016 are summarized as follows:



	September 30, 2017
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities
U.S. Government and agencies and corporations	$	23,591	$	608	$	64	$	24,135
Residential mortgage-backed securities:
Government-sponsored agencies	120,898		1,580		719		121,759
Nongovernment-sponsored entities	2,714		49		8		2,755
State and political subdivisions
General obligations	2,803		11		1		2,813
Other revenues	10,568		83		29		10,622
Corporate debt securities	16,326		—		136		16,190
Total taxable debt securities	176,900		2,331		957		178,274
Tax-exempt debt securities
State and political subdivisions
General obligations	70,714		1,382		510		71,586
Water and sewer revenues	25,049		433		74		25,408
Lease revenues	14,250		283		71		14,462
Electric revenues	6,226		76		23		6,279
University revenues	5,290		3		22		5,271
Other revenues	26,831		593		115		27,309
Total tax-exempt debt securities	148,360		2,770		815		150,315
Equity securities	137		—		—		137
Total available for sale securities	$	325,397	$	5,101	$	1,772	$	328,726



	December 31, 2016
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities
U.S. Government and agencies and corporations	$	14,580	$	642	$	48	$	15,174
Residential mortgage-backed securities:
Government-sponsored agencies	138,451		1,554		1,159		138,846
Nongovernment-sponsored entities	4,631		44		22		4,653
Corporate debt securities	18,295		23		148		18,170
Total taxable debt securities	175,957		2,263		1,377		176,843
Tax-exempt debt securities
State and political subdivisions
General obligations	49,449		569		1,388		48,630
Water and sewer revenues	9,087		63		149		9,001
Lease revenues	9,037		7		201		8,843
Electric revenues	3,247		10		48		3,209
Sales tax revenues	2,870		—		34		2,836
Other revenues	17,321		93		371		17,043
Total tax-exempt debt securities	91,011		742		2,191		89,562
Equity securities	137		—		—		137
Total available for sale securities	$	267,105	$	3,005	$	3,568	$	266,542

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	September 30, 2016
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value
Available for Sale
Taxable debt securities:
U.S. Government and agencies and corporations	$	14,818	$	921	$	47	$	15,692
Residential mortgage-backed securities:
Government-sponsored agencies	132,913		2,556		264		135,205
Nongovernment-sponsored agencies	5,382		48		29		5,401
State and political subdivisions:
Water and sewer revenues	250		—		—		250
Corporate debt securities	20,003		49		149		19,903
Total taxable debt securities	173,366		3,574		489		176,451
Tax-exempt debt securities:
State and political subdivisions:
General obligations	47,014		2,221		115		49,120
Water and sewer revenues	7,980		265		11		8,234
Lease revenues	7,392		321		38		7,675
Sales tax revenues	2,880		124		—		3,004
Other revenues	16,869		701		29		17,541
Total tax-exempt debt securities	82,135		3,632		193		85,574
Equity securities	77		—		—		77
Total available for sale securities	$	255,578	$	7,206	$	682	$	262,102

The below information is relative to the five states where issuers with the highest volume of state and political subdivision securities held in our portfolio are located. We own no such securities of any single issuer which we deem to be a concentration.



	September 30, 2017
	Amortized		Unrealized				Estimated
Dollars in thousands	Cost		Gains		Losses		Fair Value

Texas	$	20,215	$	440	$	71	$	20,584
Michigan	18,823		235		212		18,846
California	15,314		260		64		15,510
Illinois	12,463		244		38		12,669
Pennsylvania	10,603		91		79		10,615

Management performs pre-purchase and ongoing analysis to confirm that all investment securities meet applicable credit quality standards.

The maturities, amortized cost and estimated fair values of securities at September 30, 2017, are summarized as follows:



Dollars in thousands	Amortized Cost		Estimated Fair Value
Due in one year or less	$	46,461	$	46,984
Due from one to five years	82,524		83,284
Due from five to ten years	33,110		33,119
Due after ten years	163,165		165,202
Equity securities	137		137
	$	325,397	$	328,726

The proceeds from sales, calls and maturities of available for sale securities, including principal payments received on mortgage-backed obligations, and the related gross gains and losses realized, for the nine months ended September 30, 2017 and 2016 are as follows:

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		Proceeds from						Gross realized
Dollars in thousands		Sales		Calls and Maturities		Principal Payments		Gains		Losses
For the Nine Months Ended September 30,
2017
	Securities available for sale	$	131,345	$	2,610	$	24,349	$	416	$	358

2016
	Securities available for sale	$	63,641	$	630	$	27,696	$	1,117	$	281

We held 81 available for sale securities having an unrealized loss at September 30, 2017. We do not intend to sell these securities, and it is more likely than not that we will not be required to sell these securities before recovery of their amortized cost bases. We believe that this decline in value is primarily attributable to the lack of market liquidity and to changes in market interest rates and not due to credit quality. Accordingly, no other-than-temporary impairment charge to earnings is warranted at this time.

Provided below is a summary of securities available for sale which were in an unrealized loss position at September 30, 2017 and December 31, 2016.



	September 30, 2017
	Less than 12 months					12 months or more					Total
Dollars in thousands	Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss
Temporarily impaired securities
Taxable debt securities
U.S. Government agencies and corporations	$	5,374	$	(25	)	$	2,712	$	(39	)	$	8,086	$	(64	)
Residential mortgage-backed securities:
Government-sponsored agencies	29,222		(316		)	13,476		(403		)	42,698		(719		)
Nongovernment-sponsored entities	—		—			949		(8		)	949		(8		)
State and political subdivisions:
General obligations	734		(1		)	—		—			734		(1		)
Other revenues	4,816		(29		)	—		—			4,816		(29		)
Corporate debt securities	3,014		(39		)	1,653		(97		)	4,667		(136		)
Tax-exempt debt securities
State and political subdivisions:
General obligations	14,204		(164		)	10,236		(346		)	24,440		(510		)
Water and sewer revenues	6,702		(74		)	—		—			6,702		(74		)
Lease revenues	571		(2		)	1,061		(69		)	1,632		(71		)
Electric revenues	2,146		(23		)	—		—			2,146		(23		)
University revenues	3,508		(22		)	—		—			3,508		(22		)
Other revenues	4,279		(42		)	1,278		(73		)	5,557		(115		)
Total temporarily impaired securities	74,570		(737		)	31,365		(1,035		)	105,935		(1,772		)
Total	$	74,570	$	(737	)	$	31,365	$	(1,035	)	$	105,935	$	(1,772	)

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	December 31, 2016
	Less than 12 months					12 months or more					Total
Dollars in thousands	Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss			Estimated Fair Value		Unrealized Loss
Temporarily impaired securities
Taxable debt securities
U.S. Government agencies and corporations	$	763	$	(5	)	$	2,575	$	(43	)	$	3,338	$	(48	)
Residential mortgage-backed securities:
Government-sponsored agencies	55,388		(985		)	8,389		(174		)	63,777		(1,159		)
Nongovernment-sponsored entities	97		—			3,013		(22		)	3,110		(22		)
Corporate debt securities	968		(31		)	3,136		(117		)	4,104		(148		)
Tax-exempt debt securities
State and political subdivisions:
General obligations	33,115		(1,388		)	—		—			33,115		(1,388		)
Water and sewer revenues	4,761		(149		)	—		—			4,761		(149		)
Lease revenues	7,011		(201		)	—		—			7,011		(201		)
Electric revenues	1,973		(48		)	—		—			1,973		(48		)
Sales tax revenues	2,836		(34		)	—		—			2,836		(34		)
Other revenues	8,445		(371		)	—		—			8,445		(371		)
Total temporarily impaired securities	115,357		(3,212		)	17,113		(356		)	132,470		(3,568		)
Total	$	115,357	$	(3,212	)	$	17,113	$	(356	)	$	132,470	$	(3,568	)

NOTE 6. LOANS

Loans are summarized as follows:



Dollars in thousands	September 30, 2017		December 31, 2016		September 30, 2016
Commercial	$	187,193	$	119,088	$	110,466
Commercial real estate
Owner-occupied	239,840		203,047		192,254
Non-owner occupied	464,543		381,921		367,196
Construction and development
Land and land development	71,412		72,042		65,430
Construction	28,756		16,584		11,276
Residential real estate
Non-jumbo	355,642		265,641		228,777
Jumbo	61,253		65,628		57,276
Home equity	82,720		74,596		75,161
Mortgage warehouse lines	33,525		85,966		108,983
Consumer	36,915		25,534		19,756
Other	9,994		9,489		9,649
Total loans, net of unearned fees	1,571,793		1,319,536		1,246,224
Less allowance for loan losses	12,465		11,674		11,619
Loans, net	$	1,559,328	$	1,307,862	$	1,234,605

The outstanding balance and the recorded investment of acquired loans included in the consolidated balance sheet at September 30, 2017 are as follows:

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	Acquired Loans
Dollars in thousands	Purchased Credit Impaired		Purchased Performing		Total
Outstanding balance	$	6,393	$	238,314	$	244,707

Recorded investment
Commercial	$	11	$	31,430	$	31,441
Commercial real estate
Owner-occupied	695		23,084		23,779
Non-owner occupied	1,846		35,704		37,550
Construction and development
Land and land development	—		9,080		9,080
Construction	—		2,226		2,226
Residential real estate
Non-jumbo	1,861		114,756		116,617
Jumbo	1,005		3,443		4,448
Home equity	—		3,431		3,431
Consumer	—		13,050		13,050
Other	—		236		236
Total recorded investment	$	5,418	$	236,440	$	241,858

The following table presents a summary of the change in the accretable yield of the PCI loan portfolio for the period from January 1, 2017 to September 30, 2017:



Dollars in thousands
Accretable yield, January 1, 2017	$	290
Accretion	(135		)
Additions for First Century Bankshares, Inc. acquisition	661
Reclassification of nonaccretable difference due to improvement in expected cash flows	—
Other changes, net	(13		)
Accretable yield, September 30, 2017	$	803

The following table presents the contractual aging of the recorded investment in past due loans by class as of September 30, 2017 and 2016 and December 31, 2016.



	At September 30, 2017
	Past Due										> 90 days and Accruing
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		> 90 days and Accruing
Commercial	$	204	$	175	$	65	$	444	$	186,749	$	—
Commercial real estate
Owner-occupied	469		45		740		1,254		238,586		—
Non-owner occupied	177		252		1,969		2,398		462,145		—
Construction and development
Land and land development	268		21		3,880		4,169		67,243		—
Construction	—		—		—		—		28,756		—
Residential mortgage
Non-jumbo	4,860		2,062		4,837		11,759		343,883		—
Jumbo	—		—		—		—		61,253		—
Home equity	50		290		657		997		81,723		—
Mortgage warehouse lines	—		—		—		—		33,525		—
Consumer	387		173		405		965		35,950		35
Other	56		—		—		56		9,938		—
Total	$	6,471	$	3,018	$	12,553	$	22,042	$	1,549,751	$	35

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	At December 31, 2016
	Past Due										> 90 days and Accruing
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		> 90 days and Accruing
Commercial	$	90	$	86	$	165	$	341	$	118,747	$	—
Commercial real estate
Owner-occupied	93		—		509		602		202,445		—
Non-owner occupied	340		—		65		405		381,516		—
Construction and development
Land and land development	423		129		3,852		4,404		67,638		—
Construction	—		—		—		—		16,584		—
Residential mortgage
Non-jumbo	4,297		1,889		3,287		9,473		256,168		—
Jumbo	—		—		—		—		65,628		—
Home equity	—		302		57		359		74,237		—
Mortgage warehouse lines	—		—		—		—		85,966		—
Consumer	308		84		150		542		24,992		—
Other	—		—		—		—		9,489		—
Total	$	5,551	$	2,490	$	8,085	$	16,126	$	1,303,410	$	—



	At September 30, 2016
	Past Due										> 90 days and Accruing
Dollars in thousands	30-59 days		60-89 days		> 90 days		Total		Current		> 90 days and Accruing
Commercial	$	301	$	138	$	602	$	1,041	$	109,425	$	—
Commercial real estate
Owner-occupied	251		—		505		756		191,498		—
Non-owner occupied	311		78		—		389		366,807		—
Construction and development
Land and land development	238		—		3,731		3,969		61,461		—
Construction	—		—		—		—		11,276		—
Residential mortgage
Non-jumbo	1,932		1,488		2,762		6,182		222,595		—
Jumbo	—		—		—		—		57,276		—
Home equity	—		136		318		454		74,707		—
Mortgage warehouse lines	—		—		—		—		108,983		—
Consumer	135		44		148		327		19,429		21
Other	—		—		—		—		9,649		—
Total	$	3,168	$	1,884	$	8,066	$	13,118	$	1,233,106	$	21

Nonaccrual loans: The following table presents the nonaccrual loans included in the net balance of loans at September 30, 2017, December 31, 2016 and September 30, 2016.

