ote 8 -- Business Combinations

First BancTrust Corporation

On December 11, 2017, the Company and Project Hawks Merger Sub LLC (formerly known as Project Hawks Merger Sub Corp.), a newly formed Delaware limited liability company and wholly-owned subsidiary of the Company (“Hawks Merger Sub”), entered into an Agreement and Plan of Merger (as amended as of January 18, 2018, the “First Bank Merger Agreement") with First BancTrust Corporation, a Delaware corporation (“First Bank”), pursuant to which, among other things, the Company agreed to acquire 100% of the issued and outstanding shares of First Bank pursuant to a business combination whereby First Bank will merge with and into Hawks Merger Sub, with Hawks Merger Sub as the surviving entity and a wholly-owned subsidiary of the Company (the “First Bank Merger”).

At the effective time of the First Bank Merger, each share of common stock, par value $0.01 per share, of First Bank issued and outstanding immediately prior to the effective time of the First Bank Merger (other than shares held in treasury by First Bank and shares held by stockholders who had properly made and not withdrawn a demand for appraisal rights under Delaware law) converted into and become the right to receive, (a) $5.00 in cash and (b) 0.800 shares of common stock, par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 adjustments, all as set forth in the First Bank Merger Agreement.

On May 1, 2018, the Company issued an aggregate total of 1,643,900 shares of common stock valued at $37.32 per share and approximately $10,275,000, including cash in lieu of fractional shares. First Bank’s wholly-owned bank subsidiary, First Bank & Trust, IL (“First Bank & Trust”), merged with and into First Mid Bank on August 10, 2018. At the time of the bank merger, First Bank & Trust’s banking offices became branches of First Mid Bank. 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.

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 May 1, 2018 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 $26.5 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.

The following table summarizes the estimated fair values of assets acquired and liabilities assumed at the date of the First Bank acquisition (in thousands).



	Acquired Book Value			Fair Value Adjustments			As Recorded by First Bank & Trust
Assets
Cash & due from banks	$	20,598					$	20,598
Investment Securities	59,906			(320		)	59,586
Loans	371,156			(7,875		)	363,281
Allowance for loan losses	(4,412		)	4,412			—
Other real estate owned	547			(12		)	535
Premises and equipment	10,126			(689		)	9,437
Goodwill	543			25,948			26,491
Core deposit intangible	—			5,224			5,224
Other assets	16,389			(256		)	16,133
Total assets acquired	$	474,853		$	26,432		$	501,285
Liabilities and Stockholders' Equity
Deposits	$	384,323		$	1,301		$	385,624
FHLB advances	31,000			(328		)	30,672
Subordinated debentures	6,186			(1,451		)	4,735
Other liabilities	8,665			(36		)	8,629
Total liabilities assumed	430,174			(514		)	429,660
Net assets acquired	$	44,679		$	26,946		$	71,625

Consideration Paid
Cash							$	10,275
Common stock							61,350
Total consideration paid							$	71,625

The Company has recognized approximately $7.1 million, pre-tax, of acquisition costs for the First Bank acquisition. These costs are included in legal and professional and other expense. Of the $7.9 million fair value adjustment to loans, approximately $3.6 million is being accreted to interest income over the remaining term of the loans. The differences between fair value and acquired value of the assumed time deposits of $1.3 million, of the assumed FHLB advances of $(328,000) and of the assumed subordinated debentures of $(1,451,000), are being amortized to interest expense over the remaining life of the liabilities. The core deposit intangible asset, with a fair value of $5.2 million, will be amortized on an accelerated basis over its estimated life of ten 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 First Bank acquisition taken place a the beginning of the period (dollars in thousands):



	Three months ended				Nine months ended
	September 30,		September 30,		September 30,		September 30,
	2018		2017		2018		2017
Net interest income	$	30,087	$	27,373	$	86,813	$	83,289
Provision for loan losses	2,551		1,679		5,683		5,546
Non-interest income	7,919		8,544		24,879		25,758
Non-interest expense	24,490		24,271		68,144		72,157
Income before income taxes	10,965		9,967		37,865		31,344
Income tax expense	2,731		3,315		9,356		10,147
Net income	$	8,234	$	6,652	$	28,509	$	21,197

Earnings per share
Basic	$	0.54	$	0.47	$	1.94	$	1.50
Diluted	$	0.54	$	0.47	$	1.94	$	1.50

Basic weighted average shares outstanding	15,290,539		14,172,574		14,704,888		14,142,813
Diluted weighted average shares outstanding	15,308,218		14,179,709		14,721,708		14,150,476

The unaudited pro forma condensed combined financial statements do not reflect any anticipated cost savings and revenue enhancements. Accordingly, the pro forma results of operations of the Company as of and after the First Bank business combination may not be indicative of the results that actually would have occurred if the combination had been in effect during the periods presented or of the results that may be attained in the future.

Actual revenue and earnings of First Bank & Trust included in the consolidated statement of income of the Company from the acquisition date to September 30, 2018 was $10,660,000 and $3,366,000, respectively.