Note 2

Business Combinations

UFBC Acquisition

On January 16, 2014, the Company acquired UFBC, the holding company for The Business Bank, a commercial bank with approximately $356 million in assets, after purchase accounting adjustments. For each share of UFBC common stock outstanding, the shareholders of UFBC received a fixed exchange ratio of $19.13 in cash and 1.154 shares of the Company’s common stock. The total consideration for the acquisition was $54.3 million, which was comprised of $26.8 million in cash and 1.6 million shares of the Company’s common stock.

In connection with the acquisition, the Company acquired all of the voting and common shares of UFBC Capital Trust I (the “UFBC Trust”), which is a wholly-owned subsidiary established for the sole purpose of issuing $5.0 million of floating rate junior subordinated deferrable interest debentures (“trust preferred securities”). These trust preferred securities are due in 2035 and have an interest rate of LIBOR (London Interbank Offering Rate) plus 2.10%, which adjusts quarterly. The UFBC Trust is an unconsolidated subsidiary since the Company is not the primary beneficiary of this entity. The additional $155,000 that is payable by the Company to the UFBC Trust represents the Company’s unfunded capital investment in the UFBC Trust.

Merger and acquisition expense was $5.8 million and $464,000 for the years ended December 31, 2014 and 2013, respectively, which are primarily related to legal and accounting costs, contract termination expenses, system conversion and integration expenses, employee retention and severance payments.

The following table sets forth the assets acquired and liabilities assumed in the acquisition at their estimated fair values as of the closing date of the transaction:

	January 16, 2014
	(in thousands)
Assets acquired:
Cash and cash equivalents	$	63,313
Investment securities available-for-sale	16,278
Loans	238,272
Premises and equipment	7,652
Accrued interest receivable	522
Goodwill	24,706
Other intangible assets	2,740
Other assets	2,640
Total assets acquired	$	356,123
Liabilities assumed:
Deposits:
Non-interest bearing	90,206
Savings, NOW and money market	131,312
Certificates of deposit	73,686
Total deposits	295,204
Junior subordinated debentures issued to Trust	3,679
Other liabilities	2,953
Total liabilities assumed	$	301,836
Total consideration paid	$	54,287

The fair value estimates are subject to change for up to one year after the closing date of the transaction if additional information relative to closing dates fair values becomes available.

Fair Value Measurement of Assets Acquired and Liabilities Assumed

Below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the acquisition.

Cash and cash equivalents. The carrying amount of cash and cash equivalents was used as a reasonable estimate of fair value.

Investment securities available for sale. The estimated fair values of investment securities available-for-sale was based on reliable and unbiased evaluations by an industry-wide valuation service. This service uses evaluated pricing models that vary based on asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

Loans. The acquired loan portfolio was segregated into one of two categories for valuation purposes: purchased credit impaired loans and performing loans. Purchased credit impaired loans were identified as those loans that were nonaccrual prior to the business combination and those loans that had been identified as potentially impaired. Potentially impaired loans were those loans that were identified during the credit review process where there was an indication that the borrower did not have sufficient cash flows to service the loan in accordance with its terms. Performing loans were those loans that were currently performing in accordance with the loan contract and do not appear to have any significant credit issues.

For loans that were identified as performing, the fair values were determined using a discounted cash flow analysis (the “income approach”). Performing loans were segmented into pools based on loan type (1-4 family residential, commercial, commercial owner occupied, construction and development), and further segmented based on payment type (fully amortizing, non-fully amortizing balloon, or interest only), rate type (fixed versus variable), and remaining maturity. The estimated cash flows expected to be collected for each loan was determined using a valuation model that included the following key assumptions: prepayment speeds, expected credit loss rates and discount rates. Prepayment speeds were influenced by many factors including, but not limited to, current yields, historic rate trends, payment types, interest rate type, and the duration of the individual loan. Expected credit loss rates were based on recent and historical default and loss rates observed for loans with similar characteristics, and further influenced by a credit review by management and a third party consultant on a selection of loans within the acquired portfolio. The discount rates used were based on rates market participants might charge for cash flows with similar risk characteristics at the acquisition date. The market rates were estimated using a build up approach which included assumptions with respect to loan servicing costs, interest rate volatility, and systemic risk, among other factors.

