NOTE 2 – Business combinations AND DIVESTITURES

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

Effective September 8, 2018 the Company acquired (i) First Bancorp of Durango, Inc. (“FBD”) and its community banking subsidiaries, The First National Bank of Durango and Bank of New Mexico and (ii) Southern Colorado Corp. (“SCC”) and its community banking subsidiary, Citizens Bank of Pagosa Springs, in all-cash transactions. The First National Bank of Durango serves consumers and businesses from four branches in Durango, Colorado and one branch in Bayfield, Colorado, Bank of New Mexico serves consumers and businesses from three branches in Albuquerque, Gallup and Grants, New Mexico, and Citizens Bank of Pagosa Springs serves consumers and businesses from two branches in Pagosa Springs, Colorado. The acquisitions expanded the Company’s market in Colorado and into New Mexico and further diversified the Company’s loan, customer, and deposit base.

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

(Dollars in thousands)	FBD		SCC		Total
Assets acquired:
Cash and cash equivalents	$	151,973	$	14,299	$	166,272
Securities		237,183		33,477		270,660
Loans held for sale		1,238		—		1,238
Loans		256,384		31,454		287,838
FHLB stock		786		129		915
Premises and equipment		7,495		840		8,335
Other real estate owned		213		—		213
Intangible assets		11,915		2,154		14,069
Other assets		2,730		403		3,133
		669,917		82,756		752,673
Liabilities assumed:
Deposits		601,194		73,464		674,658
Federal Home Loan Bank advances		737		—		737
Other liabilities		1,313		64		1,377
		603,244		73,528		676,772
Fair value of net assets acquired		66,673		9,228		75,901
Cash consideration transferred		134,667		13,294		147,961
Goodwill	$	67,994	$	4,066	$	72,060

The Company has recognized goodwill of $72,060,000, 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 these acquisitions resulted from expected synergies and expansion in the Colorado market and into the New Mexico market. The goodwill will be deducted for tax purposes. The intangible assets recognized in the transactions will be amortized utilizing an accelerated method over their ten year estimated useful lives. The initial accounting for the acquisitions has not been completed because the fair values of the assets acquired and liabilities assumed have not yet been finalized.

In connection with the acquisitions, 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 Loans						PCI Loans						Total Loans
(Dollars in thousands)	FBD		SCC		Total		FBD		SCC		Total		Acquired
Commercial real estate	$	140,955	$	11,894	$	152,849	$	832	$	200	$	1,032	$	153,881
Construction, land development, land		13,949		5,229		19,178		3,081		—		3,081		22,259
1-4 family residential properties		59,228		10,180		69,408		75		—		75		69,483
Farmland		5,709		1,207		6,916		—		—		—		6,916
Commercial		26,125		2,121		28,246		1,020		—		1,020		29,266
Factored receivables		—		—		—		—		—		—		—
Consumer		5,410		623		6,033		—		—		—		6,033
Mortgage warehouse		—		—		—		—		—		—		—
	$	251,376	$	31,254	$	282,630	$	5,008	$	200	$	5,208	$	287,838

The following presents information at the acquisition date for non-PCI loans acquired in the transactions:

(Dollars in thousands)	FBD		SCC		Total
Contractually required principal and interest payments	$	318,674	$	38,590	$	357,264
Contractual cash flows not expected to be collected	$	4,255	$	550	$	4,805
Fair value at acquisition	$	251,376	$	31,254	$	282,630

The following presents information at the acquisition date for PCI loans acquired in the transactions:

(Dollars in thousands)	FBD		SCC		Total
Contractually required principal and interest payments	$	10,511	$	269	$	10,780
Contractual cash flows not expected to be collected (nonaccretable difference)		2,570		5		2,575
Expected cash flows at acquisition		7,941		264		8,205
Interest component of expected cash flows (accretable yield)		2,933		64		2,997
Fair value of loans acquired with deterioration of credit quality	$	5,008	$	200	$	5,208

The following table presents supplemental pro forma information for the three and nine months ended September 30, 2018 and 2017 as if the FBD and SCC acquisitions had occurred at the beginning of 2017. The supplemental pro forma information includes adjustments for interest income on loans acquired, depreciation expense on property acquired, amortization of intangibles arising from the transactions, and the related income tax effects. Additionally, because FBD and SCC were Subchapter S corporations before the acquisitions and did not incur any federal income tax liabilities, adjustments have been included to estimate the impact of federal income taxes on FBD and SCC’s net income for the periods presented. The supplemental pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been completed on the assumed date.

	Three months ended September 30, 2018						Three months ended September 30, 2017
(Dollars in thousands)	FBD		SCC		Total		FBD		SCC		Total
Net interest income	$	65,694	$	62,269	$	66,181	$	44,683	$	40,147	$	45,318
Noninterest income	$	7,167	$	6,159	$	7,267	$	5,404	$	4,260	$	5,493
Net income	$	8,371	$	8,578	$	7,778	$	10,595	$	9,804	$	10,617
Basic earnings per common share	$	0.31	$	0.32	$	0.29	$	0.44	$	0.48	$	0.43
Diluted earnings per common share	$	0.31	$	0.32	$	0.29	$	0.43	$	0.47	$	0.43

	Nine months ended September 30, 2018						Nine months ended September 30, 2017
(Dollars in thousands)	FBD		SCC		Total		FBD		SCC		Total
Net interest income	$	176,441	$	163,916	$	178,188	$	125,098	$	111,756	$	126,966
Noninterest income	$	19,679	$	16,618	$	20,121	$	40,072	$	37,028	$	40,442
Net income	$	34,179	$	33,458	$	34,013	$	32,291	$	30,065	$	32,441
Basic earnings per common share	$	1.31	$	1.35	$	1.30	$	1.42	$	1.55	$	1.40
Diluted earnings per common share	$	1.30	$	1.33	$	1.28	$	1.39	$	1.51	$	1.37

The operations of FBD and SCC are included in the Company’s operating results beginning September 8, 2018.

Expenses related to the acquisitions, including professional fees and other transaction costs, totaling $5,871,000 were recorded in noninterest expense in the consolidated statements of income during the three months ended September 30, 2018.

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 fair value of the contingent consideration was $20,487,000 at September 30, 2018.

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.

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. 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 accounting for the acquisition has 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 $1,725,000 at September 30, 2018. The Company received the first cash proceeds of $174,000 from the revenue share during the nine months ended September 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.