On January 1, 2019, the Company acquired Limberlost Bancshares, Inc. (“Limberlost”), the bank holding company for Bank of Geneva, a community bank based in Geneva, Indiana. Bank of Geneva operated six full-service offices in the northeast Indiana communities of Geneva, Berne, Decatur, Monroe, Portland and Monroeville. Shareholders of Limberlost received 1,830 shares of FMAO common stock and $8,465.00 in cash for each share. Limberlost had 1,000 shares outstanding on January 1, 2019. The share price of Farmers & Merchants Bancorp, Inc. (FMAO) stock on January 1, 2019 was $38.49. Total consideration for the acquisition was approximately $78.9 million consisting of $8.5 million in cash and $70.4 million in stock. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

In 2018, the Company incurred $742.1 thousand of third-party acquisition-related costs. The largest portion of the expenses recognized in 2018 related to consulting fees of $340 thousand, other general and administration expenses of $331.5 thousand and data processing expenses of $58.6 thousand. These three categories of expense accounted for 98.4% of the total acquisition expenses impacting the 2018 financial statements of the Company.

In 2019, the Company has incurred additional third-party acquisition-related costs of $1.27 million. These expenses are comprised of data processing of $867.6 thousand, employee benefits of $156.6 thousand, ATM expense of $31.4 thousand, consulting fees of $19.3 thousand and other general and administrative expense of $195.4 thousand in the Company’s consolidated statement of income for the nine months ended September 30, 2019.

Under the acquisition method of accounting, the total purchase is allocated to net tangible and intangible assets based on their current estimated fair values on the date of acquisition. Of the total purchase price of $78.9 million, $3.9 million has been allocated to core deposit intangible included in other assets and will be amortized over seven years on a straight line basis. Goodwill of $43.3 million resulting from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and Bank of Geneva. Of that total amount, none of the purchase price is deductible for tax purposes. The following table summarizes the consideration paid for Bank of Geneva and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.

Fair Value of Consideration Transferred
	(In Thousands)
Cash	$	8,465
Common Shares (1,830,000 shares)		70,437
Total	$	78,902

Recognized amounts of identifiable assets acquired and liabilities assumed

Assets
Cash and cash equivalents	$	6,376
Securities - available-for-sale		17,494
Other securities, at cost		2,347
Loans, net		257,183
Premises and equipment		2,538
Goodwill		43,266
Other assets		7,176
Total Assets Purchased	$	336,380

Liabilities
Deposits
Noninterest bearing	$	37,822
Interest bearing		168,312
Total deposits		206,134
Federal Home Loan Bank (FHLB) advances		48,196
Accrued expenses and other liabilities		3,148
Total Liabilities Assumed	$	257,478

The fair value of the assets acquired includes loans with a fair value of $257.2 million. The gross principal and contractual interest due under the contracts is $359.2 million, of which $4.7 million is expected to be uncollectible. The loans have a weighted average life of 70 months.

The fair value of building and land included in premises and equipment was written down by $1.2 million and will be amortized based on the remaining life of each building. The combined average remaining life is 16.75 years.

The fair value for certificates of deposit incorporates a valuation amount of $0.5 million which will be amortized over 1.5 years. The fair value of Federal Home Loan Bank (FHLB) advances includes a valuation amount of $1.3 million which will be amortized over 2.3 years.

The Company acquired loans in the acquisition that had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

The carrying amount of those loans is included in loans, net on the balance sheet at September 30, 2019. The amounts of loans at September 30, 2019 are as follows:

	2019
	(In Thousands)
Balance - January 1, 2019
Commercial	$	4,094
Consumer RE		231
Consumer		71
Carrying amount, net of fair value adjustment of $2,118	$	2,278

Balance - September 30, 2019
Commercial	$	110
Consumer RE		55
Consumer		-
Carrying amount, net of fair value adjustment of $63	$	102

Loans acquired during 2019 for which it was probable at acquisition that all contractually required payments would not be collected are as follows:

	(In Thousands)
Contractually required payments receivable at acquisition
Commercial	$	4,215
Consumer RE		261
Consumer		94
Total required payments receivable	$	4,570

Cash flows expected to be collected at acquisition	$	2,788

Basis in acquired loans at acquisition	$	4,396

During the second quarter, two commercial purchased credit-impaired loans were paid off in full after the customer was able to secure financing at another financial institution. The associated credit loss of $1.985 million has been included in loan interest income in the Company’s consolidated statement of income for the nine months ended September 30, 2019. The balance of the fair value adjustment for loans acquired and accounted for under this guidance (ASC 310-30) was $63 thousand at September 30, 2019 and $2.118 million on January 1, 2019, respectively.

Changes in accretable yield, or income expected to be collected, are as follows:

	Three Months Ended September 30, 2019			Nine Months Ended September 30, 2019
	(In Thousands)			(In Thousands)
Beginning Balance	$	2,329		$	2,544
Additions		-			6
Accretion		(112	)		(2,316	)
Reclassification from nonaccretable difference		34			2,019
Disposals		(6	)		(8	)
Ending Balance	$	2,245		$	2,245

The results of operations of Bank of Geneva have been included in the Company’s consolidated financial statements since the acquisition date of January 1, 2019. The following schedule includes pro-forma results for the three and nine months ended September 30, 2019 and 2018 as if the Bank of Geneva acquisitions had occurred as of the beginning of the comparable prior reporting period.

	(in thousands of dollars, except per share data)				(in thousands of dollars, except per share data)
	Three Months Ended				Nine Months Ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
Summary of Operations
Net Interest Income - Before Provision for Loan Losses	$	12,900	$	13,198	$	40,211	$	40,916
Provision for Loan Losses		247		77		410		474
Net Interest Income After Provision for Loan Losses		12,653		13,121		39,801		40,442
Noninterest Income		3,161		2,858		8,837		8,585
Noninterest Expense		10,585		9,810		30,562		28,529
Income Before Income Taxes		5,229		6,169		18,076		20,498
Income Taxes		935		946		3,380		3,686
Net Income	$	4,294	$	5,223	$	14,696	$	16,812
Basic and Diluted Earnings Per Share	$	0.38	$	0.47	$	1.32	$	1.51

The pro-forma information includes adjustments for interest income on loans, amortization of intangibles arising from the transaction, interest expense on deposits acquired, premises expense for the branches acquired and the related income tax effects. The pro-forma information for the quarter ended September 30, 2019 includes approximately $5.5 million, net of tax, of operating revenue from Bank of Geneva since acquisition.

The pro-forma financial information is presented for informational purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

The Company purchased an office on December 13, 2013 in Custar, Ohio. Core deposit intangible assets of $1.17 million were recognized and are being amortized over its remaining economic useful life of the deposits of 7 years on a straight line basis.

As mentioned previously, the acquisition of Bank of Geneva resulted in the recognition of $3.9 million in core deposit intangible assets which are being amortized over its remaining life of 7 years on a straight line basis.

The amortization expense for the nine months ended September 30, 2018 was $126 thousand. Of the $727 thousand to be expensed in 2019, $546 thousand has been expensed for the nine months ended September 30, 2019. Future amortization of core deposit intangible assets is as follows:

	(In Thousands)		(In Thousands)		(In Thousands)
	Custar		Geneva		Total
2019	$	167	$	560	$	727
2020		161		560		721
2021		-		560		560
2022		-		560		560
2023		-		560		560
2024		-		560		560
2025		-		560		560
	$	328	$	3,920	$	4,248