NOTE 26 — ACQUISITIONS

First Financial Bancorp. Merger

On July 25, 2017, First Financial Bancorp (“First Financial”) and MainSource Financial Group, Inc. (the “Company”) executed a definitive merger agreement pursuant to which the Company agreed to merge into First Financial in a stock-for-stock transaction. MainSource Bank, a wholly owned subsidiary of the Company, will merge into First Financial Bank, a wholly owned subsidiary of First Financial.

Under the terms of the merger agreement, shareholders of the Company will receive 1.3875 common shares of First Financial common stock for each share of the Company’s common stock. The closing price of First Financial on July 25, 2017 was $28.10. Including outstanding options and warrants on the Company’s common stock, the transaction is valued at approximately $1.0 billion. Upon closing, First Financial shareholders will own approximately 63% of the combined company and the Company’s shareholders will own approximately 37% on a fully diluted basis.

The merger will result in a combined company with approximately $13.5 billion in assets, $9.0 billion in loans, and $10.4 billion in deposits, utilizing financial information as of December 31, 2017. The transaction will allow the combined company to better meet the needs of its communities in a rapidly changing banking environment, while providing the efficiencies and scale required to comply with regulatory requirements and costs associated with crossing the $10 billion asset threshold. The combined company will operate as First Financial and its headquarters will be located in downtown Cincinnati, Ohio.

The Board of Governors of the Federal Reserve System has approved the transaction. Subject to satisfaction of other customary closing conditions, the transaction is expected to close on April 1, 2018.

Department of Justice Letter of Agreement

On January 25, 2018, First Financial and the Company entered into a Letter of Agreement with the United States Department of Justice (“DOJ”) regarding the divestiture of four (4) MainSource Bank branch locations in Columbus (Bartholomew County), Indiana, and one (1) MainSource Bank branch location in Greensburg (Decatur County), Indiana. The divestiture will include all deposits and loans, as well as all real and personal property, associated with the branches. The divestiture is designed to resolve competitive concerns raised by the DOJ regarding the pending merger of First Financial and the Company. The divestiture is not anticipated to have a material impact on the financial metrics of the proposed merger or the combined company following the merger.

The Letter of Agreement provides, among other things, that the parties will take certain required steps to sell the branches to a competitively suitable purchaser or purchasers, subject to the approval of the DOJ. Prior to sale, First Financial and the Company will preserve, maintain and continue to operate the branches, including maintaining all branch personnel. The sale of the branches must be consummated within 180 days following completion of the merger of First Financial and the Company. Additionally, the agreement requires that if the parties determine to discontinue retail banking services at any branch located in Decatur or Bartholomew County within two years following the merger, the parties will notify the DOJ and sell or lease such branch to an FDIC insured institution.

German American Bancorp Branch Divestiture

On February 13, 2018, the Company announced that its wholly owned bank subsidiary, MainSource Bank, entered into a Branch Purchase and Assumption Agreement with German American Bancorp (“GAB”) to sell certain assets to GAB, including four (4) MainSource Bank branch locations in Columbus (Bartholomew County), Indiana, and one (1) MainSource Bank branch location in Greensburg (Decatur County), Indiana. The sale includes all deposits and loans, as well as all real and personal property, associated with the branches. The branch divestiture is anticipated to close in the second quarter of 2018.

Capstone Investment Management, LLC Acquisition

On May 1, 2017, MainSource Bank entered into an agreement with Capstone Investment Management, LLC. (“Capstone”), located in Greenwood, Indiana, to acquire the assets under management. The purchase price of approximately $1,750 resulted in intangible assets of goodwill of $610 and a customer relationship intangible of $1,140. The customer relationship intangible is being amortized over 15 years. The customer relationship intangible and goodwill will be deducted for tax purposes over 15 years. $756 was paid on May 1, 2017 upon closing of the transaction and a loan held by the seller of $644 was assumed. The remaining balance will be paid as earned over the next two years.

First Service Capital Management, Inc. Acquisition

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. The transaction closed on February 17, 2017. $1,400 was paid on February 17, 2017 upon closing of the transaction and the remaining balance will be paid as earned over the next two years. The purchase price of approximately $1,750 resulted in goodwill of $660 and a customer relationship intangible of $1,090 being recorded. The customer relationship intangible is being amortized over 15 years. Goodwill and intangible assets will be deducted for tax purposes over 15 years.

FCB Bancorp, Inc. Merger

On April 28, 2017, the Company acquired 100% of the outstanding common shares of FCB Bancorp, Inc. (“FCB”) and its subsidiary The First Capital Bank of Kentucky in exchange for stock and cash. Shareholders of FCB were entitled to merger consideration in accordance with the terms of the merger agreement. At the time of the merger, shareholders of FCB received 0.9 shares of MainSource common stock and $7.00 in cash for each share of FCB common stock owned. In total, the Company issued 1,402,612 shares of common stock and paid $10.9 million in cash to the former shareholders of FCB.

With the acquisition, the Company expanded its presence in the greater Louisville 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. FCB’s results of operations were included in the Company’s results beginning April 28, 2017. Acquisition-related costs of $7,063 were included in the Company’s income statement for 2017. The fair value of the common shares issued as part of the consideration paid for FCB was determined on the basis of the closing price of the Company’s common shares on the acquisition date.

Goodwill of $34,505 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 FCB and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date. The core deposit intangible of $6,263 is being amortized for book purposes over 20 years.


Consideration
Cash	$	10,911
Equity Instruments		47,969
Fair Value of Total Consideration	$	58,880
Recognized Amounts of Identifiable Assets Acquired and Liabilities Assumed
Cash and cash equivalents	$	15,972
Securities		45,498
Federal Home Loan Bank stock		3,418
Loans		427,541
Premises and equipment		9,863
Core deposit intangibles		6,263
Bank owned life insurance		6,571
Other assets		8,441
Total assets acquired		523,567

Deposits		366,871
Federal Home Loan Bank advances		43,804
Subordinated debt		17,111
Other liabilities		71,406
Total liabilities assumed		499,192

Total identifiable net assets	$	24,375

Goodwill	$	34,505

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 $419,927 and $427,611 on the date of acquisition. The Company also purchased some PCI loans related to the FCB acquisition. These loans had a contractual balance of $10,186 with a fair value of $7,614.

The following table presents pro forma information as if the acquisition had occurred at the beginning of 2016. 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.


	2017		2016
Net interest income	$	148,794	$	135,414
Net income		54,460		47,292
Basic earnings per share		2.13		1.92
Diluted earnings per share		2.09		1.89

Cheviot Financial Corp. Merger

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

Old National Bank Branch Purchase

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.