SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10‑K

Annual Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the fiscal year ended December 31, ~~2016~~2017

Commission file number 0‑12422

MAINSOURCE FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)


Indiana (State or other jurisdiction of incorporation or organization)	35‑1562245 (I.R.S. Employer Identification No.)
2105 North State Road 3 Bypass Greensburg, Indiana 47240 (Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code: (812) 663‑6734
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Common shares, no par value	Name of each exchange on which registered The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T during the previous 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark ifwhether ~~disclosure~~the ofregistrant ~~delinquent~~is ~~filers~~a ~~pursuant~~large toaccelerated ~~Item 405~~filer, ofan ~~Regulation S‑K~~accelerated isfiler, ~~not~~a ~~contained~~non-accelerated ~~herein~~filer, ~~and~~a ~~will~~smaller ~~not~~reporting ~~be contained~~company, toor ~~the~~an ~~best~~emerging growth company. See definitions of ~~registrant’s~~“large ~~knowledge~~accelerated filer,” in“accelerated ~~definitive~~filer,” ~~proxy~~“smaller orreporting ~~information~~company” ~~statements~~and ~~incorporated~~“emerging bygrowth ~~reference~~ company” in ~~Part~~Rule ~~III~~12b-2 of ~~this~~the ~~Form 10‑K~~Exchange ~~or any amendment to this Form 10‑K~~Act. ☐

~~Indicate~~Large ~~by check mark whether the registrant is a large~~ accelerated filer, an☒ ~~accelerated~~Accelerated filer, a☐ ~~non‑~~Non-accelerated filer, or☐ aSmaller ~~smaller~~ reporting company. ~~See~~☐ ~~definitions~~(Do ofnot ~~“large~~check ~~accelerated~~if ~~filer”,~~a ~~“accelerated filer”, and “~~smaller reporting company”) inEmerging ~~Rule 12b‑2~~growth ~~of the Exchange Act.~~ company☐

~~Large~~ If ~~accelerated~~an ~~filer~~emerging ☐growth ~~Accelerated~~company, ~~filer~~indicate ☒by ~~Non-accelerated~~check ~~filer~~mark ~~☐(Do~~if the registrant has elected not ~~check~~to ifuse athe ~~smallerreporting~~extended ~~company~~transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) ~~Smaller~~of ~~reporting~~the ~~company~~Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). Yes ☐ No ☒

The aggregate market value (not necessarily a reliable indication of the price at which more than a limited number of shares would trade) of the voting stock held by non‑affiliates of the registrant was $~~529~~857,~~339~~145,~~599~~722 as of June 30, ~~2016~~2017.

As of ~~March~~February 1025, ~~2017~~2018, there were outstanding 2425,~~135~~604,~~544~~702 common shares, without par value, of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Documents		Part of Form 10-KInto Which Incorporated
Definitive Proxy Statement for AnnualMeeting of Shareholders to be heldMay 3, 2017		Part III (Items 10 through 14)
Definitive Proxy Statement for 2018 AnnualMeeting of Shareholders		Part III (Items 10 through 14)

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FORM 10‑K

TABLE OF CONTENTS

PART I		Page
Item 1	Business	34
Item 1A	Risk Factors	1314
Item 1B	Unresolved Staff Comments	2023
Item 2	Properties	2023
Item 3	Legal Proceedings	2023
Item 4	Mine Safety Disclosures	2023
PART II
Item 5	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2124
Item 6	Selected Financial Data	2326
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2427
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	3842
Item 8	Financial Statements and Supplementary Data	4043
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	98104
Item 9A	Controls and Procedures	98104
Item 9B	Other Information	98104
PART III
Item 10	Directors, Executive Officers and Corporate Governance	See below
Item 11	Executive Compensation	See below
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	See below
Item 13	Certain Relationships and Related Transactions and Director Independence	See below
Item 14	Principal Accounting Fees and Services	See below
PART IV
Item 15	Exhibits, Financial Statement Schedules	99105

Pursuant to General Instruction G, the information called for by Items 10‑14 is omitted by MainSource Financial Group, Inc. since MainSource Financial Group, Inc. will file with the Commission a definitive proxy statement for its ~~2017~~2018 Annual Meeting of Shareholders pursuant to Regulation 14A not later than 120 days after the close of the fiscal year containing the information required by Items 10‑14.

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PART I.

(Dollar amounts in thousands except per share data)

Cautionary Note Regarding Forward‑Looking Statements

Except for historical information contained herein, the discussion in this Annual Report includes certain forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Any statement that does not describe historical or current facts is a forward looking statement. These statements often include the words “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “goals,” “targets,” “initiatives,” “potentially,” “probably,” “projects,” “outlook” or similar expressions or future conditional verbs such as “may,” “will,” “should,” “would,” and “could.” Actual results and experience could differ materially from the anticipated results or other expectations expressed in the Company’s forward looking statements. The Company disclaims any intent or obligation to update such forward looking statements. Factors which could cause future results to differ from these expectations include the following: general economic conditions; legislative and regulatory initiatives; monetary and fiscal policies of the federal government; deposit flows; the cost of funds; general market rates of interest; interest rates on competing investments; demand for loan products; demand for financial services; changes in accounting policies or guidelines; changes in the quality or composition of the Company’s loan and investment portfolios; the Company’s ability to integrate acquisitions, and other factors, including the risk factors set forth in Item 1A of this Annual Report on Form 10 K and in other reports we file from time to time with the Securities and Exchange Commission. The Company intends the forward looking statements set forth herein to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995.

The forward-looking statements in this Annual Report are subject to numerous assumptions, risks, and uncertainties which change over time. In addition to factors previously disclosed in reports filed by MainSource or First Financial Bancorp (“First Financial”) with the SEC, the following factors, among others, could cause actual results to differ materially from forward-looking statements:

the inability to close the proposed merger with First Financial (the “Merger”) in a timely manner;

the failure to obtain applicable regulatory approvals and meet other closing conditions to the Merger on the expected terms and schedule;

the potential impact of announcement or consummation of the proposed Merger with First Financial on relationships with third parties, including customers, employees, and competitors;

business disruption following the Merger;

difficulties and delays in integrating the First Financial and MainSource businesses or fully realizing cost savings and other benefits;

the impact of the combined company exceeding $10 billion in assets;

the challenges of integrating, retaining, and hiring key personnel;

failure to attract new customers and retain existing customers in the manner anticipated;

the outcome of pending or threatened litigation, or of matters before regulatory agencies, whether currently existing or commencing in the future, including litigation related to the Merger;

any interruption or breach of security resulting in failures or disruptions in customer account management, general ledger, deposit, loan, or other systems;

changes in MainSource’s or First Financial’s stock price before closing, including as a result of the financial performance of either company prior to closing;

operational issues stemming from, and/or capital spending necessitated by, the potential need to adapt to industry changes in information technology systems, on which First Financial and MainSource are highly dependent;

changes in legislation, regulation, policies, or administrative practices, whether by judicial, governmental, or legislative action, including, but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), and other changes pertaining to banking, securities, taxation, rent regulation and housing, financial accounting and reporting, environmental protection, and insurance, and the ability to comply with such changes in a timely manner;

changes in the monetary and fiscal policies of the U.S. Government, including policies of the U.S. Department of the Treasury and the Federal Reserve Board;

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changes in interest rates, which may affect First Financial’s or MainSource’s net income, prepayment penalty income, mortgage banking income, and other future cash flows, or the market value of First Financial’s or MainSource’s assets, including its investment securities;

changes in accounting principles, policies, practices, or guidelines;

natural disasters, war, or terrorist activities; and

other economic, competitive, governmental, regulatory, technological, and geopolitical factors affecting First Financial’s or MainSource’s operations, pricing, and services.

Additionally, the timing and occurrence or non-occurrence of events may be subject to circumstances beyond First Financial’s or MainSource’s control.

ITEM 1. BUSINESS

General

MainSource Financial Group, Inc. (“MainSource” or the “Company”) is an Indiana corporation and bank holding company, within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHC Act”), that has elected to become a financial holding company (“FHC”). The Company is based in Greensburg, Indiana. As of December 31, ~~2016~~2017, the Company operated one banking subsidiary: MainSource Bank (“the Bank”), an Indiana state chartered bank. Through its non‑bank affiliates, the Company provides services incidental to the business of banking. Since its formation in 1982, the Company has acquired and established various institutions and financial services companies and may acquire additional financial institutions and financial services companies in the future. For further discussion of the business of the Company see Management’s Discussion and Analysis in Part II, Item 7.

As of December 31, ~~2016~~2017, the Company operated 9094 branch banking offices in Indiana, Illinois, Ohio and Kentucky. As of December 31, ~~2016~~2017, the Company had consolidated assets of $4,~~080~~647,~~257~~862, consolidated deposits of $3,~~110~~507,~~871~~603 and shareholders’ equity of $~~449~~532,~~494~~958.

Through the Bank, the Company offers a broad range of financial services, including: accepting time and transaction deposits; making consumer, commercial, agribusiness and real estate mortgage loans; renting safe deposit facilities; providing personal and corporate trust services; and providing other corporate services such as letters of credit and repurchase agreements.

~~The~~Proposed ~~lending~~Merger ~~activities~~with ofFirst ~~the~~Financial ~~Bank are separated into primarily the categories of commercial, commercial real estate, residential, and consumer~~Bancorp. Loans are originated by the lending officers of the Bank subject to limitations set forth in lending policies. The Board of Directors of the Bank monitors concentrations of credit, problem and past due loans and charge‑offs of uncollectible loans and approves loan policy. The Bank maintains conservative loan policies and underwriting practices in order to address and manage loan risks. These policies and practices include granting loans on a sound and collectible basis, serving the legitimate needs of the community and the general market area while obtaining a balance between maximum yield and minimum risk, ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan, developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each category and developing and applying adequate collection policies.

3On July 25, 2017, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with First Financial Bancorp. (“First Financial”), an Ohio corporation. The Merger Agreement was approved by the boards of directors and shareholders of the Company and First Financial, and is subject to regulatory approval and other customary closing conditions. Pursuant to the Merger Agreement, each of the Company’s shareholders will receive 1.3875 shares of First Financial common stock for each share of Company common stock owned by the shareholder.

The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, the Company will be merged with and into First Financial, with First Financial as the surviving corporation (the “Merger”). Immediately following completion of the Merger, First Financial intends to consolidate MainSource Bank with and into First Financial Bank, First Financial’s wholly-owned subsidiary bank, with First Financial Bank as the surviving institution (the “Bank Merger”).

Overview

The lending activities of the Bank are separated into primarily the categories of commercial, commercial real estate, residential, and consumer. Loans are originated by the lending officers of the Bank subject to limitations set forth in lending policies. The Board of Directors of the Bank monitors concentrations of credit, problem and past due loans and charge‑offs of uncollectible loans and approves loan policy. The Bank maintains conservative loan policies and underwriting practices in order to address and manage loan risks. These policies and practices include granting loans on a

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sound and collectible basis, serving the legitimate needs of the community and the general market area while obtaining a balance between maximum yield and minimum risk, ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan, developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each category and developing and applying adequate collection policies.

Commercial loans include secured and unsecured loans, including real estate loans, to individuals and companies and to governmental units predominantly within the market area of the Bank for a myriad of business purposes.

Agricultural loans are generated in the Bank’s markets. Most of the loans are real estate loans on farm properties. Loans are also made for agricultural production and such loans are generally reviewed annually.

Residential real estate lending has been the largest component of the loan portfolio for many years. The Bank generates residential mortgages for its own portfolio. However, the Company elects to sell the majority of its fixed rate mortgages into the secondary market while maintaining the servicing of such loans. At December 31, ~~2016~~2017, the Company was servicing a $1~~.115~~,149 billion residential real estate loan portfolio. By originating loans for sale in the secondary market, the Company can more fully satisfy customer demand for fixed rate residential mortgages and increase fee income, while reducing the risk of loss caused by rising interest rates.

The principal source of revenues for the Company is interest and fees on loans, which accounted for 5660.12% of total revenues in ~~2016~~2017, 5356.91% in ~~2015~~2016 and 53.9% in ~~2014~~2015. While the Company’s chief decision makers monitor the revenue streams of the various Company products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company‑wide basis. Accordingly, all of the Company’s financial service operations are considered by management to be aggregated in one reportable operating segment.

The Company’s investment securities portfolio is primarily comprised of state and municipal bonds; U.S. government sponsored entities’ mortgage‑backed securities and collateralized mortgage obligations; and corporate securities. The Company has classified its entire investment portfolio as available for sale, with fair value changes reported separately in shareholders’ equity. Funds invested in the investment portfolio generally represent funds not immediately required to meet loan demand. Income related to the Company’s investment portfolio accounted for 14.74% of total revenues in ~~2016~~2017, 14.97% in ~~2015~~2016 and 1614.69% in ~~2014~~2015. As of December 31, ~~2016~~2017, the Company had not identified any securities as being “high risk” as defined by the FFIEC Supervisory Policy Statement on Securities Activities.

The primary source of funds for the Bank is deposits generated in local market areas. To attract and retain stable depositors, the Bank markets various programs for demand, savings and time deposit accounts. These programs include interest and non‑interest bearing demand and individual retirement accounts.

Currently, national retailing and manufacturing subsidiaries, brokerage and insurance firms and credit unions are fierce competitors within the financial services industry. Mergers between financial institutions within Indiana and neighboring states, which became permissible under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”), have also added competitive pressure.

Historically, the branches of the Bank were located in non-metropolitan areas. For the past several years, the Company has prioritized growth in metropolitan areas, primarily Louisville, Cincinnati and Indianapolis, and within its existing market. Since 2009, the Company has entered or expanded its presence in Columbus, Seymour, Bloomington and Indianapolis, Indiana, Cincinnati, Ohio and Louisville, Kentucky. In these markets, in addition to competing vigorously with other banks, thrift institutions, credit unions and finance companies, the Company competes, directly and indirectly, with all providers of financial services.

Employees

As of December 31, ~~2016~~2017, the Company and the Bank had ~~888~~901 full‑time equivalent employees to whom they provide a variety of benefits and with whom they enjoy excellent relations. None of our employees are subject to collective bargaining agreements.

~~Available Information~~5

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~~(the~~ Available “Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Such materials are also available free of charge on the SEC website, www.sec.gov. We have included our and the SEC’s Internet website addresses throughout this Annual Report on Form 10‑K as textual references only. The information contained on these websites is not incorporated into this Annual Report on Form 10‑K.Information

We make available free of charge on or through our Internet web site, www.mainsourcebank.com, our Annual Report on Form 10‑K, Quarterly Reports on Form 10‑Q and Current Reports on Form 8‑K and all amendments to those reports filed or furnished pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). Such materials are also available free of charge on the SEC website, www.sec.gov. We have included our and the SEC’s Internet website addresses throughout this Annual Report on Form 10‑K as textual references only. The information contained on these websites is not incorporated into this Annual Report on Form 10‑K.

Regulation and Supervision

The Company is a financial holding company within the meaning of the Bank Holding Company Act of 1956, as amended. As a FHC, the Company is subject to regulation by the Federal Reserve Board (“FRB”). The Bank is an Indiana state chartered bank subject to supervision and regulation by the Federal Deposit Insurance Corporation (“FDIC”) and the Indiana Department of Financial Institutions. The following is a discussion of material statutes and regulations affecting the Company and the Bank. The discussion is qualified in its entirety by reference to such statutes and regulations.

Bank Holding Company Act of 1956

Generally, the BHC Act governs the acquisition and control of banks and nonbanking companies by bank holding companies. A bank holding company is subject to regulation by and is required to register with the FRB under the BHC Act. The BHC Act requires a bank holding company to file an annual report of its operations and such additional information as the FRB may require. The FRB has issued regulations under the BHC Act requiring a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. It is the policy of the FRB that, pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity.

The acquisition of 5% or more of the voting shares of any bank or bank holding company generally requires the prior approval of the FRB and is subject to applicable federal and state law, including the Riegle‑Neal Act for interstate transactions. The FRB evaluates acquisition applications based on, among other things, competitive factors, supervisory factors, adequacy of financial and managerial resources, and banking and community needs considerations.

The BHC Act also prohibits, with certain exceptions, a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any “nonbanking” company unless the nonbanking activities are found by the FRB to be “so closely related to banking ... as to be a proper incident thereto.” Under current regulations of the FRB, a bank holding company and its nonbank subsidiaries are permitted, among other activities, to engage in such banking‑related business ventures as consumer finance, equipment leasing, data processing, mortgage banking, financial and investment advice, and securities brokerage services. The BHC Act does not place territorial restrictions on the activities of a bank holding company or its nonbank subsidiaries.

Federal law prohibits acquisition of “control” of a bank or bank holding company without prior notice to certain federal bank regulators. “Control” is defined in certain cases as the acquisition of as little as 10% of the outstanding shares of any class of voting stock. Furthermore, under certain circumstances, a bank holding company may not be able to purchase its own stock, where the gross consideration will equal 10% or more of the company’s net worth, without obtaining approval of the FRB. Under the Federal Reserve Act, banks and their affiliates are subject to certain requirements and restrictions when dealing with each other (affiliate transactions include transactions between a bank and its bank holding company).

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Gramm‑Leach‑Bliley Financial Modernization Act of 1999

The Gramm‑Leach‑Bliley Financial Modernization Act of 1999 (the “Modernization Act”) was enacted on November 12, 1999. The Modernization Act, which amended the BHC Act,

allows bank holding companies that qualify as “financial holding companies” to engage in a broad range of financial and related activities;

allows insurers and other financial services companies to acquire banks;

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removes various restrictions that applied to bank holding company ownership of securities firms and mutual fund advisory companies; and

establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.

The Company initially qualified as a financial holding company in December, 2004. Thus the Company is authorized to operate as a financial holding company and is eligible to engage in, or acquire companies engaged in, the broader range of activities that are permitted by the Modernization Act. These activities include those that are determined to be “financial in nature,” including insurance underwriting, securities underwriting and dealing, and making merchant banking investments in commercial and financial companies. If a banking subsidiary ceases to be “well capitalized” or “well managed” under applicable regulatory standards, the FRB may, among other things, place limitations on our ability to conduct these broader financial activities or, if the deficiencies persist, require us to divest the banking subsidiary. In addition, if a banking subsidiary receives a rating of less than satisfactory under the Community Reinvestment Act of 1977 (“CRA”), we would be prohibited from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies.

Bank Secrecy Act and USA Patriot Act

In 1970, Congress enacted the Currency and Foreign Transactions Reporting Act, commonly known as the Bank Secrecy Act (the “BSA”). The BSA requires financial institutions to maintain records of certain customers and currency transactions and to report certain domestic and foreign currency transactions, which may have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings. Under this law, financial institutions are required to develop a BSA compliance program.

In 2001, the President signed into law comprehensive anti‑terrorism legislation known as the USA Patriot Act. Title III of the USA Patriot Act requires financial institutions, including the Company and the Bank, to help prevent and detect international money laundering and the financing of terrorism and prosecute those involved in such activities. The Department of the Treasury has adopted additional requirements to further implement Title III.

Under these regulations, a mechanism has been established for law enforcement officials to communicate names of suspected terrorists and money launderers to financial institutions to enable financial institutions to promptly locate accounts and transactions involving those suspects. Financial institutions receiving names of suspects must search their account and transaction records for potential matches and report positive results to the U.S. Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”). Each financial institution must designate a point of contact to receive information requests. These regulations outline how financial institutions can share information concerning suspected terrorist and money laundering activity with other financial institutions under the protection of a statutory safe harbor if each financial institution notifies FinCEN of its intent to share information. The Department of the Treasury has also adopted regulations intended to prevent money laundering and terrorist financing through correspondent accounts maintained by U.S. financial institutions on behalf of foreign banks. Financial institutions are required to take reasonable steps to ensure that they are not providing banking services directly or indirectly to foreign shell banks. In addition, banks must have procedures in place to verify the identity of the persons with whom they deal.

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FDIC Improvement Act of 1991

The Federal Deposit Insurance Act, as amended (“FDIA”), requires among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total risk‑based capital ratio, the Tier 1 risk‑based capital ratio, the common equity Tier 1 risk‑based capital ratio, and the leverage ratio.

A bank will be (i) “well capitalized” if the institution has a total risk‑based capital ratio of 10.0% or greater, a Tier 1 risk‑based capital ratio of 8.0% or greater, a common equity Tier 1 risk‑based capital ratio of 6.5% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk‑based capital ratio of 8.0% or greater, a Tier 1 risk‑based capital ratio of 6.0% or greater, a common equity Tier 1 risk‑based capital ratio of 4.5% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk‑based capital ratio that is less than 8.0%, a Tier 1 risk‑based capital ratio of less than 6.0%, a common equity Tier 1 risk‑based capital ratio of less than 4.5%, or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk‑based capital ratio of less than 6.0%, a Tier 1 risk‑based capital ratio of less than 4.0%, a common equity Tier 1 risk‑based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

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a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if the institution has a total risk‑based capital ratio of 8.0% or greater, a Tier 1 risk‑based capital ratio of 6.0% or greater, a common equity Tier 1 risk‑based capital ratio of 4.5% or greater, and a leverage ratio of 4.0% or greater and is not “well capitalized”; (iii) “undercapitalized” if the institution has a total risk‑based capital ratio that is less than 8.0%, a Tier 1 risk‑based capital ratio of less than 6.0%, a common equity Tier 1 risk‑based capital ratio of less than 4.5%, or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if the institution has a total risk‑based capital ratio of less than 6.0%, a Tier 1 risk‑based capital ratio of less than 4.0%, a common equity Tier 1 risk‑based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if the institution’s tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

The appropriate federal banking agency may, under certain circumstances, reclassify a well‑capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.

The Company believes that, as of December 31, ~~2016~~2017, the Company and the Bank were each “well capitalized” based on the aforementioned ratios.

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Deposit Insurance Fund

The deposits of the Bank are insured to the maximum extent permitted by law by the Deposit Insurance Fund (“DIF”) of the FDIC, which was created in 2006 as the result of the merger of the Bank Insurance Fund and the Savings Association Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (the “FDI Act”). The FDIC maintains the DIF by assessing depository institutions an insurance premium. Pursuant to the Dodd‑Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the FDIC is required to set a DIF reserve ratio of 1.35% of estimated insured deposits and is required to achieve this ratio by September 30, 2020.

Under the FDIC’s risk‑based assessment system, insured institutions are required to pay deposit insurance premiums based on the risk that each institution poses to the DIF. An institution’s risk to the DIF is measured by its regulatory capital levels, supervisory evaluations, and certain other factors. An institution’s assessment rate depends upon the risk category to which it is assigned. Pursuant to the Dodd‑Frank Act, the FDIC will calculate an institution’s assessment level based on its total average consolidated assets during the assessment period less average tangible equity (i.e., Tier 1 capital) as opposed to an institution’s deposit level which was the previous basis for calculating insurance assessments. Pursuant to the Dodd‑Frank Act, institutions will be placed into one of four risk categories for purposes of determining the institution’s actual assessment rate. The FDIC will determine the risk category based on the institution’s capital position (well capitalized, adequately capitalized, or undercapitalized) and supervisory condition (based on exam reports and related information provided by the institution’s primary federal regulator).

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the risk category to which it is assigned. Pursuant to the Dodd‑Frank Act, the FDIC will calculate an institution’s assessment level based on its total average consolidated assets during the assessment period less average tangible equity (i.e., Tier 1 capital) as opposed to an institution’s deposit level which was the previous basis for calculating insurance assessments. Pursuant to the Dodd‑Frank Act, institutions will be placed into one of four risk categories for purposes of determining the institution’s actual assessment rate. The FDIC will determine the risk category based on the institution’s capital position (well capitalized, adequately capitalized, or undercapitalized) and supervisory condition (based on exam reports and related information provided by the institution’s primary federal regulator).

Dividends

The Company is a legal entity separate and distinct from the Bank. There are various legal limitations on the extent to which the Bank can supply funds to the Company. The principal source of the Company’s funds consists of dividends from the Bank. State and Federal law restricts the amount of dividends that may be paid by banks. The specific limits depend on a number of factors, including the bank’s type of charter, recent earnings, recent dividends, level of capital and regulatory status. The regulators are authorized, and under certain circumstances are required, to determine that the payment of dividends or other distributions by a bank would be an unsafe or unsound practice and to prohibit that payment. For example, the FDI Act generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be undercapitalized.

The Dodd‑Frank Act and its accompanying regulations also limit a depository institution’s ability to make capital distributions if it does not hold a 2.5% capital buffer above the required minimum risk‑based capital ratios. Regulators also review and limit proposed dividend payments as part of the supervisory process and review of an institution’s capital planning. In addition to dividend limitations, the Bank is subject to certain restrictions on extensions of credit to the Company, on investments in the stock or other securities of the Company and in taking such stock or securities as collateral for loans.

Community Reinvestment Act

The Community Reinvestment Act requires that the federal banking regulators evaluate the records of a financial institution in meeting the credit needs of its local community, including low and moderate income neighborhoods. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could result in the imposition of additional requirements and limitations on the Bank.

The Dodd‑Frank Wall Street Reform and Consumer Protection Act

The Dodd-Frank Act was enacted in July, 2010. Under this law, various federal agencies are given significant discretion in drafting and implementing a broad range of rules and regulations. While many new rules and regulation have been adopted, many more remain to be adopted.

Certain provisions of the Dodd‑Frank Act are now effective and have been fully implemented, including the revisions in the deposit insurance assessment base for FDIC insurance and the permanent increase in coverage to $250,000; the permissibility of paying interest on business checking accounts; the removal of barriers to interstate branching and required disclosure and shareholder advisory votes on executive compensation. Recent action to implement the final Dodd‑Frank Act provisions included (i) final new capital rules, (ii) a final rule to implement the so called “Volcker rule” restrictions on certain proprietary trading and investment activities and (iii) final rules and increased enforcement action by the Consumer Finance Protection Bureau (“CFPB”).

