Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

MAINSOURCE FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)

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

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 o No ý

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 ý No o

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 ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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

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 $239,915,062 as of June 30, 2012.

As of March 14, 2013, there were outstanding 20,326,725 common shares, without par value, of the registrant.

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 2013 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.

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, 2012, 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, 2012, the Company operated 78 branch banking offices in Indiana, Illinois, Ohio and Kentucky. As of December 31, 2012, the Company had consolidated assets of $2,769,288, consolidated deposits of $2,185,054 and shareholders' equity of $323,751.

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 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 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, 2012, the Company was servicing a $758 million 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 55.0% of total revenues in 2012, 55.7% in 2011 and 59.8% in 2010. 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 entity's 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 16.2% of total revenues in 2012, 17.0% in 2011 and 16.6% in 2010. As of December 31, 2012, 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 Interstate Banking and Branching Efficiency Act of 1994, have also added competitive pressure.

The branches of the Bank are predominantly located in non-metropolitan areas and the Bank's business is centered in loans and deposits generated within markets considered largely rural in nature. In addition to competing vigorously with other banks, thrift institutions, credit unions and finance companies located within their service areas, we also compete, directly and indirectly, with all providers of financial services.

As of December 31, 2012, the Company and its subsidiaries had 808 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.

The Company is a financial holding company ("FHC") 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.

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 Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal") 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).

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, provides the following:

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.

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.

The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires, among other things, federal bank regulatory authorities to take "prompt corrective action" with respect to banks which do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The FDIC has adopted regulations to implement the prompt corrective action provisions of FDICIA.

"Undercapitalized" banks are subject to growth limitations and are required to submit a capital restoration plan. A bank's compliance with such plan is required to be guaranteed by the bank's parent holding company. If an "undercapitalized" bank fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. "Significantly undercapitalized" banks are subject to one or more restrictions, including an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cease receipt of deposits from correspondent banks, and restrictions on compensation of executive officers. "Critically undercapitalized" institutions may not, beginning 60 days after becoming "critically undercapitalized," make any payment of principal or interest on certain subordinated debt or extend credit for a highly leveraged transaction or enter into any transaction outside the ordinary course of business. In addition, "critically undercapitalized" institutions are subject to appointment of a receiver or conservator.

A "well capitalized" institution is one that has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, a leverage ratio of at least 5% and is not subject to regulatory direction to maintain a specific level for any capital measure. An "adequately capitalized" institution is one that has ratios greater than 8%, 4% and 4%. An institution is "undercapitalized" if its respective ratios are less than 8%, 4% and 4%. "Significantly undercapitalized" institutions have ratios of

less than 6%, 3% and 3%. An institution is deemed to be "critically undercapitalized" if it has a ratio of tangible equity to total assets that is 2% or less.

The Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. Among other requirements, the Sarbanes-Oxley Act established: (i) requirements for audit committees of public companies, including independence and expertise standards; (ii) additional responsibilities regarding financial statements for the chief executive officers and chief financial officers of reporting companies; (iii) standards for auditors and regulation of audits; (iv) increased disclosure and reporting obligations for reporting companies regarding various matters relating to corporate governance, and (v) new and increased civil and criminal penalties for violation of the securities laws.

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 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. Also, the Dodd-Frank Act has eliminated the 1.50% ceiling on the reserve ratio and provides that the FDIC is no longer required to refund amounts in the DIF that exceed 1.50% of insured deposits.

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. As noted above, 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).

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. In addition, 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.

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.

As discussed above, the Company and the Bank must meet certain minimum capital requirements mandated by each of their state or federal regulators. These regulatory agencies require BHCs and banks to maintain certain minimum ratios of primary capital to total assets and total capital to total assets. The FRB requires BHCs to maintain a minimum Tier 1 leverage ratio of 3% capital to total assets; however, for all but the most highly rated institutions which do not anticipate significant growth, the minimum Tier 1 leverage ratio is 3% plus an additional cushion of 100 to 200 basis points. As of December 31, 2012, the Company's leverage ratio of capital to total assets was 10.4%. The FRB and FDIC each have approved the imposition of "risk-adjusted" capital ratios on BHCs and financial institutions. The Company's Tier 1 Capital to Risk-Weighted Assets Ratio was 16.5% and its Total Capital to Risk-Weighted Assets Ratio was 17.8% at December 31, 2012. The Bank had capital to asset ratios and risk- adjusted capital ratios at December 31, 2012, in excess of the applicable minimum regulatory requirements.

In October 2008, the Emergency Economic Stabilization Act of 2008 ("EESA") was enacted. The EESA authorized Treasury to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage- related securities and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies in a troubled asset relief program ("TARP"). The purpose of TARP was to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other. EESA also increased the amount of deposit insurance provided by the FDIC.

The U.S. Department of the Treasury ("Treasury"), working with the Federal Reserve Board, established late in 2008 the TARP Capital Purchase Program ("CPP"), which was intended to stabilize the financial services industry. One of the components of the CPP included a $250 billion voluntary capital purchase program for certain qualified and healthy banking institutions. Pursuant to the CPP, Treasury purchased from the Company 57,000 shares of $1,000 par value senior perpetual preferred securities at a price of $57 million equal to approximately 3.0% of the Company's then risk-weighted assets. Such preferred shares pay a dividend of 5% for the first five years and will increase to 9% thereafter. In connection with the Company's participation in the CPP, Treasury also received a warrant for the purchase of common stock in the amount of 571,906 shares at a strike price of $14.95 per share. The warrant expires on January 16, 2019. During 2012, Treasury auctioned off the Company's preferred shares to third parties. The Company was successful in repurchasing some of these shares and on two separate occasions during 2012, repurchased some additional shares from third parties. As of December 31, 2012, 15,100 shares of Series A preferred stock remained outstanding. See Note 2 in the Consolidated Financial Statements for further discussion of the preferred shares.

On February 17, 2009, President Barack Obama signed the American Recovery and Reinvestment Act of 2009 ("ARRA"), more commonly known as the economic stimulus or economic recovery package. ARRA included a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs. In addition, ARRA imposed new executive compensation and corporate governance limits on current and future participants in the CPP, including the Company, which are in addition to those previously announced by Treasury. These limits remain in place until the participant has redeemed the preferred stock sold to Treasury, which is now permitted under ARRA without penalty and without the need to raise new capital, subject to Treasury's consultation with the recipient's appropriate federal regulator. On June 10, 2009, Treasury released an interim final rule, effective June 15, 2009, that provided guidance on the compensation and governance standards for participants in the CPP, and promulgated regulations to implement the restrictions and standards set forth in ARRA. Among other things, Treasury's final rule and ARRA significantly expanded the executive compensation restrictions previously imposed by EESA. As of April 3, 2012, the date the U.S. Treasury no longer held any shares of the Company's preferred stock issued under the CPP, the Company was no longer subject to the ARRA or EESA restrictions.

On July 21, 2010, President Obama signed into law the sweeping financial regulatory reform act entitled the "Dodd-Frank Wall Street Reform and Consumer Protection Act" (Dodd-Frank Act). The Dodd-Frank Act implements far-reaching changes to the regulation of the financial services industry, including provisions that, among other things will:

The Dodd-Frank Act includes certain provisions concerning the capital regulations of the United States banking regulators, which are often referred to as the "Collins Amendment." These provisions are intended to subject bank holding companies to the same capital requirements as their bank subsidiaries and to eliminate or significantly reduce the use of hybrid capital instruments, especially trust preferred securities, as regulatory capital. Under the Collins Amendment, trust preferred securities issued by a company, such as the Company, with total consolidated assets of less than $15 billion before May 19, 2010 and treated as regulatory capital are grandfathered, but any such securities issued later are not eligible as regulatory capital. The banking regulators must develop regulations setting minimum risk-based and leverage capital requirements for holding companies and banks on a consolidated basis that are no less stringent than the generally applicable requirements in effect for depository institutions under prompt corrective action regulations. The banking regulators also must seek to make capital standards countercyclical so that the required levels of capital increase in times of economic expansion and decrease in times of economic contraction.

