ACQUISITIONS

Cornerstone Financial Services, Inc.

On January 1, 2020, Summit Community Bank, Inc., a wholly-owned subsidiary of Summit, acquired 100% of the ownership of Cornerstone Financial Services, Inc. ("Cornerstone") and its subsidiary Cornerstone Bank, Inc., headquartered in West Union, West Virginia, for consideration of 570,000 shares of Summit common stock and $14.25 million cash. With this transaction, Summit expanded its footprint into Doddridge, Harrison, Ritchie and Wood counties of West Virginia. Cornerstone's assets and liabilities approximated $195 million and $176 million, respectively at December 31, 2019 and 2019's total revenues, net of interest expense were $3.3 million and 2019 net income totaled $638,000. The acquisition will be accounted for using the acquisition method of accounting and is deemed immaterial to our financial statements.

The former Cornerstone offices will continue to operate under that name until close of business on Friday, March 20, 2020, and will commence operating under the name Summit Community Bank on Monday, March 23, 2020.

Peoples Bankshares, Inc.

On January 1, 2019, Summit Community Bank, Inc. acquired 100% of the ownership of Peoples Bankshares, Inc. ("PBI") and its subsidiary First Peoples Bank, Inc., headquartered in Mullens, West Virginia, for consideration of 465,931 shares of Summit common stock and $12.7 million cash. With this transaction, Summit expanded its footprint into Wyoming and Raleigh counties of West Virginia. PBI's assets and liabilities approximated $133 million and $113 million, respectively, at December 31, 2018 and 2018's total revenues, net of interest expense were $3.6 million and 2018 net income totaled $21,000. The acquisition was deemed immaterial to our financial statements.

We accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations and accordingly, the assets and liabilities of PBI 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 $2.10 million in connection with the acquisition (not deductible for income tax purposes), which is not amortized for financial reporting purposes, but is subject to annual impairment testing. The core deposit intangible represents the value of long-term deposit relationships acquired in this transaction and will be amortized over an estimated weighted average life of 15 years using an accelerated method which approximates the estimated run-off of the acquired deposits. The following table details the total consideration paid on January 1, 2019 in connection with the acquisition of PBI, the fair values of the assets acquired and liabilities assumed and the resulting preliminary goodwill.



(Dollars in thousands)	As Recorded by PBI			Estimated Fair Value Adjustments			Estimated Fair Values as Recorded by Summit
Cash consideration							$	12,740
Stock consideration							8,997
Total consideration							21,737

Identifiable assets acquired:
Cash and cash equivalents	$	33,422		$	(93	)	$	33,329
Securities available for sale, at fair value	55,206			(93		)	55,113
Loans
Purchased performing	42,376			(977		)	41,399
Purchased credit impaired	—			—			—
Allowance for loan losses	(410		)	410			—
Premises and equipment	1,382			(567		)	815
Property held for sale	—			—			—
Core deposit intangibles	—			2,129			2,129
Other assets	1,110			(100		)	1,010
Total identifiable assets acquired	$	133,086		$	709		$	133,795

Identifiable liabilities assumed:
Deposits	112,064			315			112,379
Other liabilities	1,422			353			1,775
Total identifiable liabilities assumed	$	113,486		$	668		$	114,154

Net identifiable assets acquired	$	19,600		$	41		$	19,641

Goodwill resulting from acquisition							$	2,096

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, with the exception of certificates of deposits held at other banks, which were adjusted to fair value based upon current interest rates.

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 PBI'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 PBI.

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

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

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

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 following presents the financial effects of adjustments recognized in the statements of income for the years ended December 31, 2019, 2018 and 2017 related to all business combinations.



	Income increase (decrease)
Dollars in thousands	2019			2018			2017
Interest and fees on loans	$	694		$	386		$	825
Interest expense on deposits	316			205			237
Amortization of intangibles	(1,634		)	(1,471		)	(1,210		)
Income before income tax expense	$	(624	)	$	(880	)	$	(148	)

Pending MVB Bank Branches Acquisition

On November 22, 2019, Summit announced the signing of a definitive agreement under which Summit Community Bank, Inc. will acquire three MVB Bank locations in Berkeley County, West Virginia and one MVB Bank location in Jefferson County, West Virginia. The transaction is expected to close early second quarter 2020. Summit will assume certain deposits and loans whose balances at December 31, 2019, were approximately $190 million and $40 million, respectively.