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asthe ~~moral~~permissibility ~~hazard~~of ~~and~~paying ~~information~~interest ~~asymmetry;~~on ~~enabling~~business ~~American~~checking ~~companies~~accounts; tothe beremoval ~~competitive~~of ~~with~~barriers ~~foreign~~to ~~firms~~interstate inbranching ~~domestic~~ and ~~foreign~~required ~~markets;~~disclosure ~~advancing~~and ~~American~~shareholder ~~interests~~advisory invotes ~~international~~on ~~financial~~executive ~~regulatory~~compensation. ~~negotiations~~Recent ~~and~~action ~~meetings;~~to ~~and~~implement ~~restoring~~the ~~public~~final ~~accountability~~Dodd‑Frank ~~within~~Act ~~Federal~~provisions ~~financial~~included ~~regulatory~~(i) final ~~agencies~~new ~~and~~capital ~~“rationalizing”~~rules, ~~the~~(ii) a ~~Federal~~final ~~financial~~rule ~~regulatory~~to ~~framework. It~~implement isthe ~~too~~so ~~early~~called at“Volcker ~~this~~rule” ~~point~~restrictions toon ~~predict~~certain ~~the~~proprietary ~~likelihood,~~trading ~~scope,~~and orinvestment ~~timing~~activities ofand ~~any~~(iii) final ~~changes~~rules orand ~~their~~increased ~~impact~~enforcement onaction by the ~~existing~~Consumer orFinance ~~proposed~~Protection ~~regulations~~Bureau ~~implementing the Dodd-Frank Act~~(“CFPB”).

On February 3, 2017, President Donald J. Trump signed an executive order calling for his administration to review existing U.S. financial laws and regulations, including the Dodd-Frank Act, in order to determine their consistency with a set of “core principles” of financial policy. The core financial principles identified in the executive order include the following: empowering Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth; preventing taxpayer-funded bailouts; fostering economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry; enabling American companies to be competitive with foreign firms in domestic and foreign markets; advancing American interests in international financial regulatory negotiations and meetings; and restoring public accountability within Federal financial regulatory agencies and “rationalizing” the Federal financial regulatory framework. It is too early at this point to predict the likelihood, scope, or timing of any changes or their impact on the existing or proposed regulations implementing the Dodd-Frank Act.

S.A.F.E. Act Requirements

Regulations issued under the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (the “S.A.F.E. Act”) require residential mortgage loan originators who are employees of institutions regulated by the foregoing agencies, including national banks, to meet the registration requirements of the S.A.F.E. Act. The S.A.F.E. Act requires residential mortgage loan originators who are employees of regulated financial institutions to be registered with the Nationwide Mortgage Licensing System and Registry, a database created by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators to support the licensing of mortgage loan originators by the states. Employees of regulated financial institutions are generally prohibited from originating residential mortgage loans unless they are registered.

Regulatory Capital Requirements

In July 2013, the federal banking agencies published the Basel III Capital Rules establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act.

The Basel III Capital Rules became effective on January 1, 2015 (subject to a phase-in period) and, among other things, introduced a new capital measure known as “Common Equity Tier 1” (“CET1”), which generally consists of common equity Tier 1 capital instruments and related surplus, retained earnings, and common equity Tier 1 minority interests (minus certain adjustments and deductions, as discussed below).

The Basel III Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under the former capital standards, the effects of accumulated other comprehensive income items included in capital were excluded for the purposes of determining regulatory capital ratios. Under the Basel III Capital Rules, the effects of certain accumulated other comprehensive items are not excluded; however, non-advanced approaches banking organizations, including the Company, may make a one-time permanent election to continue to exclude these items. The Company and the Bank both made this election in order to avoid significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company’s available-for-sale securities portfolio. The Basel III Capital Rules also preclude certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies, subject to phase-out. The Company has some trust preferred securities. Implementation of the deductions and other adjustments to CET1 began on January 1, 2015 and will be phased-in over a four-year period (beginning at 40% on January 1, 2015 and an additional 20% per year thereafter).

The Basel III Capital Rules prescribe a standardized approach for risk weightings depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures. Specifics risk-weights impacting the Company’s determination of risk-weighted assets include, among other things:10

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The Basel III Capital Rules prescribe a standardized approach for risk weightings depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures. Specific risk-weights impacting the Company’s determination of risk-weighted assets include, among other things:

Applying a 150% risk weight for certain high volatility commercial real estate acquisition, development and construction loans;

Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due;

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Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; and

Providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based on the risk weight category of the underlying collateral securing the transaction.

When fully phased in on January 1, 2019, the Basel III Capital Rules will require the Company and its banking subsidiaries to maintain:

a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation);

a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation);

a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and

a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to average assets.

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

~~Under the Basel III Capital Rules, the minimum capital ratios, with the capital conversation buffer, as of January 1, 2017 are as follows:~~11

· 5.75% CET1 to risk-weighted assets;

· 7.25% Tier 1 capital to risk-weighted assets; and

· 9.25% Total capital to risk-weighted assets.

Certain regulatory capital ratios for the Company as of December 31, 2016, are shown below:

· 12.4% CET1 to risk-weighted assets;

· 13.9% Tier 1 capital to risk-weighted assets;

· 14.7% Total capital to risk-weighted assets; and

· 9.8% leverage ratio.

Certain regulatory capital ratios for the Bank as of December 31, 2016, are shown below:

· 13.9% CET1 to risk-weighted assets;

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· Under ~~13.9%~~the ~~Tier~~Basel 1III Capital Rules, the minimum capital toratios, ~~risk-weighted~~with ~~assets;~~the capital conversation buffer, as of January 1, 2018 are as follows:

· 146.738% ~~Total~~CET1 ~~capital~~ to risk-weighted assets; ~~and~~

· 97.888% ~~leverage~~Tier ~~ratio.~~1 capital to risk-weighted assets; and

9.88% Total capital to risk-weighted assets.

Certain regulatory capital ratios for the Company as of December 31, 2017, are shown below:

11.5% CET1 to risk-weighted assets;

13.0% Tier 1 capital to risk-weighted assets;

13.9% Total capital to risk-weighted assets; and

9.7% leverage ratio.

Certain regulatory capital ratios for the Bank as of December 31, 2017, are shown below:

12.9% CET1 to risk-weighted assets;

12.9% Tier 1 capital to risk-weighted assets;

13.6% Total capital to risk-weighted assets; and

9.6% leverage ratio.

Volcker Rule

On December 10, 2013, the Federal Reserve, the Office of the Comptroller of the Currency, the FDIC, the CFTC and the SEC issued final rules to implement the Volcker Rule contained in section 619 of the Dodd‑Frank Act. On July 7, 2016, the FRB granted a one‑year extension to July 21, 2017 ~~and~~ to confirm investments in and relationships with covered funds that were in place prior to December 31, 2013 (“Legacy Covered Funds”). This was the last of the three one-year ~~extendsions~~extensions that the FRB was authorized to issue. With respect to all other investments in and relationships with ~~convered~~covered funds other than Legacy Covered Funds, the Volcker Rule became effective July 21, 2015.

The Volcker Rule prohibits an insured depository institution and its affiliates from: (i) engaging in “proprietary trading” and (ii) investing in or sponsoring certain types of funds (“covered funds”) subject to certain limited exceptions. The rule also effectively prohibits short‑term trading strategies by any U.S. banking entity if those strategies involve instruments other than those specifically permitted for trading and prohibits the use of some hedging strategies.

Under these rules and subject to certain exceptions, banking entities, including the Company and the Bank, will be restricted from engaging in activities that are considered proprietary trading and from sponsoring or investing in certain entities, including hedge or private equity funds that are considered “covered funds.” Certain collateralized debt obligations (“CDO”) securities backed by trust preferred securities were initially defined as covered funds subject to the investment prohibitions of the final rule. Action taken by the Federal Reserve in January 2014 exempted many such securities to address the concern that community banks holding such CDO securities may have been required to recognize losses on those securities. Banks with less than $10 billion in total consolidated assets, such as the Bank, that do not engage in any ~~covered activities, other than trading in certain government agency, state or municipal obligations, do not have any significant compliance obligations under the rules implementing the Volcker Rule.~~

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covered activities, other than trading in certain government agency, state or municipal obligations, do not have any significant compliance obligations under the rules implementing the Volcker Rule.

Office of Foreign Assets Control Regulation

The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others which are administered by the U.S. Treasury Department Office of Foreign Assets Control. Failure to comply with these sanctions could have serious legal and reputational consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

Incentive Compensation

The Dodd‑Frank Act requires the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting incentive‑based payment arrangements at specified regulated entities having at least $1 billion in total assets. The regulations must prohibit compensation that encourages inappropriate risks by providing an executive officer, employee, director or principal stockholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. In addition, these regulations or guidelines must require enhanced disclosure of incentive‑based compensation arrangements to regulators. The agencies proposed the regulations in April 2011, but the regulations were not finalized. In 2016 the federal agencies re-proposed these rules with some modifications.

In June 2010, the FRB and the FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk‑taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk‑taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. These three principles are incorporated into the proposed joint compensation regulations under the Dodd‑Frank Act, discussed above. The FRB will review, as part of its regular, risk‑focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk‑management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiency.

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that do not encourage risk‑taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. These three principles are incorporated into the proposed joint compensation regulations under the Dodd‑Frank Act, discussed above. The FRB will review, as part of its regular, risk‑focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk‑management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiency.

Future Legislation

Since the U.S. federal elections in November 2016, there has been significant discussion regarding financial regulatory reform. For example, in February 2017, President Trump issued an executive order calling for his administration to review existing U.S. financial laws and regulations in order to determine their consistency with a set of “core principles” of financial policy. Additionally, the Financial CHOICE Act, which was introduced in the House Financial Services Committee, would make changes to the Dodd-Frank Act such as providing a Dodd-Frank Act off-ramp for highly-rated banking organizations that satisfy a heightened leverage ratio requirement, repealing the Volcker Rule and Durbin Amendment, revamping the CFPB and eliminating or substantially modifying the federal banking agencies’ authority to exercise extraordinary powers during a financial crises.

In addition to the specific legislation described above, various additional legislation is currently being considered by Congress. This legislation may change banking statutes and the Company’s operating environment in substantial and unpredictable ways and may increase reporting requirements and governance. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any potential legislation will be enacted and, if enacted, the effect that it, or any implementing regulations, would have on its business, results of operations, or financial condition.

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banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any potential legislation will be enacted and, if enacted, the effect that it, or any implementing regulations, would have on its business, results of operations, or financial condition.

ITEM 1A. RISK FACTORS

In addition to the other information contained in this report, the following risks may affect us. If any of these risks actually occur, our business, financial condition or results of operations may suffer. As a result, the price of our common shares could decline.

Risks Related to Our Proposed Merger with First Financial.

Combining with First Financial may be more difficult, costly or time consuming than expected, and the anticipated benefits and cost savings of the Merger with First Financial may not be realized.

The Company and First Financial have operated and, until the completion of the Merger, will continue to operate, independently. The success of the Merger, including anticipated benefits and cost savings, will depend, in part, on First Financial’s and the Company’s ability to successfully combine and integrate the businesses of the Company and First Financial in a manner that permits growth opportunities and does not materially disrupt the existing customer relations or result in decreased revenues due to loss of customers. It is possible that the integration process could result in the loss of key employees, the disruption of either company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect the combined company’s ability to maintain relationships with customers, depositors, clients and employees or to achieve the anticipated benefits and cost savings of the Merger. If the combined companies experience difficulties with the integration process, the anticipated benefits of the Merger may not be realized fully or at all, or may take longer to realize than expected. There also may be business disruptions that cause the Company and/or First Financial to lose customers or cause customers to remove their accounts from the Company and/or First Financial and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of the Company and First Financial during this transition period and for an undetermined period after completion of the Merger on the combined company.

Additionally, the combined company may not be able to successfully achieve the level of cost savings, revenue enhancements and other synergies that it expects, and may not be able to capitalize upon the existing customer relationships of each party to the extent anticipated, or it may take longer, or be more difficult or expensive than expected, to achieve these goals. These circumstances could have an adverse effect on the combined company's business, results of operation and stock price.

We are subject to business uncertainties and contractual restrictions while the Merger with First Financial is pending.

Uncertainty about the effect of the Merger with First Financial on employees and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Merger is completed, and could cause customers and others that deal with us to seek to change existing business relationships. Retention of certain employees by us may be challenging while the Merger is pending, as certain employees may experience uncertainty about their future roles with the combined company. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us, our business could be harmed. In addition, subject to certain exceptions, we have agreed to operate our business in the ordinary course prior to closing.

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The Merger may distract our management from their other responsibilities.

The Merger could cause our management to focus their time and energies on matters related to the Merger that otherwise would be directed to our business and operations. Any such distraction on the part of our management, if significant, could affect our ability to service existing business and develop new business and adversely affect our business and earnings before the Merger, or the business and earnings of the combined company after the Merger.

The Merger Agreement contains provisions that limit each party’s ability to pursue alternatives to the Merger, could discourage a potential competing acquirer of either the Company or First Financial from making a favorable alternative transaction proposal and, in specified circumstances, could require MainSource to pay First Financial a termination fee of $40.0 million.

Under the Merger Agreement, each of the Company and First Financial has agreed not to, subject to certain exceptions generally related to its board of directors or the exercise of its fiduciary duties (as set forth in the Merger Agreement), solicit or initiate, or knowingly facilitate or knowingly encourage, inquiries or proposals with respect to, engage in any discussions or negotiations concerning, or provide any confidential information relating to, any alternative business combination transactions. In addition, the Merger Agreement contains certain termination rights for each of the Company and First Financial. If the Merger Agreement is terminated under certain circumstances, including certain breaches of the Merger Agreement, the Company or First Financial, as applicable, is required to reimburse the other party for its transaction-related expenses.

If the Merger Agreement is terminated and we determine to seek another business combination, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the Merger.

If the Merger with First Financial is not completed, we will have incurred substantial expenses without realizing the expected benefits of the Merger.

We have incurred and will continue to incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the Merger Agreement with First Financial. If the Merger is not completed, we would have to recognize these expenses without realizing the expected benefits of the Merger.

Risks Related to Our Business.

A significant portion of our assets consists of loans, which if not repaid could result in losses to the Company.

As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their terms and that the collateral securing the payment of their loans (if any) may not be sufficient to assure repayment. Credit losses could have a material adverse effect on our operating results.

As of December 31, ~~2016~~2017, our total loan portfolio was approximately $23,~~652~~063 million or 6566% of our total assets. Three major components of the loan portfolio are loans principally secured by real estate, approximately $2,~~055~~417 million or 7879% of total loans; other commercial loans, approximately $~~535~~579 million or 2019% of total loans; and consumer loans, approximately $6267 million or 2% of total loans. Our credit risk with respect to our consumer installment loan portfolio and commercial loan portfolio relates principally to the general creditworthiness of individuals and businesses within our local market area. Our credit risk with respect to our residential and commercial real estate mortgage and construction loan portfolio relates principally to the general creditworthiness of individuals and businesses and the value of real estate serving as security for the repayment of the loans. A related risk in connection with loans secured by commercial real estate is the effect of unknown or unexpected environmental contamination, which could make the real estate effectively unmarketable or otherwise significantly reduce its value as security. Continued or worsening declines in the economy could cause additional credit issues, particularly within our residential and commercial real estate mortgage and construction loan portfolio.

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Our allowance for loan losses may not be sufficient to cover actual loan losses, which could adversely affect our earnings.

We maintain an allowance for loan losses at a level estimated by management to be sufficient to cover probable incurred loan losses in our loan portfolio. Loan losses will likely occur in the future and may occur at a rate greater than we have experienced to date. In determining the size of the allowance, our management makes various assumptions and judgments about the collectability of our loan portfolio, including the diversification by industry of our commercial loan portfolio, the effect of changes in the local real estate markets on collateral values, the results of recent regulatory examinations, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers, the amount of charge‑offs for the period, the amount of nonperforming loans and related collateral security, and the evaluation of our loan portfolio by an external loan review. If our assumptions and judgments prove to be incorrect, our current allowance may not be sufficient and adjustments may be necessary to allow for different economic conditions or adverse developments in our loan portfolio. Additionally, continuing deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside the Company’s control, may require an increase in the allowance for loan losses. Federal and state regulators also periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge‑offs, based on judgments different than those of our management. Any increase in our allowance for loan losses or loan charge‑offs could have an adverse effect on our operating results and financial condition. There can be no assurance that our monitoring procedures and policies will reduce certain lending risks or that our allowance for loan losses will be adequate to cover actual losses.

If we foreclose on collateral property, we may be subject to the increased costs associated with ownership of real property, resulting in reduced revenues and earnings.

We may have to foreclose on collateral property to protect our investment and may thereafter own and operate such property, in which case we will be exposed to the risks inherent in the ownership of real estate. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control, including, but not limited to: (i) general or local economic conditions; (ii) neighborhood values; (iii) interest rates; (iv) real estate tax rates; (v) operating expenses of the mortgaged properties; (vi) environmental remediation liabilities; (vii) ability to obtain and maintain adequate occupancy of the properties; (viii) zoning laws; (ix) governmental rules, regulations and fiscal policies; and (x) acts of God. Certain expenditures associated with the ownership of real estate, principally real estate taxes, insurance, and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating real property may exceed the income earned from such property, and we may have to advance funds in order to protect our investment, or we may be required to dispose of the real property at a loss. The foregoing expenditures and costs could adversely affect our ability to generate revenues, resulting in reduced levels of profitability.

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adequate occupancy of the properties; (viii) zoning laws; (ix) governmental rules, regulations and fiscal policies; and (x) acts of God. Certain expenditures associated with the ownership of real estate, principally real estate taxes, insurance, and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating real property may exceed the income earned from such property, and we may have to advance funds in order to protect our investment, or we may be required to dispose of the real property at a loss. The foregoing expenditures and costs could adversely affect our ability to generate revenues, resulting in reduced levels of profitability.

Fluctuating interest rates could adversely affect our profitability.

Our profitability is dependent to a large extent upon our net interest income, which is the difference between the interest earned on loans, securities and other interest-earning assets and interest paid on deposits, borrowings, and other interest-bearing liabilities. Because of the differences in maturities and re-pricing characteristics of our interest-earning assets and interest-bearing liabilities, changes in interest rates do not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our net interest margin, and, in turn, our profitability. We manage our interest rate risk within established guidelines and generally seek an asset and liability structure that insulates net interest income from large deviations attributable to changes in market rates. However, our interest rate risk management practices may not be effective in a highly volatile rate environment.

Revisions to the mortgage regulations may adversely impact our business.

Revisions made pursuant to the Dodd‑Frank Act to Regulation Z, which implements the Truth in Lending Act (the “TILA”), were effective in January 2014, and apply to all consumer mortgages (except home equity lines of credit, timeshare plans, reverse mortgages, or temporary loans). The revisions mandate specific underwriting criteria and “ability to repay” requirements for home loans. This may impact our offering and underwriting of single family residential loans in our residential mortgage lending operation and could have a resulting unknown effect on potential delinquencies. In ~~addition, the relatively uniform requirements may make it difficult for regional and community banks to compete against the larger national banks for single family residential loan originations.~~

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addition, the relatively uniform requirements may make it difficult for regional and community banks to compete against the larger national banks for single family residential loan originations.

The impact of new capital rules will impose enhanced capital adequacy requirements on us and may materially impact our operations.

Pursuant to the Dodd‑Frank Act and the “Basel III” standards, the federal banking agencies have adopted a new set of rules on minimum leverage and risk-based capital that will apply to both insured banks and their holding companies. These regulations were issued in July 2013. The full implementation of the new capital rules may adversely affect our ability to pay dividends, or require us to reduce business levels or raise capital, including in ways that may adversely affect our business, liquidity, financial condition and results of operations.

We may be required to pay significantly higher Federal Deposit Insurance Corporation (FDIC) premiums in the future.

Insured institution failures during the past several years have significantly increased FDIC loss provisions, resulting in a decline in the designated reserve ratio to historical lows. In addition the Dodd‑Frank Act permanently implemented FDIC insurance coverage for all deposit accounts up to $250,000 and revised the insurance premium assessment base from all domestic deposits to the average of total assets less tangible equity. The minimum reserve ratio of the deposit insurance fund has been increased from 1.15% to 1.35%, with the increase to be covered by assessments on insured institutions with assets over $10 billion until the new reserve ratio is reached.

We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels. Additionally, the FDIC may make material changes to the calculation of the prepaid assessment from the current proposal. Any future changes in the calculation or assessment of FDIC insurance premiums may have a material adverse effect on our results of operations, financial condition and our ability to continue to pay dividends on our common shares at the current rate or at all.

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Future growth or operating results may require the Company to raise additional capital but that capital may not be available or it may be dilutive.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. To the extent our future operating results erode capital or we elect to expand through loan growth or acquisition we may be required to raise capital. Our ability to raise capital will depend on conditions in the capital markets, which are outside of our control, and on our financial performance. Accordingly, we cannot be assured of our ability to raise capital if needed or on favorable terms. If we cannot raise additional capital when needed, we will be subject to increased regulatory supervision and the imposition of restrictions on our growth and business. These could negatively impact our ability to operate or further expand our operations through acquisitions or the establishment of additional branches and may result in increases in operating expenses and reductions in revenues that could have a material adverse effect on our financial condition and results of operations.

We rely heavily on our management and other key personnel, and the loss of any of them may adversely affect our operations.

We are and will continue to be dependent upon the services of our management team. The loss of any of our senior managers could have an adverse effect on our growth and performance because of their skills, knowledge of the markets in which we operate and years of industry experience and the difficulty of promptly finding qualified replacement personnel. The loss of key personnel in a particular market could have an adverse effect on our performance in that market because it may be difficult to find qualified replacement personnel who are already located in or would be willing to relocate to a non‑metropolitan market. Additionally, recent regulations issued by banking regulators regarding executive compensation may impact our ability to compensate executives and, as a result, to attract and retain qualified personnel.

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The geographic concentration of our markets makes our business highly susceptible to local economic conditions.

Unlike larger banking organizations that are more geographically diversified, our operations are currently concentrated in Indiana, Illinois, Ohio, and Kentucky. As a result of this geographic concentration in four fairly contiguous markets, our financial results depend largely upon economic conditions in these market areas. A deterioration in economic conditions in one or all of these markets could result in one or more of the following:

an increase in loan delinquencies;

an increase in problem assets and foreclosures;

a decrease in the demand for our products and services; or

a decrease in the value of collateral for loans, especially real estate, in turn reducing customers’ borrowing power, the value of assets associated with problem loans and collateral coverage.

If we do not adjust to rapid changes in the financial services industry, our financial performance may suffer.

We face substantial competition for deposit, credit and trust relationships, as well as other sources of funding in the communities we serve. Competing providers include other banks, thrifts and trust companies, insurance companies, mortgage banking operations, credit unions, finance companies, money market funds, financial technology companies and other financial and nonfinancial companies which may offer products functionally equivalent to those offered by the Bank. Competing providers may have greater financial resources than we do and offer services within and outside the market areas we serve. In addition to this challenge of attracting and retaining customers for traditional banking services, our competitors now include securities dealers, brokers, mortgage bankers, investment advisors and finance and insurance companies who seek to offer one‑stop financial services to their customers that may include services that banks have not been able or allowed to offer to their customers in the past. The increasingly competitive environment is primarily a result of changes in regulation, changes in technology and product delivery systems and the accelerating pace of consolidation among financial service providers. If we are unable to adjust both to increased competition for traditional banking services and changing customer needs and preferences, it could adversely affect our financial performance and your investment in our common stock.

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and changing customer needs and preferences, it could adversely affect our financial performance and your investment in our common stock.

The operations of our business, including our interaction with customers, are increasingly done via electronic means, and this has increased our risks related to cybersecurity and data security.

The Company relies heavily on internal and outsourced digital technologies, communications, and information systems to conduct its business. As the Company's reliance on technology systems increases, the potential risks of technology-related operation interruptions in the Company's customer relationship management, general ledger, deposit, loan, or other systems or the occurrence of cyber and data security incidents also increases. Cyber and data security incidents can result from deliberate attacks or unintentional events including, among other things, (i) gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing potentially debilitating operational disruptions; (ii) causing denial-of-service attacks on websites; or (iii) intelligence gathering and social engineering aimed at obtaining information. The occurrence of an operational interruption, cyber incident, data security breach or other deficiency in the security of the Company's technology systems (internal or outsourced) could negatively impact the Company's financial condition or results of operations.

The Company has policies and procedures expressly designed to prevent or limit the effect of a failure, interruption, or security breach of its systems and maintains cyber security insurance. Significant interruptions to the Company's business from technology issues could result in expensive remediation efforts and distraction of management. The Company invests in security and controls to prevent and mitigate incidents. Although the Company has not experienced any material losses related to a technology-related operational interruption, cyber-attack, or data security breach, there can be no assurance that such failures, interruptions, or security breaches will not occur in the future or, if they do occur, that the impact will not be substantial.

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The occurrence of any failures, interruptions, or security breaches of the Company's technology systems could damage the Company's reputation, result in a loss of customer business, result in the unauthorized release, gathering, monitoring, misuse, loss, or destruction of proprietary information, subject the Company to additional regulatory scrutiny, or expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company's business, financial condition, and results of operations, as well as its reputation or stock price. As cyber and data security threats continue to evolve, the Company expects it will be required to spend significant resources on an ongoing basis to continue to modify and enhance its protective measures and to investigate and remediate any information security vulnerabilities.

Negative perception of the Company through social media may adversely affect the Company’s reputation and business.

The Company’s reputation is critical to the success of its business. The Company believes that its brand image has been well received by customers, reflecting the fact that the brand image, like the Company’s business, is based in part on trust and confidence. The Company’s reputation and brand image could be negatively affected by rapid and widespread distribution of publicity through social media channels. The Company’s reputation could also be affected by the Company’s association with clients affected negatively through social media distribution, or other third parties, or by circumstances outside of the Company’s control. Negative publicity, whether true or untrue, could affect the Company’s ability to attract or retain customers, or cause the Company to incur additional liabilities or costs, or result in additional regulatory scrutiny.

Acquisitions entail risks which could negatively affect our operations.

Acquisitions involve numerous risks, including:

exposure to asset quality problems of the acquired institution;

maintaining adequate regulatory capital;

diversion of management’s attention from other business concerns;

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risks and expenses of entering new geographic markets;

potential significant loss of depositors or loan customers from the acquired institution; or

exposure to undisclosed or unknown liabilities of an acquired institution.

Any of these acquisition risks could result in unexpected losses or expenses and thereby reduce the expected benefits of the acquisition.

Unanticipated costs related to our acquisitions could reduce our future earnings per share.