For loans that were identified as purchased credit impaired (“PCI”), either the above income approach was used or the asset approach was used. The income approach was used for PCI loans where there was an expectation that the borrower would more likely than not continue to pay based on the current terms of the loan contract. Management used the asset approach for all nonaccrual loans to reflect market participant assumptions. Under the asset approach, the fair value of each loan was determined based on the estimated values of the underlying collateral.

The methods used to estimate the Level 3 fair values of loans are extremely sensitive to the assumptions and estimates used. While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets.

The difference between the fair value and the expected cash flows from acquired loans will be accreted to interest income over the remaining term of the loans in accordance with Accounting Standards Codification (“ASC”) topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.” See Note 6 for further details.

Premises and equipment. The land and buildings acquired were recorded at fair value as determined by third party appraisals.

Other intangible assets. Other intangible assets consisting of core deposit intangibles (“CDI”) are measures of the value of non-interest checking, savings, interest-bearing checking, and money market deposits that are acquired in a business combination excluding certificates of deposit with balances over $250,000 and high yielding interest bearing deposit accounts, which the Company determines customer related intangible assets as non-existent. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative funding source. The CDI is being amortized over an estimated useful life of 6.7 years to approximate the existing deposit relationships acquired.

Deposits. The fair values of deposit liabilities with no stated maturity (non-interest checking, savings, interest-bearing checking, and money market deposits) are equal to the carrying amounts payable on demand. The fair values of the certificates of deposit represent contractual cash flows, discounted to present value using interest rates currently offered by market participants on deposits with similar characteristics and remaining maturities.

Junior subordinated debentures issued to Trust. There is no active market for trust preferred securities issued by UFBC Capital Trust I; therefore, the fair value of junior subordinated debentures was estimated utilizing the income approach. Under the income approach, the expected cash flows over the remaining estimated life of the debentures were discounted at the prevailing market rate. The prevailing market rate was based on: (i) a third-party broker opinion; (ii) implied market yields for recent trust preferred sales; and (iii) new trust preferred issuances for instruments with similar long durations.

Gainesville Branch Acquisition

On November 7, 2014, the Company acquired a branch location in Gainesville, VA, with approximately $66.3 million in assets, after purchase accounting adjustments. The total consideration for the acquisition was $195,000 in cash.

The following table sets forth the assets acquired and liabilities assumed in the acquisition at their estimated fair values as of the closing date of the transaction:

	November 7, 2014
	(in thousands)
Assets acquired:
Cash	$	65,786
Goodwill	157
Other intangible assets	340
Total assets acquired	$	66,283
Liabilities assumed:
Deposits:
Non-interest bearing	4,234
Savings, NOW and money market	9,859
Certificates of deposit	50,528
Total deposits	64,621
Other borrowed funds	1,467
Total liabilities assumed	$	66,088
Total consideration paid	$	195

Fair Value Measurement of Assets Acquired and Liabilities Assumed

Below are the methods used to determine the fair values of the significant assets acquired and liabilities assumed in the acquisition.

Cash. The carrying amount of the cash received was used as a reasonable estimate of fair value.

Other intangible assets. Other intangible assets consisting of core deposit intangibles (“CDI”) are measures of the value of non-interest checking, savings, interest-bearing checking, and money market deposits that are acquired in a business combination excluding certificates of deposit with balances over $250,000 and high yielding interest bearing deposit accounts, which the Company determines customer related intangible assets as non-existent. The fair value of the CDI stemming from any given business combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative funding source. The CDI is being amortized over an estimated useful life of 5.9 years to approximate the existing deposit relationships acquired.

Other borrowed funds. Other borrowed funds consist of one customer repurchase agreement. The fair value of this repurchase agreement is equal to the carrying amount payable on demand as the stated maturity for customer repurchases agreements is between one and four days.