Acquisitions

On May 31, 2012, the Company acquired 100% of the outstanding common and preferred stock of Virginia Savings Bancorp, Inc. and its wholly owned subsidiary, Virginia Savings Bank (collectively, “Virginia Savings”). As a result of this acquisition, the Company acquired five branches which expanded its footprint into Virginia. At the time of closing, Virginia Savings had total assets of $132 million, loans of $82 million, deposits of $120 million and shareholders’ equity of $11 million.

The total transaction was valued at $12.4 million, consisting of cash of $4.7 million and approximately 240,000 shares of common stock valued at $7.7 million. The common stock was valued based on the closing price of $32.18 for the Company’s common shares on May 31, 2012.

On January 10, 2013, the Company acquired 100% of the outstanding common and preferred stock of Community Financial Corporation and its wholly owned subsidiary, Community Bank (collectively, "Community"). As a result of this acquisition, the Company acquired eight branches along the I-81 corridor in western Virginia and two branches in Virginia Beach, Virginia. At the time of closing, Community had total assets of $460 million, loans of $410 million, deposits of $380 million and shareholders' equity of $53 million. Community shareholders received 0.1753 shares of the Company's common stock for each share of Community Financial Corporation stock, resulting in the issuance of approximately 767,000 shares of the Company's common stock valued at $27.8 million. The common stock was valued based on the closing price of $36.23 for the Company's common stock on January 9, 2013. In conjunction with this acquisition, the Company repurchased $12.7 million of Community preferred stock previously issued to the U.S. Department of Treasury ("Treasury Department"). A related warrant issued by Community to the Treasury Department has been converted into a warrant to purchase 61,565 shares of the Company's common stock, with an exercise price of $30.80 per share and an expiration period of ten years, which was subsequently reduced to six years. Based on the preliminary purchase price allocation, the Company recorded an estimate of goodwill of $9.3 million and a core deposit intangible of $2.7 million as a result of this acquisition. The Company has recorded estimates of the fair values of the acquired assets and liabilities. These fair value estimates are provisional amounts based on third-party valuations that are currently under review.

The purchase price of both acquisitions has been allocated as follows (in thousands):



			(preliminary)
	Virginia Savings		Community		Total
Date of acquisition	May 31, 2012		January 10, 2013

Consideration:
Cash	$	4,672	$	12,738	$	17,410
Common stock	7,723		27,783		35,506
Warrant issued	—		725		725
	$	12,395	$	41,246	$	53,641

Identifiable assets:
Cash and cash equivalents	$	24,943	$	8,888	$	33,831
Investment securities	14,082		17,659		31,741
Loans	73,463		370,754		444,217
Bank owned life insurance	—		6,935		6,935
Premises and equipment	5,158		8,950		14,108
Deferred tax asset, net	4,173		15,228		19,401
Other assets	4,626		7,988		12,614
Total identifiable assets	126,445		436,402		562,847

Identifiable liabilities:
Deposits	122,723		383,070		505,793
Other liabilities	841		24,086		24,927
Total identifiable liabilities	123,564		407,156		530,720

Net identifiable asset	2,881		29,246		32,127
Goodwill	8,241		9,289		17,530
Core deposit intangible	1,273		2,711		3,984
	$	12,395	$	41,246	$	53,641

Acquired Loans

In determining the estimated fair value of the acquired loans, management considered several factors, such as estimated future credit losses, estimated prepayments, remaining lives of the acquired loans, estimated value of the underlying collateral and the net present value of the cash flows expected to be received. For smaller loans not specifically reviewed, management grouped the loans into their respective homogeneous loan pool and applied a fair value estimate accordingly.

Acquired loans are accounted for using one of the two following accounting standards:


(1)	ASC Topic 310-20 is used to value loans that do not have evidence of credit quality deterioration. For these loans, the difference between the fair value of the loan and the amortized cost of the loan would be amortized or accreted into income using the interest method.