Many aspects of the act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or the financial industry more generally. Provisions in the legislation that affect deposit insurance assessments and payment of interest on demand deposits could increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate.

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.

In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, officially identified by the Basel Committee as "Basel III". In June 2012, the Federal Reserve Board, OCC, and FDIC (collectively, the "Agencies") each issued Notices of Proposed Rulemaking ("NPRs") that would revise and replace the Agencies' current capital rules to align with the BASEL III capital standards and meet certain requirements of the Dodd-Frank Act. The comment period for the NPRs ended October 22, 2012, and comments received by such deadline are currently being evaluated by the Agencies.

The standards set forth in the NPRs, when implemented by the Agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity.

The timing for the Agencies' adoption and implementation of final rules to implement the Basel III/Dodd-Frank Act capital framework is uncertain. Accordingly, the regulations ultimately applicable to the Company and the Bank may be substantially different from the Basel III final framework as published in December 2010 (and updated in 2011) or the NPRs. The requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company's financial results.

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.

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.

Difficult conditions in the capital markets and the economy generally have affected and may continue to materially adversely affect our business and results of operations.

From 2007 through 2009, the U.S. economy was in recession. Business activity across a wide range of industries and regions in the U.S. was greatly reduced. Although economic conditions have begun to improve, certain sectors, such as real estate, remain weak and unemployment remains high. Local governments and many businesses are still in serious difficulty due to lower consumer spending and the lack of liquidity in the credit markets.

Market conditions also led to the failure or merger of several prominent financial institutions and numerous regional and community-based financial institutions. These failures, as well as projected future failures, have had a significant negative impact on the capitalization level of the deposit insurance fund of the FDIC, which, in turn, has led to a significant increase in deposit insurance premiums paid by financial institutions.

The Company's financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, as well as demand for loans and other products and services that the Company offers, is highly dependent upon the business environment in the markets where the Company operates and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters, or a combination of these or other factors.

During 2011 and 2012, the business environment continued to be adverse for many households and businesses in the United States and worldwide. While economic conditions in the United States and worldwide have begun to improve, there can be no assurance that this improvement will continue. Such conditions have affected, and could continue to adversely affect, the credit quality of the Company's loans, results of operations and financial condition.

Recently enacted and potential further financial regulatory reforms could have a significant impact on our business, financial condition and results of operations.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") into law. The Dodd-Frank Act is expected to have a broad impact on the financial services industry, including significant regulatory and compliance changes. Many of the requirements called for in the Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of business activities, require changes to certain business practices, impose more stringent capital, liquidity and leverage requirements or otherwise adversely affect our business. In particular, the potential impact of the Dodd-Frank Act on our operations and activities, both currently and prospectively, include, among others:

Further, we may be required to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements under the Dodd-Frank Act, which may negatively impact results of operations and financial condition.

We cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced or how such changes may affect us. However, the costs of complying with any additional laws or regulations could have a material adverse effect on our financial condition and results of operations.

The new Basel III capital rules proposed in August 2012 by the Federal Reserve and the FDIC to implement the Basel III capital guidelines may adversely affect the Company's and the Bank's capital adequacy and the costs of conducting its business.

If adopted and effective in their current form, many of these proposals will be applicable to the Company and the Bank, and will include several significant changes, including changes to the definition of "capital" for regulatory purposes, the types and minimum levels of capital required under the prompt corrective action rules and for other regulatory purposes and the risk-weighting of various assets. In addition, among other things, for bank holding companies with under $15 billion in assets, trust preferred securities will be phased out as Tier 1 capital over 10 years. Based on the current components and levels of our capital and assets, we believe that we would be in compliance with the requirements in the proposed rules if they were currently in effect. There is no assurance that the Basel III proposals will be adopted in their current form, what changes may be made prior to adoption, or when the final rules will be effective. Until the proposals are finalized and the timing of implementation of the new rules is determined, some uncertainty will exist with respect to the impact of the rules on us and the banking industry generally.

Like most banking organizations, 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, 2012, our total loan portfolio was approximately $1,553,383 or 56% of our total assets. Three major components of the loan portfolio are loans principally secured by real estate, approximately $1,345,354 or 87% of total loans; other commercial loans, approximately $159,734 or 10% of total loans; and consumer loans, approximately $48,295 or 3% 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.

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.

Our results of operations are affected principally by net interest income, which is the difference between interest earned on loans and investments and interest expense paid on deposits and other borrowings. We cannot predict or control changes in interest rates. National, regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the Board of Governors of the Federal Reserve System, affect market interest rates. While we have instituted policies and procedures designed to manage the risks from changes in market interest rates, at any given time our assets and liabilities will likely be affected differently by a given change in interest rates, principally because we do not match the maturities of our loans and investments precisely with our deposits and other funding sources. Changes in interest rates may also affect the level of voluntary prepayments on our loans and the level of financing or refinancing by customers. As of December 31, 2012, we had a negative interest rate gap of approximately 20% of interest earning assets in the one-year time frame. Although this is within our internal policy limits, our earnings will be adversely affected in periods of rising interest rates because, during such periods, the interest expense paid on deposits and borrowings will generally increase more rapidly than the interest income earned on loans and investments. If such an interest rate increase occurred gradually, we would use our established procedures to attempt to mitigate the effects over time. However, if such an interest rate increase occurred rapidly, or interest rates exhibited volatile increases and decreases, we might be unable to mitigate the effects, and our net interest income could suffer significant adverse effects. While management intends to continue to take measures to mitigate interest rate risk, we cannot assure you that such measures will be entirely effective in minimizing our exposure to the risk of rapid changes in interest rates.

The repeal of Regulation Q may increase competition for deposits and increase our interest expense.

On July 18, 2011, the Board of Governors of the Federal Reserve System published a final rule repealing Regulation Q, which prohibits the payment of interest on demand deposits by institutions that are member banks of the Federal Reserve System. The rule implements Section 627 of the Dodd-Frank Wall Street Reform and Consumer Protection Act signed by President Obama on July 21, 2010, which repealed Section 19(i) of the Federal Reserve Act in its entirety effective July 21, 2011. As a result, banks and thrifts may now offer interest-bearing demand deposit accounts to commercial customers, which were previously forbidden under Regulation Q. The repeal of Regulation Q may cause increased competition from other financial institutions for these deposits. If the Bank decides to pay interest on demand accounts, it would expect interest expense to increase.

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, as well as deterioration in banking and economic conditions, have significantly increased FDIC loss provisions, resulting in a decline in the designated reserve ratio to historical lows. The FDIC expects the higher rate of insured institution failures to continue for the next few years compared to the past; thus, the reserve ratio may continue to decline. 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.

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.

The Company is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. To the extent the Company's future operating results erode capital or the Company elects to expand through loan growth or acquisition it may be required to raise capital. The Company's ability to raise capital will depend on conditions in the capital markets, which are outside of its control, and on the Company's financial performance. Accordingly, the Company cannot be assured

of its ability to raise capital if needed or on favorable terms. If the Company cannot raise additional capital when needed, it will be subject to increased regulatory supervision and the imposition of restrictions on its growth and business. These could negatively impact the Company's ability to operate or further expand its 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 its 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 proposed 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.

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 31 counties in Indiana, three counties in Illinois, two counties in Ohio, and three counties in 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:

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 and other financial and nonfinancial companies which may offer products functionally equivalent to those offered by our banks. 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.

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 MainSource's future earnings per share.

