On August 15, 2023, the Company completed its acquisition of Blackhawk Bancorp, Inc. (“Blackhawk”) pursuant to an Agreement

and Plan of Merger Agreement, dated March 20, 2023 (the “Agreement”). Pursuant to the Agreement, Blackhawk was merged with and into the Company. Blackhawk shareholders received 1.15 shares of the Company's common stock for each share of Blackhawk common stock.

The Company accounted for the Blackhawk acquisition as a business combination using the acquisition method of accounting in accordance with ASC 805, Business Combinations (“ASC 805”). ASC 805 requires assets purchased and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The Company determined the fair value of loans, core deposit intangibles, mortgage servicing rights, time deposits, real property, and subordinated debt with the assistance of third-party valuations and appraisals.

A preliminary summary of the fair value of assets received and liabilities assumed are as follows:


(In thousands)
Assets
Cash and due from banks	$	55,600
Loans held for sale		3,222
Loans, net		722,866
Investments-available for sale		377,969
Short-term investments		869
FHLB stock		1,737
Premises and equipment		12,366
Accrued interest receivable		4,029
Prepaid expenses		1,182
Other assets		20,742
Core deposit intangible		34,590
Income tax receivable		2,077
Deferred tax asset		22,152
Mortgage servicing rights		7,031
Total assets acquired	$	1,266,432

Liabilities
Deposits	$	1,194,972
Subordinated and jr. subordinated debt		16,448
Accrued interest payable		1,091
Accrued and other liabilities		10,508
Total liabilities assumed		1,223,019
Net assets acquired	$	43,413

Total consideration	$	93,510
Goodwill	$	50,097

The Company recorded $50.1 million of goodwill in connection with the acquisition of Blackhawk, none of which is deductible for tax purposes. The amount of goodwill recorded reflects the synergies and operational efficiencies that are expected to result from the acquisition. The descriptions below describe the methods used to determine the fair value of significant assets acquired and liabilities assumed, as presented above:

Loans, net. The fair value of the loan portfolio was calculated on an individual loan basis using a discounted cash flow analysis, with results presented and assumptions applied on a summary basis. This analysis took into consideration the contractual terms of the loans and assumptions related to the cost of debt, cost of equity, servicing cost and other liquidity/risk premium considerations to estimate the projected cash flows. The inputs and assumptions used in the fair value estimate of the loan portfolio include credit mark, discount rate, prepayment speed, and foreclosure lag. Cash flows were adjusted by estimating future credit losses and the rate

of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans.

Core deposit intangible. The Company identified customer relationships, in the form of core deposit intangibles, as an identified intangible asset. Core deposit intangibles derive value from the expected future benefits or earnings capacity attributable to the acquired core deposits. The fair value of the core deposit intangible was estimated by identifying the expected future benefits of the core deposits and discounting those benefits back to present value. The core deposit intangible will be amortized over its estimated useful life of approximately 10 years using the sum of the months digits accelerated method.

Mortgage servicing rights. The Company identified residential mortgage servicing rights intangible asset and determined the fair value using a discounted cash flow analysis. The key inputs and assumptions used in the fair value estimate include prepayment assumptions, servicing costs, delinquencies, foreclosure costs, ancillary income, income earned on float & escrow, interest on escrow, internal rate of return and inflation.

Deposits. The fair value of demand deposit and interest checking deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities.

Subordinated and jr. subordinated debt. The Subordinated and jr. subordinated debt was fair valued using an income approach. Cash flows were calculated using an annualized contractual rate adjusted for forward interest costs and discounted using a variable discount rate.

Loans acquired are recorded at fair value with no carryover of the related allowance for credit losses. Purchased-credit deteriorated loans (“PCD”) are loans that have experienced more than insignificant credit deterioration since origination and are recorded at the purchase price. The allowance for credit losses is determined at the loan level. The sum of the loan’s purchase price and the allowance for credit losses becomes its initial amortized cost basis. The difference between the initial amortized cost basis and the par value of the loan is a noncredit discount or premium, which is amortized into interest income over the life of the loan.

Non-PCD loans have not experienced a more than insignificant deterioration in credit quality since origination. The difference between the fair value and outstanding balance of the non-PCD loans is recognized as an adjustment to interest income over the lives of the loan.

In accordance with ASC 326, Financial Instruments – Credit Losses, immediately following the acquisition the Company established a $3.8 million allowance for credit losses on the $618.33 million of acquired non-PCD loans through provision for credit losses in the consolidated statement of operations.

The following unaudited pro forma condensed combined financial information presents the results of operations of the Company, including the effects of the purchase accounting adjustments and acquisition expenses, had the Blackhawk Merger taken place at the beginning of the period (dollars in thousands, except per share data):


	Three months ended				Nine months ended
	September 30,				September 30,
	2023		2022		2023		2022
Net interest income	$	57,245	$	52,141	$	171,635	$	179,040
Provision for loan losses		6,246		1,742		6,768		2,601
Non-interest income		25,205		16,712		73,892		67,954
Non-interest expense		60,741		44,476		166,430		162,943
Income before taxes		15,463		22,635		72,329		81,450
Income tax expense		3,830		5,191		17,069		18,662
Net income	$	11,633	$	17,444	$	55,260	$	62,788

Earnings per share
Basic	$	0.52	$	0.73	$	2.62	$	2.69
Diluted		0.52		0.73		2.61		2.68

Basic weighted average shares o/s		22,220,438		23,744,891		21,086,802		23,360,909
Diluted weighted average shares o/s		22,319,334		23,825,437		21,176,946		23,435,657

Acquisition costs are expensed as incurred as a component of non-interest expense and primarily include, but are not limited to, severance costs, professional services, data processing fees, and marketing and advertising expenses. The Company incurred acquisition costs related to the Blackhawk acquisition, pre-tax, of $2.1 million and $2.6 million, respectively, during the three and nine-months ended September 30, 2023 and no related acquisition costs were incurred during the three and nine-months ended September 30, 2022.