(2)

ASC Topic 310-30 is used to value loans that have evidence of credit quality deterioration. For these loans, the expected cash flows that exceed the fair value of the loan represent the accretable yield, which is recognized as interest income on a level-yield basis over the expected cash flow periods of the loans. The non-accretable difference represents the difference between the contractually required principal and interest payments and the cash flows expected to be collected based upon management’s estimation. Subsequent decreases in the expected cash flows will require the Company to evaluate the need for additions to the Company’s allowance for loan losses. Subsequent increases in the expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges with a corresponding adjustment to the accretable yield, which will result in the recognition of additional interest income over the remaining lives of the loans.

The following table presents the purchased credit-impaired loans acquired in conjunction with both acquisitions (in thousands):



	Virginia
	Savings			Community			Total
Contractually required principal and interest	$	11,567		$	58,014		$	69,581
Contractual cash flows not expected to be collected (non-accretable difference)	(3,973		)	(20,724		)	(24,697		)
Expected cash flows	7,594			37,290			44,884
Interest component of expected cash flows (accretable difference)	(954		)	(5,587		)	(6,541		)
Estimated fair value of purchased credit impaired loans acquired	$	6,640		$	31,703		$	38,343

Acquired Deposits

The fair values of non-time deposits approximated their carrying value at the acquisition date. For time deposits, the fair values were estimated based on discounted cash flows, using interest rates that are currently being offered compared to the contractual interest rates. Based on these analyses, management recorded a premium on time deposits acquired of $2.3 million and $1.1 million, for the Virginia Savings and Community acquisitions, respectively, each of which is being amortized over five years.

Core Deposit Intangible

The Company believes that the customer relationships with the deposits acquired have an intangible value. In connection with the acquisition, the Company recorded a core deposit intangible asset of $1.3 million and $2.7 million, for Virginia Savings and Community, respectively. Each of the core deposit intangible assets represent the value that the acquiree had with their deposit customers. The fair value was estimated based on a discounted cash flow methodology that considered type of deposit, deposit retention and the cost of the deposit base. The core deposit intangible is being amortized over ten years, with an annual charge of less than $0.7 million per year. The following table presents a rollforward of the Company’s intangible assets from the beginning of the year (in thousands):



	Intangible Assets
Balance, beginning of period	$	2,069
Core deposit intangible acquired in conjunction with the acquisition of Community	2,711
Amortization expense	(779		)
Balance, end of period	$	4,001

Goodwill

Under GAAP, management has up to twelve months following the date of the acquisition to finalize the fair values of acquired assets and liabilities. The measurement period ends as soon as the Company receives information it was seeking about facts and circumstances that existed as of the acquisition date or learns more information is not obtainable. Any subsequent adjustments to the fair value of the acquired assets and liabilities, intangible assets or other purchase accounting adjustments during the measurement period will result in adjustments to the goodwill recorded. The measurement period is limited to one year from the acquisition date. The goodwill recorded in conjunction with the Virginia Savings and Community acquisitions is not expected to be deductible for tax purposes. The following table presents a rollforward of goodwill from the beginning of the year (in thousands):



	Goodwill
Balance, beginning of period	$	62,988
Adjustment to goodwill acquired in conjunction with the acquisition of Virginia Savings	142
Goodwill acquired in conjunction with the acquisition of Community	9,289
Balance, end of period	$	72,419

Merger Related Costs

During the three and nine months ended September 30, 2013, the Company incurred less than $0.1 million and $5.5 million of merger-related costs in connection with the Community acquisition. These costs were primarily for severance ($2.5 million), professional fees ($1.4 million) and data processing costs ($1.1 million).

During the three and nine months ended September 30, 2012, the Company incurred $0.2 million and $4.3 million of merger-related costs in the connection with the Virginia Savings acquisition. These costs were primarily for severance ($0.9 million), professional fees ($0.9 million) and data processing costs ($2.3 million).