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	September 30,				December 31,
Dollars in thousands	2017		2016		2016
Commercial	$	757	$	846	$	298
Commercial real estate
Owner-occupied	740		505		509
Non-owner occupied	2,033		4,362		4,336
Construction and development
Land & land development	3,931		4,360		4,465
Construction	—		—		—
Residential mortgage
Non-jumbo	7,309		3,680		4,621
Jumbo	—		—		—
Home equity	773		494		194
Mortgage warehouse lines	—		—		—
Consumer	494		148		151
Total	$	16,037	$	14,395	$	14,574

Impaired loans: Impaired loans include the following:

▪

Loans which we risk-rate (consisting of loan relationships having aggregate balances in excess of $2.5 million, or loans exceeding $500,000 and exhibiting credit weakness) through our normal loan review procedures and which, based on current information and events, it is probable that we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement. Risk-rated loans with insignificant delays or insignificant short falls in the amount of payments expected to be collected are not considered to be impaired.


▪	Loans that have been modified in a troubled debt restructuring.

Both commercial and consumer loans are deemed impaired upon being contractually modified in a troubled debt restructuring. Troubled debt restructurings typically result from our loss mitigation activities and occur when we grant a concession to a borrower who is experiencing financial difficulty in order to minimize our economic loss and to avoid foreclosure or repossession of collateral. Once restructured, a loan is generally considered impaired until its maturity, regardless of whether the borrower performs under the modified terms. Although such a loan may be returned to accrual status if the criteria set forth in our accounting policy are met, the loan would continue to be evaluated for an asset-specific allowance for loan losses and we would continue to report the loan in the impaired loan table below.

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The following tables present loans individually evaluated for impairment at September 30, 2017, December 31, 2016 and September 30, 2016.



	September 30, 2017
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized while impaired

Without a related allowance
Commercial	$	254	$	254	$	—	$	264	$	10
Commercial real estate
Owner-occupied	7,138		7,141		—		4,869		185
Non-owner occupied	9,884		9,886		—		10,142		511
Construction and development
Land & land development	5,029		5,029		—		4,729		87
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	4,200		4,210		—		4,294		209
Jumbo	3,581		3,580		—		3,605		171
Home equity	524		523		—		523		25
Mortgage warehouse lines	—		—		—		—		—
Consumer	29		29		—		34		3
Total without a related allowance	$	30,639	$	30,652	$	—	$	28,460	$	1,201

With a related allowance
Commercial	$	259	$	259	$	259	$	266	$	—
Commercial real estate
Owner-occupied	2,448		2,448		127		2,456		121
Non-owner occupied	1,014		1,018		501		2		—
Construction and development
Land & land development	1,470		1,470		525		1,482		56
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	1,728		1,729		217		1,681		82
Jumbo	841		842		15		847		42
Home equity	—		—		—		—		—
Mortgage warehouse lines	—		—		—		—		—
Consumer	—		—		—		—		—
Total with a related allowance	$	7,760	$	7,766	$	1,644	$	6,734	$	301

Total
Commercial	$	27,496	$	27,505	$	1,412	$	24,210	$	970
Residential real estate	10,874		10,884		232		10,950		529
Consumer	29		29		—		34		3
Total	$	38,399	$	38,418	$	1,644	$	35,194	$	1,502

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	December 31, 2016
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized while impaired

Without a related allowance
Commercial	$	285	$	285	$	—	$	247	$	10
Commercial real estate
Owner-occupied	520		520		—		534		31
Non-owner occupied	10,203		10,205		—		10,675		294
Construction and development
Land & land development	5,227		5,227		—		5,270		80
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	4,055		4,065		—		3,910		193
Jumbo	3,640		3,639		—		3,693		175
Home equity	524		523		—		523		22
Mortgage warehouse lines	—		—		—		—		—
Consumer	44		44		—		50		5
Total without a related allowance	$	24,498	$	24,508	$	—	$	24,902	$	810

With a related allowance
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial real estate
Owner-occupied	6,864		6,864		347		6,879		269
Non-owner occupied	1,311		1,311		197		1,327		43
Construction and development
Land & land development	2,066		2,066		585		2,074		80
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	2,055		2,057		251		1,851		78
Jumbo	853		853		24		862		44
Home equity	—		—		—		—		—
Mortgage warehouse lines	—		—		—		—		—
Consumer	—		—		—		—		—
Total with a related allowance	$	13,149	$	13,151	$	1,404	$	12,993	$	514

Total
Commercial	$	26,476	$	26,478	$	1,129	$	27,006	$	807
Residential real estate	11,127		11,137		275		10,839		512
Consumer	44		44		—		50		5
Total	$	37,647	$	37,659	$	1,404	$	37,895	$	1,324

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	September 30, 2016
Dollars in thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Impaired Balance		Interest Income Recognized while impaired

Without a related allowance
Commercial	$	791	$	790	$	—	$	400	$	9
Commercial real estate
Owner-occupied	4,914		4,914		—		4,932		188
Non-owner occupied	10,394		10,396		—		10,831		456
Construction and development
Land & land development	6,181		6,181		—		6,207		104
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	3,852		3,861		—		3,732		170
Jumbo	3,683		3,682		—		3,711		176
Home equity	713		713		—		710		21
Mortgage warehouse lines	—		—		—		—		—
Consumer	48		48		—		52		5
Total without a related allowance	$	30,576	$	30,585	$	—	$	30,575	$	1,129

With a related allowance
Commercial	$	19	$	19	$	19	$	6	$	—
Commercial real estate
Owner-occupied	2,499		2,499		12		2,491		112
Non-owner occupied	1,321		1,321		132		1,332		43
Construction and development
Land & land development	1,140		1,141		492		1,155		58
Construction	—		—		—		—		—
Residential real estate
Non-jumbo	2,617		2,619		216		2,329		103
Jumbo	859		859		25		864		43
Home equity	—		—		—		—		—
Mortgage warehouse lines	—		—		—		—		—
Consumer	—		—		—		—		—
Total with a related allowance	$	8,455	$	8,458	$	896	$	8,177	$	359

Total
Commercial	$	27,259	$	27,261	$	655	$	27,354	$	970
Residential real estate	11,724		11,734		241		11,346		513
Consumer	48		48		—		52		5
Total	$	39,031	$	39,043	$	896	$	38,752	$	1,488

Included in impaired loans are TDRs of $29.1 million, of which $28.3 million were current with respect to restructured contractual payments at September 30, 2017, and $28.6 million, of which $28.1 million were current with respect to restructured contractual payments at December 31, 2016. There were no commitments to lend additional funds under these restructurings at either balance sheet date.

The following table presents by class the TDRs that were restructured during the three and nine months ended September 30, 2017 and September 30, 2016 . Generally, the modifications were extensions of term, modifying the payment terms from principal and interest to interest only for an extended period, or reduction in interest rate. All TDRs are evaluated individually for allowance for loan loss purposes.

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	For the Three Months Ended September 30, 2017					For the Three Months Ended September 30, 2016
Dollars in thousands	Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment		Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment
Commercial real estate
Owner-occupied	1	$	2,302	$	2,302	—	$	—	$	—
Non-owner occupied	1	148		148		—	—		—
Construction and development
Land & land development	1	438		438		—	—		—
Residential real estate
Non-jumbo	—	—		—		1	307		307
Total	3	$	2,888	$	2,888	1	$	307	$	307



	For the Nine Months Ended September 30, 2017					For the Nine Months Ended September 30, 2016
Dollars in thousands	Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment		Number of Modifications	Pre-modification Recorded Investment		Post-modification Recorded Investment
Commercial real estate
Owner-occupied	1	$	2,302	$	2,302	—	$	—	$	—
Non-owner occupied	1	148		148		—	—		—
Construction and development
Land & land development	1	438		438		—	—		—
Residential real estate
Non-jumbo	5	1,086		1,086		4	702		702
Consumer	—	—		—		1	2		2
Total	8	$	3,974	$	3,974	5	$	704	$	704

During the three months and nine months ended September 30, 2017, four non-jumbo residential real estate loans and one land & land development loan that had been restructured within the past twelve months defaulted. A default is considered as either the loan was past due 30 days or more at any time during the period, or the loan was fully or partially charged off during the period.

The following tables detail the activity regarding TDRs by loan type, net of fees, for the three months and nine months ended September 30, 2017, and the related allowance on TDRs.



For the Three Months Ended September 30, 2017
	Construction & Land Development								Commercial Real Estate						Residential Real Estate
Dollars in thousands	Land & Land Develop- ment			Construc- tion		Commer- cial			Owner Occupied			Non- Owner Occupied			Non- jumbo			Jumbo			Home Equity		Mortgage Warehouse Lines		Con- sumer			Other		Total
Troubled debt restructurings
Balance July 1, 2017	$	2,639		$	—	$	438		$	7,315		$	5,245		$	6,200		$	4,456		$	523	$	—	$	34		$	—	$	26,850
Additions	438			—		—			2,302			148			—			—			—		—		—			—		2,888
Charge-offs	—			—		—			—			—			—			—			—		—		—			—		—
Net (paydowns) advances	(15		)	—		(12		)	(31		)	(45		)	(621		)	(33		)	—		—		(5		)	—		(762		)
Transfer into foreclosed properties	—			—		—			—			—			—			—			—		—		—			—		—
Refinance out of TDR status	—			—		—			—			—			—			—			—		—		—			—		—
Balance, September 30, 2017	$	3,062		$	—	$	426		$	9,586		$	5,348		$	5,579		$	4,423		$	523	$	—	$	29		$	—	$	28,976

Allowance related to troubled debt restructurings	$	461		$	—	$	259		$	127		$	—		$	217		$	15		$	—	$	—	$	—		$	—	$	1,079

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For the Nine Months Ended September 30, 2017
	Construction & Land Development								Commercial Real Estate						Residential Real Estate
Dollars in thousands	Land & Land Develop- ment			Construc- tion		Commer- cial			Owner Occupied			Non- Owner Occupied			Non- jumbo			Jumbo			Home Equity		Mortgage Warehouse Lines		Con- sumer			Other		Total
Troubled debt restructurings
Balance January 1, 2017	$	3,337		$	—	$	711		$	7,383		$	6,714		$	5,417		$	4,493		$	523	$	—	$	44		$	—	$	28,622
Additions	438			—		—			2,302			148			1,086			—			—		—		—			—		3,974
Charge-offs	—			—		—			—			(65		)	—			—			—		—		—			—		(65		)
Net (paydowns) advances	(713		)	—		(285		)	(99		)	(1,449		)	(924		)	(70		)	—		—		(15		)	—		(3,555		)
Transfer into foreclosed properties	—			—		—			—			—			—			—			—		—		—			—		—
Refinance out of TDR status	—			—		—			—			—			—			—			—		—		—			—		—
Balance, September 30, 2017	$	3,062		$	—	$	426		$	9,586		$	5,348		$	5,579		$	4,423		$	523	$	—	$	29		$	—	$	28,976

Allowance related to troubled debt restructurings	$	461		$	—	$	259		$	127		$	—		$	217		$	15		$	—	$	—	$	—		$	—	$	1,079

The following table presents the recorded investment in construction and development, commercial, and commercial real estate loans which are generally evaluated based upon our internal risk ratings.