MainSource believes it has reasonably estimated the likely costs of integrating the operations of the banks it acquires into MainSource 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 MainSource's earnings per share. Current accounting guidance requires expensing of acquisition costs. In prior years, these costs could be capitalized. In other words, if MainSource incurs such unexpected costs and expenses as a result of its acquisitions, MainSource believes that the earnings per share of MainSource common stock could be less than they would have been if those acquisitions had not been completed.

MainSource may be unable to successfully integrate the operations of the banks it has acquired and may acquire in the future and retain employees of such banks.

MainSource's acquisition strategy involves the integration of the banks MainSource has acquired and may acquire in the future as MainSource subsidiary banks. The difficulties of integrating the operations of such banks with MainSource and its other subsidiary banks include:

The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of MainSource, its subsidiary banks and the banks MainSource has 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 are expected to be retained by MainSource. We cannot be sure, however, that MainSource 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 the business and results of operation of MainSource.

During 2009, the Company recorded $80,310 in goodwill impairment charges in the second and fourth quarters. No goodwill impairment charges were recorded in 2010, 2011, or 2012. While the Company does not currently anticipate that there will be additional impairment charges required in the future, it can make no guarantees that none will be taken. If more impairment is recorded, it will have a negative impact on future earnings.

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 govern 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.

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 current 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.

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 raised the dividend to $.03/share, and in the first quarter of 2013 it raised the dividend to $.06/share.

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:

The Company's charter documents and federal regulations may inhibit a takeover, 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.

As of December 31, 2012, 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, 2012 the Company had 78 banking locations. At December 31, 2012, the Company had approximately $54,101 invested in premises and equipment.

The Company and its subsidiaries may be parties (both plaintiff and defendant) to ordinary litigation incidental to the conduct of business. Management is presently not aware of any material pending or contemplated legal proceedings.

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

The Company's Common Stock is traded on the NASDAQ Stock Market under the symbol MSFG. The Common Stock was held by approximately 4,500 shareholders at March 12, 2013. 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.

In the first quarter of 2013 the Board of Directors voted to raise the quarterly dividend to $.06/share. 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.

The Company purchased the following equity securities of the Company during the quarter ended December 31, 2012:

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, 2012. 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, 2007.

Selected Financial Data
(Dollar amounts in thousands except per share data)

	2012			2011			2010			2009			2008


Results of Operations
Net interest income	$	94,082		$	99,848		$	101,252		$	98,008		$	87,525
Provision for loan losses		9,850			17,800			35,250			46,310			20,918
Noninterest income		43,891			45,308			41,291			40,050			29,697
Noninterest expense, excluding goodwill impairment		94,838			99,805			92,252			87,222			72,773
Goodwill impairment		—			—			—			80,310			—
Income (loss) before income tax		33,285			27,551			15,041			(75,784	)		23,531
Income tax (benefit)		6,027			3,738			239			(11,645	)		4,379
Net income (loss)		27,258			23,813			14,802			(64,139	)		19,152
Preferred dividends and accretion		2,110			3,054			3,054			2,919			—
Net income (loss) available to common shareholders		26,505			20,759			11,748			(67,058	)		19,152
Dividends paid on common stock		1,623			807			805			5,135			11,133
Per Common Share*
Earnings (loss) per share (basic)	$	1.31		$	1.03		$	0.58		$	(3.33	)	$	1.00
Earnings (loss) per share (diluted)		1.30			1.03			0.58			(3.33	)		1.00
Dividends paid		0.08			0.04			0.04			0.26			0.58
Book value — end of period		15.21			13.87			12.24			11.84			14.90
Tangible book value — end of period		11.72			10.45			8.71			8.16			7.43
Market price — end of period		12.67			8.83			10.41			4.78			15.50
At Year End
Total assets	$	2,769,288		$	2,754,180		$	2,769,312		$	2,906,530		$	2,899,835
Securities		902,341			876,090			806,071			714,607			513,310
Loans, excluding held for sale		1,553,383			1,534,379			1,680,971			1,885,447			1,995,601
Allowance for loan losses		32,227			39,889			42,605			46,648			34,583
Total deposits		2,185,054			2,159,900			2,211,564			2,270,650			2,009,324
Federal Home Loan Bank advances		141,052			151,427			152,065			222,265			433,167
Subordinated debentures		50,418			50,267			50,117			49,966			49,816
Shareholders' equity		323,751			336,553			302,570			294,462			299,949
Financial Ratios
Return on average assets		0.99	%		0.85	%		0.51	%		(2.19	)%		0.73	%
Return on average common shareholders' equity		8.15			7.44			4.86			(22.61	)		6.90
Allowance for loan losses to total loans (year end, excluding held for sale)		2.07			2.60			2.53			2.47			1.73
Allowance for loan losses to total non-performing loans (year end)		63.04			61.18			46.55			50.60			58.31
Shareholders' equity to total assets (year end)		11.69			12.22			10.93			10.13			10.34
Average equity to average total assets		12.12			11.46			10.59			11.59			10.57
Dividend payout ratio		6.12			3.89			6.85			NM			58.13

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)

Except for historical information contained herein, the discussion in this Annual Report includes certain forward-looking statements based upon management expectations. 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.

MainSource Financial Group, Inc. ("MainSource" or the "Company") 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"). 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 include MainSource Insurance, LLC, Insurance Services Marketing, LLC and MainSource Title, LLC. These three subsidiaries are subject to regulation by the Indiana Department of Insurance. The Company sold the property and casualty and health insurance book of businesses related to MainSource Insurance, LLC in the fourth quarter of 2010, but retained its business relating to annuities and credit life insurance.

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 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.

Net income attributable to common shareholders was $26,505 in 2012, $20,759 in 2011, and $11,748 in 2010. Earnings per common share on a fully diluted basis were $1.30 in 2012, $1.03 in 2011, and $0.58 in 2010. The primary drivers that led to the increase in net income in 2012 were lower loan loss provision expense of $7,950, reduced consultant expenses of $5,397, higher mortgage banking income of $4,376, an increase in service charge income of $1,668, a reduction in FDIC premiums of $1,479, and smaller losses on OREO property of $1,385. Credit losses continued to decline and new impaired loans decreased in 2012. The third party consulting fees paid in 2011 were an increase in consultant expenses. A reduction in interest rates in 2012 led to increased mortgage refinancing activity. Continued emphasis on new account growth generated additional service charge income. FDIC premiums lowered as a result of a lower rate for the Company's premiums. Finally, OREO losses declined as a result of a reduced amount of OREO property. Offsetting these items was a reduction in securities gains of $9,990, lower net interest income of $5,766, and a pre payment penalty of $1,313 on a FHLB advance. As a result of favorable pricing, the Company recorded gains during 2011 on the sale of securities at a higher level than 2012. The reduction in the Company's yield on earnings assets was not completely offset by the reduction in the Company's cost of funds. The Company paid off a FHLB advance early and incurred a prepayment penalty. However, this should provide the Company with future decreased annual interest expense of $500.

The primary drivers that led to the increase in net income in 2011 from 2010 were lower loan loss provision expense of $17,450, higher realized gains on securities of $8,378, increased trust and investment product fees of $887, a reduction in FDIC premiums of $966, and increased interchange income of $738. Credit losses continued to decline and new impaired loans decreased in 2011. As a result of favorable pricing, the Company recorded gains during 2011 on the sale of securities at a higher level than 2010. The full year effect of increasing the number of financial advisors in 2010 resulted in higher trust and investment product fees. The Company realized a savings in FDIC premiums due to the change in 2011 of basing the premium on total assets instead of deposits. Continued emphasis on new account growth generated additional interchange income. Offsetting these items was an increase in consulting expenses of $6,547, a decrease in mortgage banking income of $2,091, a reduction in insurance commissions of $1,711, an increase in OREO losses

of $1,647 and a decrease in other income of $1,176 (approximately 85% of this reduction is due to the gain recognized on the sale of the property and casualty business lines of the Company's insurance division in 2010). In 2011, the Company completed an efficiency project with the aid of a third party consulting firm. As a result of the project, approximately 150 full-time equivalent positions were targeted for elimination. While mortgage rates remained low during 2011, mortgage financing levels declined and represented more normal activity. As mentioned above, the Company sold the property and casualty business lines in 2010 which caused the reduction in commissions. The OREO losses are the result of the Company continuing its efforts to reduce its non-performing assets.