We believe we have reasonably estimated the likely costs of integrating the operations of the banks we acquire into the Company and the incremental costs of operating such banks as a part of the MainSource family. However, it is possible that unexpected transaction costs such as taxes, fees or professional expenses or unexpected future operating expenses, such as increased personnel costs or increased taxes, as well as other types of unanticipated adverse developments, could have a material adverse effect on the results of operations and financial condition of MainSource. If unexpected costs are incurred, acquisitions could have a dilutive effect on our earnings per share. Current accounting guidance requires expensing of acquisition costs. In prior years, these costs could be capitalized. In other words, if we incur such unexpected costs and expenses as a result of our acquisitions, we believe that the earnings per share of our common stock could be less than they would have been if those acquisitions had not been completed.

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We may be unable to successfully integrate the operations of the banks we have acquired and may acquire in the future and retain employees of such banks.

Our acquisition strategy involves the integration of the banks we have acquired and may acquire in the future into MainSource Bank. The difficulties of integrating the operations of such banks with MainSource Bank include:

coordinating geographically separated organizations;

integrating personnel with diverse business backgrounds;

combining different corporate cultures; or

retaining key employees.

The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of the Company, our subsidiary banks and the banks we have acquired and may acquire in the future and the loss of key personnel. The integration of such banks as MainSource subsidiary banks requires the experience and expertise of certain key employees of such banks who we expect to retain. We cannot be sure, however, that we will be successful in retaining these employees for the time period necessary to successfully integrate such banks’ operations as subsidiary banks of MainSource. The diversion of management’s attention and any delays or difficulties encountered in connection with the mergers, along with the integration of the banks as MainSource subsidiary banks, could have an adverse effect on our business and results of operation.

The Company’s success depends on our ability to respond to the threats and opportunities of financial technology innovation.

Financial technology (“FinTech”), a broad category referring to technological innovation in the design and delivery of financial services and products, has the potential to disrupt the financial industry and change the way banks do business. Investment in new technology to stay competitive may result in significant costs and increased risks of cyber security attacks. Our success depends on our ability to adapt to the pace of the rapidly changing technological environment, which is crucial to retention and acquisition of customers. On December 2, 2016 the Office of the Comptroller of the Currency announced that it will consider applications from FinTech companies to become special purpose national banks. The federal charter would largely allow FinTech companies to operate nationwide under a single set of national standards, without needing to seek state-by-state licenses or joining with brick-and-mortar banks, and may therefore allow FinTech companies to more easily compete with us for customers of financial products and services in the communities we serve.

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The federal charter would largely allow FinTech companies to operate nationwide under a single set of national standards, without needing to seek state-by-state licenses or joining with brick-and-mortar banks, and may therefore allow FinTech companies to more easily compete with us for customers of financial products and services in the communities we serve.

Risks Relating to the Banking Industry

Changes in governmental regulation and legislation could limit our future performance and growth.

We are subject to extensive state and federal regulation, supervision and legislation that governs almost all aspects of our operations, as well as any acquisitions we may propose to make. Any change in applicable federal or state laws or regulations could have a substantial impact on us, our subsidiary banks and our operations. While we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could reduce the value of your investment.

The implementation of final rules under the many provisions of the Dodd‑Frank Act could adversely affect us.

Regulation of the financial services industry is undergoing major changes from the enactment and ongoing implementation of Dodd‑Frank. Certain provisions of Dodd‑Frank are effective and have been fully implemented, including the revisions in the deposit insurance assessment base for FDIC insurance and the permanent increase in FDIC coverage to $250,000; the permissibility of paying interest on business checking accounts; the removal of remaining barriers to interstate branching and required disclosure and shareholder advisory votes on executive compensation. Other actions to implement the final Dodd‑Frank Act provisions include (i) final capital rules; (ii) a final rule to implement the “Volcker Rule” restrictions on certain proprietary trading and investment activities; and (iii) the promulgation of final rules and increased enforcement action by the CFPB. The full implementation of certain final rules is delayed or phased in over several years; therefore, as yet we cannot definitively assess what may be the short or longer term specific or aggregate effect of the full implementation of the Dodd‑Frank Act on us.

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“Volcker Rule” restrictions on certain proprietary trading and investment activities; and (iii) the promulgation of final rules and increased enforcement action by the CFPB. The full implementation of certain final rules is delayed or phased in over several years; therefore, as yet we cannot definitively assess what may be the short or longer term specific or aggregate effect of the full implementation of the Dodd‑Frank Act on us.

Changes in regulation or oversight may have a material adverse impact on our operations.

We are subject to extensive regulation, supervision and examination by the Indiana Department of Financial Institutions, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission and other regulatory bodies. Such regulation and supervision governs the activities in which we may engage. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, investigations and limitations related to our securities, the classification of our assets and determination of the level of our allowance for loan losses. In light of the recent conditions in the U.S. financial markets and economy, Congress and regulators have increased their focus on the regulation of the financial services industry. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material adverse impact on our business, financial condition or results of operations.

Changes in economic or political conditions could adversely affect the Company’s business and results of operations, as the ability of the Company’s borrowers to repay loans, and the value of the collateral securing such loans, decline.

The Company’s success depends, to a certain extent, upon economic or political conditions, local and national, as well as governmental monetary policies. Conditions such as recession, unemployment, changes in interest rates, inflation, money supply and other factors beyond our control may adversely affect our asset quality, deposit levels and loan demand and, therefore, our earnings. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings. In addition, substantially all of the Company’s loans are to individuals and businesses in our market area. Consequently, any economic decline in the Company’s primary market areas, which include Indiana, Illinois, Ohio and Kentucky, could have an adverse impact on the Company’s earnings.

~~Weakness in the U.S. economy, including within the Company’s geographic footprint, has adversely affected the~~ 21

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Weakness in the U.S. economy, including within the Company’s geographic footprint, has adversely affected the Company in the past and may adversely affect the Company in the future.

If the strength of the U.S. economy in general or the strength of the local economies in the Company’s markets declines, this could result in, among other things, a decreased demand for our products and services, a deterioration in credit quality or a reduced demand for credit. These factors could result in higher delinquencies, greater charge-offs and increased losses in future periods, which could materially adversely affect our financial condition and results of operations.

Changes in consumer use of banks and changes in consumer spending and savings habits could adversely affect our financial results.

Technology and other changes now allow many customers to complete financial transactions without using banks. For example, consumers can pay bills and transfer funds directly without going through a bank. This process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits. In addition, changes in consumer spending and savings habits could adversely affect our operations, and we may be unable to timely develop competitive new products and services in response to these changes that are accepted by new and existing customers.

Our earnings could be adversely impacted by incidences of fraud and compliance failure.

Financial institutions are inherently exposed to fraud risk and compliance risk. A fraud can be perpetrated by a customer of MainSource, an employee, a vendor, or members of the general public. We are most subject to fraud and compliance risk in connection with the origination of loans, ACH transactions, ATM transactions and checking transactions. Our largest fraud risk, associated with the origination of loans, includes the intentional misstatement of information in property appraisals or other underwriting documentation provided to us by third parties. Compliance risk is the risk to earnings or capital from noncompliance with laws, rules, and regulations. We face risk of noncompliance and enforcement actions under the BSA and other anti-money laundering statutes and regulations. The BSA requires banks and other financial institutions to, among other things, develop and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. If our policies, procedures and internal controls are deemed deficient, we could face money penalties as well as serious reputational consequences. There can be no assurance that we can prevent or detect acts of fraud or violation of law or our compliance standards by our employees or the other parties with whom we conduct business. Repeated incidences of fraud or compliance failures would adversely impact our reputation, the performance of our loan portfolio, and our earnings.

Risks Related to the Company’s Stock

We may not be able to pay dividends in the future in accordance with past practice.

The Company has traditionally paid a quarterly dividend to common stockholders. The Company is a separate legal entity from the Bank and receives substantially all of its revenue and cash flow from dividends paid by the Bank to the Company. Indiana state law and agreements between the Bank and its federal and state regulators may limit the amount of dividends that the Bank may pay to the Company. In the event that the Bank is unable to pay dividends to the Company for an extended period of time, the Company may not be able to service its debt obligations or pay dividends on its common stock. Additionally, any payment of dividends in the future will depend, in large part, on the Bank’s earnings, capital requirements, financial condition and other factors considered relevant by the Company’s Board of Directors. Starting in the second quarter of 2009 and continuing to the second quarter of 2012, the Company reduced the amount of cash dividends paid. This reduction was made to preserve capital levels at the Company. Beginning in the third quarter of 2012, the Company has steadily raised the dividend, including an increase to $0.11 per common share in the third quarter of 2014, $0.13 per common share in the first quarter of 2015, $0.14 per common share in the third quarter of 2015, $0.15 per common share in the first quarter of 2016, ~~and~~ $0.16 per common share in the fourth quarter of 2016, $0.17 per common share in the second quarter of 2017, and $0.18 per common share in the fourth quarter of 2017. There can be no assurance that the Company will continue to raise the amount of the dividend or that it will not decrease or eliminate the dividend in the future.

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The price of the Company’s common stock may be volatile, which may result in losses for investors.

General market price declines or market volatility in the future could adversely affect the price of the Company’s common stock. In addition, the following factors may cause the market price for shares of the Company’s common stock to fluctuate:

announcements of developments related to the Company’s business;

fluctuations in the Company’s results of operations;

sales or purchases of substantial amounts of the Company’s securities in the marketplace;

general conditions in the banking industry, the US economy or the global economy;

a shortfall or excess in revenues or earnings compared to securities analysts’ expectations;

changes in analysts’ recommendations or projections; and

the Company’s announcement of new acquisitions or other projects.

The Company’s charter documents and federal regulations may inhibit a takeover, or prevent a transaction that may favor or otherwise limit the Company’s growth opportunities, which could cause the market price of the Company’s common stock to decline.

Certain provisions of the Company’s charter documents and federal regulations could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. In addition, the Company must obtain approval from regulatory authorities before acquiring control of any other company.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES

As of December 31, ~~2016~~2017, the Company leased an office building located in Greensburg, Indiana, from one of its subsidiaries for use as its corporate headquarters. The Company’s subsidiaries own, or lease, all of the facilities from which they conduct business. All leases are comparable to other leases in the respective market areas and do not contain provisions materially detrimental to the Company or its subsidiaries. As of December 31, ~~2016~~2017 the Company had 9094 banking locations and approximately $7682,~~426~~438 invested in premises and equipment.

ITEM 3. LEGAL PROCEEDINGS

From time to time the Company and its subsidiaries may be parties (both plaintiff and defendant) to ordinary litigation incidental to the conduct of business.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER’S PURCHASES OF EQUITY SECURITIES

Market Information

The Company’s Common Stock is traded on the NASDAQ Global Select Market under the symbol MSFG. The Common Stock was held by approximately 9,~~700~~600 shareholders at ~~March~~February 1028, ~~2017~~2018. The quarterly high and low closing prices for the Company’s common stock as reported by NASDAQ and quarterly cash dividends declared and paid are set forth in the tables below. All per share data is retroactively restated for all stock dividends and splits.

The range of known per share prices by calendar quarter, based on actual transactions, excluding commissions, is shown below.

	Market Prices
2016	Q1		Q2		Q3		Q4
2017	Q1		Q2		Q3		Q4
High	$	35.21	$	35.31	$	35.86	$	40.24
Low	$	31.57	$	31.55	$	31.78	$	34.83
2016		Q1		Q2		Q3		Q4
High	$	22.18	$	23.25	$	24.95	$	34.57
Low	$	19.95	$	20.30	$	21.39	$	23.94
2015		Q1		Q2		Q3		Q4
High	$	20.62	$	22.40	$	22.15	$	23.79
Low	$	18.71	$	19.04	$	20.21	$	20.15
	Cash Dividends
2017		Q1		Q2		Q3		Q4
	$	0.16	$	0.17	$	0.17	$	0.18
2016		Q1		Q2		Q3		Q4
	$	0.15	$	0.15	$	0.15	$	0.16
2015		Q1		Q2		Q3		Q4
	$	0.13	$	0.13	$	0.14	$	0.14

It is expected that the Company will continue to consider the Company’s results of operations, capital levels and other external factors beyond management’s control in making the decision to maintain or further raise the dividend.

Issuer Purchases of Equity Securities

The Company purchased the following equity securities of the Company during the quarter ended December 31, ~~2016~~2017:

				Total Number of Shares	Maximum Number (or
				(or Units) Purchased as	Approximate Dollar Value)
	Total Number			Part of Publicly	of Shares (or Units) That
	of Shares (or		Average Price Paid Per	Announced Plans or	May Yet Be Purchased
Period	Units) Purchased (1)		Share (or Unit)	Programs	Under the Plans or Programs
October 1‑31, 2016	—	$	—	—	—
October 1‑31, 2017	400	$	37.61	—	—
November 1‑30, 2016	18,487		29.30	—	—
November 1‑30, 2017	—		—	—	—
December 1-31, 2016	5,280		31.98	—	—
December 1-31, 2017	—		—	—	—
Total:	~~23,767~~400	$	2937.9061	—	—

(1)

Represents shares purchased by the Company from employees upon the vesting of restricted stock grants for purposes of satisfying the employees’ tax withholding obligations.

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Stock Performance Graph

The following performance graph compares the performance of our common shares to the performance of the NASDAQ Market Index (U.S.) and the NASDAQ Bank Stocks Index for the 60 months ended December 31, ~~2016~~2017. The graph assumes an investment of $100 in each of the Company’s common shares, the NASDAQ Market Index (U.S.) and the NASDAQ Bank Stocks Index on December 31, ~~2011~~2012.

12/31/11

12/31/12

12/31/13

12/31/14

12/31/15

12/31/16

12/31/12

12/31/13

12/31/14

12/31/15

12/31/16

12/31/17

MainSource Financial Group

100.00

143.7461

~~206~~167.4337

~~240~~183.5969

~~264~~269.0480

~~387~~284.8278

NASDAQ MARKET INDEX (U.S.)

100.00

~~115~~138.9130

~~160~~156.3185

~~181~~165.8084

~~192~~178.2228

~~206~~228.6563

NASDAQ Bank Stocks Index

100.00

115.77

160.82

165.39

176.34

238.10

KBW Bank Stock Index

100.00

135.06

144.81

142.51

178.14

208.09

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ITEM 6. SELECTED FINANCIAL DATA

Selected Financial Data

(Dollar amounts in thousands except per share data)

	2016			2015			2014			2013			2012
	2017			2016			2015			2014			2013
Results of Operations
Net interest income	$	~~117~~142,~~601~~869		$	~~102~~117,~~725~~601		$	94102,~~488~~725		$	9194,~~300~~488		$	9491,~~082~~300
Provision for loan losses		1,~~705~~250			1,~~625~~705			1,~~500~~625			41,~~534~~500			94,~~850~~534
Noninterest income		52,612			50,272			43,007			43,129			43,891
Non-interest income		53,365			52,612			50,272			43,007			43,129
Noninterest expense		118,048			105,597			99,220			98,231			94,838
Non-interest expense		132,610			118,048			105,597			99,220			98,231
Income before income tax		5062,~~460~~374			4550,~~775~~460			3645,775			3136,~~664~~775			3331,~~285~~664
Income tax		12,~~137~~936			1012,~~233~~137			710,~~779~~233			57,~~319~~779			65,~~027~~319
Net income		3849,~~323~~438			3538,~~542~~323			2835,~~996~~542			2628,~~345~~996			2726,~~258~~345
Preferred dividends and accretion		—			—			—			~~504~~—			~~2,110~~504
Net income available to common shareholders		3849,~~323~~438			3538,~~542~~323			2835,~~996~~542			2528,~~693~~996			2625,~~505~~693
Dividends paid on common stock		1417,~~296~~162			1114,~~680~~296			811,~~726~~680			58,~~709~~726			15,~~623~~709
Per Common Share*
Earnings per share (basic)	$	1.6697		$	1.6466		$	1.4064		$	1.2640		$	1.3126
Earnings per share (diluted)		1.6494			1.6264			1.3962			1.2639			1.3026
Dividends paid		0.6168			0.5461			0.4254			0.2842			0.0828
Book value — end of period		1820.6883			1718.6768			1617.6367			1416.9663			1514.2196
Tangible book value — end of period		14.1693			1314.9416			13.0194			1113.5301			11.7253
Market price — end of period		3436.4031			2234.8840			2022.9288			1820.0392			1218.6703
At Year End
Total assets	$	4,~~080~~647,~~257~~862		$	34,~~385~~080,~~408~~257		$	3,~~122~~385,~~516~~408		$	23,~~847~~122,~~209~~516		$	2,~~769~~847,~~288~~209
Securities		1,~~007~~077,~~540~~573			~~925~~1,~~279~~007,540			~~867~~925,~~760~~279			~~891~~867,~~106~~760			~~902~~891,~~341~~106
Loans, excluding held for sale		23,~~651~~063,~~673~~463			2,~~155~~651,~~392~~673			12,~~957~~155,~~765~~392			1,~~671~~957,~~926~~765			1,~~553~~671,~~383~~926
Allowance for loan losses		22,~~499~~543			22,~~020~~499			2322,~~250~~020			2723,~~609~~250			3227,~~227~~609
Total deposits		3,~~110~~507,~~871~~603			23,~~650~~110,~~775~~871			2,~~468~~650,~~321~~775			2,~~200~~468,~~628~~321			2,~~185~~200,~~054~~628
Federal Home Loan Bank advances		~~249~~335,~~658~~986			~~269~~249,~~488~~658			~~214~~269,~~413~~488			~~247~~214,~~858~~413			~~141~~247,~~052~~858
Subordinated debentures		4156,~~239~~545			41,239			41,239			4641,~~394~~239			5046,~~418~~394
Shareholders’ equity		~~449~~532,~~494~~958			~~381~~449,~~360~~494			~~360~~381,~~662~~360			~~305~~360,~~526~~662			~~323~~305,~~751~~526
Financial Ratios
Return on average assets		1.0112	%		1.1001	%		01.9910	%		0.9599	%		0.9995	%
Return on average common shareholders’ equity		89.9387			98.5693			89.8156			8.3581			8.1535
Allowance for loan losses to total loans (year end, excluding held for sale)		0.8574			10.0285			1.1902			1.6519			21.0765
Allowance for loan losses to total non‑performing loans (year end)		106.06			137.29			80.62			104.02			63.04
Allowance for loan losses to total non-performing loans (year end)		121.44			106.06			137.29			80.62			104.02
Shareholders’ equity to total assets (year end)		11.0247			11.2602			11.5526			1011.7355			1110.6973
Average equity to average total assets		11.3635			11.4636			11.2746			11.3227			1211.1232
Dividend payout ratio		3734.3071			3237.8630			3032.0986			2230.2209			622.1222

* Adjusted for stock split and dividends

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Tangible book value per share is a non-GAAP financial measure calculated using GAAP amounts. Tangible book value per share is calculated by dividing tangible common equity by the number of shares outstanding. Tangible common equity is calculated by excluding the balance of preferred stock, goodwill, and other intangible assets from the calculation of stockholders' equity. The Company believes that this non-GAAP financial measure provides information to investors that is useful in understanding its financial condition. Because not all companies use the same calculation of tangible common equity, this presentation may not be comparable to other similarly titled measures calculated by other companies.

A reconciliation of this non-GAAP financial measure to the most comparable GAAP financial measure is provided below.

		2016		2015		2014		2013		2012
	2017		2016		2015		2014		2013
Shareholders' Equity	$	~~449~~532,~~494~~958	$	~~381~~449,~~360~~494	$	~~360~~381,~~662~~360	$	~~305~~360,~~526~~662	$	~~323~~305,~~751~~526
Less: Preferred Stock		—		—		—		—		~~14,918~~—
Intangible Assets		~~108~~150,~~734~~991		80108,~~615~~734		7880,~~546~~615		7078,~~025~~546		70,~~940~~025
Tangible Common Equity	$	~~340~~381,~~760~~967	$	~~300~~340,~~745~~760	$	~~282~~300,~~116~~745	$	~~235~~282,~~501~~116	$	~~237~~235,~~893~~501
Ending Shares Outstanding		2425,~~067~~586,~~364~~013		2124,~~579~~067,~~575~~364		21,~~687~~579,~~525~~575		2021,~~417~~687,~~224~~525		20,~~304~~417,~~525~~224
Tangible Book Value Per Common Share	$	14.1693	$	1314.9416	$	13.0194	$	1113.5301	$	11.7253

The allowance for loan losses to total loans ratio at December 31, ~~2016~~2017 includes loans acquired from The Merchant’s Bank and Trust Company, Old National Bank, ~~and~~ Cheviot Savings Bank, ~~acquired~~and ~~loans~~First Capital Bank which were brought over at fair value with no associated allowance. The allowance for loan losses to total loans ratio at December 31, ~~2015~~2016 includes loans acquired from The Merchant’s Bank and Trust Company, ~~and~~ Old National Bank, ~~acquired~~and ~~loans~~Cheviot Savings Bank which were brought over at fair value with no associated allowance. See Note 26 to the Consolidated Financial Statements for additional information concerning acquisitions by the Company.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis

(Dollar amounts in thousands except per share data)

Overview

MainSource Financial Group, Inc. is a financial holding company whose principal activity is the ownership and management of its wholly owned subsidiary bank: MainSource Bank headquartered in Greensburg, Indiana. The Bank operates under an Indiana state charter and is subject to regulation by the Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation. Non-banking subsidiaries of the Company include MainSource ~~Insurance, LLC, Insurance Services Marketing, LLC, MainSource Title, LLC, and MainSource~~ Risk Management, Inc. ~~Non~~The non banking ~~subsidiaries~~subsidiary of the Bank ~~are~~is New American Real Estate, LLC. ~~The first three subsidiaries are subject to regulation by the Indiana Department of Insurance.~~

Business Strategy

The Company operates under the broad tenets of a long‑term strategic plan (“Plan”) designed to improve the Company’s financial performance, expand its competitive position and enhance long‑term shareholder value. The Plan is premised on the belief of the Company’s Board of Directors that it can best promote long‑term shareholder interests by pursuing strategies which will continue to preserve its community‑focused philosophy. The dynamics of the Plan assure continually evolving goals, with the enhancement of shareholder value being the constant, overriding objective. The extent

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of the Company’s success will depend upon how well it anticipates and responds to competitive changes within its markets, the interest rate environment and other external forces.

Results of Operations

Net income attributable to common shareholders was $3849,~~323~~438 in ~~2016~~2017, $3538,~~542~~323 in ~~2015~~2016, and $2835,~~996~~542 in ~~2014~~2015. Earnings per common share on a fully diluted basis were $1.6494 in ~~2016~~2017, $1.6264 in ~~2015~~2016, and $1.3962 in ~~2014~~2015. The primary drivers that led to the increase in net income in ~~2016~~2017 versus ~~2015~~2016 were an increase in net interest income of $1425,~~876~~268, increases in ~~mortgage~~trust ~~banking~~and investment product fees of $1754,~~689,~~ interchange income of $~~1,877,~~752 as well as and a ~~prepayment~~reduction ~~penalty~~in onconsultant aexpenses ~~FHLB~~of ~~advance~~$549. ~~taken~~The inCompany ~~2015~~also ~~and~~benefited afrom ~~reduction~~the inrecently-enacted ~~consultant~~“H.R. ~~expenses~~1” oftax ~~$557.~~reform legislation. An increase in earning assets primarily from the ~~2015~~2016 acquisition of ~~the~~Cheviot ~~five~~Financial ~~Old~~Corp. ~~National branches~~ and the partial year effect of the ~~Cheviot~~2017 ~~acquisition~~FCB asBancorp ~~well~~acquisition ~~as organic loan growth~~ resulted in higher net interest income. The increase in trust and investment product fees was due primarily the acquisition of two brokerage agencies in 2017. Continued emphasis on new deposit generation, the effect of the aforementioned acquisitions, and a switch of debit card providers from VISA to Mastercard in 2016 led to increased interchange income. The ~~continued low interest rate environment spurred new home sales as well as refinancing activity. The~~ decrease in the consultant expense is due to the end of the amortization period of ~~these~~ payments made in prior years for revenue enhancements/cost savings opportunities. ~~Offsetting~~ The ~~these~~tax ~~increases~~legislation ~~were~~reduced athe ~~decrease~~Company’s infederal ~~service~~tax ~~charges~~expense ofby $12,~~033,~~505. Offsetting these increases were increases in salaries and employee benefits of $68,~~586~~287, net occupancy expenses of $~~972~~1,412, equipment expenses of $1,~~336~~074, ~~interchange~~intangibles ~~expenses~~amortization of $~~757~~669, ~~and~~$1,874 of acquisition related expenses over the amount from 2016, state capital taxes of $6966,~~399~~ and the write down of branches targeted for closure of $1,204. The full year effect of the ~~Old~~Cheviot ~~National branch~~ acquisition and the partial year effect of the ~~Cheviot~~FCB Bancorp acquisition led to increases in salaries and employee benefits, net occupancy, ~~and~~ equipment expenses, intangibles amortization, and state capital taxes. The ~~increase~~increased inacquisition ~~interchange~~costs ~~expense~~primarily isrelated ato ~~direct~~costs ~~result~~incurred with the pending merger of ~~higher~~the ~~interchange~~Company ~~income~~and inFirst ~~2016~~Financial.