On July 28, 2021, the Company and Brock Sub LLC, a newly formed Delaware limited liability company and wholly-owned subsidiary of the Company (“Delta Merger Sub”), entered into an Agreement and Plan of Merger (the “Delta Merger Agreement”) with Delta Bancshares Company, a Missouri corporation (“Delta”), pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of Delta pursuant to a business combination whereby Delta merged with and into Delta Merger Sub, whereupon the separate corporate existence of Delta ceased and Delta Merger Sub continued as the surviving company and a wholly-owned subsidiary of First Mid (the “Delta Merger”). The Delta Merger was completed on February 14, 2022.

Subject to the terms and conditions of the Delta Merger Agreement, at the effective time of the Delta Merger, each share of common stock, par value $10.00 per share, of Delta issued and outstanding immediately prior to the effective time of the Delta Merger (other than shares held in treasury by Delta) converted into and became the right to receive cash and shares of common stock, par value $4.00 per share, of the Company and cash in lieu of fractional shares, less any applicable taxes required to be withheld, and subject to certain potential adjustments. On an aggregate basis, the total consideration paid by the Company at the closing of the Delta Merger to Delta’s shareholders and option holders was approximately $15.15 million in cash and 2,292,270 shares of Company common stock. Delta’s outstanding stock options vested upon consummation of the Delta Merger, and all outstanding Delta options that were unexercised prior to the effective time of the Delta Merger were cashed out.

The acquisition was accounted for under the acquisition method of accounting in accordance with ASC 805, “Business Combinations ("ASC 805"),” and accordingly the assets and liabilities were recorded at their estimated fair values as of the date of acquisition. Fair values are subject to refinement for up to one year after the closing date of February 14, 2022 as additional information regarding the closing date fair values become available. The total consideration paid was used to determine the amount of goodwill resulting from the transaction. As the total consideration paid exceeded the net assets acquired, goodwill of $28.2 million was recorded for the acquisition. Goodwill recorded in the transaction, which reflects the synergies and economies of scale expected from combining operations and the enhanced revenue opportunities from the Company’s service capabilities, is not tax deductible, and was all assigned to the banking segment of the Company.


	Acquired			Fair Value			As Recorded by
(In thousands)	Book Value			Adjustments			Jefferson Bank
Assets
Cash and due from banks	$	82,473		$	—		$	82,473
Investment securities		184,959			(2,836	)		182,123
Loans		426,433			(7,924	)		418,509
Allowance for credit losses		(5,388	)		4,525			(863	)
Premises and equipment		5,522			3,508			9,030
Goodwill		14			28,544			28,558
Core deposit intangible		—			5,920			5,920
Bank owned life insurance		15,822						15,822
Right of use asset		—			717			717
Other assets		9,061			(1,287	)		7,774
Total assets acquired	$	718,896		$	31,167		$	750,063

Liabilities
Deposits	$	558,619		$	1,759		$	560,378
Securities sold under agreements to repurchase		35,523			—			35,523
FHLB advances		45,000			75			45,075
Lease liability		—			717			717
Other liabilities		2,209			(1,161	)		1,048
Total liabilities assumed		641,351			1,390			642,741
Net assets acquired	$	77,545		$	29,777		$	107,322

Consideration paid
Cash							$	15,150
Common stock								92,172
							$	107,322

The Company has recognized approximately $2.6 million, pre-tax, of acquisition costs for the Delta Merger. Of this amount, $2.1 million was recognized during 2022. These costs are included in salaries and benefits, legal and professional and other expense. Of the $7.9 million adjustment to loans, $8.2 million is being accreted to interest income over the remaining term of the loans. The remaining $300,000 was the elimination of deferred fees and unearned discounts previously recorded by Jefferson Bank. The Company also recorded approximately $863,000 directly to the allowance for credit losses for loans identified as PCD. Of the $426 million of loans acquired, approximately $18.8 million was identified as PCD.

The differences between fair value and acquired value of the assumed time deposits of $1.8 million and the assumed FHLB advances of $75,000, are being amortized to interest expense over the remaining life of the liabilities. The core deposit intangible asset, with a fair value of $5.9 million, is being amortized on an accelerated basis over its estimated life of 10 years.

The following unaudited pro forma condensed combined financial information presents the results of operations of the Company, including the effects of the purchase accounting adjustments and acquisition expenses, had the Delta Merger taken place at the beginning of the period (dollars in thousands, except per share data):


	Nine months ended
	September 30, 2022

Net interest income	$	141,524
Provision for loan losses		4,001
Non-interest income		56,592
Non-interest expense		125,690
Income before taxes		68,425
Income tax expense		15,480
Net income	$	52,945

Earnings per share
Basic	$	2.64
Diluted		2.63

Basic weighted average shares o/s		20,070,687
Diluted weighted average shares o/s		20,145,435