Loan Risk Profile by Internal Risk Rating
	Construction and Development												Commercial Real Estate
	Land and Land Development				Construction				Commercial				Owner Occupied				Non-Owner Occupied				Mortgage Warehouse Lines
Dollars in thousands	9/30/2017		12/31/2016		9/30/2017		12/31/2016		9/30/2017		12/31/2016		9/30/2017		12/31/2016		9/30/2017		12/31/2016		9/30/2017		12/31/2016
Pass	$	64,744	$	64,144	$	28,756	$	16,584	$	183,966	$	117,214	$	232,329	$	201,113	$	454,433	$	375,181	$	33,525	$	85,966
OLEM (Special Mention)	1,593		2,097		—		—		2,468		1,471		3,578		567		1,722		1,381		—		—
Substandard	5,075		5,801		—		—		759		403		3,933		1,367		8,388		5,359		—		—
Doubtful	—		—		—		—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—		—		—		—
Total	$	71,412	$	72,042	$	28,756	$	16,584	$	187,193	$	119,088	$	239,840	$	203,047	$	464,543	$	381,921	$	33,525	$	85,966

The following table presents the recorded investment and payment activity in consumer, residential real estate, and home equity loans, which are generally evaluated based on the aging status of the loans.



	Performing						Nonperforming
Dollars in thousands	9/30/2017		12/31/2016		9/30/2016		9/30/2017		12/31/2016		9/30/2016
Residential real estate
Non-jumbo	$	348,333	$	261,020	$	225,097	$	7,309	$	4,621	$	3,680
Jumbo	61,253		65,628		57,276		—		—		—
Home Equity	81,947		74,402		74,667		773		194		494
Consumer	36,349		25,368		19,574		566		166		182
Other	9,994		9,489		9,649		—		—		—
Total	$	537,876	$	435,907	$	386,263	$	8,648	$	4,981	$	4,356

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NOTE 7. ALLOWANCE FOR LOAN LOSSES

An analysis of the allowance for loan losses for the nine month periods ended September 30, 2017 and 2016, and for the year ended December 31, 2016 is as follows:



	Nine Months Ended September 30,				Year Ended December 31,
Dollars in thousands	2017		2016		2016
Balance, beginning of year	$	11,674	$	11,472	$	11,472
Charge-offs:
Commercial	23		379		489
Commercial real estate
Owner occupied	3		179		179
Non-owner occupied	65		122		124
Construction and development
Land and land development	3		50		127
Construction	21		—		9
Residential real estate
Non-jumbo	200		119		169
Jumbo	2		—		—
Home equity	95		117		175
Mortgage warehouse lines	—		—		—
Consumer	147		61		98
Other	179		128		185
Total	738		1,155		1,555
Recoveries:
Commercial	13		69		73
Commercial real estate
Owner occupied	82		25		31
Non-owner occupied	92		13		17
Construction and development
Land and land development	246		514		840
Construction	—		—		—
Real estate - mortgage
Non-jumbo	50		58		136
Jumbo	—		6		6
Home equity	29		3		3
Mortgage warehouse lines	—		—		—
Consumer	64		55		76
Other	78		59		75
Total	654		802		1,257
Net charge-offs	84		353		298
Provision for loan losses	875		500		500
Balance, end of period	$	12,465	$	11,619	$	11,674

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Activity in the allowance for loan losses by loan class during the first nine months of 2017 is as follows:



	Allowance for loan losses												Allowance related to:								Loans
	Beginning Balance		Charge- offs			Recoveries		Provision			Ending Balance		Loans individua- lly evaluated for impairm- ent		Loans collective- ly evaluated for impairm- ent		Loans acquired with deteriora- ted credit quality (PCI)		Total		Loans individua- lly evaluated for impairm- ent		Loans collective- ly evaluated for impairm- ent		Loans acquired with deteriora- ted credit quality (PCI)		Total
Commercial	$	934	$	(23	)	$	13	$	293		$	1,217	$	259	$	958	$	—	$	1,217	$	513	$	186,669	$	11	$	187,193
Commercial real estate
Owner occupied	2,109		(3		)	82		121			2,309		127		2,178		4		2,309		9,586		229,559		695		239,840
Non-owner occupied	3,438		(65		)	92		1,709			5,174		501		4,670		3		5,174		10,898		451,799		1,846		464,543
Construction and development
Land and land development	2,263		(3		)	246		(1,858		)	648		525		123		—		648		6,499		64,913		—		71,412
Construction	24		(21		)	—		13			16		—		16		—		16		—		28,756		—		28,756
Residential real estate
Non-jumbo	2,174		(200		)	50		24			2,048		217		1,829		2		2,048		5,928		347,853		1,861		355,642
Jumbo	95		(2		)	—		(15		)	78		15		63		—		78		4,422		55,826		1,005		61,253
Home equity	413		(95		)	29		261			608		—		608		—		608		524		82,196		—		82,720
Mortgage warehouse lines	—		—			—		—			—		—		—		—		—		—		33,525		—		33,525
Consumer	121		(147		)	64		177			215		—		215		—		215		29		36,886		—		36,915
Other	103		(179		)	78		150			152		—		152		—		152		—		9,994		—		9,994
Total	$	11,674	$	(738	)	$	654	$	875		$	12,465	$	1,644	$	10,812	$	9	$	12,465	$	38,399	$	1,527,976	$	5,418	$	1,571,793

NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS

Effective July 1, 2017, we early adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The adoption of ASU 2017-04 had no impact on our consolidated financial statements.

During third quarter 2017, we performed the qualitative assessment of the goodwill of our community banking and insurance services reporting units and determined that the fair values of the reporting units were more likely than not greater than their carrying values. In performing the qualitative assessments, we considered certain events and circumstances specific to each reporting unit, such as macroeconomic conditions, industry and market considerations, overall financial performance and cost factors when evaluating whether it is more likely than not that the fair values of our community banking or insurance services reporting units are less than their carrying values. No indicators of impairment for either reporting unit were noted as of September 30, 2017.

The following tables present our goodwill by reporting unit at September 30, 2017 and other intangible assets by reporting unit at September 30, 2017 and December 31, 2016.



	Goodwill Activity
Dollars in thousands	Community Banking		Insurance Services		Total
Balance, January 1, 2017	$	6,280	$	4,710	$	10,990
Reclassifications to goodwill	31		—		31
Acquired goodwill, net	4,252		—		4,252
Balance, September 30, 2017	$	10,563	$	4,710	$	15,273

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	Other Intangible Assets
	September 30, 2017						December 31, 2016
Dollars in thousands	Community Banking		Insurance Services		Total		Community Banking		Insurances Services		Total
Identifiable intangible assets
Gross carrying amount	$	12,528	$	3,000	$	15,528	$	1,610	$	3,000	$	4,610
Less: accumulated amortization	872		2,050		2,922		47		1,900		1,947
Net carrying amount	$	11,656	$	950	$	12,606	$	1,563	$	1,100	$	2,663

We recorded amortization expense of approximately $974,000 for the nine months ended September 30, 2017 relative to our identifiable intangible assets.

Amortization relative to our identifiable intangible assets is expected to approximate the following during the next five years:



	Core Deposit		Customer
Dollars in thousands	Intangible		Intangible
2017	$	1,210	$	200
2018	1,471		200
2019	1,368		200
2020	1,265		200
2021	1,162		200

NOTE 9. DEPOSITS

The following is a summary of interest bearing deposits by type as of September 30, 2017 and 2016 and December 31, 2016:



Dollars in thousands	September 30, 2017		December 31, 2016		September 30, 2016
Demand deposits, interest bearing	$	397,843	$	262,591	$	212,172
Savings deposits	362,653		337,348		321,563
Time deposits	640,362		545,843		500,397
Total	$	1,400,858	$	1,145,782	$	1,034,132

Included in time deposits are deposits acquired through a third party (“brokered deposits”) totaling $219.8 million, $205.7 million and $178.9 million at September 30, 2017, December 31, 2016, and September 30, 2016, respectively.

A summary of the scheduled maturities for all time deposits as of September 30, 2017 is as follows:



Dollars in thousands
Three month period ending December 31, 2017	$	81,870
Year ending December 31, 2018	232,020
Year ending December 31, 2019	140,028
Year ending December 31, 2020	88,444
Year ending December 31, 2021	54,858
Thereafter	43,142
Total	$	640,362

The following is a summary of the maturity distribution of all certificates of deposit in denominations of $100,000 or more as of September 30, 2017:



Dollars in thousands	Amount		Percent
Three months or less	$	52,185	11.9	%
Three through six months	54,568		12.4	%
Six through twelve months	66,426		15.1	%
Over twelve months	265,855		60.6	%
Total	$	439,034	100.00	%

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NOTE 10. BORROWED FUNDS

Short-term borrowings: A summary of short-term borrowings is presented below:



	Nine Months Ended September 30,
	2017						2016
Dollars in thousands	Short-term FHLB Advances			Federal Funds Purchased and Lines of Credit			Short-term FHLB Advances			Federal Funds Purchased and Lines of Credit
Balance at September 30	$	199,500		$	3,488		$	231,200		$	3,457
Average balance outstanding for the period	196,728			3,474			177,239			3,455
Maximum balance outstanding at any month end during period	229,300			3,488			231,200			3,457
Weighted average interest rate for the period	1.10		%	1.03		%	0.59		%	0.50		%
Weighted average interest rate for balances
outstanding at September 30	1.32		%	1.25		%	0.54		%	0.50		%

Long-term borrowings: Our long-term borrowings of $45.8 million, $46.7 million and $74.1 million at September 30, 2017, December 31, 2016, and September 30, 2016 respectively, consisted primarily of advances from the Federal Home Loan Bank (“FHLB”) and structured repurchase agreements with unaffiliated institutions. All FHLB advances are collateralized primarily by similar amounts of residential mortgage loans, certain commercial loans, mortgage backed securities and securities of U. S. Government agencies and corporations.



	Balance at September 30,				Balance at December 31,
Dollars in thousands	2017		2016		2016
Long-term FHLB advances	$	755	$	792	$	767
Long-term repurchase agreements	45,000		72,000		45,000
Term loan	—		1,354		903
Total	$	45,755	$	74,146	$	46,670

At December 31, 2016, the term loan was secured by the common stock of our subsidiary bank, had a variable interest rate of prime minus 50 basis points and matured in second quarter 2017. Our long term FHLB borrowings and repurchase agreements bear both fixed and variable rates and mature in varying amounts through the year 2026.

The average interest rate paid on long-term borrowings for the nine month period ended September 30, 2017 was 4.32% compared to 4.43% for the first nine months of 2016.

Subordinated debentures owed to unconsolidated subsidiary trusts: We have three statutory business trusts that were formed for the purpose of issuing mandatorily redeemable securities (the “capital securities”) for which we are obligated to third party investors and investing the proceeds from the sale of the capital securities in our junior subordinated debentures (the “debentures”). The debentures held by the trusts are their sole assets. Our subordinated debentures totaled $19.6 million at September 30, 2017, December 31, 2016, and September 30, 2016.

The capital securities held by SFG Capital Trust I, SFG Capital Trust II, and SFG Capital Trust III qualify as Tier 1 capital under Federal Reserve Board guidelines. In accordance with these Guidelines, trust preferred securities generally are limited to 25% of Tier 1 capital elements, net of goodwill. The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital.

A summary of the maturities of all long-term borrowings and subordinated debentures for the next five years and thereafter is as follows:

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Dollars in thousands		Long-term borrowings		Subordinated debentures owed to unconsolidated subsidiary trusts
Year Ending December 31,	2017	$	4	$	—
	2018	45,017		—
	2019	18		—
	2020	19		—
	2021	20		—
	Thereafter	677		19,589
		$	45,755	$	19,589

NOTE 11. 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 employee stock options to individual employees. During first quarter 2017, we granted 53,309 SARs that become exercisable ratably over five years (20% per year) and expire ten years after the grant date. We granted 34,306 SARS that become exercisable ratably over seven years (14.29% per year) and expire ten years after the grant date. There were no grants of stock options or SARs during the three months ended September 30, 2017 or the first nine months of 2016.