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 $101,054 in 2012 decreased from $107,033 in 2011. Net interest margin, on a fully-taxable equivalent basis, was 4.07% for 2012 compared to 4.23% for the same period a year ago. The Company was unable to match reductions in its yield on earning assets with a corresponding reduction in its cost of funds. Over the three year period interest income has continued to decline as decreases in earning assets and yields have had a negative impact on interest income. A significant portion of the Company's CDs matured in 2011 and the Company was able to reprice those deposits to current, lower market rates. The Company was also able to continue to lower the interest paid on deposit accounts. The Federal Reserve Bank continues to target the fed funds rate at 0%-.25%.

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

	2012								2011								2010


Assets	Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate			Average Balance			Interest		Average Rate

Short-term investments	$	48,712			134		0.28	%	$	69,960			167		0.24	%	$	33,037		$	12		0.04	%
Federal funds sold and money market accounts		10,811			30		0.28			16,644			48		0.29			44,025			190		0.43
Securities
Taxable		567,437			12,510		2.20			523,760			16,040		3.06			512,749			18,828		3.67
Non-taxable*		302,040			18,707		6.19			304,366			19,100		6.28			246,312			15,940		6.47

Total securities		869,477			31,217		3.59			828,126			35,140		4.24			759,061			34,768		4.58
Loans**
Commercial*		889,313			50,523		5.68			959,550			55,905		5.83			1,061,537			62,433		5.88
Residential real estate		393,844			19,969		5.07			380,255			21,970		5.78			400,994			24,536		6.12
Consumer		270,459			13,867		5.13			276,660			15,566		5.63			317,654			18,921		5.96

Total loans		1,553,616			84,359		5.43			1,616,465			93,441		5.78			1,780,185			105,890		5.95

Total earning assets		2,482,616			115,740		4.66			2,531,195			128,796		5.09			2,616,308			140,860		5.38

Cash and due from banks		43,107								40,444								41,427
Unrealized gains (losses) on securities		41,035								26,222								28,074
Allowance for loan losses		(37,626	)							(42,583	)							(43,711	)
Premises and equipment, net		50,710								49,920								49,696
Intangible assets		68,704								70,006								72,765
Accrued interest receivable and other assets		112,177								115,695								113,814

Total assets	$	2,760,723							$	2,790,899							$	2,878,373

Liabilities
Interest-bearing deposits DDA, savings, and money market accounts	$	1,321,901			2,138		0.16		$	1,294,274			4,275		0.33		$	1,201,145		$	6,184		0.51
Certificates of deposit		494,142			5,499		1.11			631,270			9,836		1.56			798,471			16,978		2.13

Total interest-bearing deposits		1,816,043			7,637		0.42			1,925,544			14,111		0.73			1,999,616			23,162		1.16
Short-term borrowings		30,514			104		0.34			30,946			161		0.52			40,320			258		0.64
Subordinated debentures		49,000			1,825		3.72			49,000			1,737		3.54			49,000			1,755		3.58
Notes payable and FHLB borrowings		148,466			5,120		3.45			150,814			5,754		3.82			197,769			8,144		4.12

Total interest-bearing liabilities		2,044,023			14,686		0.72			2,156,304			21,763		1.01			2,286,705			33,319		1.46
Demand deposits		348,858								288,908								259,607
Other liabilities		33,354								25,734								27,209

Total liabilities		2,426,235								2,470,946								2,573,521
Shareholders' equity		334,488								319,953								304,852

Total liabilities and shareholders' equity	$	2,760,723			14,686		0.59	***	$	2,790,899			21,763		0.86	***	$	2,878,373			33,319		1.27	***

Net interest income				$	101,054		4.07	****				$	107,033		4.23	****				$	107,541		4.11	****

Conversion of tax exempt income to a fully taxable equivalent basis using a marginal rate of 35%				$	6,972							$	7,185							$	6,289

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)

	2012 OVER 2011									2011 OVER 2010

	Volume			Rate			Total			Volume			Rate			Total

Interest income
Loans	$	(3,547	)	$	(5,535	)	$	(9,082	)	$	(9,528	)	$	(2,921	)	$	(12,449	)
Securities		1,688			(5,611	)		(3,923	)		3,035			(2,663	)		372
Federal funds sold and money market funds		(16	)		(2	)		(18	)		(93	)		(49	)		(142	)
Short-term investments		(66	)		33			(33	)		26			129			155

Total interest income		(1,941	)		(11.115	)		(13,056	)		(6,560	)		(5,504	)		(12,064	)

Interest expense
Interest-bearing DDA, savings, and money market accounts	$	89		$	(2,226	)	$	(2,137	)	$	449		$	(2,358	)		(1,909	)
Certificates of deposit		(1,873	)		(2,464	)		(4,337	)		(3,138	)		(4,004	)		(7,142	)
Borrowings		(89	)		(602	)		(691	)		(1,871	)		(616	)		(2,487	)
Subordinated debentures		—			88			88			—			(18	)		(18	)

Total interest expense		(1,873	)		(5,204	)		(7,077	)		(4,560	)		(6,996	)		(11,556	)

Change in net interest income		(68	)		(5,911	)		(5,979	)		(2,000	)		1,492			(508	)

Change in tax equivalent adjustment								(213	)								896

Change in net interest income before tax equivalent adjustment							$	(5,766	)							$	(1,404	)

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.

The Company expensed $9,850, $17,800, and $35,250 in provision for loan losses in 2012, 2011, and 2010 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".

										Percent Change

	2012			2011			2010			12/11		11/10

Non-interest income
Insurance commissions	$	—		$	—		$	1,711			0.0%		-100.0%
Mortgage banking		9,927			5,551			7,642			78.8%		-27.4%
Trust and investment product fees		3,650			3,250			2,363			12.3%		37.5%
Service charges on deposit accounts		19,815			18,147			17,462			9.2%		3.9%
Net realized gains on securities sales		1,367			11,357			2,979			-88.0%		281.2%
Increase in cash surrender value of life insurance		1,206			1,200			1,246			0.5%		-3.7%
Interchange income		6,540			6,225			5,487			5.1%		13.4%
Gain/(loss) on sale of OREO		(1,359	)		(2,744	)		(1,097	)		50.5%		-150.1%
Other		2,745			2,322			3,498			18.2%		-33.6%

Total non-interest income	$	43,891		$	45,308		$	41,291			-3.1%		9.7%

Non-interest expense
Salaries and employee benefits	$	48,990		$	49,950		$	50,138			-1.9%		-0.4%
Net occupancy		6,769			6,686			6,654			1.2%		0.5%
Equipment		8,564			7,822			7,855			9.5%		-0.4%
Intangibles amortization		1,835			1,939			2,066			-5.4%		-6.1%
Telecommunications		1,729			1,991			1,882			-13.2%		5.8%
Stationery, printing, and supplies		1,337			1,510			1,478			-11.5%		2.2%
FDIC assessment		2,495			3,974			4,940			-37.2%		-19.6%
Marketing		4,397			4,057			3,412			8.4%		18.9%
Collection expenses		3,768			4,334			3,579			-13.1%		21.1%
Consultant expense		1,150			6,547			—			-82.4%		NA
Prepayment penalty on FHLB advance		1,313			—			—			NA		0.0%
Interchange expense		1,591			1,465			1,515			8.6%		-3.3%
Other		10,900			9,530			8,733			14.4%		9.1%

Total non-interest expense	$	94,838		$	99,805		$	92,252			-5.0%		8.2%

Non-interest income was $43,891 for 2012 compared to $45,308 for the same period in 2011, a decrease of $1,417 or 3.1%. Increases in mortgage banking income, service charge on deposit accounts, lower losses on the sale of OREO, trust and investment product fees, and interchange income were the primary causes of the increase. These increases were offset by a reduction in securities gains. A reduction in interest rates in 2012 led to increased mortgage refinancing activity. Continued emphasis on new account growth generated additional service charge and interchange income. OREO losses declined as a result of a reduced amount of OREO property as well as more timely appraisals when the property is initially placed in OREO. As a result of favorable pricing, the Company recorded gains during 2011 on the sale of securities at a higher level than 2012.

