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Business Combination

6 Months Ended

Jun. 30, 2020

NOTE 3 – BUSINESS COMBINATION

Effective June 5, 2020, the Company acquired Edon Bancorp and its subsidiary The Edon State Bank Company of Edon, Ohio. Edon Bancorp was headquartered in Edon, Ohio and had one retail office. The Edon State Bank was merged with and into State Bank, with State Bank surviving. Under the terms of the merger agreement, shareholders of Edon received fixed consideration of $103.50 in cash for each share of Edon common stock for total consideration of $15.5 million. The Company accounted for the transaction under the acquisition method of accounting, which means that the acquired assets and liabilities were recorded at fair value at the date of acquisition.

In accordance with ASC 805, the Company expensed approximately $1.2 million of direct acquisition costs during the three months ended June 30, 2020. The $1.2 million in merger expense is split between data processing and professional fees expense. As a result of the acquisition, the Company recorded $4.3 million of goodwill and $0.7 million of intangible assets in the second quarter of 2020. The Company was able to increase both its deposit and loan base and acquire new households in a new market. It is expected that this transaction will result in business synergies and economies of scale. The acquisition was consistent with the Company’s strategy to expand its presence in Northwest Ohio and to increase profitability by introducing existing products and services to the acquired customer base. The intangible assets are related to core deposits, which are being amortized over 10 years on a straight-line basis. For tax purposes, goodwill is non-deductible but will be evaluated annually for impairment.

The following table summarizes the fair value of the total consideration transferred as part of the acquisition as well as the fair value of identifiable assets and liabilities assumed as of the effective date of the transaction based on assumptions that are subject to change as management continues to evaluate as relevant information becomes available. If, prior to the end of the one-year measurement period for finalizing the purchase price allocation, relevant information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be recorded in the reporting period in which the adjustment amounts are determined. Potential adjustments, if any, will be related to assets that have may have changes to valuation amounts that were not readily determinable at acquisition date.

The contractual principal of loans at the acquisition date was $16.3 million and the estimate of the contractual cash flows not expected to be collected is $0.4 million.

($ in thousands)

Fair value of assets acquired

Cash and cash equivalents	$	31,756
Interest bearing time deposits		11,542
Investment securities		1,362
Federal Home Loan Bank stock		117
Loans held for investment		16,395
Premises and equipment		446
Goodwill		4,325
Core deposit intangible		660
Other assets		192
Total assets acquired	$	66,795

Fair value of liabilities assumed

Deposits	$	51,053
Other liabilities		223
Total liabilities assumed		51,276
Total purchase price (cash)	$	15,519

Pro Forma Financial Information

The results of operations of Edon Bancorp have been included in the Company’s consolidated financial statements since the acquisition date of June 5, 2020. The following schedule includes the pro forma results for the three and six months ended June 30, 2020 and 2019, as if the Edon acquisition had occurred as of the beginning of the reporting periods presented. The acquisition added less than $0.1 million in revenue and earnings to the Company for the three months ended June 30, 2020.

	Three Months Ended
Summary of Operations ($ in thousands)	Jun. 2020		Jun. 2019

Net interest income	$	9,033	$	9,196
Provision for loan losses		1,300		200

Net interest income after provision	$	7,733	$	8,996

Non interest income		8,632		3,726
Non interest expense		12,451		9,382

Income before income taxes	$	3,914	$	3,340
Income tax expense*		742		614

Net income	$	3,172	$	2,726
Preferred share dividends		-		487

Net income to common shareholders	$	3,172	$	2,239

Basic earnings per share	$	0.41	$	0.35
Diluted earnngs per share	$	0.41	$	0.34

* Income tax expense for Edon calculated using a 21% statutory rate

	Six Months Ended
Summary of Operations ($ in thousands)	Jun. 2020		Jun. 2019

Net interest income	$	17,919	$	17,916
Provision for loan losses		1,900		200

Net interest income after provision	$	16,019	$	17,716

Non interest income		10,820		6,750
Non interest expense		22,139		18,266

Income before income taxes	$	4,700	$	6,200
Income tax expense*		781		1,133

Net income	$	3,919	$	5,067
Preferred share dividends		-		487

Net income to common shareholders	$	3,919	$	4,580

Basic earnings per share	$	0.51	$	0.71
Diluted earnngs per share	$	0.51	$	0.63

* Income tax expense for Edon calculated using a 21% statutory rate