The primary drivers that led to the increase in net income in ~~2015~~2016 versus ~~2014~~2015 were an increase in net interest income of $814,~~237~~876, increases in mortgage banking of $1,~~601~~689, interchange income of $1,~~649~~877, ~~service~~as ~~charge~~well ~~income~~as ofa ~~$1,341,~~prepayment ~~swap~~penalty ~~fee~~on ~~income~~a ofFHLB ~~$674,~~advance ~~and~~taken ~~securities~~in ~~gains~~2015 ofand ~~$362~~a asreduction ~~well as reductions~~ in ~~acquisition related expenses of $2,388 and~~ consultant expenses of $~~294~~557. An increase in earning assets (primarily ~~loans)~~from the 2015 acquisition of the five Old National branches and athe ~~continued~~partial ~~slight~~year ~~reduction~~effect inof ~~interest~~the ~~costs~~Cheviot acquisition as well as organic loan growth resulted in higher net interest income. Continued emphasis on new deposit generation, asthe ~~well as a full year~~ effect of the ~~MBT~~aforementioned ~~Bancorp~~acquisitions, ~~acquisition~~ and ~~partial~~a ~~year~~switch ~~effect~~ of ~~the~~debit ~~Old~~card ~~National~~providers ~~Branch~~from ~~branch~~VISA ~~acquisitions~~to Mastercard in 2016 led to increased ~~service charge and~~ interchange income. The continued low interest rate environment spurred new home sales as well as refinancing activity. ~~Favorable~~ ~~pricing~~The decrease in ~~2015 allowed~~ the ~~Company~~consultant toexpense ~~realize~~is ~~higher~~due ~~securities~~to ~~gain. The~~the ~~Company~~end ~~started~~of ~~offering~~the ~~derivative~~amortization ~~products~~period ~~to some~~ of ~~its~~payments ~~commercial~~made ~~customers~~ in ~~2015~~prior ~~that~~years ~~generated~~for ~~fee~~revenue ~~income~~enhancements/cost savings opportunities. ~~The~~Offsetting ~~costs~~these ~~incurred~~increases ~~in acquiring the five Old National branches in 2015~~ were ~~siginificantly~~a ~~less~~decrease ~~than the costs incurred for the MBT Bancorp acquisition~~ in ~~2014.~~service ~~Offsetting~~charges ~~these~~of ~~increases~~$1,033, ~~were~~ increases in salaries and employee benefits of $36,~~609~~586, net occupancy expenses of $~~698~~972, equipment expenses of $1,~~023~~336, ~~FHLB~~interchange ~~advance~~expenses ~~prepayment penalty~~ of $2757,~~364,~~ and ~~interchange~~acquisition related expenses of $~~332~~6,399. The full year effect of the ~~MBT~~Old ~~Bancorp~~National branch acquisition and the partial year effect of the ~~Old~~Cheviot ~~National branch~~ acquisition led to increases in salaries and employee benefits, net occupancy, and equipment expenses. The increase in interchange expense is a direct result of higher interchange income in ~~2015~~2016.

Net Interest Income

Net interest income and net interest margin are influenced by the volume and yield or cost of earning assets and interest‑bearing liabilities. Tax equivalent net interest income of $~~125~~150,~~011~~995 in ~~2016~~2017 increased from $~~109~~125,~~939~~011 in ~~2015~~2016. Net interest margin, on a fully‑taxable equivalent basis, was 3.6577% for ~~2016~~2017 compared to 3.7465% for the same period a year ago. The ~~Company~~increase ~~was~~in ~~unable~~the toCompany’s ~~match~~net ~~reductions~~interest inmargin ~~its~~was ~~yield~~a onresult ~~earning~~of ~~assets~~the ~~with~~increase ain ~~corresponding~~interest ~~reduction~~rates inmade ~~its~~by ~~cost~~the ofFederal ~~funds,~~Reserve asduring ~~the~~2017 ~~cost~~as ofwell ~~funds~~as ~~has~~some ~~essentially~~acquisition ~~floored.~~accounting ~~The~~adjustments ~~Company~~made ~~experienced~~as ~~loan~~a ~~growth~~result inof ~~2016~~the ~~which~~Company’s ~~partially~~acquisition ~~offset~~of ~~the~~FCB ~~reduction~~Bancorp in ~~its yield~~2017.

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Table of Contents

The following table summarizes net interest income (on a tax‑equivalent basis) for each of the past three years.

Average Balance Sheet and Net Interest Analysis (Taxable Equivalent Basis)*

2016

2015

2014

2017

2016

2015

Average

Balance

Interest

Rate***

Balance

Interest

Rate***

Balance

Interest

Rate

Assets

Short‑term investments

1710,~~062~~769

86123

01.5014

2817,~~223~~062

7386

0.2650

1928,~~389~~223

5173

0.26

Federal funds sold and money market accounts

1916,~~676~~708

~~131~~233

01.6740

19,~~343~~676

61131

0.3267

1419,~~582~~343

4661

0.32

Securities

Taxable

~~645~~709,~~712~~091

1417,~~550~~453

2.2546

~~554~~645,~~269~~712

1214,~~004~~550

2.1725

~~558~~554,~~848~~269

12,~~366~~004

2.2117

Non‑taxable*

~~333~~368,~~814~~918

1820,~~462~~130

5.5346

~~323~~333,~~205~~814

18,~~366~~462

5.6853

~~308~~323,~~953~~205

18,~~249~~366

5.9168

Total securities

~~979~~1,~~526~~078,009

3337,~~012~~583

3.3749

~~877~~979,~~474~~526

3033,~~370~~012

3.4637

~~867~~877,~~801~~474

30,~~615~~370

3.5346

Loans**

Commercial*

1,~~510~~899,~~103~~470

6586,~~425~~651

4.3350

1,~~247~~510,~~639~~103

5565,~~544~~425

4.4533

1,~~035~~247,~~645~~639

4755,~~820~~544

4.6245

Residential real estate

~~530~~607,~~107~~007

2225,~~061~~534

4.1621

~~437~~530,~~751~~107

1822,~~204~~061

4.16

~~415~~437,~~390~~751

1718,~~852~~204

4.3016

Consumer

~~365~~392,~~860~~364

1516,~~022~~549

4.1122

~~329~~365,~~661~~860

1415,~~072~~022

4.2711

~~299~~329,~~940~~661

1314,~~447~~072

4.4827

Total loans

2,~~406~~898,~~070~~841

~~102~~128,~~508~~734

4.2640

2,~~015~~406,~~051~~070

87102,~~820~~508

4.3626

12,~~750~~015,~~975~~051

7987,~~119~~820

4.5236

Total earning assets

34,~~422~~004,~~334~~327

~~135~~166,~~737~~673

3.9796

23,~~940~~422,~~091~~334

~~118~~135,~~324~~737

43.0397

2,~~652~~940,~~747~~091

~~109~~118,~~831~~324

4.1403

Cash and due from banks

5662,~~796~~455

4956,~~146~~796

4349,~~143~~146

Unrealized gains (losses) on securities

289,~~158~~282

2228,~~121~~158

1622,~~271~~121

Allowance for loan losses

(2122,~~676~~652)

(2321,~~096~~676)

(2523,~~816~~096)

Premises and equipment, net

7283,~~509~~413

6172,~~497~~509

5661,~~103~~497

Intangible assets

95132,~~998~~388

7895,~~639~~998

7078,~~914~~639

Accrued interest receivable and other assets

~~122~~143,~~026~~415

~~116~~122,~~581~~026

~~109~~116,~~267~~581

Total assets

34,~~776~~412,~~145~~628

3,~~244~~776,~~979~~145

23,~~922~~244,~~629~~979

Liabilities

Interest‑bearing deposits DDA, savings, and money market accounts

12,~~853~~051,~~401~~946

23,~~130~~105

0.1115

1,~~666~~853,~~268~~401

12,~~985~~130

0.1211

1,~~489~~666,~~938~~268

1,~~647~~985

0.1112

Certificates of deposit

~~418~~507,~~297~~829

23,~~039~~038

0.4960

~~334~~418,~~810~~297

12,~~693~~039

0.5149

~~341~~334,~~343~~810

21,~~031~~693

0.6051

Total interest‑bearing deposits

2,~~271~~559,~~698~~775

46,~~169~~143

0.1824

2,~~001~~271,~~078~~698

34,~~678~~169

0.18

12,~~831~~001,~~281~~078

3,678

0.2018

Short‑term borrowings

73174,~~736~~332

~~714~~1,981

01.9714

3073,~~512~~736

56714

0.1897

30,~~320~~512

7156

0.2318

Subordinated debentures

4150,~~239~~667

12,~~425~~307

34.4655

41,239

1,~~264~~425

3.0746

41,~~042~~239

1,~~286~~264

3.1307

Notes payable and FHLB borrowings

~~261~~290,~~490~~286

45,~~418~~247

1.6981

~~190~~261,~~356~~490

34,~~387~~418

1.7869

~~200~~190,~~598~~356

3,~~572~~387

1.7578

Total interest‑bearing liabilities

23,~~648~~075,~~163~~060

1015,~~726~~678

0.4151

2,~~263~~648,~~185~~163

810,~~385~~726

0.3741

2,~~103~~263,~~241~~185

8,~~607~~385

0.4137

Demand deposits

~~679~~813,~~879~~982

~~576~~679,~~341~~879

~~463~~576,~~197~~341

Other liabilities

1922,~~124~~824

3319,~~535~~124

2633,~~951~~535

Total liabilities

3,~~347~~911,~~166~~866

23,~~873~~347,~~061~~166

2,~~593~~873,~~389~~061

Shareholders’ equity

~~428~~500,~~979~~762

~~371~~428,~~918~~979

~~329~~371,~~240~~918

Total liabilities and shareholders’ equity

34,~~776~~412,~~145~~628

1015,~~726~~678

0.3239***

3,~~244~~776,~~979~~145

810,~~385~~726

0.2932***

23,~~922~~244,~~629~~979

8,~~607~~385

0.3229***

Net interest income

~~125~~150,~~011~~995

3.6577****

~~109~~125,~~939~~011

3.7465****

~~101~~109,~~224~~939

3.8274****

Conversion of tax exempt income to a fully taxable equivalent basis using a marginal rate of 35%

78,~~410~~126

7,~~214~~410

67,~~736~~214

Security yields are calculated based on amortized cost.

*Adjusted to reflect income related to securities and loans exempt from Federal income taxes.

** Non-accruing loans have been included in the average balances.

*** Total interest expense divided by total earning assets.

**** Net interest income divided by total earning assets.

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Table of Contents

The following table sets forth for the periods indicated a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rates.

Volume/Rate Analysis of Changes in Net Interest Income

(Tax Equivalent Basis)

2016 OVER 2015

2015 OVER 2014

2017 OVER 2016

2016 OVER 2015

Volume

Rate

Total

Volume

Rate

Total

Interest income

Loans

1621,~~699~~731

(24,~~011)~~495

1426,~~688~~226

1116,~~590~~699

(2,~~889~~011)

814,~~701~~688

Securities

3,~~456~~404

~~(814)~~1,167

24,~~642~~571

~~339~~3,456

(~~584~~814)

~~(245)~~2,642

Federal funds sold and money market funds

1(22)

69124

70102

151

—69

1570

Short‑term investments

(3741)

5078

1337

23(37)

~~(1)~~50

2213

Total interest income

2025,~~119~~072

(25,~~706)~~864

1730,~~413~~936

1120,~~967~~119

(32,~~474~~706)

817,~~493~~413

Interest expense

Interest‑bearing DDA, savings, and money market accounts

~~217~~246

~~(72)~~729

~~145~~975

~~204~~217

~~134~~(72)

~~338~~145

Certificates of deposit

~~409~~485

~~(63)~~514

~~346~~999

~~(38)~~409

(~~300~~63)

~~(338)~~346

Borrowings

12,~~752~~012

~~(63)~~84

12,~~689~~096

~~(156)~~1,752

(4463)

~~(200)~~1,689

Subordinated debentures

—369

~~161~~513

~~161~~882

6—

~~(28)~~161

~~(22)~~161

Total interest expense

23,~~378~~112

~~(37)~~1,840

24,~~341~~952

162,378

(~~238~~37)

~~(222)~~2,341

Change in net interest income

1721,~~741~~960

(24,~~669)~~024

1525,~~072~~984

1117,~~951~~741

(32,~~236~~669)

815,~~715~~072

Change in tax equivalent adjustment

~~196~~716

~~478~~196

Change in net interest income before tax equivalent adjustment

1425,~~876~~268

814,~~237~~876

Variances not attributed to rate or volume are allocated between rate and volume in proportion to the relationship of the absolute dollar amount of the change in each.

Provision for Loan Losses

The Company expensed $1,~~705~~250, $1,~~625~~705, and $1,~~500~~625 in provision for loan losses in ~~2016~~2017, ~~2015~~2016, and ~~2014~~2015 respectively. This level of provision allowed the Company to maintain an adequate allowance for loan losses. This topic is discussed in detail under the heading “Loans, Credit Risk and the Allowance and Provision for Loan Losses”.

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Table of Contents

Non‑interest Income and Expense

							Percent Change
	2016		2015		2014		16/15	15/14
	2017		2016		2015		17/16	16/15
Non-interest income
Mortgage banking	$	10,~~044~~341	$	810,~~355~~044	$	68,~~754~~355	203.20%	2320.72%
Trust and investment product fees		45,~~866~~620		4,~~947~~866		4,~~712~~947	-115.65%	5-1.06%
Service charges on deposit accounts		2120,~~006~~901		2221,~~039~~006		2022,~~698~~039	-40.75%	6-4.57%
Net realized gains on securities sales		~~170~~84		~~386~~170		24386	-5650.06%	~~1,508~~-56.30%
Increase in cash surrender value of life insurance		1,~~513~~778		1,~~236~~513		1,~~298~~236	2246.40%	-422.84%
Interchange income		11,~~116~~868		911,~~239~~116		79,~~590~~239	206.38%	2120.73%
Gain/(loss) on sale of OREO		268		68		(153)	294.1%	44.4%
Gain on sale of foreclosed assets		262		268		68	-2.2%	294.1%
Other		32,~~629~~511		43,~~002~~629		24,~~084~~002	-942.37%	92-9.03%
Total non-interest income	$	5253,~~612~~365	$	5052,~~272~~612	$	4350,~~007~~272	41.74%	164.97%
Non-interest expense
Salaries and employee benefits	$	6472,~~327~~614	$	5764,~~741~~327	$	5457,~~132~~741	1112.49%	611.74%
Net occupancy		910,~~298~~710		89,~~326~~298		78,~~628~~326	1115.72%	911.27%
Equipment		1213,~~696~~770		1112,~~360~~696		1011,~~337~~360	~~11.~~8.5%	911.98%
Intangibles amortization		12,~~342~~011		1,~~640~~342		1,~~690~~640	~~-18~~49.29%	-318.02%
Telecommunications		1,~~647~~836		1,~~775~~647		1,~~747~~775	-711.25%	1-7.62%
Stationery, printing, and supplies		1,~~052~~255		1,~~162~~052		1,~~174~~162	-919.53%	-19.05%
FDIC assessment		1,~~560~~407		1,~~655~~560		1,~~620~~655	-59.78%	2-5.27%
Marketing		3,~~390~~262		3,~~193~~390		3,~~187~~193	6-3.28%	06.2%
Collection expenses		~~910~~991		~~1,173~~910		1,~~330~~173	~~-22~~8.49%	-1122.84%
Consultant expense		~~549~~—		~~1,106~~549		1,~~400~~106	-50100.40%	-2150.04%
Prepayment penalty on FHLB advance		—214		~~2,364~~—		—2,364	~~-100.0%~~NA	NA-100.0%
Interchange expense		3,~~376~~387		23,~~619~~376		2,~~287~~619	280.93%	1428.59%
Bank acquisition expense		79,~~130~~004		~~731~~7,130		~~3,119~~731	~~875~~26.43%	~~-76~~875.64%
Other		1012,~~771~~149		10,~~752~~771		910,~~569~~752	012.28%	120.42%
Total non-interest expense	$	~~118~~132,~~048~~610	$	~~105~~118,~~597~~048	$	99105,~~220~~597	1112.83%	611.48%

Non‑interest Income

Non‑interest income was $5253,~~612~~365 for ~~2016~~2017 compared to $5052,~~272~~612 for the same period in ~~2015~~2016, an increase of $~~2,340~~753 or 41.74%. Increases in ~~interchange~~trust ~~income,~~and ~~mortgage~~investment ~~banking~~product fees, and ~~increase~~interchange inincome, ~~cash surrender value on life insurance contracts~~ were the reasons for the increase. The full year effect of the ~~Old~~Cheviot ~~National~~Financial ~~Bank~~Corp. ~~branch acquisitions~~acquisition in ~~2015~~2016 and the partial year effect of the ~~Cheviot~~FCB Bancorp acquisition in ~~2016~~2017 as well as a switch in debit card providers from VISA to Mastercard generated additional interchange income as well as other ancillary fee increases. The ~~continued~~increase ~~low~~in ~~interest~~trust ~~rate~~and ~~environment~~investment ~~led~~product fees was due to ~~increased~~the ~~mortgage~~acquisition ~~banking~~of ~~activity~~two brokerage firms in the first half of 2017. Offsetting these increases ~~were~~was ~~decreases~~a decrease in ~~service charges and~~ other income (primarily title company revenue and loss on sale of fixed assets). The Company elected to exit the title company business in mid 2016 and ~~expect~~the totitle becompany was fully dissolved in 2017. The Company announced in the third quarter of 2017 that it would be closing seven branches in the first quarter of 2018 and wrote down the branches by $1,052 to their estimated fair value.

Non‑interest income was $5052,~~272~~612 for ~~2015~~2016 compared to $4350,~~007~~272 for the same period in ~~2014~~2015, an increase of $72,~~265~~340 or 164.97%. Increases in ~~service charges,~~ interchange income, mortgage banking, and ~~securities~~increase ~~gains~~in cash surrender value on life insurance contracts were the reasons for the increase. The full year effect of the ~~MBT~~Old ~~Bancorp~~National ~~acquisition~~Bank branch acquisitions in 2015 and the partial year effect of the ~~Old~~Cheviot ~~National~~acquisition ~~branch~~in ~~acquisitions~~2016 ~~generated~~as ~~additional~~well ~~service~~as ~~charges~~a ~~and~~switch in debit card providers from VISA to Mastercard generated additional interchange income as well as other ancillary fee increases. The continued low interest rate environment led to increased mortgage banking activity. ~~Favorable~~Offsetting ~~pricing~~these ~~led~~increases ~~the~~were decreases in service charges and other income (primarily title company revenue). The Company toexited ~~realize~~the ~~higher~~title ~~securities~~company ~~gains~~business in ~~2015~~mid 2016.

~~Non‑interest Expense~~31

Table of Contents

~~Cheviot~~ Non‑interest acquisition and Old National Bank branch acquisitions, resulted in increases of the above mentioned expenses with the exception of interchange expenses which increased as a result of higher interchange income. Offsetting these increases was a decrease in a prepayment penalty on a FHLB advance in 2015 and consultant expense. The decrease in the consultant expense is due to the end of the amortization period for revenue enhancements/cost savings opportunities paid up front in a prior year.Expense

Total non‑interest expense was $~~105~~132,~~597~~610 in ~~2015~~2017 compared to $99118,~~220~~048 in ~~2014~~2016, an increase of $614,~~377~~562 or 612.43%. The increase was primarily attributable to increases in salaries and employee benefits, occupancy and equipment costs, anintangibles ~~FHLB~~amortization, ~~advance~~acquisition ~~prepayment~~related ~~penalty~~expenses, and ~~interchange~~state ~~expenses~~capital taxes. The Company’s entry into new markets, resulting from the ~~MBT~~Cheviot ~~Bancorp~~Financial ~~acquisition~~Corp. and ~~Old~~FCB ~~National~~Bancorp ~~Bank branch~~ acquisitions, resulted in increases of the above mentioned expenses ~~with the exception of interchange expenses which increased as a result of higher interchange income~~. ~~The prepayment penalty should result in lower interest expense in future periods.~~ Offsetting these increases was a decrease in ~~acquisition~~consultant ~~related expenses~~expense. The ~~expenses~~decrease ~~related~~in to the ~~acquisition~~consultant ofexpense ~~the~~is ~~Old~~due ~~National~~to ~~branches~~the inend ~~2015~~of ~~were~~the ~~significantly~~amortization ~~lower~~period ~~than~~for ~~the~~revenue ~~expenses~~enhancements/cost ~~related~~savings toopportunities ~~the~~paid ~~acquisition~~up offront ~~MBT~~in ~~Bancorp~~a inprior ~~2014~~year.

Total non‑interest expense was $118,048 in 2016 compared to $105,597 in 2015, an increase of $12,451 or 11.8%. The increase was primarily attributable to increases in salaries and employee benefits, occupancy and equipment costs, acquisition related expenses, and interchange expenses. The Company’s entry into new markets, resulting from the Cheviot Financial Corp. and Old National Bank branch acquisitions, resulted in increases of the above mentioned expenses with the exception of interchange expenses which increased as a result of higher interchange income. Offsetting these increases was a decrease in a prepayment penalty on a FHLB advance in 2015 and consultant expense. The decrease in the consultant expense is due to the end of the amortization period for revenue enhancements/cost savings opportunities paid up front in a prior year.

Income Taxes

The effective tax rate was 2420.17% in ~~2016~~2017, 2224.41% in ~~2015~~2016, and 2122.24% in ~~2014~~2015. The ~~increase~~decrease in the Company’s effective rate from ~~2015~~2016 to ~~2016~~2017 was due primarily to“H.R. an1” ~~increase~~tax inreform ~~taxable~~legislation ~~income~~which ~~with~~reduced the ~~tax~~Company’s ~~exempt income and~~ tax ~~credits~~rate ~~remaining~~by ~~the same from year to year~~4%. The increase in the Company’s effective rate from ~~2014~~2015 to ~~2015~~2016 was due primarily to an increase in taxable income with the tax exempt income and tax credits remaining the same from year to year.

Balance Sheet

At December 31, ~~2016~~2017, total assets were $4,~~080~~647,~~257~~862 compared to $34,~~385~~080,~~408~~257 at December 31, ~~2015~~2016, an increase of $~~694~~567,~~849~~605. Increases in loans of $~~496~~411,~~281~~790 and investment securities of $8270,~~261~~033 made up the majority of the increase.

Loans, Credit Risk and the Allowance and Provision for Loan Losses

Loans remain the Company’s largest concentration of assets and continue to represent the greatest potential risk. The loan underwriting standards observed by the Bank are viewed by management as a means of controlling problem loans and the resulting charge‑offs. The Company also believes credit risks may be elevated if undue concentrations of loans in specific industry segments and to out‑of‑area borrowers are incurred. Accordingly, the Company’s Board of Directors regularly monitors such concentrations to determine compliance with its loan concentration policy. The Company believes it has no undue concentrations of loans.

Total loans (excluding those held for sale) increased by $~~496~~411,~~281~~790 in ~~2016~~2017 with ~~$355,343~~most of the increase coming from the acquisition of ~~Cheviot~~FCB Bancorp in the second quarter of ~~2016~~2017. All major categories of loans experienced loan growth in ~~2016~~2017. ~~The Company has also invested in additional lending personnel and opened branches in new markets which has contributed to the growth.~~ Commercial real estate loans continue to represent the largest portion of the total loan portfolio and were 4447% of total loans at December 31, ~~2016~~2017 compared to 4344% of total loans at the end of ~~2015~~2016.

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The following table details the Company’s loan portfolio by type of loan.

Loan Portfolio

2016

2015

2014

2013

2012

2017

2016

2015

2014

2013

Types of loans

Commercial and industrial

~~461~~515,~~092~~122

~~380~~461,~~960~~092

~~275~~380,~~646~~960

~~180~~275,~~378~~646

~~134~~180,~~156~~378

Agricultural production financing

7363,~~467~~869

6473,~~704~~467

4664,~~784~~704

3046,~~323~~784

2230,~~355~~323

Farm real estate

~~111~~106,~~807~~010

97111,~~916~~807

7697,~~849~~916

76,~~082~~849

6676,~~119~~082

Commercial real estate mortgage

~~948~~1,~~291~~245,420

~~750~~948,~~574~~291

~~741~~750,~~379~~574

~~655~~741,~~196~~379

~~638~~655,~~726~~196

Construction and development

~~102~~86,~~598~~045

77102,~~394~~598

6177,~~640~~394

3561,~~731~~640

2535,~~208~~731

Residential real estate mortgage

~~892~~980,~~513~~171

~~727~~892,~~073~~513

~~709~~727,~~495~~073

~~648~~709,~~010~~495

~~618~~648,~~524~~010

Consumer

6166,~~905~~826

5661,~~771~~905

4556,~~972~~771

4645,~~206~~972

4846,~~295~~206

Total loans

23,~~651~~063,~~673~~463

2,~~155~~651,~~392~~673

12,~~957~~155,~~765~~392

1,~~671~~957,~~926~~765

1,~~553~~671,~~383~~926

The following table indicates the amounts of loans (excluding residential and commercial mortgages and consumer loans) outstanding as of December 31, ~~2016~~2017 which, based on remaining scheduled repayments of principal, are due in the periods indicated.

Maturities and Sensitivity to Changes in Interest Rates of Commercial and Construction Loans

Within

Over

Due:

1 Year

1‑5 Years

5 years

Total

Loan Type

Commercial and industrial

~~133~~124,~~092~~469

~~181~~227,~~239~~594

~~146~~163,~~761~~059

~~461~~515,~~092~~122

Agricultural production financing

5344,~~605~~129

1516,~~253~~353

43,~~609~~387

7363,~~467~~869

Construction and development

1528,~~626~~662

4525,~~188~~638

4131,~~784~~745

~~102~~86,~~598~~045

Totals

~~202~~197,~~323~~260

~~241~~269,~~680~~585

~~193~~198,~~154~~191

~~637~~665,~~157~~036

Percent

3230

3840

100

Rate Sensitivity

Fixed Rate

2334,~~254~~191

~~171~~197,~~697~~519

91,~~588~~302

~~286~~323,~~539~~012

Variable Rate

~~268~~250,~~595~~165

5456,~~454~~043

2735,~~569~~816

~~350~~342,~~618~~024

Totals

~~291~~284,~~849~~356

~~226~~253,~~151~~562

~~119~~127,~~157~~118

~~637~~665,~~157~~036

Loans are placed on “non‑accrual” status when, in management’s judgment, the collateral value and/or the borrower’s financial condition does not justify accruing interest. As a general rule, commercial, commercial real estate, residential, and consumer loans are reclassified to non‑accrual status at or before becoming 90 days past due. Interest previously recorded is reversed and charged against current income. Subsequent interest payments collected on non‑accrual loans are thereafter applied as a reduction of the loan’s principal balance. Non‑performing loans were $2118,~~213~~563 as of December 31, ~~2016~~2017 compared to $1621,~~039~~213 as of December 31, ~~2015~~2016 and represented 0.8061% of total loans at December 31, ~~2016~~2017 versus 0.7480% one year ago. The ~~increase~~decrease in ~~2016~~2017 is the result ~~the acquisition~~ of ~~Cheviot in 2016 and~~ the ~~non-accrual~~continued ~~loans~~emphasis ~~that~~on ~~were~~credit ~~part~~monitoring of the ~~acquisition~~portfolio.

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The following table details the Company’s non‑performing loans as of December 31 for the years indicated.