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 2017 were as follows:



	5-year vesting SARs		7-year vesting SARs
Risk-free interest rate	2.16	%	2.24	%
Expected dividend yield	1.45	%	1.45	%
Expected common stock volatility	60.05	%	59.60	%
Expected life	6.5 years		7.0 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 the first nine months of 2017 and 2016, our share-based compensation expense was $285,000 and $150,000 and the related deferred tax benefits were approximately $105,000 and $56,000.

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A summary of activity in our Plans during the first nine months of 2017 and 2016 is as follows:



	For the Nine Months Ended September 30,
	2017				2016
	Options/SARs		Weighted-Average Exercise Price		Options/SARs	Weighted-Average Exercise Price
Outstanding, January 1	217,857		$	13.56	244,147	$	14.05
Granted	87,615		26.01		—	—
Exercised	(2,000	)	6.21		—	—
Forfeited	—		—		—	—
Expired	—		—		—	—
Outstanding, September 30	303,472		$	17.20	244,147	$	14.05

Other information regarding awards outstanding and exercisable at September 30, 2017 is as follows:



	Options/SARs Outstanding						Options/SARs Exercisable
Range of exercise price	# of awards	WAEP		Wted. Avg. Remaining Contractual Life (yrs)	Aggregate Intrinsic Value (in thousands)		# of awards	WAEP		Aggregate Intrinsic Value (in thousands)
$2.54 - $6.00	5,000	$	2.54	5.83	$	116	5,000	$	2.54	$	116
6.01 - 10.00	5,640	8.91		1.29	94		5,640	8.91		94
10.01 - 17.50	166,717	12.01		7.57	2,275		66,687	12.01		910
17.51 - 20.00	15,100	17.81		0.78	119		15,100	17.81		119
20.01 - 25.93	111,015	25.99		7.64	—		23,400	25.93		—
	303,472	17.20			$	2,604	115,827	15.02		$	1,239

NOTE 12. COMMITMENTS AND CONTINGENCIES

Off-Balance Sheet Arrangements

We are a party to certain financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the statement of financial position. The contract amounts of these instruments reflect the extent of involvement that we have in this class of financial instruments.

Many of our lending relationships contain both funded and unfunded elements. The funded portion is reflected on our balance sheet. The unfunded portion of these commitments is not recorded on our balance sheet until a draw is made under the loan facility. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.

A summary of the total unfunded, or off-balance sheet, credit extension commitments follows:



Dollars in thousands	September 30, 2017
Commitments to extend credit:
Revolving home equity and credit card lines	$	68,616
Construction loans	56,715
Other loans	104,778
Standby letters of credit	3,469
Total	$	233,578

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. We evaluate each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if we deem necessary upon extension of credit, is based on our credit evaluation. Collateral held varies but may include accounts receivable, inventory, equipment or real estate.

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Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party.

Our exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.

Litigation

On May 13, 2014, the ResCap Liquidating Trust (“ResCap”), as successor to Residential Funding Company, LLC f/k/a Residential Funding Corporation (“RFC”), filed a complaint against Summit Financial Mortgage, LLC (“Summit Mortgage”), a former residential mortgage subsidiary of Summit whose operations were discontinued in 2007, in the United States Bankruptcy Court for the Southern District of New York and subsequently amended its complaint on July 25, 2014.

Furthermore, on January 23, 2017, ResCap, as successor to RFC (together with RFC, the "RFC Parties"), filed a complaint against Summit Community Bank, Inc., as successor to Shenandoah Valley Community Bank (“Summit”), in the United States District Court for the District of Minnesota (collectively, the “ResCap Litigation”). Additional information regarding the ResCap Litigation is included under the caption “Legal Contingencies” in Note 17 of our consolidated financial statements beginning on page 92 of our Form 10-K for the year ended December 31, 2016.

On April 24, 2017, Summit Community Bank, Inc. entered into a Settlement and Release Agreement (the “Settlement Agreement”) with the RFC parties with respect to the Rescap Litigation. Under the Settlement Agreement, Summit Community Bank paid $9.9 million to fully resolve all claims by the RFC Parties, and to avoid the further costs, disruption, and distraction of defending the Rescap Litigation. Summit recorded a charge to noninterest expense in its consolidated statement of income for the three months ended March 31, 2017 to recognize this settlement.

We are not a party to any other litigation except for matters that arise in the normal course of business. While it is impossible to ascertain the ultimate resolution or range of financial liability if any, with respect to these contingent matters, in the opinion of management, the outcome of these matters will not have a significant adverse effect on the consolidated financial statements.

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 Common Equity Tier ("CET1") 1, Total capital 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, 2017, 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 CET1, Total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below.

The Basel III Capital Rules became effective for us on January 1, 2015, with full compliance with all of the final rule's requirements phased in over a multi-year schedule, to be fully phased-in by January 1, 2019. As of September 30, 2017, our capital levels remained characterized as "well-capitalized" under the new rules. See the Capital Requirements section included in Part I Item 1 Business of our 2015 Annual Report on Form 10-K for further discussion of Basel III.

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The following table presents Summit's, as well as our subsidiary, Summit Community Bank's ("Summit Community"), actual and required minimum capital amounts and ratios as of September 30, 2017 and December 31, 2016 under the Basel III Capital Rules. The minimum required capital levels presented below reflect the minimum required capital levels (inclusive of the full capital conservation buffers) that will be effective as of January 1, 2019 when the Basel III Capital Rules have been fully phased-in. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.



	Actual				Minimum Required Capital - Basel III Fully Phased-in				Minimum Required To Be Well Capitalized
Dollars in thousands	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of September 30, 2017
CET1 (to risk weighted assets)
Summit	$	176,666	10.8	%	$	114,506	7.0	%	$	106,327	6.5	%
Summit Community	194,410		11.8	%	115,328		7.0	%	107,090		6.5	%
Tier I Capital (to risk weighted assets)
Summit	195,666		11.9	%	139,761		8.5	%	131,540		8.0	%
Summit Community	194,410		11.8	%	140,041		8.5	%	131,803		8.0	%
Total Capital (to risk weighted assets)
Summit	208,130		12.7	%	172,076		10.5	%	163,882		10.0	%
Summit Community	206,874		12.6	%	172,395		10.5	%	164,186		10.0	%
Tier I Capital (to average assets)
Summit	195,666		9.5	%	82,386		4.0	%	102,982		5.0	%
Summit Community	194,410		9.4	%	82,728		4.0	%	103,410		5.0	%



	Actual			Minimum Required Capital - Basel III Fully Phased-in			Minimum Required To Be Well Capitalized
Dollars in thousands	Amount	Ratio		Amount	Ratio		Amount	Ratio
As of December 31, 2016
CET1 (to risk weighted assets)
Summit	146,494	10.5	%	97,663	7.0	%	90,687	6.5	%
Summit Community	165,747	11.9	%	97,498	7.0	%	90,534	6.5	%
Tier I Capital (to risk weighted assets)
Summit	164,357	11.8	%	118,393	8.5	%	111,428	8.0	%
Summit Community	165,747	11.9	%	118,391	8.5	%	111,427	8.0	%
Total Capital (to risk weighted assets)
Summit	176,031	12.6	%	146,693	10.5	%	139,707	10.0	%
Summit Community	177,421	12.7	%	146,687	10.5	%	139,702	10.0	%
Tier I Capital (to average assets)
Summit	164,357	9.4	%	69,939	4.0	%	87,424	5.0	%
Summit Community	165,747	9.5	%	69,788	4.0	%	87,235	5.0	%

NOTE 14. SEGMENT INFORMATION

We operate three business segments: community banking, insurance services and trust and wealth management services. These segments are primarily identified by the products or services offered. The community banking segment consists of our full service banks which offer customers traditional banking products and services through various delivery channels. The insurance services segment includes two insurance agency offices that sell insurance products. The trust and wealth management segment includes Summit Community Bank's trust division and other non-bank investment products. The accounting policies discussed throughout the notes to the consolidated financial statements apply to each of our business segments.

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Inter-segment revenue and expense consists of management fees allocated to the community banking, insurance services and trust and wealth management segments for all centralized functions that are performed by the parent, including overall direction in the areas of strategic planning, investment portfolio management, asset/liability management, financial reporting and other financial and administrative services. Information for each of our segments is included below:



	Three Months Ended September 30, 2017
Dollars in thousands	Community Banking			Trust and Wealth Management		Insurance Services			Parent			Eliminations			Total
Net interest income	$	17,408		$	—	$	—		$	(176	)	$	—		$	17,232
Provision for loan losses	375			—		—			—			—			375
Net interest income after provision for loan losses	17,033			—		—			(176		)	—			16,857
Other income	2,408			589		1,003			491			(491		)	4,000
Other expenses	10,844			546		814			734			(491		)	12,447
Income (loss) before income taxes	8,597			43		189			(419		)	—			8,410
Income tax expense (benefit)	2,482			16		92			(110		)	—			2,480
Net income (loss)	$	6,115		$	27	$	97		$	(309	)	$	—		$	5,930
Inter-segment revenue (expense)	$	(451	)	$	—	$	(40	)	$	491		$	—		$	—
Average assets	$	2,110,832		$	—	$	6,288		$	217,928		$	(246,788	)	$	2,088,260
Capital expenditures	$	1,497		$	—	$	—		$	—		$	—		$	1,497



	Three Months Ended September 30, 2016
Dollars in thousands	Community Banking			Trust and Wealth Management		Insurance Services			Parent			Eliminations			Total
Net interest income	$	12,197		$	—	$	—		$	(160	)	$	—		$	12,037
Provision for loan losses	—			—		—			—			—			—
Net interest income after provision for loan losses	12,197			—		—			(160		)	—			12,037
Other income	1,622			126		1,001			389			(389		)	2,749
Other expenses	7,249			100		902			557			(389		)	8,419
Income (loss) before income taxes	6,570			26		99			(328		)	—			6,367
Income tax expense (benefit)	2,145			10		40			(109		)	—			2,086
Net income (loss)	$	4,425		$	16	$	59		$	(219	)	$	—		$	4,281
Inter-segment revenue (expense)	$	(361	)	$	—	$	(28	)	$	389		$	—		$	—
Average assets	$	1,609,343		$	—	$	6,005		$	175,581		$	(201,875	)	$	1,589,054
Capital expenditures	$	766		$	—	$	—		$	—		$	—		$	766

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	Nine Months Ended September 30, 2017
Dollars in thousands	Community Banking			Trust and Wealth Management		Insurance Services			Parent			Eliminations			Total
Net interest income	$	49,220		$	—	$	—		$	(511	)	$	—		$	48,709
Provision for loan losses	875			—		—			—			—			875
Net interest income after provision for loan losses	48,345			—		—			(511		)	—			47,834
Other income	6,280			1,284		2,932			1,473			(1,473		)	10,496
Other expenses	41,351			1,219		2,495			1,807			(1,473		)	45,399
Income (loss) before income taxes	13,274			65		437			(845		)	—			12,931
Income tax expense (benefit)	3,386			24		190			(261		)	—			3,339
Net income (loss)	$	9,888		$	41	$	247		$	(584	)	$	—		$	9,592
Inter-segment revenue (expense)	$	(1,353	)	$	—	$	(120	)	$	1,473		$	—		$	—
Average assets	$	1,994,042		$	—	$	6,197		$	203,459		$	(232,211	)	$	1,971,487
Capital expenditures	$	5,544		$	—	$	36		$	92		$	—		$	5,672



	Nine Months Ended September 30, 2016
Dollars in thousands	Community Banking			Trust and Wealth Management		Insurance Services			Parent			Eliminations			Total
Net interest income	$	36,028		$	—	$	—		$	(478	)	$	—		$	35,550
Provision for loan losses	500			—		—			—			—			500
Net interest income after provision for loan losses	35,528			—		—			(478		)	—			35,050
Other income	5,240			358		3,003			1,166			(1,166		)	8,601
Other expenses	21,735			335		2,771			1,735			(1,166		)	25,410
Income (loss) before income taxes	19,033			23		232			(1,047		)	—			18,241
Income tax expense (benefit)	5,888			9		95			(337		)	—			5,655
Net income (loss)	$	13,145		$	14	$	137		$	(710	)	$	—		$	12,586
Inter-segment revenue (expense)	$	(1,081	)	$	—	$	(85	)	$	1,166		$	—		$	—
Average assets	$	1,565,099		$	—	$	5,951		$	172,840		$	(199,962	)	$	1,543,928
Capital expenditures	$	1,099		$	—	$	9		$	91		$	—		$	1,199

NOTE 15. DERIVATIVE FINANCIAL INSTRUMENTS

We have entered into three forward-starting, pay-fixed/receive LIBOR interest rate swaps. $40 million notional with an effective date of July 18, 2016, was designated as a cash flow hedge of $40 million of forecasted variable rate Federal Home Loan Bank advances. Under the terms of this swap we will pay a fixed rate of 2.98% for a 3 year period. $30 million notional with an effective date of April 18, 2016, was designated as a cash flow hedge of $30 million of forecasted variable rate Federal Home Loan Bank advances. Under the terms of this swap we will pay a fixed rate of 2.89% for a 4.5 year period. $40 million notional with an effective date of October 18, 2016, was designated as a cash flow hedge of $40 million of forecasted variable rate Federal Home Loan Bank advances. Under the terms of the swap we will pay a fixed rate of 2.84% for a 3 year period.

