BUSINESS COMBINATIONS

On January 2, 2020, the Company completed its previously announced acquisition of Ann Arbor Bancorp, Inc. and its wholly owned subsidiary, Ann Arbor State Bank. The Company paid an aggregate consideration of approximately $67.9 million in cash.

AAB's results of operations were included in the Company’s results beginning January 2, 2020. Acquisition-related costs of $1.5 million are included in the Company’s income statement for the quarter ended March 31, 2020.

Goodwill of $26.8 million arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the operations of the companies. The goodwill arising from the acquisition of AAB is not deductible for tax purposes.

The following table summarizes the amounts of assets acquired and liabilities assumed recognized at the acquisition date.



(Dollars in thousands)
Consideration paid:
Cash	$	67,944
Fair value of assets acquired:
Cash and cash equivalents	38,480
Investment securities	47,416
Federal Home Loan Bank stock	923
Loans held for sale	1,703
Loans held for investment	222,356
Premises and equipment	2,404
Core deposit intangibles	3,663
Other assets	7,520
Total assets acquired	324,465
Fair value of liabilities assumed:
Deposits	264,820
Federal Home Loan Bank advances	15,279
Other liabilities	3,251
Total liabilities assumed	283,350
Total identifiable net assets	41,115
Goodwill recognized in the acquisition	$	26,829

Loans acquired in the acquisition were initially recorded at fair value with no separate allowance for loan losses. The Company reviewed the loans at acquisition to determine which should be considered purchased credit impaired loans (i.e. loans accounted for under ASC 310-30) defining impaired loans as those that were either not accruing interest or exhibited credit risk factors consistent with nonaccrual loans at the acquisition date. Fair values for purchased loans are based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of the loan and whether or not the loan was amortizing, and a discount rate reflecting the Company's assessment of risk inherent in the cash flow estimates. The Company accounts for purchased credit impaired loans in accordance with the provisions of ASC 310-30. The cash flows expected to be collected on purchased loans are estimated based upon the expected remaining life of the underlying loans, which includes the effects of estimated prepayments. Purchased loans are considered credit impaired if there is evidence of credit deterioration at the date of purchase and if it is probable that not all contractually required payments will be collected. Interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows is recognized on the acquired loans accounted for under ASC 310-30.

Purchased loans outside the scope of ASC 310-30 are accounted for under ASC 310-20. Premiums and discounts created when the loans were recorded at their fair values at acquisition are amortized over the remaining terms of the loans as an adjustment to the related loan's yield.



(Dollars in thousands)
Accounted for under ASC 310-30:
Contractual cash flows	$	1,018
Contractual cash flows not expected to be collected (nonaccretable difference)	82
Expected cash flows	936
Interest component of expected cash flows (accretable yield)	35
Fair value at acquisition	901
Accounted for under ASC 310-20:
Unpaid principal and interest balance	221,061
Fair value premium	394
Fair value at acquisition	221,455
Total fair value at acquisition	$	222,356

The pro forma table below presents information as if the acquisition had occurred on January 1, 2019. The pro forma information includes adjustments to give the effects to any changes in interest income due to the accretion (amortization) of the discount (premium) associated with the fair value adjustments to acquired loans, any changes in interest expense due to estimated premium amortization/discount accretion associated with the fair value adjustments to acquired time deposits and borrowings and other debt, amortization of core deposit intangibles that would have resulted had the deposits been acquired as of January 1, 2019, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date. Due diligence, professional fees, and other expenses related to the merger were incurred by the Company and AAB during the three months ended March 31, 2020, but the pro forma condensed combined statement of income is not adjusted to exclude these costs.



	Three months ended March 31,
(Dollars in thousands, except per share data)	2020		2019
Net interest income	$	14,865	$	15,185
Noninterest income	4,690		2,678
Noninterest expense	14,579		12,099
Net income	4,123		4,066
Net income per diluted share	0.53		0.52