Non-interest income was $45,308 for 2011 compared to $41,291 for the same period in 2010, an increase of $4,017 or 9.7%. Increases in trust and investment product fees, service charges on deposit accounts, net realized gains on securities sales, and interchange income were the primary causes of the increase. These increases were offset by a reduction in insurance commissions, mortgage banking, losses on OREO property, and other income. The Company realized the full year effect of increasing the number of financial advisors in 2010. A continued emphasis on new account growth yielded additional service charge and interchange income. As a result of favorable pricing, the Company recorded gains during 2011 on the sale of securities at a higher level than 2010. The level of mortgage banking activity leveled off in 2011 from what the Company had experienced in 2010. The reduction of insurance commissions was caused by the sale of the property and casualty book of business during the fourth quarter of 2010. Also in connection with the sale of the property and casualty book of business, the Company recorded a $988 gain in 2010 on the sale. The Company continues to move the Other Real Estate (OREO) property as quickly as possible and incurred additional losses in 2011 as well as write-downs on some of the properties due to the significant changes in the properties' value. The Company obtained up to date appraisals on several properties which resulted in additional charge downs. Non-interest income as a percent of non-interest expense was 45.4% for 2011 compared to 44.8% for 2010.

Total non-interest expense was $94,838 in 2012 compared to $99,805 in 2011, a decrease of $4,967 or 5.0%. The decrease was primarily attributable to a reduction in consultant expenses of $5,397. During 2011 the Company completed an efficiency project with the aid of a third party consulting firm. Almost all of the Company's departments and corresponding headcount were reviewed, as well as the entire organizational structure of the Company. As a result of the project, many of the non-interest expense categories showed reductions in 2012. These included salaries and employee benefits, telecommunications, and stationary and printing costs. Other categories also showing reductions were intangibles amortization, FDIC assessment, and collection expenses. FDIC premiums lowered as a result of a lower multiplier for the Company's premiums. Collection expenses decreased due to a reduction in new problem loans compared to 2011. Offsetting these decreases were increases in occupancy, equipment, marketing, other expenses, and a prepayment penalty on a FHLB advance. Occupancy, equipment, and marketing expenses increased primarily due to opening of three de novo branches in 2012. The largest contributor to other expense was expenses related to tax credit properties. Lastly, the Company paid off a FHLB advance early and incurred a prepayment penalty of $1,313. However, the pay off of this advance should lower interest expense costs by approximately $500 on an annual basis.

Total non-interest expense was $99,805 in 2011 compared to $92,252 in 2010, an increase of $7,553 or 8.2%. The increase was primarily attributable to consultant expenses of $6,547 incurred in 2011 as a result of the previously described efficiency project. As a result of the project, approximately 150 full-time equivalent positions were targeted for elimination. The third party consulting firm also recommended various revenue enhancements which may require future payouts if certain targets are achieved. Marketing expense and collection expense increases of $645 and $755 were partially offset by a reduction in the Company's FDIC assessment of $966. The marketing expense increase was due to costs involved in generating new deposit accounts. Collection costs continue to be elevated as the Company is working through its problem credits. As a result of the FDIC changing the assessment base to total assets instead of deposits, the Company's FDIC assessment was lower in 2011.

The effective tax rate was 18.1% in 2012, 13.6% in 2011, and 1.6% in 2010. The increase in the Company's effective rate from 2011 to 2012 and from 2010 to 2011 was primarily due to an increase in taxable income in each year. The Company and its subsidiaries file consolidated income tax returns.

At December 31, 2012, total assets were $2,769,288 compared to $2,754,180 at December 31, 2011, an increase of $15 million. Increases in loans ($27 million), investment securities ($26 million) and cash surrender value of life insurance ($11 million) were offset by decreases in cash and cash equivalents ($43 million) and other assets ($11 million).

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 $19,004 from year-end 2011. The largest increase was in the Company's residential real estate portfolio as on balance sheet fixed-rate residential real estate loans refinanced during the year, and the Company elected to keep many of these loans instead of selling them to the secondary market. The remaining increase in loan balances was primarily due to an overall increase in loan demand. Decreases in certain other loan categories were primarily due to the following factors: a decrease in construction and development loans as the continued sluggish economy resulted in the Company ceasing the origination of these loans, charge-offs taken during 2012, and early payoffs on some credits. Residential real estate loans continue to represent the largest portion of the total loan portfolio and were 40% of total loans at December 31, 2012 compared to 48% of total loans at the end of 2011.

The following table indicates the amounts of loans (excluding residential and commercial mortgages and consumer loans) outstanding as of December 31, 2012 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

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 $51,118 as of December 31, 2012 compared to $65,196 as of December 31, 2011 and represented 3.29% of total loans at December 31, 2012 versus 4.25% one year ago. The significant reduction in 2012 is a result of the Company's continued emphasis on reducing the amount of non-performing loans.

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

A reconciliation of non-performing assets ("NPA") for 2012 and 2011 is as follows:

	2012			2011


Beginning Balance — NPA — January 1	$	80,731		$	102,955
Non-accrual
Add: New non-accruals		34,863			47,516
Less: To accrual/payoff/restructured		(18,142	)		(31,688	)
Less: To OREO		(5,286	)		(23,093	)
Less: Charge offs		(17,512	)		(19,443	)

Increase/(Decrease): Non-accrual loans		(6,077	)		(26,708	)
Other Real Estate Owned (OREO)
Add: New OREO properties		5,286			23,093
Less: OREO sold		(12,089	)		(16,125	)
Less: OREO losses (write-downs)		(1,976	)		(2,965	)

Increase/(Decrease): OREO		(8,779	)		4,003
Increase/(Decrease): Repossessions		(79	)		53
Increase/(Decrease): 90 Days Delinquent		(2,701	)		2,276
Increase/(Decrease): TDR's		(5,300	)		(1,848	)

Total NPA change		(22,936	)		(22,224	)

Ending Balance — NPA — December 31	$	57,795		$	80,731

At December 31, 2012, only one of the non-accrual loan balances was greater than $1,000. This loan is a real estate backed loan. The Company is working with this borrower 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 $9,850 in 2012, $17,800 in 2011, and $35,250 in 2010. The Company's provision for loan losses continued to decline in 2012 due to the stabilization of problem credits. New non-accrual loans declined over 26% in 2012. Net charge-offs were $17,512 in 2012 compared to $20,516 in 2011 and $39,293 in 2010. As a percentage of average loans, net charge-offs equaled 1.13%, 1.27%, and 2.21% in 2012, 2011 and 2010, 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. Credits 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 $28,785 at December 31, 2012 and $63,379 at December 31, 2011, a decrease of $34,594. The Company believes its substandard loans peaked in 2009 when the substandard balance was approximately $70,000. These loans which are $250 or greater are reviewed at least quarterly by senior management. This review includes monitoring how the borrower is performing vs 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, 2012.