We have entered into two pay fixed/receive variable interest rate swaps to hedge fair value variability of two commercial fixed rate loans with the same principal, amortization, and maturity terms of the underlying loans, which are designated as fair value hedges. Under the terms of a $9.95 million original notional swap with an effective date of January 15, 2015, we will pay a

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fixed rate of 4.33% for a 10 year period. Under the terms of a $11.3 million original notional swap with an effective date of December 18, 2015, we will pay a fixed rate of 4.30% for a 10 year period.

A summary of our derivative financial instruments as of September 30, 2017 and December 31, 2016 follows:



	September 30, 2017
	Notional Amount		Derivative Fair Value				Net Ineffective
Dollars in thousands	Notional Amount		Asset		Liability		Hedge Gains/(Losses)
CASH FLOW HEDGES
Pay-fixed/receive-variable interest rate swaps
Short term borrowings	$	110,000	$	—	$	3,056	$	—

FAIR VALUE HEDGES
Pay-fixed/receive-variable interest rate swaps
Commercial real estate loans	$	20,103	$	125	$	—	$	—



	December 31, 2016
	Notional Amount		Derivative Fair Value				Net Ineffective
Dollars in thousands	Notional Amount		Asset		Liability		Hedge Gains/(Losses)
CASH FLOW HEDGES
Pay-fixed/receive-variable interest rate swaps
Short term borrowings	$	110,000	$	—	$	4,611	$	—

FAIR VALUE HEDGES
Pay-fixed/receive-variable interest rate swaps
Commercial real estate loans	$	20,507	$	200	$	—	$	—

Loan commitments: ASC Topic 815, Derivatives and Hedging, requires that commitments to make mortgage loans should be accounted for as derivatives if the loans are to be held for sale, because the commitment represents a written option and accordingly is recorded at the fair value of the option liability.

NOTE 16. ACQUISITIONS

FCB Acquisition

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 expands Summit’s community banking footprint into southwest West Virginia and southwestern Virginia, it also notably will provide us the opportunity to offer trust services throughout our Bank’s market area, a capability which we currently do 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 goodwill of $4.25 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 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 goodwill.

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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

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 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 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

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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 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 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

HCB Acquisition

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 for cash consideration of $21.8 million. HCB's assets and liabilities approximated $123 million and $107 million, respectively, at September 30, 2016.

Pro Forma

The following table estimates the pro forma revenue, net income and diluted earnings per share of the combined entities of Summit, HCB and FCB as if the acquisitions had taken place on January 1, 2016. All acquisition related expenses were excluded from the pro forma information. 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, HCB & FCB Pro Forma
	For the Nine Months Ended September 30,
Dollars in thousands, except per share amounts	2017		2016
Total revenues, net of interest expense	$	64,313	$	61,457
Net income	$	11,176	$	15,017
Diluted earnings per share	$	0.95	$	1.23

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The following presents the financial effects of adjustments recognized in the statement of income for the three and nine months ended September 30, 2017 related to business combinations that occurred during 2016 or 2017.



	Income increase (decrease)
Dollars in thousands	Three Months Ended September 30, 2017			Nine Months Ended September 30, 2017
Interest and fees on loans	$	224		$	712
Interest expense on deposits	76			167
Amortization of intangibles	(399		)	(825		)
Income before income tax expense	$	(99	)	$	54

NOTE 17. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following is changes in accumulated other comprehensive income (loss) by component, net of tax, for the three and nine months ending September 30, 2017 and 2016.



	For the Three Months Ended September 30, 2017
Dollars in thousands	Gains and Losses on Other Post-Retirement Benefits		Gains and Losses on Cash Flow Hedges			Unrealized Gains (Losses) on Available-for-Sale Securities			Total
Beginning balance	$	219	$	(2,238	)	$	1,712		$	(307	)
Other comprehensive income before reclassification	—		313			399			712
Amounts reclassified from accumulated other comprehensive income	—		—			(16		)	(16		)
Net current period other comprehensive income	—		313			383			696
Ending balance	$	219	$	(1,925	)	$	2,095		$	389



	For the Three Months Ended September 30, 2016
Dollars in thousands	Gains and Losses on Other Post-Retirement Benefits		Gains and Losses on Cash Flow Hedges			Unrealized Gains (Losses) on Available-for-Sale Securities			Total
Beginning balance	$	—	$	(5,135	)	$	5,014		$	(121	)
Other comprehensive income before reclassification	—		608			(867		)	(259		)
Amounts reclassified from accumulated other comprehensive income	—		—			(38		)	(38		)
Net current period other comprehensive income (loss)	—		608			(905		)	(297		)
Ending balance	$	—	$	(4,527	)	$	4,109		$	(418	)



	For the Nine Months Ended September 30, 2017
Dollars in thousands	Gains and Losses on Other Post-Retirement Benefits		Gains and Losses on Cash Flow Hedges			Unrealized Gains (Losses) on Available-for-Sale Securities			Total
Beginning balance	$	—	$	(2,905	)	$	(357	)	$	(3,262	)
Other comprehensive income before reclassification	219		980			2,489			3,688
Amounts reclassified from accumulated other comprehensive income	—		—			(37		)	(37		)
Net current period other comprehensive income	219		980			2,452			3,651
Ending balance	$	219	$	(1,925	)	$	2,095		$	389

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	For the Nine Months Ended September 30, 2016
Dollars in thousands	Gains and Losses on Other Post-Retirement Benefits		Gains and Losses on Cash Flow Hedges			Unrealized Gains (Losses) on Available-for-Sale Securities			Total
Beginning balance	$	—	$	(3,195	)	$	2,739		$	(456	)
Other comprehensive income (loss) before reclassification	—		(1,332		)	1,897			565
Amounts reclassified from accumulated other comprehensive income	—		—			(527		)	(527		)
Net current period other comprehensive income	—		(1,332		)	1,370			38
Ending balance	$	—	$	(4,527	)	$	4,109		$	(418	)

NOTE 18. INCOME TAXES

Our income tax expense for the three months ended September 30, 2017 and September 30, 2016 totaled $2.5 million and $2.1 million, respectively. For the nine months ended September 30, 2017 and September 30, 2016 our income tax expense totaled $3.3 million and $5.7 million, respectively. Our effective tax rate (income tax expense as a percentage of income before taxes) for the quarters ended September 30, 2017 and 2016 was 29.5% and 32.8%, respectively, and for the nine months ended September 30, 2017 and 2016 were 25.8% and 31.0%, respectively. A reconciliation between the statutory income tax rate and our effective income tax rate for the three and nine months ended September 30, 2017 and 2016 is as follows:



	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2017		2016		2017		2016
Dollars in thousands	Percent		Percent		Percent		Percent
Applicable statutory rate	35.0	%	35.0	%	35.0	%	35.0	%
Increase (decrease) in rate resulting from:
Tax-exempt interest and dividends, net	(5.1	)%	(4.2	)%	(8.8	)%	(4.4	)%
State income taxes (benefit), net of Federal income tax benefit	1.8	%	1.7	%	1.8	%	1.6	%
Other, net	(2.2	)%	0.3	%	(2.2	)%	(1.2	)%
Effective income tax rate	29.5	%	32.8	%	25.8	%	31.0	%

The components of applicable income tax expense for the three and nine months ended September 30, 2017 and 2016 are as follows:



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
Dollars in thousands	2017			2016			2017			2016
Current
Federal	$	2,436		$	1,992		$	3,315		$	5,439
State	251			171			388			451
	2,687			2,163			3,703			5,890
Deferred
Federal	(190		)	(76		)	(333		)	(234		)
State	(17		)	(1		)	(31		)	(1		)
	(207		)	(77		)	(364		)	(235		)
Total	$	2,480		$	2,086		$	3,339		$	5,655

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

The following discussion and analysis focuses on significant changes in our financial condition and results of operations of Summit Financial Group, Inc. (“Company” or “Summit”) and its operating subsidiaries, Summit Community Bank (“Summit Community”) and Summit Insurance Services, LLC, for the periods indicated. See Note 14 of the accompanying consolidated financial statements for our segment information. This discussion and analysis should be read in conjunction with our 2016 audited financial statements and Annual Report on Form 10-K.

The Private Securities Litigation Act of 1995 indicates that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by us. Our following discussion and analysis of financial condition and results of operations contains certain forward-looking statements that involve risk and uncertainty. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in those forward-looking statements.

OVERVIEW

On October 1, 2016, we acquired Highland County Bankshares, Inc. ("HCB") and its subsidiary, First and Citizens Bank, headquartered in Monterey, Virginia. On April 1, 2017, we acquired First Century Bankshares, Inc. ("FCB") and its subsidiary, First Century Bank, headquartered in Bluefield, West Virginia. Since results of the two acquisitions are included in our results from the acquisition dates forward, comparisons to prior periods are significantly impacted by the acquired companies' results.

Our primary source of income is net interest income from loans and deposits. Business volumes tend to be influenced by the overall economic factors including market interest rates, business spending, and consumer confidence, as well as competitive conditions within the marketplace.

Primarily due to our two recent acquisitions, interest earning assets increased by 27.39% for the first nine months in 2017 compared to the same period of 2016 while our net interest earnings on a tax equivalent basis increased 37.42%. Our tax equivalent net interest margin increased 27 basis points as our yield on interest earning assets increased 23 basis points while our cost of interest bearing funds decreased 3 basis points.

We recorded a charge of $9.9 million, or $6.2 million after-tax, to noninterest expense in the first quarter of 2017 to recognize our full resolution of the ResCap Litigation which had been pending since 2014.

BUSINESS SEGMENT RESULTS

We are organized and managed along three major business segments, as described in Note 14 of the accompanying consolidated financial statements. The results of each business segment are intended to reflect each segment as if it were a stand alone business. Net income by segment follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
Dollars in thousands	2017			2016			2017			2016
Community banking	$	6,115		$	4,425		$	9,888		$	13,145
Trust and wealth management	27			16			41			14
Insurance services	97			59			247			137
Parent	(309		)	(219		)	(584		)	(710		)
Consolidated net income	$	5,930		$	4,281		$	9,592		$	12,586

CRITICAL ACCOUNTING POLICIES

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and follow general practices within the financial services industry. Application of these principles requires us to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.

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Our most significant accounting policies are presented in the notes to the consolidated financial statements of our 2016 Annual Report on Form 10-K. These policies, along with the other disclosures presented in the financial statement notes and in this financial review, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, we have identified the determination of the allowance for loan losses, the valuation of goodwill, fair value measurements, accounting for acquired loans and deferred tax assets to be the accounting areas that require the most subjective or complex judgments and as such could be most subject to revision as new information becomes available.

For additional information regarding critical accounting policies, refer to Critical Accounting Policies section in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2016 Form 10-K. There have been no significant changes in our application of critical accounting policies since December 31, 2016.