Non‑performing Loans

	2016			2015			2014			2013			2012
	2017			2016			2015			2014			2013
Non‑accruing loans	$	15,~~808~~895		$	1215,~~843~~808		$	1312,~~596~~843		$	2213,~~341~~596		$	3522,~~451~~341
Troubled debt restructurings (accruing)		32,~~270~~403			3,~~196~~270			153,~~243~~196			415,~~188~~243			154,~~102~~188
Accruing loans contractually past due 90 days or more		~~2,135~~265			—2,135			—			14—			~~565~~14
Total	$	2118,~~213~~563		$	1621,~~039~~213		$	2816,~~839~~039		$	2628,~~543~~839		$	5126,~~118~~543
% of total loans		0.8061	%		0.7480	%		10.4774	%		1.5947	%		31.2959	%

A reconciliation of non‑performing assets (“NPA”) for ~~2016~~2017 and ~~2015~~2016 is as follows:

	2016		2015
	2017		2016
Beginning Balance — NPA — January 1	$	1723,~~998~~088	$	3117,~~527~~998
Non‑accrual
Non-accrual
Add: New non‑accruals		11,784		12,551
Add: New non-accruals		18,451		11,784
Add: Acquisition		~~4,052~~955		—4,052
Less: To accrual/payoff/restructured		(915,~~680~~196)		(89,~~974~~680)
Less: To OREO		(12,~~965~~917)		(1,~~475~~965)
Less: Net charge offs		(1,~~226~~206)		(21,~~855~~226)
Increase/(Decrease): Non‑accrual loans		2,965		(753)
Increase: Non-accrual loans		87		2,965
Other Real Estate Owned (OREO)
Add: New OREO properties		12,~~965~~917		1,~~475~~965
Add: New OREO from acquisition		~~1,668~~227		—1,668
Less: OREO sold		(32,~~607~~797)		(23,~~166~~607)
Less: OREO losses (write‑downs)		(~~110~~96)		(38110)
Increase/(Decrease): OREO		~~(84)~~251		(~~729~~84)
Increase/(Decrease): 90 Days Delinquent		2(1,~~135~~870)		—2,135
Increase/(Decrease): TDR’s		74(867)		~~(12,047)~~74
Total NPA change		5(2,~~090~~399)		~~(13~~5,~~529)~~090
Ending Balance — NPA — December 31	$	23,088	$	17,998
Ending Balance — NPA — December 31,	$	20,689	$	23,088

At December 31, ~~2016~~2017, the Company had only ~~five~~eight relationships of $250 ~~and~~or ~~over~~greater on non-accrual, ~~with~~two ~~one~~ of which were acquired in the ~~five~~Cheviot aFinancial ~~loan~~Corp. ~~from~~acquisition and one of which was acquired in the ~~Cheviot~~FCB Bancorp acquisition. The Company is working with these borrowers in an attempt to minimize its losses. In the course of resolving problem loans, the Company may choose to restructure the contractual terms of certain loans. The Company attempts to work out an alternative payment schedule with the borrower in order to avoid foreclosure actions. Any loans that are modified are reviewed by the Company to identify if a troubled debt restructuring has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and could include reduction of the stated interest rate, other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit us by increasing the ultimate probability of collection. The Company reviews each relationship before it grants the concession to insure the creditor can comply with the new terms. To date, most of the concessions have been extensions of maturity dates. The provision for loan losses was $1,~~705~~250 in ~~2016~~2017, $1,~~625~~705 in ~~2015~~2016, and $1,~~500~~625 in ~~2014~~2015. The Company’s provision for loan losses ~~remained~~decreased ~~flat~~ in ~~2016~~2017 due to the continued stabilization of problem credits. The ~~New non‑accrual loans were flat compared to 2015. While the provision for loan losses remained relatively flat in 2016 from 2015, the~~ Company experienced a large increase in the commericlal loan portfolio allowance due primarily to the one large ~~increase~~lease incontract ~~the~~that ~~Company’s~~went ~~commercial~~to ~~loan~~non-accrual ~~portfolio~~ in ~~2016~~2017. Also, the Company showed a negative provision expense for the commercial real estate segment due to a reduction in the historical loss reserve factor. This decrease was caused by a reduction in the historical loss factor for these loans due to several factors. One, the Company uses a three year historical charge off factor for its homogenous pools. A large number of charge-offs occurred on these loans in ~~2012~~2014 and fell out of the calculation in 2016 and were replaced by a smaller number of charge-offs. Two, the Company also received several large recoveries on these type of loans in 2016 that became part of the homogenous pool charge-off percentage. Net charge‑offs were $1,226 in 2016 compared to $2,855 in 2015 and $5,859 in

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~~2014~~fell out of the calculation in 2017 and were replaced by a smaller number of charge-offs. Two, the Company also received several large recoveries on these type of loans in 2017 that became part of the homogenous pool charge-off percentage. Net charge‑offs were $1,206 in 2017 compared to $1,226 in 2016 and $2,855 in 2015. As a percentage of average loans, net charge‑offs equaled 0.0504%, 0.1405%, and 0.3314% in ~~2016~~2017, ~~2015~~2016, and ~~2014~~2015, respectively.

Potential problem loans are identified on the Company’s watch list and consist of loans that require close monitoring by management and are not necessarily considered classified credits by regulators. A ~~Credits~~credit may be considered as a potential problem loan for reasons that are temporary or correctable, such as for a deficiency in loan documentation or absence of current financial statements of the borrower. Potential problem loans may also include credits where adverse circumstances are identified that may affect the borrower’s ability to comply with the contractual terms of the loan. Other factors which might indicate the existence of a potential problem loan include the delinquency of a scheduled loan payment, deterioration in a borrower’s financial condition identified in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment in which the borrower operates. Substandard commercial loans that were not classified as non‑accrual were $1820,~~626~~066 at December 31, ~~2016~~2017 and $718,~~157~~626 at December 31, ~~2015~~2016, an increase of $111,~~469~~440 with ~~$6,129~~the majority of the increase coming from the ~~Cheviot~~FCB Bancorp acquisition. These loans which are $250 or greater are reviewed at least quarterly by senior management. This review includes monitoring how the borrower is performing versus their workout plan, obtaining and reviewing the borrower’s financial information, and monitoring collateral values. Management believes these loans were well secured and had adequate allowance allocations at December 31, ~~2016~~2017.

Summary of the Allowance for Loan Losses

2016

2015

2014

2013

2012

2017

2016

2015

2014

2013

Balance at January 1

22,~~020~~499

2322,~~250~~020

2723,~~609~~250

3227,~~227~~609

3932,~~889~~227

Chargeoffs

Commercial

~~682~~780

~~978~~682

~~241~~978

~~1,152~~241

1,~~946~~152

Commercial real estate mortgage

~~663~~814

~~727~~663

~~5,583~~727

65,~~353~~583

136,~~553~~353

Residential real estate mortgage

~~1,345~~922

21,~~094~~345

2,~~295~~094

2,~~349~~295

32,~~547~~349

Consumer

3,~~725~~487

3,~~593~~725

23,~~899~~593

2,~~648~~899

32,~~286~~648

Total Chargeoffs

6,~~415~~003

76,~~392~~415

117,~~018~~392

1211,~~502~~018

2212,~~332~~502

Recoveries

Commercial

~~659~~497

~~502~~659

~~1,131~~502

~~341~~1,131

~~543~~341

Commercial real estate mortgage

1,~~207~~033

1,~~942~~207

21,~~262~~942

12,~~087~~262

21,~~432~~087

Residential real estate mortgage

~~415~~418

~~337~~415

~~410~~337

~~650~~410

~~265~~650

Consumer

2,~~908~~849

12,~~756~~908

1,~~356~~756

1,~~272~~356

1,~~580~~272

Total Recoveries

54,~~189~~797

45,~~537~~189

54,~~159~~537

35,~~350~~159

43,~~820~~350

Net Chargeoffs

1,~~226~~206

21,~~855~~226

52,~~859~~855

95,~~152~~859

179,~~512~~152

Provision for loan losses

1,~~705~~250

1,~~625~~705

1,~~500~~625

41,~~534~~500

94,~~850~~534

Balance at December 31

22,~~499~~543

22,~~020~~499

2322,~~250~~020

2723,~~609~~250

3227,~~227~~609

Net Chargeoffs to average loans

0.0504

0.1405

0.3314

0.5733

10.1357

Provision for loan losses to average loans

0.0704

0.0807

0.0908

0.2809

0.6328

Allowance to total loans at year end

0.8574

10.0285

1.1902

1.6519

21.0765

Although the allowance for loan losses is available for any loan that, in management’s judgment, should be charged off, the following table details the allowance for loan losses by loan category and the percent of loans in each category compared to total loans at December 31.

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Allocation of the Allowance for Loan Losses

	2016				2015				2014				2013				2012
	2017				2016				2015				2014				2013
			Percent				Percent				Percent				Percent				Percent
			of loans				of loans				of loans				of loans				of loans
			to total				to total				to total				to total				to total
December 31	Amount		loans		Amount		loans		Amount		loans		Amount		loans		Amount		loans
Real estate
Residential	$	43,~~247~~861	3432	%	$	34,~~860~~247	34	%	$	3,~~501~~860	3634	%	$	3,~~409~~501	3936	%	$	3,~~180~~409	4039	%
Farm real estate		~~819~~1,205	43			~~354~~819	4			~~576~~354	4			~~194~~576	54			~~722~~194	45
Commercial		64,~~166~~174	3641			96,~~363~~166	3536			139,~~536~~363	3835			1713,~~679~~536	3938			2017,~~465~~679	4139
Construction and development		~~721~~1,050	43			~~984~~721	34			~~1,493~~984	3			21,~~337~~493	23			2,~~970~~337	2
Total real estate		1110,~~953~~290	7879			1411,~~561~~953	7678			1914,~~106~~561	8176			2319,~~619~~106	8581			2723,~~337~~619	8785
Commercial
Agribusiness		~~272~~401	32			~~118~~272	3			~~192~~118	3			64192	23			~~166~~64	2
Other commercial		910,~~382~~832	17			69,~~393~~382	1817			26,~~785~~393	1418			32,~~227~~785	1014			3,~~728~~227	810
Total Commercial		911,~~654~~233	2019			69,~~511~~654	2120			26,~~977~~511	1721			32,~~291~~977	1217			3,~~894~~291	1012
Consumer		~~892~~1,020	2			~~948~~892	32			~~1,167~~948	23			~~699~~1,167	32			~~996~~699	3
Total	$	22,~~499~~543	100	%	$	22,~~020~~499	100	%	$	2322,~~250~~020	100	%	$	2723,~~609~~250	100	%	$	3227,~~227~~609	100	%

Management maintains a list of loans warranting either the assignment of a specific reserve amount or other special administrative attention. This watch list, together with a listing of all classified loans, non‑accrual loans and delinquent loans, is reviewed monthly by management. Additionally, the Company evaluates its consumer and residential real estate loan pools for probable losses incurred based on historical trends, adjusted by current delinquency and non‑performing loan levels.

The Company has both internal and external loan review personnel who annually review approximately 5030% of all commercial loans. External loan review personnel examine the top 7550 commercial credit relationships annually. ~~This~~as ~~equates~~well toas ~~all~~5%-10% ~~relationships~~of ~~above~~new ~~approximately~~and ~~$4,650~~existing relationships.

The ability to absorb loan losses promptly when problems are identified is invaluable to a banking organization. Most often, losses incurred as a result of prompt, aggressive collection actions are much lower than losses incurred after prolonged legal proceedings. Accordingly, the Company observes the practice of quickly initiating stringent collection efforts in the early stages of loan delinquency.

The adequacy of the allowance for loan losses is reviewed at least quarterly. The determination of the provision amount in any period is based upon management’s continuing review and evaluation of loan loss experience, changes in the composition of the loan portfolio, classified loans including non‑accrual and impaired loans, current economic conditions, the amount of loans presently outstanding, and the amount and composition of loan growth. The Company’s allowance for loan losses was $22,~~499~~543, or 0.8574% of total loans, at December 31, ~~2016~~2017 compared to $22,~~020~~499, or 1.0285% of total loans, at the end of ~~2015~~2016. The Company’s decrease in the allowance percentage to total loans was due primarily to the acquisition of ~~Cheviot~~FCB ~~Financial~~Bancorp ~~Corp.~~ in ~~2016~~2017 and the continued improvement in its credit metrics. The acquired loans were brought over at fair value with no allowance for loan losses. See Note 26 to the Consolidated Financial Statements for additional information concerning acquisitions by the Company.

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Securities, at Fair Value

	December 31,
	2016			2015			2014
	2017		2016			2015
Available for Sale
U.S. Government‑sponsored entities	$	955		$	504		$	661
U.S. government agency	$	115	$	955		$	504
State and municipal		~~369~~398,~~286~~126		369,286	~~350,733~~		350,733	~~334,298~~
Mortgage‑backed		~~626~~669,~~031~~649		626,031	~~562,829~~		562,829	~~525,609~~
Equity and other		119,~~268~~683		11,268	~~11,213~~		11,213	~~7,192~~
Total securities	$	1,~~007~~077,~~540~~573	$	$1,007,540	~~925,279~~	$	$925,279	~~867,760~~

Securities offer flexibility in the Company’s management of interest rate risk, and are the primary means by which the Company provides liquidity and responds to changing maturity characteristics of assets and liabilities. The Company’s investment policy prohibits trading activities and does not allow investment in high‑risk derivative products or junk bonds.

33As of December 31, 2017, all of the Company’s securities were classified as available for sale (“AFS”) and were carried at fair value with unrealized gains and losses, net of taxes, excluded from earnings and reported as a separate component of shareholders’ equity. A net unrealized gain of $6,466 was recorded to adjust the AFS portfolio to current market value at December 31, 2017 compared to a net unrealized gain of $4,737 at December 31, 2016.

Table of Contents

As of December 31, 2016, all of the Company’s securities were classified as available for sale (“AFS”) and were carried at fair value with unrealized gains and losses, net of taxes, excluded from earnings and reported as a separate component of shareholders’ equity. A net unrealized gain of $4,737 was recorded to adjust the AFS portfolio to current market value at December 31, 2016 compared to a net unrealized gain of $19,422 at December 31, 2015.

Securities

(Carrying Values at December 31)

	Within									Beyond
	1 Year			2‑5 Yrs			6‑10 Yrs			10 Years			Total ~~2016~~2017
Available for sale
US government agency	$	~~545~~—		$	—115		$	~~410~~—		$	—		$	~~955~~115
State and municipal		1124,~~670~~200			8089,~~412~~668			~~107~~90,~~302~~886			~~169~~193,~~902~~372			~~369~~398,~~286~~126
Mortgage‑backed securities & CMOs		—27			23,~~591~~035			4639,~~166~~610			~~577~~626,~~274~~977			~~626~~669,~~031~~649
Other securities		~~500~~—			2,~~028~~938			42,~~070~~075			—			65,~~598~~013
Total available for sale	$	1224,~~715~~227		$	8595,~~031~~756		$	~~157~~132,~~948~~571		$	~~747~~820,~~176~~349		$	1,~~002~~072,~~870~~903
Weighted average yield*		56.2855	%		5.5841	%		4.8092	%		2.7894	%		3.3749	%

*Adjusted to reflect income related to securities exempt from federal income taxes.

Amounts in the table above are based on scheduled maturity dates. Variable interest rates are subject to change not less than annually based upon certain interest rate indexes. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Equity securities of $4,670 do not have contractual maturities and are excluded from the table above.

As of December 31, ~~2016~~2017, there were no corporate bonds and other securities which represented more than 10% of shareholders’ equity.

For ~~2016~~2017 the tax equivalent yield of the investment securities portfolio was 3.3749%, compared to 3.4637% and 3.5346% for ~~2015~~2016 and ~~2014~~2015, respectively. The average life of the Company’s investment securities portfolio was 144.88 years at December 31, ~~2016~~2017. During ~~2016~~2017 the portfolio balances increased moderately as excess funds from the ~~Cheviot~~FCB Bancorp acquisition in the second quarter were invested in the securities portfolio. Reinvestments were targeted at maintaining the portfolio’s current average life balancing the need for future cash flow with current earnings performance.

The Company and its investment advisor monitor the securities portfolio on at least a quarterly basis for other‑than‑temporary impairment (“OTTI”). The amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current‑period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current‑period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current‑period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. In 2014, the Company had a recovery of a $500 impairment loss on one of its equity securities.

In December, 2013, banking regulators published the final rules under Section 619 of the Dodd‑Frank Act (commonly referred to as the “Volcker Rule”). Under the Volcker Rule, collateralized debt obligations, including pooled trust preferred securities, are no longer a permissible investment and would have to be divested prior to July 15, 2015. On January 14, 2014, banking regulators released their interim final rule regarding the Volcker Rule and its impact on collateralized debt obligations. Under the interim final rule, regulators clarified the final rule and said that collateralized debt obligations primarily backed by trust preferred securities issued by depository institutions could continue to be held by banks. The Company was informed from an outside third party that it may be holding one security that would need to be divested by the conformance date. The conformance date for the Volcker Rule has been extended to July 21, 2017.37

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the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current‑period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes.

In December, 2013, banking regulators published the final rules under Section 619 of the Dodd‑Frank Act (commonly referred to as the “Volcker Rule”). Under the Volcker Rule, collateralized debt obligations, including pooled trust preferred securities, are no longer a permissible investment and would have to be divested prior to July 15, 2015. On January 14, 2014, banking regulators released their interim final rule regarding the Volcker Rule and its impact on collateralized debt obligations. Under the interim final rule, regulators clarified the final rule and said that collateralized debt obligations primarily backed by trust preferred securities issued by depository institutions could continue to be held by banks. The conformance date for the Volcker Rule was extended to July 21, 2017.

Sources of Funds

The Company relies primarily on customer deposits and securities sold under agreement to repurchase (“repurchase agreements”) along with shareholders’ equity to fund earning assets. Federal Home Loan Bank (“FHLB”) advances are used to provide additional funding. The Company also attempts to obtain deposits through branch and whole bank acquisitions.

Deposits generated within local markets provide the major source of funding for earning assets. Average total deposits were 8684.23% and 8786.72% of total average earning assets for ~~2016~~2017 and ~~2015~~2016, respectively. Total interest‑bearing deposits averaged 7775.09% and 77.60% of average total deposits during ~~2016~~2017 and ~~2015~~2016. Management strives to increase the percentage of transaction‑related deposits to total deposits due to the positive effect on earnings.

Repurchase agreements are high denomination investments utilized by public entities and commercial customers as an element of their cash management responsibilities. During ~~2016~~2017, repurchase agreements averaged $2740,~~816~~717, with an average cost of 0.1419%.

The Company had FHLB advances of $~~249~~335,~~658~~986 outstanding at December 31, ~~2016~~2017. These advances have interest rates ranging from 01.9704% to 24.6792% (see Note 12 to the consolidated financial statements for the maturity schedule of these advances). The Company averaged $~~261~~290,~~490~~286 in FHLB advances during ~~2016~~2017 compared to $~~190~~261,~~356~~490 during ~~2015~~2016. Other sources of funding are fed funds purchased, short term FHLB advances, and a short term note. The Company had $~~15,000~~923 of federal funds purchased as of December 31, ~~2016~~2017 and $015,000 at December 31, ~~2015~~2016. Short term FHLB advances had a balance of $~~138~~130,000 at December 31, ~~2016~~2017 and $0138,000 at December 31, ~~2015~~2016. The interest rate on these advances was 01.9067% at December 31, ~~2016~~2017. The term debt had a balance of $1811,~~333~~667 at December 31, ~~2016~~2017 and $018,333 at December 31, ~~2015~~2016. The term debt had an interest rate of 23.~~8125~~50% at December 31, ~~2016~~2017.

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Average Deposits

	2016				2015				2014
	2017				2016				2015
	Amount		Rate		Amount		Rate		Amount		Rate
Demand	$	~~679~~813,~~879~~982			$	~~576~~679,~~341~~879			$	~~463~~576,~~197~~341
Interest Bearing Demand		1,~~153~~229,~~640~~228	0.1418	%		1,~~077~~153,~~308~~640	0.14	%		~~959~~1,~~186~~077,308	0.1214	%
Savings/Money Markets		~~699~~822,~~761~~718	0.0711			~~588~~699,~~960~~761	0.0907			~~530~~588,~~752~~960	0.09
Certificates of Deposit		~~418~~507,~~297~~829	0.4960			~~334~~418,~~810~~297	0.5149			~~341~~334,~~343~~810	0.6051
Totals	$	23,~~951~~373,~~577~~757	0.1418	%	$	2,~~577~~951,~~419~~577	0.14	%	$	2,~~294~~577,~~478~~419	0.1614	%

As of December 31, ~~2016~~2017, certificates of deposit and other time deposits of $100 or more mature as follows:

	3 months or less			4‑6 months			6‑12 months			over 12 months			Total
Amount	$	3055,~~340~~652		$	5745,~~867~~729		$	2359,~~733~~324		$	70173,~~437~~591		$	~~182~~334,~~377~~296
Percent		1716	%		3214	%		1318	%		3852	%

Capital Resources

The Federal Reserve Board and other regulatory agencies have adopted risk‑based capital guidelines that assign risk weightings to assets and off‑balance sheet items. The Company’s core capital (“Tier 1”) consists of common shareholders’ equity adjusted for unrealized gains or losses on available for sale (AFS) securities plus limited amounts of Trust Preferred Securities less goodwill and intangible assets. Total capital consists of core capital, certain debt instruments and a portion of the allowance for loan losses. At December 31, ~~2016~~2017, Tier 1 capital to average assets was 9.87%. Total capital to risk‑weighted assets was 1413.79%. Both ratios exceed all required ratios established for bank holding companies. Risk‑adjusted capital levels of the Bank also exceed regulatory definitions of well‑capitalized institutions. On January 1, 2015 the Basel III Capital Rules became effective and introduced a new capital measure known as “Common Equity Tier 1” (“CET1”), which generally consists of common equity Tier ~~1capital~~1 capital instruments and related surplus, retained earnings, and common equity Tier 1 minority interests. To be adequately capitalized in ~~2016~~2017, the CET1 to risk weighted assets ratio must be 4.5%. At December 31, ~~2016~~2017, this ratio was 1211.45%. The new capital rules also require a common equity Tier 1 capital conservation buffer to be phased in between 0.0% in 2015 to 2.5% in 2019. The capital conservation buffer for 2017 is 1.25%.

35The Trust Preferred Securities (which are classified as subordinated debentures) currently qualify as Tier 1 capital or core capital with respect to the Company under the risk‑based capital guidelines established by the Federal Reserve. Under such guidelines, capital received from the proceeds of the sale of these securities cannot constitute more than 25% of the total Tier 1 capital of the Company. Consequently, the amount of Trust Preferred Securities in excess of the 25% limitation constitutes Tier 2 capital, or supplementary capital, of the Company. As of December 31, 2017, all of the Company’s Trust Preferred Securities qualify as Tier 1 capital.

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capital conservation buffer to be phased in between 0.0% in 2015 to 2.5% in 2019. The capital conservation buffer for 2016 is 0.625%.

The Trust Preferred Securities (which are classified as subordinated debentures) currently qualify as Tier 1 capital or core capital with respect to the Company under the risk‑based capital guidelines established by the Federal Reserve. Under such guidelines, capital received from the proceeds of the sale of these securities cannot constitute more than 25% of the total Tier 1 capital of the Company. Consequently, the amount of Trust Preferred Securities in excess of the 25% limitation constitutes Tier 2 capital, or supplementary capital, of the Company. As of December 31, 2016, all of the Company’s Trust Preferred Securities qualify as Tier 1 capital. The Company redeemed $5,155 of these securities in March, 2014.

Common shareholders’ equity is impacted by the Company’s decision to categorize its securities portfolio as available for sale (AFS). Securities in this category are carried at fair value, and common shareholders’ equity is adjusted to reflect unrealized gains and losses, net of taxes.

The Company declared and paid common dividends of $0.6168 per share in ~~2016~~2017 compared to $0.5461 in ~~2015~~2016 and $0.4254 in ~~2014~~2015. Book value per common share increased to $1820.6883 at December 31, ~~2016~~2017 compared to $1718.6768 at the end of ~~2015~~2016. The increase is primarily the result of the net income for the year. The net adjustment for AFS securities increased book value per share by $0.1316 at December 31, ~~2016~~2017 and increased book value per share by $0.5813 at December 31, ~~2015~~2016. Depending on market conditions, the adjustment for AFS securities can cause significant fluctuations in shareholders’ equity.

Liquidity

Liquidity management involves maintaining sufficient cash levels to fund operations and to meet the requirements of borrowers, depositors and creditors. Higher levels of liquidity bear higher corresponding costs, measured in terms of lower yields on short‑term, more liquid earning assets and higher interest expense involved in extending liability maturities. Liquid assets include cash and cash equivalents, loans and securities maturing within one year and money market instruments. In addition, the Company holds approximately $994,825 of AFS securities maturing after one year, which can be sold to meet liquidity needs.

Maintaining a relatively stable funding base, which is achieved by diversifying funding sources, supports liquidity, extends the contractual maturity of liabilities, and limits reliance on volatile short‑term purchased funds. Short‑term funding needs may arise from declines in deposits or other funding sources, funding of loan commitments and requests for new loans. The Company’s strategy is to fund assets to the maximum extent possible with core deposits, which provide a sizable source of relatively stable low‑cost funds. The Company defines core deposits as all deposits except certificates of deposits greater than $100. Average core deposits funded approximately 81.4% of total earning assets during 2016 and approximately 83.3% in 2015.39

Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment. Management also plans to meet the funding requirements of the FCB Bancorp, Inc. acquisition (See Note 26) with internally generated funds. The Company has not received any directives from regulatory authorities that would materially affect liquidity, capital resources or operations.

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~~Contractual~~Liquid ~~Obligations~~assets asinclude cash and cash equivalents, loans and securities maturing within one year and money market instruments. In addition, the Company holds approximately $1,053,373 of ~~December 31~~AFS securities maturing after one year, ~~2016~~which can be sold to meet liquidity needs.

