Note 21. Virginia Partners Transaction

On November 15, 2019, the Company completed its share exchange with Virginia Partners Bank, a Virginia chartered commercial bank. Partners shareholders received 1.7179 shares of the Company's common stock for each share of Partners common stock they owned as of the effective date of the share exchange. The aggregate consideration paid to Partners shareholders was $52.3 million. Additionally, $350 thousand was included as consideration for replacement stock option awards per the share exchange agreement and $2 thousand in cash in lieu of fractional shares. The results of Partners' operations are included in the Company's consolidated statements of income for the year ended December 31, 2019 for the period beginning November 15, 2019, the date of the effectiveness of the share exchange.

The acquisition resulted in three new branches, an operations center and administrative headquarters in Fredericksburg, Virginia, along with an additional branch office in La Plata, Maryland and a loan production office in Annapolis, Maryland.

The acquisition of Partners was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the acquisition date. The excess consideration paid over the fair value of net assets acquired has been reported as goodwill in the Company's consolidated statements of financial condition as of December 31, 2019.

The assets acquired and liabilities assumed in the acquisition of Partners were recorded at their estimated fair values based on management's best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition. The items most susceptible to adjustment are the credit fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition.

In connection with the acquisition, the consideration paid and the fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition are summarized in the following table:


	Estimated Fair
	Value as of
Dollars in Thousands	November 15, 2019
Consideration paid:
Cash	$	2
Common stock issued in acquisition		52,282
Stock options issued in acquisition (replacement awards)		350
Total consideration paid		52,634
Assets acquired:
Cash and cash equivalents		6,743
Investment securities		65,373
Investments in correspondent bank stock		3,670
Loans		357,127
Premises and equipment		6,969
Accrued interest receivable		1,155
Core deposit intangible		2,650
Deferred tax asset		1,239
Other assets		9,242
Total assets acquired	$	454,168
Liabilities assumed:
Deposits	$	348,552
Other liabilities		56,408
Total liabilities assumed	$	404,960
Net assets acquired	$	49,208
Noncontrolling interest in consolidated subsidiaries		728
Goodwill recorded in acquisition		4,154

Acquired loans (impaired and non impaired) are initially recorded at their acquisition date fair values using Level 3 inputs. Fair values are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, expected life time losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Specifically, the Company has prepared three separate loan fair value adjustments that it believes a market participant might employ in estimating the entire fair value adjustment necessary under ASC 820 10 for the acquired loan portfolio. The three separate fair valuation methodologies employed are: (i) an interest rate loan fair value adjustment, (ii) a general credit fair value adjustment, and (iii) a specific credit fair value adjustment for purchased credit impaired loans subject to ASC 310 30 provisions. The acquired loans were recorded at fair value at the acquisition date without carryover of Partners’ previously established allowance for loan losses. The fair value of the financial assets acquired included loans receivable with a principal balance, prior to fair value adjustments, of $362.9 million.

The table below illustrates the fair value adjustments made to the amortized cost basis to present a fair value of the loans acquired:


Dollars in Thousands	At November 15, 2019
Gross principal balance	$	362,916
Fair value adjustment on pools of non-credit impaired loans		(4,990)
Fair value adjustment on purchased credit impaired loans		(799)
Fair value of acquired loans	$	357,127

The credit adjustment on acquired impaired loans is derived in accordance with ASC 310 30 and represents the portion of the loan balances that have been deemed uncollectible based on the Company's expectations of future cash flows for each respective loan:


Dollars in Thousands	At November 15, 2019
Contractually required principal and interest at acquisition	$	6,713
Contractual cashflows not expected to be collected (non-accretable discount)		(1,371)
Expected cash flows at acquisition		5,342
Interest component of expected cash flows		(673)
Fair value for loans acquired under ASC 310-30	$	4,669

The fair value of savings and transaction deposit accounts acquired from Partners provide value to the Company as a source of below market rate funds. The fair value of the core deposit intangible was determined based on a discounted cash flow analysis using a discount rate based on the estimated cost of capital for a market participant. To calculate cash flows, the sum of deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available to the Company. The expected cash flows of the deposit base included estimated attrition rates. The core deposit intangible was valued at $2.7 million or 1.01% of total deposits. The core deposit intangible asset is being amortized on the sum of months method over 10 years.

Direct costs related to the merger were accrued and expensed as incurred. During the year ended December 31, 2019 and 2018, the Company incurred $1.9 million and $248 thousand, respectively in Partners merger‑related expenses.