RESULTS OF OPERATIONS

Earnings Summary

Net income for the nine months ended September 30, 2017 decreased to $9.6 million, or $0.81 per diluted share compared to $12.6 million, or $1.18 per diluted share for the same period of 2016. Net income for the quarter ended September 30, 2017 was $5.9 million, or $0.48 per diluted share, compared to $4.3 million, or $0.40 per diluted share for the same period of 2016. The decrease for the nine months ended September 30, 2017 was primarily attributable to the charge for a $9.9 million pre-tax litigation settlement recognized in the first quarter of 2017. Otherwise, net income for the both the nine months and quarter ended September 30, 2017, compared to earnings for the same periods of 2016, were positively impacted by increased net interest income and increased fee income including trust and wealth management fees and fees related to deposit accounts while being negatively impacted by smaller gains realized on sales of securities, smaller gains on sales of foreclosed properties, and generally higher operating expenses due to the two recent acquisitions mentioned below. Returns on average equity and assets for the first nine months of 2017 were 7.06% and 0.65%, respectively, compared with 11.29% and 1.09% for the same period of 2016.

FCB’s results of operations are included in our consolidated results of operations from the date of acquisition, and therefore our third quarter and nine months ended September 30, 2017 results reflect increased levels of average balances, income and expense as compared to the same periods of 2016 results. At consummation (prior to fair value acquisition adjustments), FCB had total assets of $406.2 million, net loans of $226.5 million, and deposits of $350.0 million.

HCB’s results of operations are included in our consolidated results of operation from the date of acquisition, and therefore our third quarter and nine months ended September 30, 2017 results reflect increased levels of average balances, income and expense as compared to the same periods of 2016 results. At consummation (prior to fair value acquisition adjustments), HCB had total assets of $122.8 million, loans of $60.8 million, and deposits of $106.9 million.

Net Interest Income

Net interest income is the principal component of our earnings and represents the difference between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as changes in the volume and mix of earning assets and interest bearing liabilities can materially impact net interest income. Due to increases in interest earnings assets and interest bearing liabilities from the HCB and FCB acquisitions and recent FOMC increases to its target Federal funds rate, we have experienced higher levels of net interest income and an increased net interest margin.

For the quarter ended September 30, 2017, our net interest income on a fully tax-equivalent basis increased $5.5 million to $17.9 million compared to $12.4 million for the quarter end September 30, 2016. Our tax-equivalent earnings on interest earning assets increased $6.4 million, while the cost of interest bearing liabilities increased $0.9 million (see Tables I and III).

Our net interest income on a fully tax-equivalent basis totaled $50.5 million for the nine months ended September 30, 2017, or $13.7 million or 37.4% more than the $36.7 million for the nine months ended September 30, 2016. Our tax-equivalent earnings on interest earning assets increased $16.2 million, while the cost of interest bearing liabilities also increased $2.4 million (see Tables II and III).

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For the three months ended September 30, 2017 average interest earning assets increased 30.7% to $1.94 billion compared to $1.49 billion for the three months ended September 30, 2016, while average interest bearing liabilities increased 28.2% from $1.29 billion at September 30, 2016 to $1.66 billion at September 30, 2017.

Average interest earning assets increased 27.4% from $1.44 billion during the first nine months of 2016 to $1.84 billion for the first nine months of 2017, while average interest bearing liabilities increased 25.6% from $1.26 billion at September 30, 2016 to $1.58 billion at September 30, 2017.

For the quarter ended September 30, 2017, our net interest margin increased to 3.65%, compared to 3.32% for the same period of 2016, as the yields on earning assets increased 27 basis points, while the cost of our interest bearing funds decreased by 4 basis points. Our net interest margin increased to 3.67% for the nine months ended September 30, 2017, compared to 3.40% for the same period of 2016, as the yields on earning assets increased 23 basis points, while the cost of our interest bearing funds decreased by 3 basis points.

Excluding the impact of accretion and amortization of fair value acquisition accounting adjustments related to the interest earning assets and interest bearing liabilities acquired from FCB and HCB, Summit's net interest margin was 3.59% for the three months ended September 30, 2017 and 3.61% for the nine months ended September 30, 2017.

Assuming no significant unanticipated changes in market interest rates, we expect growth in our net interest income to continue over the near term primarily due to continuing expected growth in loans. We continue to monitor the net interest margin through net interest income simulation to minimize the potential for any significant negative impact. See the “Market Risk Management” section for further discussion of the impact changes in market interest rates could have on us. Further analysis of our yields on interest earning assets and interest bearing liabilities are presented in Tables I, II and III below.

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Table I - Average Balance Sheet and Net Interest Income Analysis

	For the Three Months Ended
	September 30, 2017							September 30, 2016
Dollars in thousands	Average Balance			Earnings/ Expense		Yield/ Rate		Average Balance			Earnings/ Expense		Yield/ Rate
Interest earning assets
Loans, net of unearned fees (1)
Taxable	$	1,539,945		$	19,387	4.99	%	$	1,187,205		$	14,008	4.69	%
Tax-exempt (2)	16,314			158		3.84	%	14,300			202		5.62	%
Securities
Taxable	198,913			1,283		2.56	%	198,411			1,139		2.28	%
Tax-exempt (2)	145,599			1,714		4.67	%	77,489			941		4.83	%
Federal funds sold and interest bearing deposits with other banks	42,926			149		1.38	%	10,029			5		0.2	%
Total interest earning assets	1,943,697			22,691		4.63	%	1,487,434			16,295		4.36	%
Noninterest earning assets
Cash & due from banks	9,591							3,938
Premises and equipment	33,667							21,613
Property held for sale	23,185							23,311
Other assets	90,538							64,325
Allowance for loan losses	(12,418		)					(11,567		)
Total assets	$	2,088,260						$	1,589,054
Interest bearing liabilities
Interest bearing demand deposits	$	384,539		$	323	0.33	%	211,264			85		0.16	%
Savings deposits	365,150			637		0.69	%	316,358			608		0.76	%
Time deposits	636,424			2,003		1.25	%	481,060			1,516		1.25	%
Short-term borrowings	205,536			1,160		2.24	%	189,760			675		1.42	%
Long-term borrowings and capital trust securities	65,346			681		4.13	%	94,106			985		4.16	%
Total interest bearing liabilities	1,656,995			4,804		1.15	%	1,292,548			3,869		1.19	%
Noninterest bearing liabilities and shareholders' equity
Demand deposits	217,760							124,490
Other liabilities	17,414							20,280
Total liabilities	1,892,169							1,437,318

Shareholders' equity	196,091							151,736
Total liabilities and shareholders' equity	$	2,088,260						$	1,589,054
Net interest earnings				$	17,887						$	12,426
Net yield on interest earning assets						3.65	%						3.32	%


(1)	- For purposes of this table, nonaccrual loans are included in average loan balances.


(2)	- Interest income on tax-exempt securities and loans has been adjusted assuming a Federal tax rate of 35% and 34% for the three months ended September 30, 2017 and 2016. The tax equivalent adjustment resulted in an increase in interest income of $655,000 and $389,000 for the three months ended September 30, 2017 and 2016, respectively.

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Table II - Average Balance Sheet and Net Interest Income Analysis

	For the Nine Months Ended
	September 30, 2017							September 30, 2016
Dollars in thousands	Average Balance			Earnings/ Expense		Yield/ Rate		Average Balance			Earnings/ Expense		Yield/ Rate
Interest earning assets
Loans, net of unearned fees (1)
Taxable	$	1,452,840		$	54,487	5.01	%	$	1,134,463		$	40,788	4.8	%
Tax-exempt (2)	14,223			602		5.66	%	14,890			624		5.6	%
Securities
Taxable	199,995			3,742		2.50	%	206,437			3,284		2.12	%
Tax-exempt (2)	124,860			4,392		4.70	%	76,155			2,814		4.94	%
Federal funds sold and interest bearing deposits with other banks	43,862			466		1.42	%	9,093			13		0.19	%
Total interest earning assets	1,835,780			63,689		4.64	%	1,441,038			47,523		4.41	%
Noninterest earning assets
Cash & due from banks	8,071							3,819
Premises and equipment	30,904							21,575
Property held for sale	24,393							24,365
Other assets	84,390							64,648
Allowance for loan losses	(12,051		)					(11,517		)
Total assets	$	1,971,487						$	1,543,928
Interest bearing liabilities
Interest bearing demand deposits	$	342,358		$	722	0.28	%	208,755			248		0.16	%
Savings deposits	365,068			1,879		0.69	%	296,458			1,663		0.75	%
Time deposits	602,175			5,386		1.20	%	474,691			4,622		1.3	%
Short-term borrowings	200,929			3,233		2.15	%	180,694			1,334		0.99	%
Long-term borrowings and capital trust securities	65,725			2,012		4.09	%	94,574			2,937		4.15	%
Total interest bearing liabilities	1,576,255			13,232		1.12	%	1,255,172			10,804		1.15	%
Noninterest bearing liabilities and shareholders' equity
Demand deposits	196,019							121,701
Other liabilities	17,990							18,423
Total liabilities	1,790,264							1,395,296

Shareholders' equity	181,223							148,632
Total liabilities and shareholders' equity	$	1,971,487						$	1,543,928
Net interest earnings				$	50,457						$	36,719
Net yield on interest earning assets						3.67	%						3.40	%


(1)	- For purposes of this table, nonaccrual loans are included in average loan balances.


(2)	- Interest income on tax-exempt securities and loans has been adjusted assuming a Federal tax rate of 35% and 34% for the periods ended September 30, 2017 and 2016. The tax equivalent adjustment resulted in an increase in interest income of $1,748,000 and $1,169,000 for the periods ended September 30, 2017 and 2016, respectively.

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Table III - Changes in Interest Margin Attributable to Rate and Volume

	For the Three Months Ended									For the Nine Months Ended
	September 30, 2017 vs. September 30, 2016									September 30, 2017 vs. September 30, 2016
	Increase (Decrease) Due to Change in:									Increase (Decrease) Due to Change in:
Dollars in thousands	Volume			Rate			Net			Volume			Rate			Net
Interest earned on:
Loans
Taxable	$	4,425		$	954		$	5,379		$	11,839		$	1,860		$	13,699
Tax-exempt	26			(70		)	(44		)	(29		)	7			(22		)
Securities
Taxable	3			141			144			(105		)	563			458
Tax-exempt	805			(32		)	773			1,717			(139		)	1,578
Federal funds sold and interest bearing deposits with other banks	51			93			144			169			284			453
Total interest earned on interest earning assets	5,310			1,086			6,396			13,591			2,575			16,166

Interest paid on:
Interest bearing demand deposits	103			135			238			215			259			474
Savings deposits	90			(61		)	29			361			(145		)	216
Time deposits	493			(6		)	487			1,160			(396		)	764
Short-term borrowings	60			425			485			164			1,735			1,899
Long-term borrowings and capital trust securities	(298		)	(5		)	(303		)	(886		)	(39		)	(925		)
Total interest paid on interest bearing liabilities	448			488			936			1,014			1,414			2,428

Net interest income	$	4,862		$	598		$	5,460		$	12,577		$	1,161		$	13,738

Noninterest Income

Total noninterest income for the three months ended September 30, 2017 increased 45.5% compared to same period in 2016 and increased 22.0% for the nine months ended September 30, 2017 compared to the same period in 2016 principally due to increased trust and wealth management fees and service fees on deposit accounts as a result of the HCB and FCB acquisitions. Further detail regarding noninterest income is reflected in the following table.



Table IV - Noninterest Income
	For the Quarter Ended September 30,				For the Nine Months Ended September 30,
Dollars in thousands	2017		2016		2017		2016
Insurance commissions	$	1,043	$	1,016	$	3,000	$	3,030
Trust and wealth management fees	589		126		1,284		358
Service fees related to deposit accounts	1,863		1,138		4,737		3,175
Realized securities gains	26		61		58		836
Bank owned life insurance income	255		258		758		772
Other	224		150		659		430
Total	$	4,000	$	2,749	$	10,496	$	8,601

Noninterest Expense

Total noninterest expense increased 78.7% for the nine months ended September 30, 2017, as compared to the same period in 2016, with the litigation settlement and higher salaries, commissions, and employee benefits having the largest negative impact. Table V below shows the breakdown of the changes.