	2012		2011		2010		2009		2008


Balance at January 1	$	39,889	$	42,605	$	46,648	$	34,583	$	14,331
Chargeoffs
Commercial		1,946		2,211		8,190		8,686		1,866
Commercial real estate mortgage		13,553		16,954		29,177		21,140		948
Residential real estate mortgage		3,547		3,093		2,220		1,899		1,421
Consumer		3,286		2,636		2,859		4,477		3,032

Total Chargeoffs		22,332		24,894		42,446		36,202		7,267

Recoveries
Commercial		543		1,172		518		350		214
Commercial real estate mortgage		2,432		1,371		873		226		17
Residential real estate mortgage		265		648		524		37		16
Consumer		1,580		1,187		1,238		1,344		790

Total Recoveries		4,820		4,378		3,153		1,957		1,037

Net Chargeoffs		17,512		20,516		39,293		34,245		6,230
Addition resulting from acquisition		—		—		—		—		5,564
Provision for loan losses		9,850		17,800		35,250		46,310		20,918

Balance at December 31	$	32,227	$	39,889	$	42,605	$	46,648	$	34,583

Net Chargeoffs to average loans		1.13%		1.27%		2.21%		1.73%		0.35%
Provision for loan losses to average loans		0.63%		1.10%		1.98%		2.35%		1.17%
Allowance to total loans at year end		2.07%		2.60%		2.53%		2.47%		1.73%

Although the allowance for loan loss 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.

	2012					2011					2010					2009					2008

December 31	Amount		Percent of loans to total loans			Amount		Percent of loans to total loans			Amount		Percent of loans to total loans			Amount		Percent of loans to total loans			Amount		Percent of loans to total loans

Real estate
Residential	$	3,180		40	%	$	2,972		38	%	$	2,281		45	%	$	9,449		43	%	$	3,882		44	%
Farm real estate		722		4			456		3			740		2			647		2			344		2
Commercial		20,465		41			24,187		45			20,034		31			14,754		29			11,448		26
Construction and development		2,970		2			5,833		2			11,879		5			10,205		8			6,500		9

Total real estate		27,337		87			33,448		88			34,934		83			35,055		82			22,174		81

Commercial
Agribusiness		166		2			151		1			370		2			1,126		2			303		2
Other commercial		3,728		8			5,411		7			6,016		10			7,880		11			7,632		11

Total Commercial		3,894		10			5,562		8			6,386		12			9,006		13			7,935		13

Consumer		996		3			879		4			1,285		5			2,587		5			4,072		6
Unallocated		—		—			—		—			—					—					402

Total	$	32,227		100	%	$	39,889		100	%	$	42,605		100	%	$	46,648		100	%	$	34,583		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 and the Board of Directors. 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 50% of all loans. External loan review personnel examine the top 100 commercial credit relationships. This equates to approximately all relationships above $1,750.

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. During the latter part of 2008, the Company established a separate group to address its deteriorating credit quality. This group consists of seven full-time equivalent employees and reports directly to the Chief Credit Officer of the Company. At the present time, this group is charged with the task of efficiently resolving non-performing credits and disposing of foreclosed properties.

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 $32,227, or 2.07% of total loans, at December 31, 2012 compared to $39,889, or 2.60% of total loans, at the end of 2011. This $7,662 decrease in the allowance was due in large part to write-offs in 2012 that had an allowance allocated in 2011 as well as continued monitoring of problem loans.

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.

As of December 31, 2012, all of the securities are classified as available for sale ("AFS") and are 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 $39,582 was recorded to adjust the AFS portfolio to current market value at December 31, 2012 compared to a net unrealized gain of $35,218 at December 31, 2011.

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 $4,939 do not have contractual maturities and are excluded from the table above.

As of December 31, 2012, there were no corporate bonds and other securities which represented more than 10% of shareholders' equity.

For 2012 the tax equivalent yield of the investment securities portfolio was 3.59%, compared to 4.24% and 4.58% for 2011 and 2010, respectively. The average life of the Company's investment securities portfolio was 4.88 years at December 31, 2012. During 2012 the investment portfolio increased slightly in size as the Company's earnings were invested in the portfolio as loan demand remained soft. Cash flows from security sales and normal monthly principal pay downs were reinvested at materially lower yields leading to sizable decline in portfolio yield. The reinvestments were focused on a balanced approach between a likely long term low interest rate horizon and protection against cash flow extensions when rates do move higher. This investment strategy will allow the portfolio to meet cash needs for future loan growth.

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 2012, the Company recorded a $500 impairment loss on one of its equity securities. During 2010, the Company recorded $97 of impairment charges related to three of its equity securities. These securities were written down to their fair values, as based on the financial condition of the companies, recovery of the fair value above cost could not be readily projected.

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 87.2% and 87.7% of total average earning assets for 2012 and 2011, respectively. Total interest-bearing deposits averaged 83.9% and 87.0% of average total deposits during 2012 and 2011. Management is continuing its efforts 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 2012, repurchase agreements averaged $28,243, with an average cost of 0.34%.

Another source of funding is the Federal Home Loan Bank (FHLB). The Company had FHLB advances of $141,052 outstanding at December 31, 2012. These advances have interest rates ranging from 0.5% to 5.9% (see Note 12 to the consolidated financial statements for the maturity schedule of these advances). The Company averaged $146,365 in FHLB advances during 2012 compared to $148,824 during 2011. This decrease in the average balance of FHLB borrowings was primarily due to the increased deposits generated by the Company which reduced the need for other funding sources. One final source of funding is federal funds purchased. The Company had $8,725 of federal funds purchased as of December 31, 2012 and $0 at December 31, 2011.

As of December 31, 2012, certificates of deposit and other time deposits of $100 or more mature as follows:

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, 2012, Tier 1 capital to average assets was 10.4%. Total capital to risk-weighted assets was 17.8%. 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.

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, 2012, all of the Company's Trust Preferred Securities qualify as Tier 1 capital.

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 $.08 per share in 2012 compared to $.04 both in 2011 and 2010. Book value per common share increased to $15.21 at December 31, 2012 compared to $13.87 at the end of 2011. The net adjustment for AFS securities increased book value per share by $1.27 at December 31, 2012 and increased book value per share by $1.13 at December 31, 2011. Depending on market conditions, the adjustment for AFS securities can cause significant fluctuations in shareholders' equity.

On January 16, 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. Under this agreement, the Company issued to the Treasury Department 57,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A ("preferred stock") and a warrant to purchase up to 571,906 shares ("warrant shares") of the Company's common stock. Like stock options, the warrant issued through the Capital Purchase Program is potentially dilutive. The average stock price for the Company for 2012 and 2011 was $11.45 and $8.86 per share respectively, and the warrant issued in 2009 has an exercise price of $14.95 per share. This results in no additional potentially dilutive shares during 2012 and 2011.

The preferred stock pays cumulative dividends at a rate of 5% per year for the first five years and 9% per year thereafter. The Company may, at its option and at any time, redeem the preferred stock for the liquidation amount of $1,000 per share, plus any accrued and unpaid dividends. While the preferred stock is outstanding, the Company may only pay dividends on common stock if all accrued and unpaid dividends for the preferred stock have been paid. See Note 2 to the consolidated financial statements for additional details on the Company's participation in the Capital Purchase Program.

On March 28, 2012, the U.S. Department of the Treasury priced its secondary public offering of 57,000 shares of the Company's Preferred Stock. The Company successfully bid for the purchase of 21,030 shares of the Preferred Stock. During the remainder of 2012, the Company purchased 20,870 additional shares of the preferred stock from third parties. See Note 2 in the Consolidated Financial Statements for more information related to the sale of the Preferred Stock.

