NOTE 26 — ACQUISITIONS

On February 17, 2017, MainSource Bank entered into an agreement with First Service Capital Management, Inc. (“First Service”), located in Elizabethtown, Kentucky, to acquire the assets under management. In connection with the acquisition, the Bank also agreed to hire all of First Service employees, including its four brokers. The purchase price of approximately $1,750 will result in intangible assets including goodwill and a customer relationship intangible. These amounts are currently being calculated and the amounts will be included in the first half on 2017 results.

On December 19, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with FCB Bancorp, Inc., a Kentucky corporation (“FCB”), pursuant to which FCB will merge with and into the Company, whereupon the separate corporate existence of FCB will cease and MainSource will survive (the “Merger”). After the Merger, The First Capital Bank of Kentucky, a Kentucky-chartered bank and a wholly-owned subsidiary of FCB (“FCB Bank”), will be a wholly-owned subsidiary of MainSource. The Company anticipates that within a few months following the Merger, FCB Bank will merge with and into MainSource Bank, with MainSource Bank as the surviving bank.

Subject to the approval of FCB’s stockholders of the merger, regulatory approvals and other customary closing conditions, the parties anticipate completing the Merger in the second quarter of 2017.

At the effective time of the Merger, stockholders of FCB shall be entitled to receive (i) 0.9 shares of MainSource common stock (the “Exchange Ratio”) and (ii) $7.00 in cash for each share of FCB common stock owned. Additionally, all outstanding and unexercised options to purchase FCB stock will vest in full and be converted automatically into the right to receive an amount of cash equal to the product of (i) the difference (if positive) between (A) $7.00 plus the product of (y) 0.9 and (z) the average of the daily closing sales prices of a share of MainSource common stock as reported on the NASDAQ for the 10 consecutive trading days ending on the third business day preceding the Closing Date minus (B) the exercise price of such FCB stock option, multiplied by (ii) the number of shares of FCB common stock subject to such FCB stock option. Based upon the December 16, 2016 closing price of $32.65 per share of MainSource common stock, the transaction is valued at approximately $56.9 million.

FCB is the holding company of FCB Bank. FCB Bank was founded in 1911 as a Kentucky-chartered savings and loan association. FCB Bank now operates 7 full service branches in Jefferson County, Kentucky. As of December 31, 2016, FCB had $518,380 of total assets, $427,047 of loans, $387,862 of deposits and total equity of $30,798 .

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 50% common stock and 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 $7,130 were included in the Company’s income statement for 2016. 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 $25,362 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:The Core Deposit Intangible of $4,099 is being amortized for book purposes over 10 years.



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		355,343
Premises and equipment		6,674
Core deposit intangibles		4,099
Bank owned life insurance		16,575
Other assets		15,972
Total assets acquired		535,433

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

Total identifiable net assets	$	75,740

Goodwill	$	25,362

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 $343,783 and $350,869 on the date of acquisition. The Company also purchased some PCI loans related to the Cheviot acquisition. These loans had a contractual balance of $16,175 with a fair value of $11,560.

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.



	2016		2015
Net interest income	$	124,727	$	120,960
Net income		44,013		39,073
Basic earnings per share		1.83		1.63
Diluted earnings per share		1.81		1.61

On August 14, 2015, the Company completed its purchase of five Old National Bank branches located in Batesville, Brownstown, Richmond, and Portland, Indiana and Union City, Ohio. As of the date of acquisition, the Company acquired $37 million in loans, $99 million in deposits, and $1 million in property. Goodwill of $2.5 million and a core deposit intangible of $1.2 million were also recorded resulting in purchase premium of $3.7 million. $57 million of cash was received at purchase. The Company incurred $731 of expenses related to the acquisition of these branches. The core deposit intangible asset is being amortized over 10 years. Goodwill and the core deposit intangible will be deducted for tax purposes over 15 years.

On October 17, 2014, the Company acquired 100% of the outstanding common shares of MBT Bancorp (“MBT”) in exchange for $35.16 in cash or 2.055 shares of common stock of the Company for each share of MBT common stock outstanding. The merger agreement required that 60% of the outstanding shares of MBT common stock be converted into MainSource common stock and 40% of the outstanding shares of MBT common stock be converted into cash. A shareholder election was conducted and completed prior to the closing wherein MBT shareholders were provided the opportunity to select their preferred form of consideration, subject to the allocation and proration procedures contained in the merger agreement. MBT shareholder stock elections were not sufficient to reach the 60% stock requirement established in the merger agreement. Consequently, MBT shareholders who did not make an election received a portion of their merger consideration in MainSource common stock and a portion in cash. In total, the Company issued 1,226,312 shares of common stock and paid $13.9 million in cash to the former shareholders of MBT.

At the time of the acquisition, MBT’s wholly-owned bank subsidiary, The Merchant’s Bank and Trust Company, was merged into the Bank. With the acquisition, the Company expanded its presence in the southeastern Indiana and greater Cincinnati market areas. The acquisition of MBT offered the Company the opportunity to increase profitability by introducing existing products and services to the acquired customer base and to add new customers in the expanded region. MBT’s results of operations were included in the Company’s results beginning October 18, 2014. Acquisition-related costs of $3,119 were included in the Company’s income statement for the year ended December 31, 2014. The fair value of the common shares issued as part of the consideration paid for MBT was determined on the basis of the closing price of the Company’s common shares on the acquisition date.

Goodwill of $8,550 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 MBT and the value of the assets acquired and liabilities assumed recognized at the acquisition date:


Consideration
Cash	$	13,992
Equity Instruments		21,534
Fair Value of Total Consideration	$	35,526
Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed
Cash and cash equivalents	$	3,306
Securities		31,214
Federal Home Loan Bank stock		1,476
Loans		184,716
Premises and equipment		4,863
Core deposit intangibles		1,661
Other assets		3,468
Total assets acquired		230,704

Deposits		183,897
Federal Home Loan Bank advances		16,300
Other liabilities		3,531
Total liabilities assumed		203,728

Total identifiable net assets	$	26,976

Goodwill	$	8,550

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 $183,485 and $185,400 on the date of acquisition. The Company did acquire a small number of credit impaired loans. These loans had a net carrying amount of less than $1,000. Accordingly, no additional disclosures were made due to their immateriality.

The pro forma financial information is not included as it was considered immaterial to the Company’s results.

The above transactions were considered business combinations. Their results of operations are included in the financial statements after acquisition. Proforma data was not considered material and is not presented.