			Less than						More than
	Total		1 Year		1‑3 Years		3‑5 Years		5 Years
Time Deposits	$	431,311	$	242,669	$	116,538	$	63,735	$	8,369
FHLB Advances		250,000		20,000		105,000		75,000		50,000
Subordinated Debentures		41,239		—		—		—		41,239
Other Borrowings		209,672		198,003		11,669		—		—
Low Income Housing Unfunded Commitments		5,796		2,782		2,649		225		140
Capital Lease Payment		2,047		96		192		192		1,567
Operating Lease Commitments		12,937		1,965		3,675		2,649		4,648
Total	$	953,002	$	465,515	$	239,723	$	141,801	$	105,963

Maintaining a relatively stable funding base, which is achieved by diversifying funding sources, supports liquidity, extends the contractual maturity of liabilities, and limits reliance on volatile short‑term purchased funds. Short‑term funding needs may arise from declines in deposits or other funding sources, funding of loan commitments and requests for new loans. The Company’s strategy is to fund assets to the maximum extent possible with core deposits, which provide a sizable source of relatively stable low‑cost funds. The Company defines core deposits as all deposits except certificates of deposits greater than $100. Average core deposits funded approximately 78.4% of total earning assets during 2017 and approximately 81.4% in 2016.

Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment. Management also met the funding requirements of the FCB Bancorp acquisition (See Note 26) with internally generated funds. The Company has not received any directives from regulatory authorities that would materially affect liquidity, capital resources or operations.

Contractual Obligations as of December 31, 2017


			Less than						More than
	Total		1 Year		1‑3 Years		3‑5 Years		5 Years
Time Deposits	$	604,814	$	297,857	$	235,487	$	71,078	$	392
FHLB Advances		335,986		80,286		115,700		70,000		70,000
Subordinated Debentures		56,545		—		—		—		56,545
Other Borrowings		185,652		180,652		5,000		—		—
Low Income Housing Unfunded Commitments		7,023		4,320		2,528		77		98
Capital Lease Payment		1,951		96		192		192		1,471
Operating Lease Commitments		14,071		2,733		4,276		2,862		4,200
Total	$	1,206,042	$	565,944	$	363,183	$	144,209	$	132,706

Off‑balance Sheet Arrangements

The Bank incurs off‑balance sheet risks in the normal course of business in order to meet the financing needs of its customers. These risks derive from commitments to extend credit and standby letters of credit. Off‑balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. See Note 16 to the Consolidated Financial Statements for additional details on the Company’s off‑balance sheet arrangements.

Interest Rate Risk Management

Interest rate risk is the exposure of the Company’s financial condition to adverse changes in market interest rates. In an effort to estimate the impact of sustained interest rate movements to the Company’s earnings, the Company monitors interest rate risk through computer‑assisted simulation modeling of its net interest income. The Company’s simulation modeling monitors the potential impact to net interest income under various interest rate scenarios. The Company’s objective is to actively manage its asset/liability position within a one‑year interval and to limit the risk in any of the interest rate scenarios to a reasonable level of tax‑equivalent net interest income within that interval. The Company monitors compliance within established guidelines of the Funds Management Policy. See Item 7A. Quantitative and Qualitative Disclosures About Market Risk section for further discussion regarding interest rate risk.

Critical Accounting Policies

The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States and conform to general practices within the banking industry. These policies require estimates and assumptions. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on the Company’s future financial condition and results of operations. In management’s opinion, some of these areas have a more significant impact than others on the Company’s financial reporting. These areas currently include accounting for securities, the allowance for loan losses, goodwill, income taxes, and mortgage servicing rights.

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assumptions. Changes in underlying factors, assumptions, or estimates in any of these areas could have a material impact on the Company’s future financial condition and results of operations. In management’s opinion, some of these areas have a more significant impact than others on the Company’s financial reporting. These areas currently include accounting for securities, the allowance for loan losses, goodwill, income taxes, and mortgage servicing rights.

Business Combinations – Business combinations require management to use certain assumptions and estimates pertaining to the fair value of the assets acquired and liabilities assumed for initial purchase accounting. Information received subsequent to initial measurement must be analyzed for its impact on the original accounting through the end of the measurement period.

Securities Valuation and Other Than Temporary Impairment of Securities — Securities available‑for‑sale are carried at fair value, with unrealized holding gains and losses reported separately in accumulated other comprehensive income (loss), net of tax. In estimating the fair value for the majority of securities, fair values are based on observable market prices of the same or similar investments. The majority of securities are priced by an independent third party pricing service. Equity securities that do not have readily determinable fair values are carried at cost. When the fair value of securities is less than its amortized cost for an extended period, the Company will decide if the security is other than temporarily impaired. If the security is deemed to be other than temporarily impaired, an impairment charge will be recorded through earnings. In determining whether a market value decline is other than temporary, management considers the reason for the decline, the extent of the decline, the duration of the decline and whether the Company intends to sell or believes it will be required to sell the securities prior to recovery.

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Allowance for Loan Losses — The level of the allowance for loan losses is based upon management’s evaluation of the loan and lease portfolios, past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, and other pertinent factors. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The level of allowance maintained is believed by management to be adequate to cover losses inherent in the portfolio. The allowance is increased by provisions charged to expense and decreased by charge‑offs, net of recoveries of amounts previously charged‑off.

Goodwill — Goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. The Company has selected June 30 as its date for annual impairment testing, but will test more frequently if circumstances warrant. No goodwill impairment was identified during testing performed in ~~2016~~2017 or ~~2015~~2016.

Income taxes — The Company is subject to the income tax laws of the U.S., its states and the municipalities in which it operates. These tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. The Company reviews income tax expense and the carrying value of deferred tax assets; and as new information becomes available, the balances are adjusted as appropriate. In establishing a provision for income tax expense, the Company makes judgments and interpretations about the application of these inherently complex tax laws and also makes estimates about when in the future certain items will affect taxable income in the various tax jurisdictions.

Mortgage servicing rights — The Company originally records mortgage servicing rights at fair value and amortizes them over the period of the estimated future net servicing income of the underlying loans. The servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount.

New Accounting Matters

See Note 1 to the Consolidated Financial Statements regarding the adoption of new accounting standards in ~~2016~~2017.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s exposure to market risk is reviewed on a regular basis by the Credit and Risk Committee of the Board of Directors and by the Boards of Directors of the Company and the Bank. Primary market risks, which impact the Company’s operations, are liquidity risk and interest rate risk, as discussed above.

As discussed previously, the Company monitors interest rate risk by the use of computer simulation modeling to estimate the potential impact on its net interest income under various interest rate scenarios. Another method by which the Company’s interest rate risk position can be estimated is by computing estimated changes in its net portfolio value (“NPV”). This method estimates interest rate risk exposure from movements in interest rates by using interest rate sensitivity analysis to determine the change in the NPV of discounted cash flows from assets and liabilities. Computations are based on a number of assumptions, including the relative levels of market interest rates and prepayments in mortgage loans and certain types of investments. These computations do not contemplate any actions management may undertake in response to changes in interest rates, and should not be relied upon as indicative of actual results. In addition, certain shortcomings are inherent in the method of computing NPV. Should interest rates remain or decrease below current levels, the proportion of adjustable rate loans could decrease in future periods due to refinancing activity. In the event of an interest rate change, prepayment levels would likely be different from those assumed in the table. Lastly, the ability of many borrowers to repay their adjustable rate debt may decline during a rising interest rate environment.

The following tables provide an assessment of the risk to NPV in the event of sudden and sustained 1% and 2% increases and decreases in prevailing interest rates. The table indicates that as of December 31, ~~2016~~2017 the Company’s estimated NPV might be expected to ~~increase~~decrease in the event of a decrease in prevailing interest rates, and might be expected to generally decrease in the event of an increase in prevailing interest rates (dollars in thousands). As of December 31, 2016 the Company’s estimated NPV would generally increase in the event of a decrease in prevailing rates and generally decrease in the event of an increase in prevailing interest rates.

38December 31, 2017

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	$ Amount	$ Change	NPV Ratio		Change
+2%	1,081,769	(81,378)	23.18	%	(53)
+1%	1,126,029	(37,118)	23.49	%	(22)
Base	1,163,147	—	23.71	%	—
−1%	1,157,864	(5,283)	23.08	%	(63)
−2%	1,144,071	(19,076)	22.28	%	(143)

2015 the Company’s estimated NPV would generally increase in the event of a decrease in prevailing rates and generally decrease in the event of an increase in prevailing interest rates.

December 31, 2016


	$ Amount	$ Change	NPV Ratio		Change
+2%	893,702	(82,041)	22.18	%	(72)
+1%	936,342	(39,401)	22.58	%	(32)
Base	975,743	—	22.90	%	—
−1%	985,526	9,783	22.52	%	(38)
−2%	982,901	7,158	21.91	%	(99)

December 31, 2015

	$ Amount	$ Change	NPV Ratio		Change
+2%	778,743	(67,189)	23.16	%	(52)
+1%	814,888	(31,044)	23.51	%	(17)
Base	845,932	—	23.68	%	—
−1%	846,048	116	23.04	%	(64)
−2%	846,939	1,007	22.45	%	(123)

The above discussion, and the portions of “Management’s Discussion and Analysis” in Item 7 of this Report that are referenced in the above discussion, contain statements relating to future results of the Company that are considered “forward‑looking‑statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to, among other things, simulation of the impact on net interest income from changes in interest rates. Actual results may differ materially from those expressed or implied therein as a result of certain risks and uncertainties, including those risks and uncertainties expressed above, those that are described in “Management’s Discussion and Analysis” in Item 7 of this Report, those that are described in Item 1 of this Report, “Business,” under the caption “Forward‑Looking‑Statements,” and those that are described in Item 1A of this Report, “Risk Factors”, all of which discussions are incorporated herein by reference.

3942

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

~~REPORT~~Report OFof ~~INDEPENDENT~~Independent ~~REGISTERED~~Registered ~~PUBLIC~~Public ~~ACCOUNTING~~Accounting ~~FIRM~~Firm

Shareholders and the Board of Directors ~~and Shareholders~~

of MainSource Financial Group, Inc.

Greensburg, Indiana

WeOpinions have audited the accompanying consolidated balance sheets of MainSource Financial Group, Inc. as of December 31, 2016 and 2015 and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. We also have audited MainSource Financial Group, Inc.’s internal control over financial reporting as of December 31, 2016, based on ~~criteria established in~~ the ~~2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). MainSource~~ Financial ~~Group, Inc.’s~~Statements ~~management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting,~~ and ~~for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on~~ Internal Control over Financial Reporting~~. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the company’s internal control over financial reporting based on our audits.~~

We ~~conducted~~have ~~our~~audited ~~audits~~the inaccompanying ~~accordance~~consolidated ~~with~~balance ~~the~~sheets ~~standards~~ of ~~the~~MainSource ~~Public~~Financial ~~Company~~Group, ~~Accounting~~Inc. ~~Oversight Board~~ (~~United~~the ~~States~~"Company"). ~~Those~~as ~~standards~~of ~~require~~December ~~that~~31, we2017 ~~plan~~ and ~~perform~~2016, the ~~audits~~related toconsolidated ~~obtain reasonable assurance about whether the financial~~ statements ~~are free~~ of ~~material~~income, ~~misstatement~~comprehensive ~~and~~income, ~~whether~~shareholder’s ~~effective~~equity, ~~internal~~and ~~control~~cash ~~over~~flows ~~financial~~for ~~reporting~~each ~~was maintained in all material respects. Our audits~~ of the ~~financial~~years ~~statements~~in ~~included~~the ~~examining,~~three-year onperiod aended ~~test~~December ~~basis~~31, ~~evidence~~2017, ~~supporting~~and the ~~amounts~~related ~~and~~notes ~~disclosures~~(collectively inreferred to as the "financial statements,"). ~~assessing~~We ~~the~~also ~~accounting~~have ~~principles~~audited ~~used and significant estimates made by management, and evaluating~~ the ~~overall~~Company’s ~~financial statement presentation. Our audit of~~ internal control over financial reporting ~~included~~as ~~obtaining an understanding~~ of ~~internal~~December ~~control over financial reporting~~31, ~~assessing the risk that a material weakness exists~~2017, ~~and testing and evaluating the design and operating effectiveness of internal control~~ based on ~~the~~criteria ~~assessed~~established ~~risk.~~in ~~Our~~Internal ~~audits~~Control ~~also~~– ~~included~~Integrated ~~performing~~Framework: ~~such~~(2013) ~~other~~issued ~~procedures~~by ~~as we considered necessary in~~ the ~~circumstances.~~Committee Weof ~~believe~~Sponsoring ~~that~~Organizations ~~our~~of ~~audits~~the ~~provide~~Treadway aCommission ~~reasonable basis for our opinions~~(COSO).

AIn ~~company’s~~our ~~internal~~opinion, ~~control~~the ~~over~~ financial ~~reporting~~statements isreferred ato ~~process~~above ~~designed~~present tofairly, ~~provide~~in ~~reasonable~~all ~~assurance~~material ~~regarding~~respects, the ~~reliability of~~ financial ~~reporting~~position ~~and~~of the ~~preparation~~Company as of ~~financial~~December ~~statements~~31, ~~for~~2017 ~~external~~and ~~purposes~~2016, ~~in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies~~ and ~~procedures that (1) pertain to~~ the ~~maintenance~~results of ~~records~~its ~~that,~~operations ~~in reasonable detail, accurately~~ and ~~fairly~~its ~~reflect~~cash ~~the~~flows ~~transactions~~for ~~and~~each ~~dispositions~~ of the ~~assets~~years ofin the ~~company;~~three-year ~~(2) provide~~period ~~reasonable~~ended ~~assurance~~December ~~that~~31, ~~transactions~~2017 ~~are recorded as necessary to permit preparation of financial statements~~ in ~~accordance~~conformity with ~~generally accepted~~ accounting principles, ~~and~~generally ~~that~~accepted ~~receipts~~in ~~and expenditures of~~ the ~~company~~United ~~are~~States ~~being~~of ~~made~~America. Also ~~only~~ in ~~accordance~~our ~~with~~opinion, ~~authorizations~~the ofCompany ~~management~~maintained, ~~and~~in ~~directors~~all ofmaterial ~~the~~respects, ~~company;~~effective ~~and~~internal ~~(3) provide~~control ~~reasonable~~over ~~assurance~~financial ~~regarding~~reporting ~~prevention~~as ~~or timely detection~~ of ~~unauthorized~~December ~~acquisition~~31, ~~use~~2017, orbased ~~disposition~~on ofcriteria ~~the~~established ~~company’s~~in ~~assets~~Internal ~~that~~Control ~~could~~– ~~have~~Integrated aFramework: ~~material~~(2013) ~~effect~~issued onby ~~the financial statements~~COSO.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting

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principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In/s/ ~~our~~Crowe ~~opinion,~~Horwath ~~the~~LLP consolidated financial statements referred to above present fairly, in all material respects, the financial position of MainSource Financial Group, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, MainSource Financial Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control — Integrated Framework issued by the COSO.

~~/s/~~ We ~~Crowe~~have ~~Horwath~~served ~~LLP~~as ~~Indianapolis,~~the ~~Indiana~~Company's ~~March~~auditor ~~10,~~since ~~2017~~1999.

40Indianapolis, Indiana

February 28, 2018

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MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands except share and per share data)

	December 31,		December 31,
	2016		2015
	2017		2016
Assets
Cash and due from banks	$	7589,~~778~~623	$	5675,~~104~~778
Money market funds and federal funds sold		107,~~774~~882		1110,~~474~~774
Cash and cash equivalents		8697,~~552~~505		6786,~~578~~552
Interest bearing time deposits		12,~~960~~065		1,960
Securities available for sale		1,~~007~~077,~~540~~573		~~925~~1,~~279~~007,540
Loans held for sale		127,~~479~~794		712,~~533~~479
Loans, net of allowance for loan losses of $22,499 and $22,020		2,629,174		2,133,372
Loans, net of allowance for loan losses of $22,543 and $22,499		3,040,920		2,629,174
FHLB and other stock, at cost		2127,~~693~~796		1121,~~300~~693
Premises and equipment, net		7682,~~426~~438		6276,~~973~~426
Goodwill		~~101~~137,~~315~~090		75101,~~953~~315
Purchased intangible assets		713,~~419~~901		47,~~662~~419
Cash surrender value of life insurance		8088,~~539~~633		6280,~~451~~539
Interest receivable and other assets		5572,~~160~~147		3255,~~347~~160
Total assets	$	4,~~080~~647,~~257~~862	$	34,~~385~~080,~~408~~257
Liabilities
Deposits
Noninterest bearing	$	~~767~~868,~~159~~384	$	~~641~~767,~~439~~159
Interest bearing		2,~~343~~639,~~712~~219		2,~~009~~343,~~336~~712
Total deposits		3,~~110~~507,~~871~~603		23,~~650~~110,~~775~~871
Other borrowings		~~209~~185,~~672~~652		28209,~~363~~672
Long term Federal Home Loan Bank (FHLB) advances		~~249~~335,~~658~~986		~~269~~249,~~488~~658
Subordinated debentures		4156,~~239~~545		41,239
Other liabilities		1929,~~323~~118		1419,~~183~~323
Total liabilities		34,~~630~~114,~~763~~904		3,~~004~~630,~~048~~763
Commitments and contingent liabilities
Shareholders’ equity
Preferred stock, no par value
Authorized shares — 400,000
Issued shares — 0
Outstanding shares — 0
Aggregate liquidation preference $0		—		—
Common stock $.50 stated value:
Authorized shares — 100,000,000
Issued shares — 24,682,189 and 22,266,107
Issued shares — 26,121,057 and 24,682,189
Outstanding shares — 24,067,364 and 21,579,575		12,463		11,201
Outstanding shares — 25,586,013 and 24,067,364		13,250		12,463
Treasury stock — 614,825 and 686,532 shares, at cost		(10,909)		(11,812)
Treasury stock — 535,044 and 614,825 shares, at cost		(9,677)		(10,909)
Additional paid-in capital		~~299~~347,~~116~~161		~~247~~299,~~629~~116
Retained earnings		~~145~~178,~~745~~021		~~121~~145,~~718~~745
Accumulated other comprehensive income		34,~~079~~203		123,~~624~~079
Total shareholders’ equity		~~449~~532,~~494~~958		~~381~~449,~~360~~494
Total liabilities and shareholders’ equity	$	4,~~080~~647,~~257~~862	$	34,~~385~~080,~~408~~257

The accompanying notes are an integral part of these consolidated financial statements.

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MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, ~~2016~~2017, ~~2015~~2016, AND ~~2014~~2015

(Dollar amounts in thousands except per share data)

	2016		2015		2014
	2017		2016		2015
Interest income
Loans, including fees	$	~~101~~127,~~560~~611	$	87101,~~002~~560	$	7887,~~770~~002
Securities
Taxable		1417,~~550~~453		1214,~~004~~550		12,~~366~~004
Tax exempt		1213,~~000~~127		1112,~~970~~000		11,~~862~~970
Other interest income		~~217~~356		~~134~~217		97134
Total interest income		~~128~~158,~~327~~547		~~111~~128,~~110~~327		~~103~~111,~~095~~110
Interest expense
Deposits		46,~~169~~143		34,~~678~~169		3,678
Federal Home Loan Bank advances		45,~~418~~247		34,~~387~~418		3,~~572~~387
Subordinated debentures		12,~~425~~307		1,~~264~~425		1,~~286~~264
Other borrowings		~~714~~1,981		56714		7156
Total interest expense		1015,~~726~~678		810,~~385~~726		8,~~607~~385
Net interest income		~~117~~142,~~601~~869		~~102~~117,~~725~~601		94102,~~488~~725
Provision for loan losses		1,~~705~~250		1,~~625~~705		1,~~500~~625
Net interest income after provision for loan losses		~~115~~141,~~896~~619		~~101~~115,~~100~~896		92101,~~988~~100
Non-interest income
Service charges on deposit accounts		2120,~~006~~901		2221,~~039~~006		2022,~~698~~039
Interchange income		11,~~116~~868		911,~~239~~116		79,~~590~~239
Mortgage banking		10,~~044~~341		810,~~355~~044		68,~~754~~355
Trust and investment product fees		45,~~866~~620		4,~~947~~866		4,~~712~~947
Increase in cash surrender value of life insurance		1,~~513~~778		1,~~236~~513		1,~~298~~236
Net realized gains on securities (includes $170, $386, $24 accumulated other comprehensive income (AOCI) reclassifications for realized net gains on available for sale securities		170		386		24
Net realized gains on securities (includes $84, $170, $386 accumulated other comprehensive income (AOCI) reclassifications for realized net gains on available for sale securities		84		170		386
Gain/(Loss) on sale and write-down of OREO		268		68		(153)
Gain on sale of foreclosed assets		262		268		68
Other income		32,~~629~~511		43,~~002~~629		24,~~084~~002
Total non-interest income		5253,~~612~~365		5052,~~272~~612		4350,~~007~~272
Non-interest expense
Salaries and employee benefits		6472,~~327~~614		5764,~~741~~327		5457,~~132~~741
Net occupancy		910,~~298~~710		89,~~326~~298		78,~~628~~326
Equipment		1213,~~696~~770		1112,~~360~~696		1011,~~337~~360
Intangibles amortization		12,~~342~~011		1,~~640~~342		1,~~690~~640
Telecommunications		1,~~647~~836		1,~~775~~647		1,~~747~~775
Stationery printing and supplies		1,~~052~~255		1,~~162~~052		1,~~174~~162
FDIC assessment		1,~~560~~407		1,~~655~~560		1,~~620~~655
Marketing		3,~~390~~262		3,~~193~~390		3,~~187~~193
Collection expense		~~910~~991		~~1,173~~910		1,~~330~~173
Prepayment penalty on FHLB advance		—214		~~2,364~~—		—2,364
Acquisition related expenses		79,~~130~~004		~~731~~7,130		~~3,119~~731
Consultant expense		~~549~~—		~~1,106~~549		1,~~400~~106
Interchange expense		3,~~376~~387		23,~~619~~376		2,~~287~~619
Other expenses		1012,~~771~~149		10,~~752~~771		910,~~569~~752
Total non-interest expense		~~118~~132,~~048~~610		~~105~~118,~~597~~048		99105,~~220~~597
Income before income tax		5062,~~460~~374		4550,~~775~~460		3645,775
Income tax expense (includes $60, $135, and $8 income tax expense from AOCI reclassification items)		12,137		10,233		7,779
Income tax expense (includes $29, $60, and $135 income tax expense from AOCI reclassification items)		12,936		12,137		10,233
Net income attributable to common shareholders	$	3849,~~323~~438	$	3538,~~542~~323	$	2835,~~996~~542
Net income per common share:
Basic	$	1.6697	$	1.6466	$	1.4064
Diluted	$	1.6494	$	1.6264	$	1.3962
Dividend per share	$	0.6168	$	0.5461	$	0.4254

The accompanying notes are an integral part of these consolidated financial statements.

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MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, ~~2016~~2017, ~~2015~~2016, AND ~~2014~~2015

(Dollar amounts in thousands)

	2016		2015		2014
	2017		2016		2015
Net income	$	3849,~~323~~438	$	3538,~~542~~323	$	2835,~~996~~542
Other comprehensive income:
Unrealized holding gains/(losses) on securities available for sale		~~(14~~1,~~515)~~813		(~~970~~14,515)		~~19,056~~(970)
Reclassification adjustment for (gains) included in net income		(~~170~~84)		(~~386~~170)		(24386)
Tax effect		~~5,140~~(605)		~~267~~5,140		~~(6,453)~~267
Other comprehensive income		(91,~~545)~~124		(19,~~089~~545)		12(1,~~579~~089)
Comprehensive income	$	2850,~~778~~562	$	3428,~~453~~778	$	4134,~~575~~453

The accompanying notes are an integral part of these consolidated financial statements.

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MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, ~~2016~~2017, ~~2015~~2016, AND ~~2014~~2015

(Dollar amounts in thousands except per share data)

												Accumulated
			Common Stock					Additional				Other
	Preferred		Shares			Treasury		Paid-in		Retained		Comprehensive
	Stock		Outstanding	Amount		Stock		Capital		Earnings		Income/(Loss)		Total
Balance, January 1, 2014	$	—	20,417,224	$	10,508	$	(8,495)	$	224,793	$	77,586	$	1,134	$	305,526
Balance, January 1, 2015	$	—	21,687,525	$	11,159	$	(8,701)	$	246,635	$	97,856	$	13,713	$	360,662
Net income											28,996				28,996
Other comprehensive loss													12,579		12,579
Purchase of treasury stock			(19,078)				(319)								(319)
Stock option exercise			6,950		4		113		(51)						66
Stock option expense									160						160
Dividends — common stock ( $.42 per share)											(8,726)				(8,726)
Restricted stock award			34,337		23				464						487
Director retainer award			21,780		11				348						359
Issuance of common stock in acquisition			1,226,312		613				20,921		—				21,534
Balance, December 31, 2014		—	21,687,525		11,159		(8,701)		246,635		97,856		13,713		360,662
Net income											35,542				35,542
Other comprehensive income													(1,089)		(1,089)
Purchase of treasury stock			(176,405)				(3,527)								(3,527)
Stock option exercise			25,075		13		416		(135)						294
Stock option expense									180						180
Dividends — common stock ( $.54 per share)											(11,680)				(11,680)
Restricted stock award			27,955		21				642						663
Director retainer award			15,425		8				307						315
Issuance of common stock in acquisition		—	—		—				—		—				—
Balance, December 31, 2015		—	21,579,575		11,201		(11,812)		247,629		121,718		12,624		381,360
Net income											38,323				38,323
Other comprehensive loss													(9,545)		(9,545)
Stock option exercise, including tax benefit			111,595		55		1,948		(220)						1,783
Stock option expense									91						91
Dividends — common stock ( $.61 per share)									—		(14,296)				(14,296)
Restricted stock award, including tax benefit			45,932		22				1,032						1,054
Director retainer award			18,334		9				373						382
Purchase of treasury stock			(39,888)				(1,045)								(1,045)
Issuance of common stock in acquisition		—	2,351,816		1,176				50,211		—				51,387
Balance, December 31, 2016	$	—	24,067,364	$	12,463	$	(10,909)	$	299,116	$	145,745	$	3,079	$	449,494
Net income											49,438				49,438
Other comprehensive income													1,124		1,124
Stock option exercise, including tax benefit			91,556		46		1,627		(530)						1,143
Stock option expense									28						28
Dividends — common stock ( $.68 per share)									—		(17,162)				(17,162)
Restricted stock award, including tax benefit			28,052		33				975						1,008
Director retainer award			8,204		7				304						311
Purchase of treasury stock			(11,775)				(395)								(395)
Issuance of common stock in acquisition		—	1,402,612		701				47,268		—				47,969
Balance, December 31, 2017	$	—	25,586,013	$	13,250	$	(9,677)	$	347,161	$	178,021	$	4,203	$	532,958

The accompanying notes are an integral part of these consolidated financial statements.