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Table V - Noninterest Expense
	For the Quarter Ended September 30,											For the Nine Months Ended September 30,
				Change											Change
Dollars in thousands	2017			$			%		2016			2017			$			%		2016
Salaries, commissions, and employee benefits	$	6,610		$	1,791		37.2	%	$	4,819		$	18,555		$	4,290		30.1	%	$	14,265
Net occupancy expense	847			322			61.3	%	525			2,239			663			42.1	%	1,576
Equipment expense	1,093			377			52.7	%	716			2,859			800			38.9	%	2,059
Professional fees	373			103			38.1	%	270			1,012			(159		)	(13.6	)%	1,171
Advertising and public relations	137			44			47.3	%	93			393			113			40.4	%	280
Amortization of intangibles	448			398			796.0	%	50			974			824			549.3	%	150
FDIC premiums	310			110			55.0	%	200			815			15			1.9	%	800
Merger-related expenses	11			(69		)	(86.3	)%	80			1,575			1,230			N/A		345
Foreclosed properties expense	171			71			71.0	%	100			397			80			25.2	%	317
(Gain) loss on sales of foreclosed properties	(29		)	140			N/A		(169		)	(111		)	340			(75.4	)%	(451		)
Write-downs of foreclosed properties	91			(43		)	(32.1	)%	134			538			35			7.0	%	503
Litigation settlement	—			—			N/A		—			9,900			9,900			N/A		—
Other	2,385			784			49.0	%	1,601			6,253			1,858			42.3	%	4,395
Total	$	12,447		$	4,028		47.8	%	$	8,419		$	45,399		$	19,989		78.7	%	$	25,410

Salaries, commissions, and employee benefits: These expenses are 37.2% and 30.1% higher in the first three and nine months of 2017, respectively, compared to first three and nine months of 2016 due to an increase in number of employees, primarily those in conjunction with the HCB and FCB acquisitions, and general merit raises.

Equipment: The increase in equipment expense is primarily increased depreciation and amortization related to various technological upgrades, both hardware and software, made during the past two years and also the FCB acquisition in Q2 2017.

Amortization of intangibles: Amortization of intangibles increased during 2017 as a result of the additional amortization of the core deposit intangibles associated with the HCB and FCB acquisitions.

FDIC premiums: FDIC premiums increased 55.0% and 1.9% during the three and nine months ended September 30, 2017 as a result of the significant increase in our balance sheet due to recent acquisitions, partially offset by lower premium rates caused by the FDIC's change in the factors used to compute its deposit insurance rates, effective the second half of 2016. The lower effective premium rates are expected to continue.

Merger-related expense: These expenses are comprised of data processing conversion costs, employee severance costs, write-downs of equipment and legal fees related to the HCB and FCB acquisitions. Such costs are not expected to continue for the remainder of 2017.

Foreclosed properties expense: Management expects foreclosed properties expense to trend lower than in recent years due to lower levels of foreclosed properties.

Other: The increase in other expenses is primarily due to increased operating expenses as a result of the acquisitions of FCB and HCB and due to a charge for a municipal tax assessment.

Income Taxes

Our income tax expense for the three months ended September 30, 2017 and September 30, 2016 totaled $2.5 million and $2.1 million, respectively. For the nine months ended September 30, 2017 and September 30, 2016 our income tax expense totaled $3.3 million and $5.7 million, respectively. Our effective tax rate (income tax expense as a percentage of income before taxes) for the quarters ended September 30, 2017 and 2016 was 29.5% and 32.8%, respectively, and for the nine months ended September 30, 2017 and 2016 were 25.8% and 31.0%, respectively. These decreases in effective rate are primarily attributable to our increased portfolio of tax-exempt municipal securities. Refer to Note 18 of the accompanying notes to consolidated financial statements for further information regarding our income taxes.

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Credit Experience

For purposes of this discussion, we define nonperforming assets to include foreclosed properties, other repossessed assets, and nonperforming loans, which is comprised of loans 90 days or more past due and still accruing interest and nonaccrual loans. Performing TDRs are excluded from nonperforming loans.

The provision for loan losses represents charges to earnings necessary to maintain an adequate allowance for probable credit losses inherent in the loan portfolio. Our determination of the appropriate level of the allowance is based on an ongoing analysis of credit quality and loss potential in the loan portfolio, change in the composition and risk characteristics of the loan portfolio, and the anticipated influence of national and local economic conditions. The adequacy of the allowance for loan losses is reviewed quarterly and adjustments are made as considered necessary.

We recorded $875,000 and $500,000 provision for loan losses for the first nine months of 2017 and 2016. The increase is primarily due to organic loan growth.

As illustrated in Table VII below, our non-performing assets have decreased since year end 2016.



Table VII - Summary of Non-Performing Assets
	September 30,						December 31,
Dollars in thousands	2017			2016			2016
Accruing loans past due 90 days or more	$	35		$	21		$	—
Nonaccrual loans
Commercial	757			846			298
Commercial real estate	2,773			4,867			4,845
Commercial construction and development	—			—			—
Residential construction and development	3,931			4,360			4,465
Residential real estate	8,082			4,174			4,815
Consumer	494			148			151
Total nonaccrual loans	16,037			14,395			14,574
Foreclosed properties
Commercial	—			—			—
Commercial real estate	1,988			1,749			1,749
Commercial construction and development	7,392			8,664			8,610
Residential construction and development	11,852			13,741			13,265
Residential real estate	1,390			613			880
Total foreclosed properties	22,622			24,767			24,504
Repossessed assets	12			12			12
Total nonperforming assets	$	38,706		$	39,195		$	39,090
Total nonperforming loans as a percentage of total loans	1.02		%	1.16		%	1.10		%
Total nonperforming assets as a percentage of total assets	1.84		%	2.36		%	2.22		%
Allowance for loan losses as a percentage of nonperforming loans	77.56		%	80.60		%	80.10		%
Allowance for loan losses as a percentage of period end loans	0.79		%	0.93		%	0.88		%

The following table details the activity regarding our foreclosed properties for the three and nine months ended September 30, 2017 and 2016.



Table VIII - Foreclosed Property Activity
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
Dollars in thousands	2017			2016			2017			2016
Beginning balance	$	23,592		$	23,425		$	24,504		$	25,567
Acquisitions	157			1,880			2,723			2,014
Improvements	50			—			269			463
Disposals	(1,086		)	(404		)	(4,336		)	(2,774		)
Writedowns to fair value	(91		)	(134		)	(538		)	(503		)
Balance September 30	$	22,622		$	24,767		$	22,622		$	24,767

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Refer to Note 6 of the accompanying consolidated financial statements for information regarding our past due loans, impaired loans, nonaccrual loans, and troubled debt restructurings and to Note 8 of the notes to the consolidated financial statements of our 2016 Annual Report on Form 10-K for a summary of the methodology we employ on a quarterly basis to evaluate the overall adequacy of our allowance for loan losses.

Substantially all of our nonperforming loans are secured by real estate. The majority of these loans were underwritten in accordance with our loan-to-value policy guidelines which range from 70-85% at the time of origination. The fair values of the underlying collateral value or the discounted cash flows remain in excess of the recorded investment in many of our nonperforming loans and therefore, no specific reserve allocation is required.

At September 30, 2017, December 31, 2016, and September 30, 2016, respectively, our allowance for loan losses totaled $12.5 million, or 0.79% of total loans; $11.7 million, or 0.88% of total loans; and $11.6 million, or 0.93% of total loans. If the acquired FCB and HCB loans are excluded, the allowance for loan losses to total loans ratio at September 30, 2017 and December 31, 2016 would have been 0.93% and 0.92%, respectively. The allowance for loan losses is considered adequate to cover our estimate of probable credit losses inherent in our loan portfolio. The 2017 and late 2016 decline in the allowance for loan losses as a percentage of total loans is a result of lower average loan losses experienced. Lower losses caused our historical charge-off factor of the quantitative reserve calculation to decline, thus requiring fewer quantitative reserves. Also contributing to this decline are purchased loans. Purchased loans are recorded on the balance sheet at estimated fair value on the date of acquisition without carryover of any related allowance for loan losses. Instead, the applicable fair value adjustment relative to each purchased loan includes a credit mark to provide for future, life-of-loan estimated credit losses at the date of acquisition.

Due to the loan portfolio acquired in conjunction with the FCB acquisition having a higher relative percentage of past due loans than that of Summit’s legacy portfolio, we experienced an overall increase in loans past due during the quarter ended September 30, 2017 (see Note 6 of the accompanying Notes to the Consolidated Financial Statements). Again, in accordance with acquisition accounting principles, these past due loans were recorded at fair value, which included a discount adjustment as applicable for each such loan’s estimated future credit losses at the time of acquisition; accordingly, the past quarter’s increased levels of past due loans did not significantly impact the balance of our allowance for loan losses at September 30, 2017.

At September 30, 2017, December 31, 2016, and September 30, 2016, we had approximately $22.6 million, $24.5 million and $24.8 million, respectively, in other real estate owned which was obtained as the result of foreclosure proceedings. Although foreclosed property is recorded at fair value less estimated costs to sell, the prices ultimately realized upon their sale may or may not result in us recognizing additional losses.

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FINANCIAL CONDITION

Our total assets were $2.10 billion at September 30, 2017, compared to $1.76 billion at December 31, 2016, representing a 19.5% increase. Table IX below is a summary of significant changes in our financial position between December 31, 2016 and September 30, 2017, resulting from both the FCB acquisition and other changes.



Table IX - Summary of Significant Changes in Financial Position
			Increase (Decrease)
	Balance December 31,		Impact of FCB Acquisition		Other Changes			Balance September 30,
Dollars in thousands	2016		Impact of FCB Acquisition		Other Changes			2017
Assets
Cash and cash equivalents	$	46,616	$	39,053	$	(34,455	)	$	51,214
Securities available for sale	266,542		100,735		(38,551		)	328,726
Other investments	12,942		582		(1,354		)	12,170
Loans, net	1,307,862		225,743		25,723			1,559,328
Property held for sale	24,504		2,377		(4,259		)	22,622
Premises and equipment	23,737		6,174		4,309			34,220
Goodwill and other intangibles	13,652		15,056		(829		)	27,879
Cash surrender value of life insurance policies	39,143		1,509		424			41,076
Other assets	23,649		3,593		(3,341		)	23,901
Total Assets	$	1,758,647	$	394,822	$	(52,333	)	$	2,101,136

Liabilities
Deposits	$	1,295,519	$	350,533	$	(29,284	)	$	1,616,768
Short-term borrowings	224,461		7,309		(28,782		)	202,988
Long-term borrowings	46,670		—		(915		)	45,755
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589		—		—			19,589
Other liabilities	17,048		3,853		(3,647		)	17,254

Shareholders' Equity	155,360		33,127		10,295			198,782

Total liabilities and shareholders' equity	$	1,758,647	$	394,822	$	(52,333	)	$	2,101,136

The following is a discussion of the other significant changes in our financial position during the first nine months of 2017 exclusive of the impact of the FCB acquisition:

Cash and cash equivalents and short-term borrowings: Net reduction of $34.5 million in cash and cash equivalents is primarily attributable to repayments of short-term Federal Home Loan Bank advances and the cash consideration of $15.0 million paid in conjunction with the FCB acquisition.

Securities available for sale: The net decrease of $38.6 million in securities available for sale is principally a result of a restructuring of the securities portfolio acquired from FCB wherein $94 million of the portfolio was sold, but only $54 million of the sale proceeds were reinvested.

Deposits: The net change in our deposits during the first nine months of 2017 resulted primarily from net reductions of $10 million in our time deposits, $37 million in our internet-only high yielding savings product and $8 million in our regular savings accounts, partially offset by an increase of $32 million in interest bearing checking accounts.

Shareholders' equity: Other significant changes in shareholders' equity are a result of net income, other comprehensive income and dividends.

Refer to Notes 5, 6, 9, and 10 of the notes to the accompanying consolidated financial statements for additional information with regard to changes in the composition of our securities, loans, deposits and borrowings between September 30, 2017 and December 31, 2016.

