NOTE 12 – ACQUISITION

On May 20, 2016, the Company acquired 100% of the outstanding common shares of Cheviot Financial Corp. (“Cheviot”) and its subsidiary Cheviot Savings Bank in exchange for stock and cash. Shareholders of Cheviot were entitled to merger consideration in accordance with the terms of the merger agreement. At the time of the merger, stockholders of Cheviot received either 0.6916 shares of the Company’s common stock or $15.00 in cash for each share of Cheviot common stock owned, subject to proration provisions specified in the Merger Agreement that provide for a targeted aggregate split of total consideration of approximately 50% common stock and approximately 50% cash. In total, the Company issued 2,351,816 shares of common stock and paid $49.7 million in cash to the former shareholders of Cheviot.

With the acquisition, the Company expanded its presence in the greater Cincinnati area. The acquisition offers the Company the opportunity to increase profitability by introducing new products and services to the acquired customer base and adding new customers in the expanded region. Cheviot’s results of operations were included in the Company’s results beginning May 21, 2016. Acquisition-related costs of $601 and $6,964 were included in the Company’s income statement for the three month and nine month period ended September 30, 2016, respectively. The fair value of the common shares issued as part of the consideration paid for Cheviot was determined on the basis of the closing price of the Company’s common shares on the acquisition date.

Goodwill of $24,936 arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining of the operations of the companies. Goodwill will not be deductible for income tax purposes. The following table summarizes the consideration paid for Cheviot and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date:



Consideration
Cash	$	49,715
Equity Instruments		51,387
Fair Value of Total Consideration	$	101,102

Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed
Cash and cash equivalents	$	38,426
Securities		89,693
Federal Home Loan Bank stock		8,651
Loans		358,535
Premises and equipment		6,674
Core deposit intangibles		4,099
Bank owned life insurance		16,576
Other assets		13,205
Total assets acquired		535,859

Deposits		444,695
Federal Home Loan Bank advances		12,156
Other liabilities		2,842
Total liabilities assumed		459,693

Total identifiable net assets	$	76,166

Goodwill	$	24,936

The Company will be completing its final fair value adjustments in the fourth quarter of 2016.

The fair value of net assets acquired includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which have shown evidence of credit deterioration since origination. Receivables acquired that were not subject to these requirements include non-impaired loans and customer receivables with a fair value and gross contractual amounts receivable of $344,639 and $350,869 on the date of acquisition.

The following table presents pro forma information as if the acquisition had occurred at the beginning of 2015. The pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, 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 dates.



	3 months		3 months		9 months		9 months
	9/30/2016		9/30/2015		9/30/2016		9/30/2015
Net interest income	$	30,990	$	30,544	$	86,753	$	89,836
Net income		12,156		9,884		32,045		29,193
Basic earnings per share		0.51		0.41		1.34		1.22
Diluted earnings per share		0.50		0.41		1.32		1.20

Acquisition costs of $460 and $4,801, net of taxes, were excluded from the above table in the three month period ending September 30, 2016 and nine month period ending September 30, 2016, respectively.

Two putative class action lawsuits were filed in the Court of Common Pleas, Hamilton, Ohio, Civil Division, challenging the proposed merger and naming as defendants Cheviot, its directors, and MainSource (collectively, the “defendants”). These actions are captioned: (1) Raymond J. Neiheisel v. Cheviot Financial Corp., et al., Case No. A1600359 (filed January 15, 2016); and (2) Stephen Bushansky v. Steven Hausfeld, et al., Case No. A1600936 (filed February 16, 2016) (together, the “Actions”). On February 29, 2016, each plaintiff filed an amended complaint. On March 24, 2016, the court consolidated the actions under Raymond J. Neiheisel v. Cheviot Financial Corp., et al., Case No. A1600359 (collectively, the “Actions”). The amended consolidated complaint alleges, among other things, that the directors of Cheviot breached their fiduciary duties of due care, independence, good faith and fair dealing to the stockholders of Cheviot, that the consideration to be received by the stockholders is inadequate and undervalues Cheviot, that the Merger Agreement includes improper deal-protection devices that purportedly lock up the Merger and may operate to prevent other bidders from making successful competing offers for Cheviot, that the deal protection devices unreasonably inhibit the ability of the directors of Cheviot to act with respect to investigating and pursuing superior proposals and alternatives and that the Merger Agreement involves conflicts of interest. The complaint further alleges that Cheviot and MainSource aided and abetted the alleged breaches of fiduciary duty by the directors of Cheviot. The amended consolidated complaint also alleges that the registration statement on Form S-4, initially filed with the Securities and Exchange Commission (the “SEC”) on February 11, 2016 in connection with the Merger, provides materially misleading and incomplete information rendering the stockholders of Cheviot unable to make an informed decision with respect to the Merger.

On April 21, 2016, defendants and lead plaintiffs entered into a memorandum of understanding (“MOU”), which provides for the settlement of the Actions. The settlement contemplated by the MOU is subject to confirmatory discovery and customary conditions, including court approval following notice to Cheviot’s stockholders. If the settlement is finally approved by the court, it will resolve and release all claims by stockholders of Cheviot challenging any aspect of the merger, the merger agreement, and any disclosure made in connection therewith. The terms of the settlement were disclosed to former Cheviot stockholders pursuant to a Notice mailed on September 27, 2016. The court is scheduled to consider the final settlement at a hearing to be held on December 2, 2016.

The Company does not anticipate a material financial impact as a result of the Actions, the MOU, or the settlement.