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MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, ~~2016~~2017, ~~2015~~2016, AND ~~2014~~2015

(Dollars in thousands)

	2016		2015		2014
	2017		2016		2015
Operating Activities
Net income	$	3849,~~323~~438	$	3538,~~542~~323	$	2835,~~996~~542
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,~~705~~250		1,~~625~~705		1,~~500~~625
Depreciation expense		78,~~289~~198		67,~~410~~289		56,~~886~~410
Amortization of mortgage servicing rights		1,~~510~~352		1,~~313~~510		1,~~004~~313
(Recovery)/additional impairment of valuation allowance on mortgage servicing rights		—		(200)		25
Recovery of valuation allowance on mortgage servicing rights		(75)		—		(200)
Securities amortization, net		4,~~901~~444		34,~~386~~901		13,~~973~~386
Amortization of purchased intangible assets		12,~~342~~011		1,~~640~~342		1,~~690~~640
Earnings on cash surrender value of life insurance policies		(1,~~513~~778)		(1,~~236~~513)		(1,~~298~~236)
Gain on life insurance benefit		—(431)		~~(307)~~—		—(307)
Securities gains, net		(~~170~~84)		(~~386~~170)		(24386)
Gain on loans sold		(76,~~311~~467)		(57,~~553~~311)		(45,~~730~~553)
Loans originated for sale		(~~254~~232,~~581~~027)		(~~236~~254,~~928~~581)		(~~165~~236,~~827~~928)
Proceeds from loan sales		~~256~~243,~~946~~179		~~243~~256,~~230~~946		~~168~~243,~~832~~230
Stock based compensation expense		1,~~001~~036		~~843~~1,145		~~647~~843
Stock portion of director retainer fee expense		~~382~~311		~~315~~382		~~359~~315
(Gain)/Loss on sale and write-down of OREO		(268)		(68)		153
Gain on sale of foreclosed assets		(262)		(268)		(68)
Prepayment penalty on FHLB advance		—214		~~2,364~~—		—2,364
Change in other assets and liabilities		(2,294)		1,402		4,172
Tax benefit on stock activity		(528)		—		—
Net cash provided by operating activities		47,262		53,392		43,358
Change in other assets and liabilities		(3,863)		(2,665)		1,402
Net cash provided by operating activities		65,918		47,035		53,392
Investing Activities
Net change in short term investments		—(105)		~~(45)~~—		(~~1,915~~45)
Purchases of securities available for sale		(~~242~~216,~~730~~333)		(~~345~~242,~~783~~730)		(61345,~~756~~783)
Proceeds from calls, maturities, and payments on securities available for sale		~~142~~127,~~543~~224		~~136~~142,~~799~~543		~~106~~136,~~268~~799
Proceeds from sales of securities available for sale		8859,~~203~~943		~~147~~88,~~109~~203		27147,~~131~~109
Loan originations and payments, net		~~(144~~11,~~129)~~628		(~~176~~144,~~184~~129)		(~~110~~176,~~124~~184)
Purchases of premises and equipment		(144,~~068~~347)		(714,~~794~~068)		(57,~~593~~794)
Proceeds from sale of OREO		3,985		2,272		3,864
Proceeds from sale of foreclosed assets		3,155		3,985		2,272
Proceeds from redemption of restricted stock		32,~~789~~483		23,~~785~~789		32,~~251~~785
Purchase of restricted stock		(5,~~531~~168)		(~~231~~5,531)		—(231)
Proceeds from sale of portfolio loans		—		~~11,356~~—		—11,356
Proceeds from life insurance benefit		—686		~~1,094~~—		~~588~~1,094
Cash received/(paid) from bank/branch acquisitions, net		~~(11~~2,~~289)~~845		57(11,~~083~~289)		~~(10~~57,~~686)~~083
Net cash used by investing activities		(~~179~~17,~~227~~989)		(~~171~~179,~~539~~227)		(48171,~~972~~539)
Financing Activities
Net change in deposits		1529,~~401~~861		8315,~~428~~401		83,~~796~~428
Net change in other borrowings		~~162~~(86,~~976~~067)		2162,~~014~~976		~~(13~~2,~~293)~~014
Proceeds from FHLB advances		~~420~~211,000		~~700~~420,000		~~825~~700,000
Repayment of FHLB advances		(~~451~~168,~~986~~690)		(~~647~~451,~~289~~986)		(~~874~~647,~~745~~289)
Proceeds from term debt		~~30,000~~—		—30,000		—
Cash dividends on common stock		(1417,~~296~~162)		(1114,~~680~~296)		(811,~~726~~680)
Purchase of treasury shares		(~~1,045~~395)		(31,~~527~~045)		(~~319~~3,527)
Repayment on term debt		(116,~~667~~666)		—(11,667)		—
Repayment of subordinated debentures, net		—		—		(5,000)
Proceeds from exercise of stock options, including tax benefit		1,143		1,783		294
Proceeds from exercise of stock options, including tax benefit		1,556		294		66
Net cash provided by financing activities		(36,976)		151,166		123,240
Net cash provided by financing activities		150,939		123,240		6,779
Net change in cash and cash equivalents		10,953		18,974		5,093
Net change in cash and cash equivalents		18,974		5,093		1,165
Cash and cash equivalents, beginning of period		86,552		67,578		62,485
Cash and cash equivalents, beginning of period		67,578		62,485		61,320
Cash and cash equivalents, end of period	$	97,505	$	86,552	$	67,578
Cash and cash equivalents, end of period	$	86,552	$	67,578	$	62,485
Supplemental cash flow information
Interest paid	$	1016,~~420~~418	$	810,~~424~~420	$	8,~~807~~424
Income taxes paid		58,~~365~~725		45,~~985~~365		4,~~725~~985
Supplemental non cash disclosure
Loan balances transferred to foreclosed real estate		12,~~965~~917		1,~~475~~965		21,~~585~~475
Loan balances transferred to loans held for sale		—		~~11,356~~—		—11,356

See NOTE 26 regarding non‑cash transactions included in acquisitions.

The accompanying notes are an integral part of these consolidated financial statements.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands except per share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation: The consolidated financial statements include MainSource Financial Group, Inc. and its wholly owned subsidiaries, together referred to as “the Company”. Intercompany transactions and balances are eliminated in consolidation.

The Company’s wholly owned subsidiaries include MainSource Bank (“the Bank”), ~~MainSource Title, LLC, MainSource Insurance, LLC, Insurance Services Marketing, LLC,~~ and MainSource Risk Management. In the second quarter of ~~2016~~2017, the Company acquired 100% of the outstanding common shares of ~~Cheviot~~FCB ~~Financial Corp~~Bancorp, Inc. (“~~Cheviot~~FCB”) and its subsidiary ~~Cheviot~~The ~~Savings~~First Capital Bank~~. At~~ ~~the~~of ~~date~~Kentucky ofand ~~acquisition,~~merged ~~Cheviot~~The ~~Savings~~First Capital Bank ~~was~~of ~~merged~~Kentucky into MainSource Bank. In the ~~fourth~~second quarter of ~~2014~~2016, the Company acquired 100% of the outstanding common shares of ~~MBT~~Cheviot ~~Bancorp~~Financial Corp. (“~~MBT~~Cheviot”) and its subsidiary ~~The~~Cheviot ~~Merchant’s~~Savings Bank ~~and Trust Company~~. At the date of acquisition, ~~The~~Cheviot ~~Merchant’s~~Savings Bank ~~and Trust Company~~ was merged into MainSource Bank. (See NOTE 26).

The Company provides financial services through its offices in Indiana, Illinois, Ohio, and Kentucky. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets and real estate. Other financial instruments which potentially represent concentrations of credit risk include deposit accounts in other financial institutions and federal funds sold. See the Loan Policy section for further discussion on loan information.

Use of Estimates: To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided and actual results could differ.

Cash Flows: Cash and cash equivalents include cash and due from banks, interest bearing deposits with other financial institutions with maturities under 90 days, money market funds and federal funds sold. Net cash flows are reported for loan and deposit transactions, federal funds purchased and repurchase agreements.

Interest-Bearing Time Deposits: Interest-bearing deposits in other financial institutions mature within one year and are carried at cost.

Securities: Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income/(loss), net of tax.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level‑yield method, which considers prepayments only on mortgage‑backed securities. Gains and losses on sales are recorded on the trade date and are based on the amortized cost of the security sold. The Company evaluates securities for other‑than‑temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near‑term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

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Loans Held for Sale: Loans originated and intended for sale in the secondary market are carried at the lower of cost or fair value in the aggregate, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing right. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of purchase premiums or discounts, unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized in interest income using the level‑yield method without anticipating prepayments.

For all classes of financing receivables, interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days. Past due status is based on the contractual terms of the loan. Loans are placed on non‑accrual or charged‑off at an earlier date if collection of principal or interest is considered doubtful.

For all classes of financing receivables, interest accrued but not received for loans placed on non‑accrual is reversed against interest income. Payments received on such loans subsequent to being placed on non‑accrual are applied to the principal balance of the loans. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Non‑accrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Troubled Debt Restructurings, (“TDRs”) normally follow the same guidelines as regular loans in placing on non‑accrual status.

Loans acquired in a business combination are designated as purchased loans. These loans are recorded at their fair value at acquisition date, factoring in credit losses expected to be incurred over the life of the loan. An allowance for loan losses is not carried over as of the acquisition date. Loans purchased with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are accounted for under Financial Accounting Standards Board Accounting Standards Codification 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Expected cash flows at the acquisition date in excess of the fair value of loans are considered to be accretable yield, which is recognized as interest income over the life of the loan using a level yield method.

Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged‑off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 3 years. However, a floor of 15 basis points of historical losses is used to reflect a minimum level of risk in a portfolio segment. This actual loss experience is supplemented with other economic factors based on the risks present. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The allowance for loans collectively evaluated for impairment also consists of reserves on certain loans that are classified

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but determined not to be impaired based on an analysis which incorporates probability of default with a loss given default scenario.

For allowance purposes, the following portfolio segments have been identified: Commercial, Commercial Real Estate (“CRE”), Residential and Consumer. The classes within the Commercial portfolio are commercial and industrial and agricultural. The classes within the Commercial Real Estate portfolio are farm, hotel, construction and development, and other. The classes within the Residential portfolio are 1‑4 family and home equity. Finally, the classes within the Consumer portfolio are direct and indirect.

The risk characteristics of each loan portfolio segment are as follows:

Commercial

The commercial portfolio contains commercial and industrial and agricultural loans. Commercial loans are made to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, agricultural financing, or other projects and are repaid from operations of the business. The majority of these borrowers are customers doing business within the Company’s geographic regions. Commercial loans are generally underwritten individually and secured with the assets of the company and/or the personal guarantee of the business owners. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate

Commercial real estate loans consist of loans for income‑producing real estate properties and real estate developers. The Company mitigates its risk on these loans by requiring collateral values that exceed the loan amount and underwriting the loan with projected cash flow in excess of the debt service requirement. These loans are made to finance properties such as apartment buildings, office and industrial buildings, hotels, farm real estate, and retail shopping centers; and are repaid through cash flows related to the operation, sale, or refinance of the property.

Residential

The residential portfolio contains residential mortgage and home equity loans. Residential mortgage loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15 to 30 year term, and in most cases, are extended to borrowers to finance their primary residence. Residential loans are secured by the residence being financed. For residential loans that are secured by 1‑4 family residences and are generally owner occupied, the Company generally establishes a maximum loan‑to‑value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity lending includes both home equity loans and lines‑of‑credit. This type of lending, which is secured by a first‑ or second‑ lien on the borrower’s residence, allows customers to borrow against the equity in their home. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Consumer

The consumer portfolio consists of direct and indirect installment loans. The largest percentage of the direct consumer loans are automobile loans and the automobile or other vehicle is normally used as collateral for the loan. The Company no longer writes any indirect loans. These loans are generally financed over a short (3‑7 year) time horizon. Similar to the residential loans above, repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

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All loans are charged off when the Company has determined that future collectability of the entire loan balance is doubtful. For commercial and commercial real estate loans, collateral dependent loans are written down to fair value less cost to sell.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case‑by‑case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans, for which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Impairment is measured on a loan by loan basis for commercial and commercial real estate loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential real estate loans for impairment disclosures. A specific reserve is established as a component of the allowance when a loan has been determined to be impaired for all commercial and commercial real estate relationships greater than $250.

The Company purchases individual loans and groups of loans, some of which have shown evidence of credit deterioration since origination. These purchased credit impaired loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses.

Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as, credit score, loan type, and date of origination. The Company estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of the amounts paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Federal Home Loan Bank (FHLB) Stock: The Bank is a member of the Federal Home Loan Bank (“FHLB”) system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight‑line method with useful lives ranging from 30 to 39 years for buildings and 5 to 15 years for related components. Leasehold improvements are depreciated over the shorter of its useful life or lease term. Furniture, fixtures and equipment are depreciated using the straight‑line method with useful lives ranging from 3 to 10 years.

Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially recorded at fair value net of estimated selling costs when acquired, establishing a new cost basis. Physical possession of residential real estate property collateralizing a consumer mortgage loan occurs when legal title is obtained upon completion of foreclosure or when the borrower conveys all interest in property to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. These assets are subsequently accounted for at lower of cost or fair value less estimated cost to sell. If fair value declines after acquisition, a valuation allowance is recorded through expense. Costs after acquisition are expensed.

Company Owned Life Insurance: The Company has purchased life insurance policies on certain employees. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.53

Servicing Assets: Servicing rights are recognized separately when they are acquired through sales of loans. When mortgage loans are sold, servicing rights are initially recorded at fair value with the income statement effect recorded in mortgage banking in non‑interest income. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into non‑interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase

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to Cash ~~income.~~surrender ~~Changes~~value inof ~~valuation~~life ~~allowances~~insurance: The ~~are~~Company ~~reported~~has ~~with~~purchased ~~mortgage~~life ~~banking~~insurance policies on certain employees. Company owned life insurance is recorded at the ~~income~~amount ~~statement.~~that ~~The~~can ~~fair~~be ~~values~~realized ofunder ~~servicing~~the ~~rights~~insurance ~~are~~contract ~~subject~~at tothe ~~significant~~balance ~~fluctuations~~sheet asdate, awhich ~~result~~is ofthe ~~changes~~cash insurrender ~~estimated~~value ~~and~~adjusted ~~actual~~for ~~prepayment~~other ~~speeds~~charges ~~and~~or ~~default~~other ~~rates~~amounts ~~and~~due ~~losses~~that are probable at settlement.

Servicing ~~fee~~Assets: Servicing ~~income,~~rights ~~which~~are isrecognized ~~reported~~separately onwhen ~~the~~they ~~income~~are ~~statement~~acquired asthrough ~~mortgage~~sales ~~banking~~of inloans. ~~non‑interest~~When ~~income~~mortgage loans are sold, isservicing rights are initially recorded ~~for~~at ~~fees~~fair ~~earned~~value ~~for~~with ~~servicing~~the ~~loans.~~income ~~The~~statement ~~fees~~effect ~~are~~recorded ~~based~~in onmortgage abanking ~~contractual~~in ~~percentage~~non‑interest ofincome. ~~the~~Fair ~~outstanding~~value ~~principal,~~is orbased on a ~~fixed~~valuation ~~amount~~model ~~per~~that ~~loan~~calculates ~~and~~the ~~are~~present ~~recorded~~value asof ~~income~~estimated ~~when~~future ~~earned~~net servicing income. ~~The~~All ~~amortization~~classes of ~~mortgage~~ servicing ~~rights~~assets isare ~~netted~~subsequently ~~against~~measured ~~loan~~using ~~servicing~~the ~~fee~~amortization ~~income.~~method ~~Servicing~~which ~~fees~~requires ~~totaled~~servicing ~~$2,653, $2,415~~rights ~~and~~to ~~$2,065~~be ~~for~~amortized ~~the~~into ~~years~~non‑interest ~~ended~~income ~~December~~in ~~31,~~proportion ~~2016~~to, ~~2015~~ and ~~2014.~~over ~~Late~~the ~~fees~~period ~~and~~of, ~~ancillary~~the ~~fees~~estimated ~~related~~future tonet ~~loan~~ servicing ~~are~~income ~~not~~of ~~material~~the underlying loans.

~~Mortgage~~Servicing ~~Banking~~assets ~~Derivatives: Commitments~~are toevaluated ~~fund~~for ~~mortgage~~impairment ~~loans~~based ~~(interest~~upon ~~rate~~the ~~locks)~~fair tovalue beof ~~sold into~~ the ~~secondary~~rights ~~market~~as ~~and~~compared ~~forward~~to ~~commitments~~carrying ~~for~~amount. ~~the~~Impairment ~~future~~is ~~delivery~~determined ofby ~~these~~stratifying ~~mortgage~~rights ~~loans~~into ~~are~~groupings ~~accounted~~based ~~for~~on aspredominant ~~free~~risk ~~standing~~characteristics, ~~derivatives.~~such ~~Fair~~as ~~values of~~ interest rate ~~locks are recorded at the time of commitment~~, ~~adjusted~~loan ~~for~~type ~~expected~~and ~~fall~~investor ~~out~~type. ~~before~~Impairment ~~the loan~~ is ~~funded.~~recognized ~~The~~through ~~Company~~a ~~enters~~valuation ~~into~~allowance ~~forward commitments~~ for ~~the~~an ~~future~~individual ~~delivery~~grouping, ofto ~~mortgage~~the ~~loans~~extent ~~when~~that ~~interest~~fair ~~rate~~value ~~locks~~is ~~are~~less ~~entered~~than ~~into,~~the incarrying ~~order~~amount. toIf ~~hedge~~ the ~~change~~Company inlater ~~interest~~determines ~~rates~~that ~~resulting~~all ~~from~~or ~~its~~a ~~commitments~~portion toof ~~fund~~ the ~~loans.~~impairment ~~The~~no ~~fair~~longer ~~value~~exists offor ~~these~~a ~~forward~~particular ~~commitments~~grouping, isa ~~estimated~~reduction ~~based~~of on the ~~change~~allowance inmay ~~mortgage~~be ~~interest~~recorded ~~rates~~as ~~from~~an ~~the~~increase ~~date~~to ~~the~~income. ~~commitment~~Changes isin ~~entered~~valuation ~~into.~~allowances ~~Any changes~~ are ~~recorded~~reported inwith mortgage banking on the income statement. The ~~amount~~fair values of ~~income/(expense)~~servicing ~~related~~rights toare ~~these~~subject ~~derivatives~~to ~~was~~significant ~~$(52), $(275),~~fluctuations ~~and~~as ~~$450~~a inresult ~~2016,~~of ~~2015,~~changes ~~and~~in ~~2014~~estimated and isactual ~~included~~prepayment inspeeds ~~the~~and ~~“Gain~~default ~~from~~rates ~~sale of mortgage loans~~ and ~~interest rate locks” in Note 14~~losses. ~~See Note 14 for additional information on mortgage banking activities.~~

Servicing fee income, which is reported on the income statement as mortgage banking in non‑interest income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal, or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Servicing fees totaled $2,834, $2,653 and $2,415 for the years ended December 31, 2017, 2016 and 2015. Late fees and ancillary fees related to loan servicing are not material.

Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of interest rate locks are recorded at the time of commitment, adjusted for expected fall out before the loan is funded. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the change in interest rates resulting from its commitments to fund the loans. The fair value of these forward commitments is estimated based on the change in mortgage interest rates from the date the commitment is entered into. Any changes are recorded in mortgage banking on the income statement. The amount of expense related to these derivatives was $27, $52, and $275 in 2017, 2016, and 2015 and is included in the “Gain from sale of mortgage loans and interest rate locks” in Note 14. See Note 14 for additional information on mortgage banking activities.

Transfers of Financial Assets: Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement or option to repurchase them before their maturity.

Goodwill and Other Intangible Assets: Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually and more frequently if events and circumstances exist that indicate that a goodwill impairment test should be performed. The Company has selected June 30 of each year as the date to perform its impairment review. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company’s balance sheet.

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Other intangible assets consist largely of core deposit and acquired customer relationship intangibles arising from whole bank and branch acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives, generally ten years.

Loan Commitments and Related Financial Instruments: Financial instruments include off‑balance sheet credit instruments, such as commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Long‑term Assets: Premises and equipment and other long‑term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

~~Income Taxes~~Derivatives: ~~Income~~ At ~~tax~~the ~~expense~~inception isof a derivative contract, the ~~total~~Company designates the derivative as one of three types based on the ~~current~~Company's ~~year~~intentions ~~income~~and ~~tax~~belief ~~due~~as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or ~~refundable~~liability ~~and~~or of an unrecognized firm commitment ("fair value hedge"), (2) a hedge of a forecasted transaction or the ~~change~~variability inof ~~deferred~~cash ~~tax~~flows ~~assets~~to ~~and~~be ~~liabilities~~received or paid related to a recognized asset or liability ("cash flow hedge"), or (3) an instrument with no hedging designation ("stand-alone derivative"). ~~Deferred~~For ~~tax~~a ~~assets~~fair ~~and~~value ~~liabilities~~hedge,the ~~are~~gain or loss on the derivative, ~~expected~~as ~~future~~well ~~tax~~as ~~amounts~~the ~~for~~offsetting loss or gain on the ~~temporary~~hedged item, are recognized in current earnings as fair values change.

50For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For both types of hedges, changes in the fair value of derivatives that are not highly effective in hedging the changes in fair value or expected cash flows of the hedged item are recognized immediately in current earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as noninterest income.

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in noninterest income. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. This documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses , both at the hedge's inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items . The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as noninterest income. When a fair value hedge is discontinued , the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehens ive income are amortized into earnings over the same periods which the hedged transactions will affect earnings.

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

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differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

Stock‑Based Compensation: Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value of these awards at the date of grant. A Black‑Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight‑line basis over the requisite service period for the entire award.

Retirement Plans: Employee 401(k) and profit sharing plan expense is the amount of matching contributions and discretionary contributions, respectively.

Earnings Per Common Share: Basic earnings per common share is net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock options as well as stock warrants issued as part of the Treasury Department’s Capital Purchase Program. Earnings and dividends per share are restated for all stock splits and dividends through the date of issuance of the financial statements.

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale which are also recognized as a separate component of equity.

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are now any such matters that will have a material effect on the financial statements.

Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank is required to meet regulatory reserve and clearing requirements.

Equity: Stock dividends in excess of 20% are reported by transferring the par value of the stock issued from retained earnings to common stock. Stock dividends for 20% or less are reported by transferring the fair value, as of the ex‑dividend date, of the stock issued from retained earnings to common stock and additional paid‑in capital. Fractional share amounts are paid in cash with a reduction in retained earnings. Treasury stock is carried at cost and valued on an average cost basis.

Dividend Restriction: Banking regulations require banks to maintain certain capital levels and may limit the dividends paid to the holding companies or by holding companies to shareholders.

Fair Value of Financial Instruments: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 7. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Operating Segments: While the Company monitors the revenue streams of its various products and services, the identifiable segments are not material and operations are managed and financial performance is evaluated on a Company‑ wide basis. Accordingly, all of the Company’s financial service operations are considered by management to be aggregated in one reportable operating segment.

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Company‑ wide basis. Accordingly, all of the Company’s financial service operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders’ equity.

Adoption of New Accounting Standards and Newly Issued Not Yet Effective Accounting Standards:

In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606 )” ASU 2014-09 says that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On July 9, 2015, the FASB approved amendments deferring the effective date by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or modified retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application. Early application is permitted but not before the original public entity effective date, i.e ., annual periods beginning after December 15, 2016. The Company has determined that ASU No 2014-09 will not have a significant impact on its financial statements as a significant portion of the Company’s revenue is scoped out of the standard. The Company adopted this standard on January 1, 2018 using the modified retrospective method. The Company has determined that service charges, asset management fees, and interchange fees will be included in the scope of this ASU and there will be no Day 1 impact from adoption of this ASU.

