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 Junior 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 Junior Subordinated debt. The Subordinated and Junior 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.

Accounting for acquired loans. 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		2023
Net interest income	$	57,245	$	171,635
Provision for credit losses		6,246		6,768
Non-interest income		25,205		73,892
Non-interest expense		60,741		166,430
Income before taxes		15,463		72,329
Income tax expense		3,830		17,069
Net income	$	11,633	$	55,260

Earnings per share
Basic	$	0.52	$	2.62
Diluted	$	0.52	$	2.61

Basic weighted average shares o/s		22,220,438		21,086,802
Diluted weighted average shares o/s		22,319,334		21,176,946

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 $2.5 million and $2.6 million, respectively, during the nine months ended September 30, 2024 and 2023 and $0.1 million and $2.1 million, respectively, during the three months ended September 30, 2024 and 2023.