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 $890,539 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 80.6% of total earning assets during 2012 and approximately 79.5% in 2011.

Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment. The Company has not received any directives from regulatory authorities that would materially affect liquidity, capital resources or operations.

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 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.

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 the allowance for loan losses, goodwill, income taxes, and mortgage servicing rights.

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 2012 or 2011.

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.

See Note 1 to the Consolidated Financial Statements regarding the adoption of new accounting standards in 2012.

The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee and 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, 2012 the Company's estimated NPV might be expected to increase 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, 2011 the Company's estimated NPV would generally increase in the event of a decrease in prevailing rates and decrease in the event of an increase in rates.

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 contains 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.

Board of Directors and Shareholders
MainSource Financial Group, Inc.
Greensburg, Indiana

We have audited the accompanying consolidated balance sheets of MainSource Financial Group, Inc. as of December 31, 2012 and 2011 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, 2012. We also have audited MainSource Financial Group, Inc.'s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). MainSource Financial Group, Inc.'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 these financial statements and an opinion on the company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. 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.

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 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 our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MainSource Financial Group, Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, 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, 2012, based on criteria established in Internal Control — Integrated Framework issued by the COSO.

MAINSOURCE FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share data)

	December 31, 2012			December 31, 2011


Assets
Cash and due from banks	$	58,100		$	66,864
Money market funds and federal funds sold		7,550			42,284

Cash and cash equivalents		65,650			109,148
Securities available for sale		902,341			876,090
Loans held for sale		17,025			16,620
Loans, net of allowance for loan losses of $32,227 and $39,889		1,521,156			1,494,490
Restricted stock, at cost		15,639			15,856
Premises and equipment, net		54,101			50,652
Goodwill		63,947			61,919
Purchased intangible assets		6,993			7,163
Cash surrender value of life insurance		59,410			48,204
Interest receivable and other assets		63,026			74,038

Total assets	$	2,769,288		$	2,754,180

Liabilities
Deposits
Noninterest bearing	$	405,167		$	334,345
Interest bearing		1,779,887			1,825,555

Total deposits		2,185,054			2,159,900
Other borrowings		34,519			25,789
Federal Home Loan Bank (FHLB) advances		141,052			151,427
Subordinated debentures		50,418			50,267
Other liabilities		34,494			30,244

Total liabilities		2,445,537			2,417,627
Commitments and contingent liabilities (Notes 1 and 16)
Shareholders' equity
Preferred stock, no par value
Authorized shares — 400,000
Issued shares — 57,000;
Outstanding shares — 15,100 and 57,000
Aggregate liquidation preference $15,100 and $57,000		14,918			56,387
Common stock $.50 stated value:
Authorized shares — 100,000,000
Issued shares — 20,859,027 and 20,780,616
Outstanding shares — 20,304,525 and 20,206,214		10,450			10,411
Treasury stock — 554,502 and 574,402 shares, at cost		(9,043	)		(9,367	)
Additional paid-in capital		224,096			223,510
Retained earnings		57,602			32,720
Accumulated other comprehensive income		25,728			22,892

Total shareholders' equity		323,751			336,553

Total liabilities and shareholders' equity	$	2,769,288		$	2,754,180

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

MAINSOURCE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010
(Dollar amounts in thousands except per share data)

	2012			2011			2010


Interest income
Loans, including fees	$	83,934		$	92,941		$	105,179
Securities
Taxable		12,510			16,040			18,830
Tax exempt		12,160			12,415			10,360
Other interest income		164			215			202

Total interest income		108,768			121,611			134,571

Interest expense
Deposits		7,637			14,111			23,162
Federal Home Loan Bank advances		5,120			5,754			8,144
Subordinated debentures		1,825			1,737			1,755
Other borrowings		104			161			258

Total interest expense		14,686			21,763			33,319

Net interest income		94,082			99,848			101,252
Provision for loan losses		9,850			17,800			35,250

Net interest income after provision for loan losses		84,232			82,048			66,002
Non-interest income
Service charges on deposit accounts		19,815			18,147			17,462
Interchange income		6,540			6,225			5,487
Mortgage banking		9,927			5,551			7,642
Trust and investment product fees		3,650			3,250			2,363
Increase in cash surrender value of life insurance		1,206			1,200			1,246
Net realized gains on securities		1,867			11,357			2,979
Gain/(loss) on sale and write-down of OREO		(1,359	)		(2,744	)		(1,097	)
Other-than-temporary loss
Total impairment loss		(500	)		—			—
Loss recognized in other comprehensive income		—			—			—

Net impairment loss recognized in earnings		(500	)		—			—
Insurance commissions		—			—			1,711
Other income		2,745			2,322			3,498

Total non-interest income		43,891			45,308			41,291
Non-interest expense
Salaries and employee benefits		48,990			49,950			50,138
Net occupancy		6,769			6,686			6,654
Equipment		8,564			7,822			7,855
Intangibles amortization		1,835			1,939			2,066
Telecommunications		1,729			1,991			1,882
Stationery printing and supplies		1,337			1,510			1,478
FDIC assessment		2,495			3,974			4,940
Marketing		4,397			4,057			3,412
Collection expense		3,768			4,334			3,579
Prepayment penalty on FHLB advance		1,313			—			—
Consultant expense		1,150			6,547			—
Interchange expense		1,591			1,465			1,515
Other expenses		10,900			9,530			8,733

Total non-interest expense		94,838			99,805			92,252

Income before income tax		33,285			27,551			15,041
Income tax expense		6,027			3,738			239

Net income	$	27,258		$	23,813		$	14,802
Preferred dividends and discount accretion		(2,110	)		(3,054	)		(3,054	)
Redemption of preferred stock		1,357			—			—

Net income attributable to common shareholders	$	26,505		$	20,759		$	11,748

Cash dividends declared per common share	$	0.08		$	0.04		$	0.04
Net income per common share:
Basic	$	1.31		$	1.03		$	0.58
Diluted	$	1.30		$	1.03		$	0.58

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

MAINSOURCE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010
(Dollar amounts in thousands except per share data)

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

MAINSOURCE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010
(Dollar amounts in thousands except per share data)

				Common Stock

				Common Stock													Accumulated Other Comprehensive Income/(Loss)
	Preferred Stock			Shares Outstanding		Amount		Treasury Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income/(Loss)			Total

Balance, January 1, 2010	$	55,979			20,136,188	$	10,394	$	(9,367	)	$	223,020		$	1,825		$	12,611		$	294,462
Net income															14,802						14,802
Other comprehensive income																		(3,153	)		(3,153	)
Stock option expense												114									114
Dividends — common stock ($.04 per share)															(805	)					(805	)
Dividends — preferred stock															(2,850	)					(2,850	)
Accretion of preferred stock discount		204													(204	)					—

Balance, December 31, 2010		56,183			20,136,188		10,394		(9,367	)		223,134			12,768			9,458			302,570

Net income															23,813						23,813
Other comprehensive income																		13,434			13,434
Stock option expense												72									72
Dividends — common stock ($.04 per share)															(807	)					(807	)
Restricted stock award					46,244		5					96									101
Director retainer award					23,782		12					208									220
Dividends — preferred stock															(2,850	)					(2,850	)
Accretion of preferred stock discount		204													(204	)					—

Balance, December 31, 2011		56,387			20,206,214		10,411		(9,367	)		223,510			32,720			22,892			336,553

Net income															27,258						27,258
Other comprehensive income																		2,836			2,836
Stock option exercise					19,900		10		324			(214	)								120
Stock option expense												169									169
Dividends — common stock ($.08 per share)															(1,623	)					(1,623	)
Restricted stock award					48,061		14					308									322
Director retainer award					30,350		15					323									338
Dividends — preferred stock															(1,967	)					(1,967	)
Repurchase of preferred shares		(41,612	)												1,357						(40,255	)
Accretion of preferred stock discount		143													(143	)					—