In ~~September~~January ~~2015~~2016, the FASB issued ASU ~~2015~~No. 2016-~~16,~~01 “~~Business~~Financial ~~Combinations~~Instruments - Overall (~~Topic~~Subtopic ~~805~~825-10) –- ~~Simplifying~~Recognition ~~the~~and ~~Accounting~~Measurement ~~for~~of ~~Measurement-Period~~Financial ~~Adjustments~~Assets and Financial Liabilities.” ASU ~~2015~~2016-1601 ~~requires~~is ~~that~~intended anto ~~acquirer~~improve ~~recognize~~the ~~adjustments~~recognition toand ~~provisional~~measurement ~~amounts~~of ~~that~~financial ~~are~~instruments ~~identified~~by ~~during~~requiring ~~the~~equity ~~measurement~~investments ~~period~~to inbe ~~the~~measured ~~reporting~~at ~~period~~fair value with changes in ~~which~~fair ~~the~~value ~~adjustment~~recognized ~~amounts~~in ~~are~~net ~~determined. It~~income; ~~also~~requiring ~~requires~~public ~~that~~business entities to use the ~~acquirer~~exit ~~record,~~price innotion when measuring the ~~same~~fair ~~period’s~~value of financial ~~statements,~~instruments ~~the~~for ~~effect~~disclosure onpurposes; ~~earnings~~requiring separate presentation of ~~changes~~financial inassets ~~depreciation,~~and ~~amortization,~~financial orliabilities ~~other~~by ~~income~~measurement ~~effects,~~category ifand ~~any,~~form asof afinancial ~~result~~asset ofon the ~~change~~balance tosheet or the ~~provisional~~accompanying ~~amounts,~~notes ~~calculated~~to asthe iffinancial statements; eliminating the ~~accounting~~requirement ~~had~~for ~~been~~public ~~completed~~business atentities to disclose the ~~acquisition~~method(s) ~~date. This~~and ~~ASU~~significant ~~requires~~assumptions anused ~~entity~~to estimate the fair value that is required to ~~present~~be ~~separately~~disclosed for financial instruments measured and amortized at cost on the ~~face~~balance ofsheet; ~~the~~and ~~income~~requiring ~~statement~~a orreporting ~~disclose~~organization to present separately in ~~the~~other ~~notes~~comprehensive income the portion of the ~~amount~~total ~~recorded~~change in ~~current-period~~the ~~earnings~~fair byvalue ~~line~~of ~~item~~a ~~that~~liability ~~would~~resulting ~~have~~from ~~been~~a ~~recorded~~change in ~~previous~~the ~~reporting~~instrument-specific ~~periods~~credit ifrisk when the ~~adjustment~~organization has elected to measure the ~~provisional~~liability ~~amounts~~at ~~had~~fair ~~been~~value ~~recognized~~in asaccordance ofwith the ~~acquisition~~fair ~~date~~value option for financial instruments. ASU 2016-1601 is effective for ~~fiscal~~annual ~~years~~periods ~~beginning~~and ~~after~~interim ~~December~~periods ~~15,~~within ~~2015,~~those ~~including~~annual ~~interim~~ periods, ~~within~~beginning ~~those~~after ~~fiscal~~December ~~years~~15, 2017. ~~This~~The ~~ASU~~amendments should be applied ~~prospectively~~by tomeans ~~adjustments~~of a cumulative-effect adjustment to ~~provisional~~the ~~amounts~~balance ~~that~~sheet ~~occur~~as ~~after~~of the ~~effective~~beginning ~~date~~of the fiscal year of ~~this~~adoption. ~~ASU~~The ~~with~~amendments ~~earlier~~related ~~application~~to ~~permitted~~equity ~~for~~securities ~~financial~~without ~~statements~~readily ~~that~~determinable ~~have~~fair ~~not~~values ~~been~~(including ~~issued. The~~disclosure ~~Company~~requirements) ~~implemented~~should ~~this~~be ~~ASU~~applied ~~with~~prospectively to equity investments that exist as of the ~~acquisition~~date of ~~Cheviot~~adoption. ~~Financial~~The ~~Corp~~Company will be making these changes in the ~~second~~first quarter of ~~2016.~~2018 and does not anticipate it having a material impact on the Company’s financial statements.

In ~~January~~February 2016, the FASB issued ASU No. 2016-0102 “~~Financial~~Leases ~~Instruments - Overall~~ (~~Subtopic~~Topic ~~825-10~~842) ~~- Recognition and Measurement of Financial Assets and Financial Liabilities~~.” ASU 2016-0102 isrequires ~~intended~~lessees ~~to improve the recognition~~ and ~~measurement~~lessors ~~of financial instruments by requiring equity investments~~ to beclassify ~~measured~~leases atas ~~fair~~either ~~value~~capital ~~with~~leases ~~changes~~or inoperating ~~fair~~leases. ASU ~~value~~2016-02 ~~recognized~~also inrequires ~~net~~lessees ~~income; requiring public business entities~~ to ~~use~~recognize ~~the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requiring separate presentation of financial~~ assets and ~~financial~~ liabilities byfor ~~measurement~~all ~~category~~leases ~~and~~with ~~form of financial asset on~~ the ~~balance~~exception ~~sheet~~of orshort ~~the~~term ~~accompanying~~leases. There ~~notes~~are new todisclosure ~~the~~requirements ~~financial statements; eliminating the requirement~~ for ~~public~~these ~~business~~leases ~~entities~~which towill ~~disclose~~provide ~~the~~users ~~method(s)~~of ~~and~~financial ~~significant~~statements ~~assumptions~~with ~~used~~information to ~~estimate~~understand the ~~fair~~amount, ~~value~~timing, ~~that is required to be disclosed for financial instruments measured~~ and ~~amortized~~uncertainty ~~at cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion~~ of ~~the~~cash ~~total~~flows ~~change~~arising ~~in the fair value of a liability resulting~~ from ~~a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments~~leases. ASU 2016-0102 iswill become effective for ~~annual~~fiscal ~~periods~~years ~~and interim periods within those annual periods,~~ beginning after December 15, ~~2017~~2018. The ~~amendments~~Company ~~should~~currently behas ~~applied~~prepared bya ~~means~~worksheet of aall ~~cumulative-effect~~of ~~adjustment~~its toleases ~~the~~and ~~balance~~will ~~sheet~~reviewing asthem ofduring the ~~beginning~~next ~~of the fiscal~~ year ~~of adoption. The amendments related~~ to ~~equity~~determine ~~securities~~the ~~without~~impact ~~readily~~on ~~determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of~~ the ~~date of adoption. The~~ Company’s ~~will~~financial ~~be assessing the impact of ASU 2016-01 during 2017~~statements.

In ~~February~~March 2016, the FASB issued (ASU) No. 2016-0209 “~~Leases~~Compensation - Stock Compensation (Topic ~~842~~718) - Improvements to Employee Share-Based Payment Accounting.” ASU 2016-0209 requires ~~lessees~~all ~~and~~income ~~lessors~~tax effects of awards to ~~classify~~be ~~leases~~recognized asin ~~either~~the ~~capital~~income ~~leases~~statement when the awards vest or ~~operating~~are ~~leases~~settled. ~~ASU~~ ~~2016-02~~It also ~~requires~~allows ~~lessees~~an employer to ~~recognize~~repurchase ~~assets~~more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and ~~liabilities~~to make a policy election for ~~all~~forfeitures ~~leases~~as ~~with~~they ~~the~~occur. ~~exception~~ASU of2016-09 ~~short~~is ~~term~~effective ~~leases~~for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company adopted this ASU in 2017. ~~There~~The ~~are new~~impact ~~disclosure~~of ~~requirements~~this ~~for~~ASU ~~these~~in ~~leases~~2017 resulted in a reduction in its income tax expense of $232 from stock option exercises and $177 from restricted stock activity.

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~~which~~ In ~~will~~June ~~provide~~2016, ~~users~~the FASB issued ASU 2016-13 “Financial Instruments (Topic 326) Measurement of ~~financial~~Credit ~~statements~~Losses ~~with~~on ~~information~~Financial toInstrurment” ~~understand~~“CECL”). ASU ~~the~~2016-13 ~~amount,~~requires ~~timing,~~an ~~and~~allowance ~~uncertainty~~for expected credit losses on financial assets be recognized as early as day one of ~~cash~~the ~~flows~~instrument. This ~~arising~~ASU departs from ~~leases~~the incurred loss model which means the probability threshold is removed. ~~ASU~~It ~~2016~~considers more forward-02looking ~~will~~information ~~become~~and requires the entity to estimate its credit losses as far as it can reasonably estimate. This ASU is effective for fiscal years beginning after December 15, ~~2018~~2019, including interim periods within those fiscal years. Early adoption is permitted. The Company ~~currently~~ has ~~prepared~~captured aloan ~~worksheet~~level ofloss ~~all~~data ofsince ~~its~~2011. The ~~leases~~Company ~~and~~ will ~~reviewing~~be ~~them~~starting its segregation of loans during ~~the~~2018. The ~~next~~Company ~~two~~anticipates ~~years~~that toits ~~determine~~allowance ~~the~~for ~~impact~~loan onlosses will increase with the ~~Company’s~~adoption ~~financial~~of ~~statements~~this standard.

In March 2016, the FASB issued (ASU) No. 2016-09 “Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. ASU 2016-09 is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company elected to implement this ASU in 2017. If it had adopted this ASU in 2016, the impact would have been an approximate $325 reduction in its income tax expense - $140 from restricted stock activity and $185 from stock option activity.

In June 2016, the FASB issued ASU 2016-13 “Financial Instruments (Topic 326) Measurement of Credit Losses on Financial Instrurment” “CECL”). ASU 2016-13 requires an allowance for expected credit losses on financial assets be recognized as early as day one of the instrument. This ASU departs from the incurred loss model which means the probab ility threshold is removed. It considers more forward-looking information and requires the entity to estimate its credit losses as far as it can reasonably estimate. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company has captured loan level loss data since 2011. The Company will be starting its segregation of loans during 2017. The Company anticipates that its allowance for loan losses will increase with the adoption of this standard.

In August 2016, the FASB issued ASU 2016-15 "Statement of Cash Flows (Topic 320): Classification of Certain Cash Receipts and Cash Payments". ASU 2016-15 addresses the diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows, including the following:.

Debt Prepayment or Debt Extinguishment Costs

Settlement of Zero-Coupon Bonds or Debt with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest Rate

Contingent Consideration Payments Made Soon After a Business Combination

Proceeds From the Settlement of Insurance Claims

Proceeds From the Settlement of BOLI and COLI Policies

Distributions Received From Equity Method Investees

Beneficial Interests in Securitization Transactions

This ASU is effective for fiscal years beginning after December 31, 2017 on a retrospective basis. The Company does not anticipate the adoption of this standard to have a material impact on the Company’s operating results.

In ~~January~~November, ~~2017~~2016, the FASB issued ASU ~~2017~~2016-0118 “~~Clarifying~~Statement ~~the~~of ~~Definition~~Cash ofFlows a(Topic ~~Business~~130) Restricted Cash”. ASU ~~2017~~2016-0118 ~~clarifies~~amended ~~the~~existing ~~definition~~guidance ofto require that a ~~business~~statement ~~with~~of cash flows explain the ~~objective~~change during the period in the total of ~~adding~~cash, ~~guidance~~cash toequivalents, and ~~assist~~amounts ~~entities~~generally ~~with~~described ~~evaluating~~as ~~whether~~restricted ~~transactions~~cash ~~should~~or berestricted ~~accounted~~cash ~~for~~equivalents. Therefore, amounts generally described as ~~acquistions~~restricted orcash ~~disposals~~and ofrestricted ~~assets~~cash equivalents orshould ~~businesses. It~~be ~~provides~~included awith ~~framework~~cash toand ~~assist~~cash ~~entities~~equivalents inwhen ~~evaluating~~reconciling ~~whether~~the beginning-of-period ~~assets~~and ~~acquired~~end-of-period ortotal ~~sold~~amounts ~~represent~~shown aon ~~business~~the statement of cash flows. ~~This~~ The ~~ASU~~amendments isare effective for public business entities for fiscal periods beginning after December 15, 2017, onand ainterim ~~prospective~~periods ~~basis~~within those fiscal periods. The ~~Company~~amendments ~~has~~should ~~determined~~be ~~that~~applied using a retrospective transition method to each period presented. The adoption of this ~~ASU~~standard ~~will~~is not ~~impact~~expected ~~them~~to have a material effect of the Company’s operating results or financial condition.

In January 2017, the FASB issued ASU 2017-01 “Clarifying the Definition of a Business”. ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquistions or disposals of assets or businesses. It provides a framework to assist entities in evaluating whether assets acquired or sold represent a business. This ASU is effective for periods beginning after December 15, 2017 on a prospective basis. The Company has determined that this ASU will not have an impact on its financial statements .

In January 2017, the FASB issued ASU 2017-04 “Simplifying the Test for Goodwill Impairment”. ASU 2017-04 removes step 2 from the goodwill impairment test. This ASU requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. However, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This ASU is effective for periods beginning after December 15, 2019 on a prospective basis. The Company will be evaluating the impact this ASU has on its financial statements over the next several years.

53 In March 2017, the FASB issued (ASU) No. 2017-08 "Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20). ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. ASU 2017-08 is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted.

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The Company elected to adopt this ASU in the first quarter of 2017. The impact of this adoption on the Company’s earnings was minimal.

In February 2018, the FASB issued ASU 2018-02 Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”. ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments also require certain disclosures about stranded tax effects. This ASU is effective for all entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The Company will be implementing this ASU in the first quarter of 2018 with a charge to retained earnings and a credit to other comprehensive income of $905.

NOTE 2 — STOCK WARRANTS

In January, 2009, the Company entered into an agreement with the United States Department of Treasury (the “Treasury Department”) as part of the Treasury Department’s Capital Purchase Program. As part of this agreement, the Treasury Department received a warrant to purchase 571,906 shares of the Company’s common stock at an initial per-share exercise price of $14.95. The warrant provides for the adjustment of the exercise price and the number of shares of the Company’s common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of Company common stock, upon certain issuances of the Company common stock at or below a specified price relative to the initial exercise price and in the event the Company’s quarterly dividend exceeds $0.145/share. The warrant has a term of ten years and is currently exercisable. Like stock options, the warrant issued through the Capital Purchase Program is potentially dilutive. On June 6, 2013, the Treasury Department announced it had completed an auction to sell the warrant in a private transaction. The average stock price for the Company for ~~2016~~2017, ~~2015~~2016, and ~~2014~~2015 was $2334.6444, $2023.9164, and $1720.2791 per share, respectively, and the warrant issued in 2009 has an exercise price of $14.95 per share. This resulted in additional dilutive shares in calculating earnings per share of ~~210~~325,~~638~~615, ~~163~~210,~~011~~638 and 76163,~~828~~011 shares in ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, respectively.

NOTE 3 — RESTRICTION ON CASH AND DUE FROM BANKS

The Bank is required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. The reserves required at December 31, ~~2016~~2017 and ~~2015~~2016 were $3311,~~844~~557 and $2333,~~957~~844. The Company had no compensating balance requirements at December 31, ~~2016~~2017 and ~~2015~~2016.

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NOTE 4 — SECURITIES

The fair value of securities available for sale and related gross unrealized gains and losses recognized in accumulated other comprehensive income was as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
As of December 31, 2017
Available for Sale
U. S. government agency	$	114	$	1	$	—	$	115
State and municipal		385,844		12,724		(442)		398,126
Mortgage-backed securities-residential (Government Sponsored Entity)		386,116		930		(3,792)		383,254
Collateralized mortgage obligations (Government Sponsored Entity)		289,425		420		(3,450)		286,395
Equity securities		4,670		—		—		4,670
Other securities		4,938		75		—		5,013
Total available for sale	$	1,071,107	$	14,150	$	(7,684)	$	1,077,573
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
As of December 31, 2016
Available for Sale
U. S. government agency	$	951	$	4	$	—	$	955
State and municipal		361,335		10,799		(2,848)		369,286
Mortgage-backed securities-residential (Government Sponsored Entity)		450,006		1,253		(4,629)		446,630
Collateralized mortgage obligations (Government Sponsored Entity)		179,314		1,514		(1,427)		179,401
Equity securities		4,670		—		—		4,670
Other securities		6,527		71		—		6,598
Total available for sale	$	1,002,803	$	13,641	$	(8,904)	$	1,007,540
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
As of December 31, 2015
Available for Sale
U. S. government agency	$	499	$	5	$	—	$	504
State and municipal		332,999		17,802		(68)		350,733
Mortgage-backed securities-residential (Government Sponsored Entity)		332,525		2,199		(644)		334,080
Collateralized mortgage obligations (Government Sponsored Entity)		228,621		1,966		(1,838)		228,749
Equity securities		4,689		—		—		4,689
Other securities		6,524		—		—		6,524
Total available for sale	$	905,857	$	21,972	$	(2,550)	$	925,279

Contractual maturities of securities available for sale at December 31, ~~2016~~2017 were as follows. Securities not due at a single maturity or with no maturity at year end are shown separately.

	Available for Sale
	Amortized Cost		Fair Value
Within one year	$	1223,~~583~~895	$	1224,~~715~~200
One through five years		7989,~~099~~897		8292,~~440~~721
Six through ten years		~~107~~89,~~719~~513		~~111~~92,~~782~~961
After ten years		~~169~~187,~~412~~591		~~169~~193,~~902~~372
Mortgage-backed securities-residential (Government Sponsored Entity)		~~450~~386,~~006~~116		~~446~~383,~~630~~254
Collateralized mortgage obligations (Government Sponsored Entity)		~~179~~289,~~314~~425		~~179~~286,~~401~~395
Equity securities		4,670		4,670
Total available for sale securities	$	1,~~002~~071,~~803~~107	$	1,~~007~~077,~~540~~573

Gross proceeds from sales of securities available for sale during ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015 were $8859,~~203~~943, $~~147~~88,~~109~~203, and $27147,~~131~~109. Gross gains of $~~174~~226, $1174,~~689,~~ and $~~570~~1,689 and gross losses of $4142, $14,~~303,~~ and $~~546~~1,303 were realized on those sales in ~~2016~~2017, ~~2015~~2016 and ~~2014~~2015, respectively. The tax provision related to these net realized gains was $6029, $~~135~~60, and $8135 respectively.

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Securities with a carrying value of $~~294~~442,~~806~~348 and $~~282~~294,~~897~~806 were pledged at December 31, ~~2016~~2017 and ~~2015~~2016 to secure certain deposits and repurchase agreements, secure future funding needs, and for other purposes as permitted or required by law.

At year end ~~2016~~2017 and ~~2015~~2016, there were no holdings of securities of any one issuer, other than the U.S. Government and its sponsored entities, in an amount greater than 10% of shareholders’ equity.

Below is a summary of securities with unrealized losses as of year‑end ~~2016~~2017 and ~~2015~~2016 presented by length of time the securities have been in a continuous unrealized loss position.


	Less than 12 months				12 months or longer				Total
December 31, 2017			Unrealized				Unrealized				Unrealized
Description of securities	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U. S. government agency	$	—	$	—	$	—	$	—	$	—	$	—
State and municipal		12,486		(46)		22,537		(396)		35,023		(442)
Mortgage-backed securities-residential (Government Sponsored Entity)		112,127		(737)		132,168		(3,055)		244,295		(3,792)
Collateralized mortgage obligations (Government Sponsored Entity)		183,344		(1,931)		53,443		(1,519)		236,787		(3,450)
Other securities		—		—		—		—		—		—
Total temporarily impaired	$	307,957	$	(2,714)	$	208,148	$	(4,970)	$	516,105	$	(7,684)


	Less than 12 months				12 months or longer				Total
December 31, 2016			Unrealized				Unrealized				Unrealized
Description of securities	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U. S. government agency	$	—	$	—	$	—	$	—	$	—	$	—
State and municipal		95,822		(2,848)		—		—		95,822		(2,848)
Mortgage-backed securities-residential (Government Sponsored Entity)		335,668		(4,629)		—		—		335,668		(4,629)
Collateralized mortgage obligations (Government Sponsored Entity)		77,694		(1,202)		8,518		(225)		86,212		(1,427)
Other securities		—		—		—		—		—		—
Total temporarily impaired	$	509,184	$	(8,679)	$	8,518	$	(225)	$	517,702	$	(8,904)

	Less than 12 months				12 months or longer				Total
December 31, 2015			Unrealized				Unrealized				Unrealized
Description of securities	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
U. S. government agency	$	—	$	—	$	—	$	—	$	—	$	—
State and municipal		4,802		(33)		1,367		(35)		6,169		(68)
Mortgage-backed securities-residential (Government Sponsored Entity)		168,950		(644)		—		—		168,950		(644)
Collateralized mortgage obligations (Government Sponsored Entity)		53,324		(591)		52,061		(1,247)		105,385		(1,838)
Other securities		—		—		—		—		—		—
Total temporarily impaired	$	227,076	$	(1,268)	$	53,428	$	(1,282)	$	280,504	$	(2,550)

Other‑Than‑Temporary‑Impairment

Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under ASC 320.

In determining OTTI under ASC 320, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near‑term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell ~~the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The~~

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the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other‑than‑temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether the Company intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of December 31, ~~2016~~2017, the Company’s security portfolio consisted of ~~969~~1,019 securities, ~~247~~162 of which were in an unrealized loss position. Unrealized losses on state and municipal securities of $~~2,848~~442 have not been recognized into income because management has the ability to hold for a period of time sufficient to allow for any anticipated recovery in fair value and it is unlikely that management will be required to sell the securities before their anticipated recovery. The decline in value is primarily attributable to changes in interest rates. The fair value of these debt securities is expected to recover as the securities approach their maturity date.

At December 31, ~~2016~~2017, all of the mortgage‑backed securities held by the Company were issued by U.S. government‑sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value of approximately $43,~~629~~792 is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage‑backed securities and it is unlikely that it will be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other‑than‑temporarily impaired at December 31, ~~2016~~2017.

The Company’s collateralized mortgage obligation securities portfolio includes agency collateralized mortgage obligations which were issued by U.S. government-sponsored entities and agencies. The government has affirmed its commitment to support. These securities with an unrealized loss had a market value of $86236,~~212~~787 and unrealized losses of approximately $13,~~427~~450 at December 31, ~~2016~~2017. The Company monitors to ensure it has adequate credit support and as of December 31, ~~2016~~2017, the Company believes there is no OTTI and does not have the intent to sell these securities and it is unlikely that it will be required to sell the securities before their anticipated recovery. All securities are investment grade.

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NOTE 5 — LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans were as follows:

	December 31,		December 31,
	2016		2015
	2017		2016
Commercial
Commercial and industrial	$	~~461~~515,~~092~~122	$	~~380~~461,~~960~~092
Agricultural		7363,~~467~~869		6473,~~704~~467
Commercial Real Estate
Farm		~~111~~106,~~807~~010		97111,~~916~~807
Hotel		91119,~~213~~512		7291,~~193~~213
Construction and development		~~102~~86,~~598~~045		77102,~~394~~598
Other		~~857~~1,~~078~~125,908		~~678~~857,~~381~~078
Residential
1-4 family		~~608~~681,~~366~~518		~~438~~608,~~808~~366
Home equity		~~284~~298,~~147~~653		~~288~~284,~~265~~147
Consumer
Direct		6166,~~574~~658		5661,~~312~~574
Indirect		~~331~~168		~~459~~331
Total loans		23,~~651~~063,~~673~~463		2,~~155~~651,~~392~~673
Allowance for loan losses		(22,~~499~~543)		(22,~~020~~499)
Net loans	$	23,~~629~~040,~~174~~920	$	2,~~133~~629,~~372~~174

Financing receivables purchased ~~during~~in ~~the~~prior years ~~ended December 31, 2016 and 2015~~ by portfolio class are as follows. These loans are included in the above table and all other tables below in the recorded investment amount. No allowance for loan losses is provided for these loans at December 31, ~~2016~~2017 and ~~2015~~2016.

	As of December 31,		As of December 31,
	2016		2015
	2017		2016
Commercial and industrial	$	1314,~~875~~414	$	913,~~406~~875
Agricultural		~~872~~887		—872
Construction and development		1615,~~634~~177		316,~~666~~634
Farm real estate		~~389~~3,045		—389
Hotel		210,~~983~~044		—2,983
Other real estate		~~164~~334,~~505~~990		81164,~~831~~505
1-4 family		~~206~~254,~~044~~040		46206,~~967~~044
Home equity		1424,~~342~~838		1914,~~076~~342
Direct		2,~~517~~538		2,~~818~~517
	$	~~422~~659,~~161~~973	$	~~163~~422,~~764~~161

The remaining discount on the above loans was $711,~~313~~824 and $27,~~198~~313 at December 31, ~~2016~~2017 and ~~2015~~2016 respectively.

The Company purchased some ~~credit impaired (~~PCI) loans in ~~2014~~2017 related to the ~~MBT~~FCB acquisition. These loans had a ~~net~~contractual balance of ~~under~~ $110,~~000~~186 sowith ~~additional~~a ~~disclosures~~fair ~~were~~value ~~not~~of ~~made due to their immateriality~~$7,614. ~~There were no loans classified as purchased credit impaired from 2015 purchases.~~ The Company purchased some PCI loans in 2016 related to the Cheviot acquisition. These loans had a contractual balance of $16,175 with a fair value of $11,560. There were no loans classified as purchased credit impaired from 2015 purchases.

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The following tables present the activity in the allowance for loan losses by portfolio segment for the years ending December 31, ~~2016~~2017, ~~2015~~2016, and ~~2014~~2015:


			Commercial
2017	Commercial		Real Estate		Residential		Consumer		Total
Allowance for loan losses
Balance, January 1	$	9,654	$	7,706	$	4,247	$	892	$	22,499
Provision charged to expense		1,862		(1,496)		118		766		1,250
Losses charged off		(780)		(814)		(922)		(3,487)		(6,003)
Recoveries		497		1,033		418		2,849		4,797
Balance, December 31	$	11,233	$	6,429	$	3,861	$	1,020	$	22,543


			Commercial
2016	Commercial		Real Estate		Residential		Consumer		Total
Allowance for loan losses
Balance, January 1	$	6,511	$	10,702	$	3,859	$	948	$	22,020
Provision charged to expense		3,166		(3,540)		1,318		761		1,705
Losses charged off		(682)		(663)		(1,345)		(3,725)		(6,415)
Recoveries		659		1,207		415		2,908		5,189
Balance, December 31	$	9,654	$	7,706	$	4,247	$	892	$	22,499


			Commercial
2015	Commercial		Real Estate		Residential		Consumer		Total
Allowance for loan losses
Balance, January 1	$	2,977	$	15,605	$	3,501	$	1,167	$	23,250
Provision charged to expense		4,010		(6,118)		2,115		1,618		1,625
Losses charged off		(978)		(727)		(2,094)		(3,593)		(7,392)
Recoveries		502		1,942		337		1,756		4,537
Balance, December 31	$	6,511	$	10,702	$	3,859	$	948	$	22,020

			Commercial
2014	Commercial		Real Estate		Residential		Consumer		Total
Allowance for loan losses
Balance, January 1	$	3,291	$	20,210	$	3,409	$	699	$	27,609
Provision charged to expense		(1,204)		(1,284)		1,977		2,011		1,500
Losses charged off		(241)		(5,583)		(2,295)		(2,899)		(11,018)
Recoveries		1,131		2,262		410		1,356		5,159
Balance, December 31	$	2,977	$	15,605	$	3,501	$	1,167	$	23,250

The following table presents the balance in the allowance for loan losses and the recorded investment by portfolio segment and based on impairment method as of December 31, 2017 and 2016:

The following table presents the balance in the allowance for loan losses and the recorded investment by portfolio segment and based on impairment method as of December 31, 2016 and 2015:


			Commercial
December 31, 2017	Commercial		Real Estate		Residential		Consumer		Total
Allowance for loan losses
Ending Balance individually evaluated for impairment	$	2,457	$	862	$	142	$	—	$	3,461
Ending Balance collectively evaluated for impairment		8,776		5,567		3,719		1,020		19,082
Ending Balance acquired with deteriorated credit quality		—		—		—		—		—
Total ending allowance balance	$	11,233	$	6,429	$	3,861	$	1,020	$	22,543
Loans

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