NOTE 2 – Business combinations AND DIVESTITURES

Interstate Capital Corporation

On June 2, 2018, the Company acquired substantially all of the operating assets of, and assumed certain liabilities associated with, Interstate Capital Corporation’s (“ICC”) accounts receivable factoring business and other related financial services. ICC operates out of offices located in El Paso, Texas and Santa Teresa, New Mexico and provides invoice factoring to small and medium-sized businesses.

A summary of the estimated fair values of assets acquired, liabilities assumed, consideration transferred, and the resulting goodwill is as follows:

(Dollars in thousands)
Assets acquired:
Cash and cash equivalents	$	75
Factored receivables		131,017
Premises and equipment		279
Intangible assets		13,920
Other assets		144
		145,435
Liabilities assumed:
Deposits		7,389
Other liabilities		763
		8,152
Fair value of net assets acquired		137,283
Consideration:
Cash paid		160,258
Contingent consideration		20,000
Total consideration		180,258
Goodwill	$	42,975

ICC’s net assets acquired were allocated to the Company’s Factoring segment whose factoring operations were significantly expanded as a result of the transaction. The Company has recognized goodwill of $42,975,000, which was calculated as the excess of both the fair value of cash consideration exchanged and the fair value of the contingent liability assumed as compared to the fair value of identifiable net assets acquired and was allocated to the Company’s Factoring segment. The goodwill in this acquisition resulted from expected synergies and expansion in the factoring market. The goodwill will be deducted for tax purposes. The intangible assets recognized include a customer relationship intangible asset with an acquisition date fair value of $13,500,000 which will be amortized utilizing an accelerated method over its eight year estimated useful life and a trade name intangible asset with an acquisition date fair value of $420,000 which will be amortized on a straight-line basis over its three year estimated useful life.

Consideration paid included contingent consideration with an acquisition date fair value of $20,000,000. The contingent consideration is based on a proprietary index designed to approximate the rise and fall of transportation invoice prices subsequent to acquisition and is correlated to historical monthly movements in average invoice prices historically experienced by ICC. At the end of a 30 month earnout period, a final average index price will be calculated and the contingent consideration will be settled in cash based on the final average index price. Final contingent consideration payout will range from $0 to $22,000,000 and the fair value of the associated liability will be remeasured each reporting period with changes in fair value reflected in operating results.

The operations of ICC are reflected in the Company’s Factoring segment and included in the Company’s operating results beginning June 2, 2018. The initial accounting for the acquisition has not been completed because the fair values of the assets acquired and liabilities assumed have not yet been finalized.

Expenses related to the acquisition, including professional fees and other transaction costs, totaling $1,094,000 were recorded in noninterest expense in the consolidated statements of income during the three months ended June 30, 2018.

First Bancorp of Durango, Inc. and Southern Colorado Corp.

On April 9, 2018 the Company entered into agreements to acquire (i) First Bancorp of Durango, Inc. and its community banking subsidiaries, First National Bank of Durango and Bank of New Mexico and (ii) Southern Colorado Corp. and its community banking subsidiary, Citizens Bank of Pagosa Springs for aggregate cash consideration of approximately $147,500,000. At December 31, 2017, First Bancorp of Durango, Inc. had $646,000,000 in assets, including $271,000,000 in loans, and $574,000,000 in deposits, and Southern Colorado Corp. had $88,000,000 in assets, including $37,000,000 in loans, and $79,000,000 in deposits. The transactions are expected to close during the third quarter of 2018 and are subject to certain customary closing conditions, including receipt of regulatory approvals.

Triumph Healthcare Finance

On January 19, 2018, the Company entered into an agreement to sell the assets (the “Disposal Group”) of Triumph Healthcare Finance (“THF”) and exit its healthcare asset-based lending line of business. At December 31, 2017, the carrying amount of the Disposal Group was transferred to assets held for sale. The sale closed on March 16, 2018.

A summary of the carrying amount of the assets in the Disposal Group and the gain on sale is as follows:

(Dollars in thousands)
Carrying amount of assets in the disposal group:
Loans	$	70,147
Premises and equipment, net		19
Goodwill		1,457
Intangible assets, net		958
Other assets		197
Total carrying amount		72,778
Total consideration received		74,017
Gain on sale of division		1,239
Transaction costs		168
Gain on sale of division, net of transaction costs	$	1,071

The Disposal Group was included in the Banking segment, and the loans in the Disposal Group were previously included in the commercial loan portfolio.

Valley Bancorp, Inc.

Effective December 9, 2017, the Company acquired Valley Bancorp, Inc. (“Valley”) and its community banking subsidiary, Valley Bank & Trust, in an all-cash transaction. Valley Bank & Trust serves individuals and business customers from seven locations across the northern front range including Brighton, Dacono, Denver, Hudson, Westminster and Strasburg, Colorado. Valley Bank & Trust was merged into TBK Bank upon closing. The acquisition expanded the Company’s market in Colorado and further diversified the Company’s loan, customer, and deposit base.