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Our total assets were $2.10 billion at September 30, 2017, compared to $1.66 billion at September 30, 2016, representing a 26.8% increase. Table X below is a summary of significant changes in our financial position between September 30, 2016 and September 30, 2017, resulting from both the HCB and FCB acquisitions and other changes



Table X - Summary of Significant Changes in Financial Position
			Increase (Decrease)
	Balance September 30,		Impact of HCB Acquisition		Impact of FCB Acquisition		Other Changes			Balance September 30,
Dollars in thousands	2016		Impact of HCB Acquisition		Impact of FCB Acquisition		Other Changes			2017
Assets
Cash and cash equivalents	$	34,499	$	31,409	$	39,053	$	(53,747	)	$	51,214
Securities available for sale	262,102		5,932		100,735		(40,043		)	328,726
Other investments	13,182		—		582		(1,594		)	12,170
Loans, net	1,234,605		60,847		225,743		38,133			1,559,328
Property held for sale	24,767		23		2,377		(4,545		)	22,622
Premises and equipment	21,802		1,617		6,174		4,627			34,220
Goodwill and other intangibles	7,348		6,401		15,056		(926		)	27,879
Cash surrender value of life insurance policies	38,504		351		1,509		712			41,076
Other assets	20,827		514		3,593		(1,033		)	23,901
Total Assets	$	1,657,636	$	107,094	$	394,822	$	(58,416	)	$	2,101,136

Liabilities
Deposits	$	1,156,784	$	106,762	$	350,533	$	2,689		$	1,616,768
Short-term borrowings	234,657		—		7,309		(38,978		)	202,988
Long-term borrowings	74,146		—		—		(28,391		)	45,755
Subordinated debentures owed to unconsolidated subsidiary trusts	19,589		—		—		—			19,589
Other liabilities	18,640		332		3,853		(5,571		)	17,254

Shareholders' Equity	153,820		—		33,127		11,835			198,782

Total liabilities and shareholders' equity	$	1,657,636	$	107,094	$	394,822	$	(58,416	)	$	2,101,136

Cash and cash equivalents and short-term borrowings: Net reduction of $53.7 million in cash and cash equivalents is primarily attributable to repayments of short-term Federal Home Loan Bank advances and the cash consideration of $21.8 million and $15.0 million paid in conjunction with the HCB and FCB acquisitions, respectively.

Securities available for sale: The net decrease of $40.0 million in securities available for sale is principally a result of a restructuring of the securities portfolio acquired from FCB wherein $94 million of the portfolio was sold, but only $54 million of the sale proceeds were reinvested.

Long-term borrowings: The $28.4 million reduction in long-term borrowings was primarily the result of a maturing structured repurchase agreement in late 2016.

Shareholders' equity: Other significant changes in shareholders' equity are a result of net income, other comprehensive income and dividends.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity reflects our ability to ensure the availability of adequate funds to meet loan commitments and deposit withdrawals, as well as provide for other transactional requirements. Liquidity is provided primarily by funds invested in cash and due from banks (net of float and reserves), Federal funds sold, non-pledged securities, and available lines of credit with the Federal Home Loan Bank of Pittsburgh (“FHLB”) and Federal Reserve Bank of Richmond, which totaled approximately $916 million or 43.61% of total consolidated assets at September 30, 2017.

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Our liquidity strategy is to fund loan growth with deposits and other borrowed funds while maintaining an adequate level of short- and medium-term investments to meet normal daily loan and deposit activity. As a member of the FHLB, we have access to approximately $731 million. As of September 30, 2017 and December 31, 2016, these advances totaled approximately $200 million and $222 million, respectively. At September 30, 2017, we had additional borrowing capacity of $531 million through FHLB programs. We have established a line with the Federal Reserve Bank to be used as a contingency liquidity vehicle. The amount available on this line at September 30, 2017 was approximately $159 million, which is secured by a pledge of our consumer and commercial and industrial loan portfolios. We have a $6 million unsecured line of credit with a correspondent bank. Also, we classify all of our securities as available for sale to enable us to liquidate them if the need arises.

Liquidity risk represents the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments based on external market issues, customer or creditor perception of financial strength, and events unrelated to Summit such as war, terrorism, or financial institution market specific issues. The Asset/Liability Management Committee (“ALCO”), comprised of members of senior management and certain members of the Board of Directors, oversees our liquidity risk management process. The ALCO develops and recommends policies and limits governing our liquidity to the Board of

Directors for approval with the objective of ensuring that we can obtain cost-effective funding to meet current and future obligations, as well as maintain sufficient levels of on-hand liquidity, under both normal and “stressed” circumstances.

We continuously monitor our liquidity position to ensure that day-to-day as well as anticipated funding needs are met. We are not aware of any trends, commitments, events or uncertainties that have resulted in or are reasonably likely to result in a material change to our liquidity.

One of our continuous goals is maintenance of a strong capital position. Through management of our capital resources, we seek to provide an attractive financial return to our shareholders while retaining sufficient capital to support future growth. Shareholders’ equity at September 30, 2017 totaled $198.8 million compared to $155.4 million at December 31, 2016.

Refer to Note 13 of the notes to the accompanying consolidated financial statements for additional information regarding regulatory restrictions on our capital as well as our subsidiaries’ capital.

CONTRACTUAL CASH OBLIGATIONS

During our normal course of business, we incur contractual cash obligations. The following table summarizes our contractual cash obligations at September 30, 2017.



Table XI - Contractual Cash Obligations
Dollars in thousands	Long Term Debt		Capital Trust Securities		Operating Leases
2017	$	4	$	—	$	72
2018	45,017		—		221
2019	18		—		188
2020	19		—		52
2021	20		—		31
Thereafter	677		19,589		138
Total	$	45,755	$	19,589	$	702

OFF-BALANCE SHEET ARRANGEMENTS

We are involved with some off-balance sheet arrangements that have or are reasonably likely to have an effect on our financial condition, liquidity, or capital. These arrangements at September 30, 2017 are presented in the following table.



Table XII - Off-Balance Sheet Arrangements	September 30,
Dollars in thousands	2017
Commitments to extend credit:
Revolving home equity and credit card lines	$	68,616
Construction loans	56,715
Other loans	104,778
Standby letters of credit	3,469
Total	$	233,578

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk Management

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. Interest rate risk is our primary market risk and results from timing differences in the repricing of assets, liabilities and off-balance sheet instruments, changes in relationships between rate indices and the potential exercise of imbedded options. The principal objective of asset/liability management is to minimize interest rate risk and our actions in this regard are taken under the guidance of our Asset/Liability Management Committee (“ALCO”), which is comprised of members of senior management and members of the Board of Directors. The ALCO actively formulates the economic assumptions that we use in our financial planning and budgeting process and establishes policies which control and monitor our sources, uses and prices of funds.

Some amount of interest rate risk is inherent and appropriate to the banking business. Our net income is affected by changes in the absolute level of interest rates. Our interest rate risk position is slightly liability sensitive over the next twelve months, however we are asset sensitive thereafter. The nature of our lending and funding activities tends to drive our interest rate risk position to being liability sensitive. That is, absent any changes in the volumes of our interest earning assets or interest bearing liabilities, liabilities are likely to reprice faster than assets, resulting in a decrease in net income in a rising rate environment. Net income would increase in a falling interest rate environment. Net income is also subject to changes in the shape of the yield curve. In general, a flattening yield curve would result in a decline in our earnings due to the compression of earning asset yields and funding rates, while a steepening would result in increased earnings as margins widen.

Several techniques are available to monitor and control the level of interest rate risk. We primarily use earnings simulations modeling to monitor interest rate risk. The earnings simulation model forecasts the effects on net interest income under a variety of interest rate scenarios that incorporate changes in the absolute level of interest rates and changes in the shape of the yield curve. Each increase or decrease in interest rates is assumed to gradually take place over the next 12 months, and then remain stable, except for the up 400 scenario, which assumes a gradual increase in rates over 24 months. Assumptions used to project yields and rates for new loans and deposits are derived from historical analysis. Securities portfolio maturities and prepayments are reinvested in like instruments. Mortgage loan prepayment assumptions are developed from industry estimates of prepayment speeds. Noncontractual deposit repricings are modeled on historical patterns.

The following table presents the estimated sensitivity of our net interest income to changes in interest rates, as measured by our earnings simulation model as of September 30, 2017. The sensitivity is measured as a percentage change in net interest income given the stated changes in interest rates (gradual change over 12 months, stable thereafter for the down 100 and the up 200 scenarios, and gradual change over 24 months for the up 400 scenario) compared to net interest income with rates unchanged in the same period. The estimated changes set forth below are dependent on the assumptions discussed above.



	Estimated % Change in Net Interest Income over:
Change in	0 - 12 Months		13 - 24 Months
Interest Rates	Actual		Actual
Down 100 basis points (1)	-0.10	%	0.80	%
Up 200 basis points (1)	-0.70	%	3.40	%
Up 400 basis points (2)	0.07	%	1.39	%

(1) assumes a parallel shift in the yield curve over 12 months
(2) assumes a parallel shift in the yield curve over 24 months

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Item 4. Controls and Procedures

Our management, including the Chief Executive Officer and Chief Financial Officer, has conducted as of September 30, 2017, an evaluation of the effectiveness of disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures as of September 30, 2017 were effective. There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. Other Information

Item 1. Legal Proceedings

Refer to Note 12 of the Notes to the Consolidated Financial Statements in Part I, Item 1 for information regarding legal proceedings not reportable under this Item.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

Item 6. Exhibits



Exhibit 3.i	Amended and Restated Articles of Incorporation of Summit Financial Group, Inc.

Exhibit 3.ii	Articles of Amendment 2009

Exhibit 3.iii	Articles of Amendment 2011

Exhibit 3.iv	Amended and Restated By-Laws of Summit Financial Group, Inc.

Exhibit 11	Statement re: Computation of Earnings per Share – Information contained in Note 4 to the Consolidated Financial Statements on page 16 of this Quarterly Report is incorporated herein by reference.

Exhibit 31.1	Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer

Exhibit 31.2	Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer

Exhibit 32.1	Sarbanes-Oxley Act Section 906 Certification of Chief Executive Officer

Exhibit 32.2	Sarbanes-Oxley Act Section 906 Certification of Chief Financial Officer

Exhibit 101	Interactive Data File (XBRL)

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EXHIBIT INDEX



Exhibit No.	Description	Page Number
(3)	Articles of Incorporation and By-laws:
	(i) Amended and Restated Articles of Incorporation of Summit Financial Group, Inc.	(a)
	(ii) Articles of Amendment 2009	(b)
	(iii) Articles of Amendment 2011	(c)
	(iv) Amended and Restated By-laws of Summit Financial Group, Inc.	(d)
11	Statement re: Computation of Earnings per Share	15

31.1	Sarbanes-Oxley Act Section 302 Certification of Chief Executive Officer

31.2	Sarbanes-Oxley Act Section 302 Certification of Chief Financial Officer

32.1*	Sarbanes-Oxley Act Section 906 Certification of Chief Executive Officer

32.2*	Sarbanes-Oxley Act Section 906 Certification of Chief Financial Officer
101**	Interactive data file (XBRL)

*Furnished, not filed.

** As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.


(a)	Incorporated by reference to Exhibit 3.i of Summit Financial Group, Inc.’s filing on Form 10-Q dated March 31, 2006.


(b)	Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated September 30, 2009.


(c)	Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 8-K dated November 3, 2011.


(d)	Incorporated by reference to Exhibit 3.1 of Summit Financial Group, Inc.’s filing on Form 10-Q dated March 31, 2007.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		SUMMIT FINANCIAL GROUP, INC.
		(registrant)




		By:	/s/ H. Charles Maddy, III
			H. Charles Maddy, III,
			President and Chief Executive Officer



		By:	/s/ Robert S. Tissue
			Robert S. Tissue,
			Senior Vice President and Chief Financial Officer



		By:	/s/ Julie R. Markwood
			Julie R. Markwood,
			Vice President and Chief Accounting Officer


Date:	November 3, 2017

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