A summary of the estimated fair values of assets acquired, liabilities assumed, consideration transferred, and the resulting goodwill is as follows:

(Dollars in thousands)
Assets acquired:
Cash and cash equivalents	$	38,473
Securities		97,687
Loans		171,199
FHLB stock		315
Premises and equipment		6,238
Other real estate owned		2,282
Intangible assets		6,072
Bank-owned life insurance		7,153
Other assets		1,882
		331,301
Liabilities assumed:
Deposits		293,398
Junior subordinated debentures		5,470
Other liabilities		2,881
		301,749
Fair value of net assets acquired		29,552
Consideration transferred		40,075
Goodwill	$	10,523

The Company has recognized goodwill of $10,523,000, which was calculated as the excess of both the consideration exchanged and the liabilities assumed as compared to the fair value of identifiable net assets acquired and was allocated to the Company’s Banking segment. The goodwill in this acquisition resulted from expected synergies and expansion in the Colorado market. The goodwill will be deducted for tax purposes. The intangible assets recognized in the transaction will be amortized utilizing an accelerated method over their ten year estimated useful lives. Effective June 30, 2018 the Company reversed a previously established $1.7 million measurement period adjustment for a post-retirement benefit obligation related to an acquired split-dollar bank-owned life insurance policy based on new information obtained about the acquired policy’s conditions existing at the acquisition date. The initial accounting for the acquisition has not been completed because the fair values of the assets acquired and liabilities assumed have not yet been finalized.

In connection with the acquisition, the Company acquired loans both with and without evidence of credit quality deterioration since origination. The acquired loans were initially recorded at fair value with no carryover of any allowance for loan and lease losses. Acquired loans were segregated between those considered to be purchased credit impaired (“PCI”) loans and those without credit impairment at acquisition. The following table presents details of the estimated fair value of acquired loans at the acquisition date:

	Loans,
	Excluding		PCI		Total
(Dollars in thousands)	PCI Loans		Loans		Loans
Commercial real estate	$	73,273	$	254	$	73,527
Construction, land development, land		19,770		1,199		20,969
1-4 family residential properties		26,264		—		26,264
Farmland		16,934		—		16,934
Commercial		31,893		—		31,893
Factored receivables		—		—		—
Consumer		1,612		—		1,612
Mortgage warehouse		—		—		—
	$	169,746	$	1,453	$	171,199

The operations of Valley are included in the Company’s operating results beginning December 9, 2017.

Expenses related to the acquisition, including professional fees and other transaction costs, totaling $1,251,000 were recorded in noninterest expense in the consolidated statements of income during the three months ended December 31, 2017.

Independent Bank Colorado Branches

On October 6, 2017, the Company completed its acquisition of nine branch locations in Colorado from Independent Bank Group, Inc.’s banking subsidiary Independent Bank for an aggregate deposit premium of $6,771,000 or 4.2%. The branches were merged into TBK Bank upon closing. The primary purpose of the acquisition was to improve the Company’s core deposit base and continue to build upon the diversification of the Company’s loan portfolio.

A summary of the estimated fair values of assets acquired, liabilities assumed, consideration transferred, and the resulting goodwill is as follows:

(Dollars in thousands)
Assets acquired:
Cash and cash equivalents	$	1,611
Loans		95,794
Premises and equipment		7,524
Intangible assets		3,255
Other assets		1,644
		109,828
Liabilities assumed:
Deposits		160,702
Other liabilities		249
		160,951
Fair value of net assets acquired		(51,123	)
Cash received from seller, net of $6,771 deposit premium		45,306
Goodwill	$	5,817

The Company has recognized goodwill of $5,817,000, which was calculated as the excess of both the consideration exchanged and the liabilities assumed as compared to the fair value of identifiable net assets acquired and was allocated to the Company’s Banking segment. The goodwill in this acquisition resulted from expected synergies and expansion in the Colorado market. The goodwill will be deducted for tax purposes. The intangible assets recognized in the transaction will be amortized utilizing an accelerated method over their ten year estimated useful lives. The initial accounting for the acquisition has not been completed because the fair values of the assets acquired and liabilities assumed have not yet been finalized.

The following table presents details of the estimated fair value of acquired loans at the acquisition date:

(Dollars in thousands)
Commercial real estate	$	13,382
Construction, land development, land		537
1-4 family residential properties		6,986
Farmland		31,490
Commercial		43,104
Factored receivables		—
Consumer		295
Mortgage warehouse		—
	$	95,794

The operations of the branches acquired are included in the Company’s operating results beginning October 6, 2017.

Expenses related to the acquisition, including professional fees and other transaction costs, totaling $437,000 were recorded in noninterest expense in the consolidated statements of income during the three months ended December 31, 2017.

Triumph Capital Advisors, LLC

On March 31, 2017, the Company sold its wholly owned asset management subsidiary, Triumph Capital Advisors, LLC, to an unrelated third party. The transaction was completed to enhance shareholder value and provide a platform for TCA to operate without the impact of regulations intended for depository institutions and their holding companies.

A summary of the consideration received and the gain on sale is as follows:

(Dollars in thousands)
Consideration received (fair value):
Cash	$	10,554
Loan receivable		10,500
Revenue share		1,623
Total consideration received		22,677
Carrying value of TCA membership interest		1,417
Gain on sale of subsidiary or division		21,260
Transaction costs		400
Gain on sale of subsidiary or division, net of transaction costs	$	20,860

The Company financed a portion of the consideration received with a $10,500,000 term credit facility. Terms of the floating rate credit facility provide for quarterly principal and interest payments with an interest rate floor of 5.50%, maturing on March 31, 2023.

In addition, the Company is entitled to receive an annual earn-out payment representing 3% of TCA’s future annual gross revenue, with a total maximum earn-out amount of $2,500,000. The revenue share earn-out was considered contingent consideration which the Company recorded as an asset at its estimated fair value of $1,623,000 on the date of sale. The fair value of the revenue share asset was $1,534,000 at June 30, 2018.

The Company incurred pre-tax expenses related to the transaction, including professional fees and other direct transaction costs, totaling $400,000 which were netted against the gain on sale of subsidiary in the consolidated statements of income during the three months ended March 31, 2017.