Balance, December 31, 2012	$	14,918			20,304,525	$	10,450	$	(9,043	)	$	224,096		$	57,602		$	25,728		$	323,751

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

MAINSOURCE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2012, 2011, AND 2010
(Dollars in thousands)

	2012			2011			2010


Operating Activities
Net income	$	27,258		$	23,813		$	14,802
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		9,850			17,800			35,250
Depreciation expense		5,440			5,074			5,276
Amortization of mortgage servicing rights		1,964			1,388			1,424
Valuation allowance on mortgage servicing rights		676			(45	)		(132	)
Securities amortization, net		4,717			2,693			1,794
Amortization of purchased intangible assets		1,835			1,939			2,066
Earnings on cash surrender value of life insurance policies		(1,206	)		(1,200	)		(1,246	)
Gain on life insurance benefit		—			(141	)		(67	)
Gain on sale of insurance related business line		—			—			(988	)
Securities gains, net of impairment		(1,367	)		(11,357	)		(2,979	)
Gain on loans sold		(7,068	)		(3,494	)		(5,152	)
Loans originated for sale		(246,596	)		(195,344	)		(274,111	)
Proceeds from loan sales		253,259			188,063			278,546
Stock based compensation expense		491			173			114
Stock portion of director retainer fee expense		338			220			—
Loss on sale and write-down of OREO		1,359			2,744			1,097
Prepayment penalty on FHLB advance		1,313			—			—
Change in other assets and liabilities		1,928			3,734			6,940

Net cash provided by operating activities		54,191			36,060			62,634
Investing Activities
Purchases of securities available for sale		(220,543	)		(527,834	)		(363,844	)
Proceeds from calls, maturities, and payments on securities available for sale		131,130			120,588			157,154
Proceeds from sales of securities available for sale		64,176			366,559			111,564
Loan originations and payments, net		(15,060	)		102,983			154,068
Purchases of premises and equipment		(7,387	)		(6,865	)		(4,660	)
Proceeds from sale of OREO		12,706			16,346			8,928
Sale of insurance related business line		—			—			2,000
Purchase of life insurance policies		(10,000	)		—			—
Proceeds from redemption of restricted stock		217			3,646			7,857
Proceeds from life insurance benefit		—			893			124
Cash received from branch acquisitions, net		5,464			—			—

Net cash provided (used) by investing activities		(39,297	)		76,316			73,191
Financing Activities
Net change in deposits		(11,709	)		(51,664	)		(59,086	)
Net change in other borrowings		8,730			(7,392	)		(14,450	)
Proceeds from FHLB advances		95,000			15,000			—
Repayment of FHLB advances		(106,688	)		(15,638	)		(70,200	)
Cash dividends on preferred stock		(1,967	)		(2,850	)		(2,850	)
Cash dividends on common stock		(1,623	)		(807	)		(805	)
Repurchase of preferred shares		(40,255	)		—			—
Proceeds from exercise of stock options		120			—			—

Net cash (used) by financing activities		(58,392	)		(63,351	)		(147,391	)

Net change in cash and cash equivalents		(43,498	)		49,025			(11,566	)
Cash and cash equivalents, beginning of year		109,148			60,123			71,689

Cash and cash equivalents, end of year	$	65,650		$	109,148		$	60,123

Supplemental cash flow information
Interest paid	$	15,382		$	23,263		$	34,714
Income taxes paid/(refunded)		3,893			2,672			(1,675	)
Supplemental non cash disclosure
Loan balances transferred to foreclosed real estate		5,286			23,093			11,115

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)

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, and Insurance Services Marketing, LLC. On October 1, 2010, the Company sold its property and casualty and health insurance book of businesses related to its insurance subsidiary, MainSource Insurance (MSI), to Encore Insurance Group, LLC. This sale did not materially affect the Company's financial condition or results of operation.

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 account 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. The allowance for loan losses, carrying value of goodwill, loan servicing rights, other real estate owned, deferred tax assets and fair values of financial instruments are particularly subject to change.

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.

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, 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) other-than-temporary impairment (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.

Loans Held for Sale: Loans originated and intended for sale in the secondary market are carried at the lower of cost or market 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.

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. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. 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

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 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 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.

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.

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.

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 the discounted fair value of the collateral.

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 loans greater than $250.

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. 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. 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.

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 to income. Changes in valuation allowances are reported with mortgage banking on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

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 $1,864, $2,104 and $1,890 for the years ended December 31, 2012, 2011 and 2010. 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 these mortgage derivatives are estimated based on changes in mortgage interest rates from the date the interest rate on the loan is locked. 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. Any changes are recorded in mortgage banking on the income statement. The amount of income related to these derivatives was $1,740, $40, and $144 in 2012, 2011, and 2010 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. 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.

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: 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.

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 (Loss) Per Common Share: Basic earnings (loss) 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 (loss) per common share include the dilutive effect of additional potential common shares issuable under stock options. Earnings and dividends per share are restated for all stock splits and dividends through the date of issuance of the financial statements.

Comprehensive Income (Loss): Comprehensive income (loss) consists of net income (loss) 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 was 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 maintaining certain capital levels and may limit the dividends paid by the banks to the holding company or by the holding company 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 a 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'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.

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.

In July 2012, the FASB amended existing guidance relating to testing indefinite-lived intangible assets for impairment. The amendment permits an assessment of qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, it is concluded that it is not more likely than not that the indefinite-lived intangible asset is impaired, then no further action is required. However, after the same assessment, if it is concluded that it is more likely than not that the indefinite-lived intangible asset is impaired, then a quantitative impairment test should be performed whereby the fair value of the indefinite-lived intangible asset is compared to the carrying amount. The amendments in this guidance are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. It is expected that the effect of adopting this standard will not have a material effect on the Company's operating results or financial condition.

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. The adoption of this amendment had no impact on the consolidated financial statements as the current presentation of comprehensive income is in compliance with this amendment.

In September 2011, the FASB amended existing guidance relating to goodwill impairment testing. The amendment permits an assessment of qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing these events or circumstances, it is concluded that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendments in this guidance are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The effect of adopting this standard did not have a material effect on the Company's operating results or financial condition.

On January 16, 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. Under this agreement, the Company issued to the Treasury Department 57,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A ("preferred stock"), having a liquidation amount per share of $1,000, for a total price of $57 million and a warrant to purchase up to 571,906 shares ("warrant shares") of the Company's common stock, at an initial per share exercise price of $14.95, for an aggregate purchase price of $8.55 million.

The preferred stock pays cumulative dividends at a rate of 5% per year for the first five years and 9% per year thereafter. Dividends are payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year. The Company may, at its option and at any time, redeem the preferred stock for the liquidation amount of $1,000 per share, plus any accrued and unpaid dividends. While the preferred stock is outstanding, the Company may only pay dividends on common stock if all accrued and unpaid dividends for the preferred stock have been paid.

In addition to the preferred shares, 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, and upon certain issuances of the Company common stock at or below a specified price relative to the initial exercise price. The warrant has a term of ten years and is currently exercisable. The Treasury Department has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the warrant. Like stock options, the warrant issued through the Capital Purchase Program is potentially dilutive. The average stock price for the Company for 2012 and 2011 was $11.45 and $8.86 per share and the warrant issued in 2009 has an exercise price of $14.95 per share. This resulted in no additional dilutive shares in calculating earnings per share for 2012, 2011, or 2010.

On March 28, 2012, the U.S. Department of the Treasury priced its secondary public offering of 57,000 shares of the Company's Preferred Stock. The Company successfully bid for the purchase of 21,030 shares of the Preferred Stock for a total purchase price of $19,581, plus accrued and unpaid dividends on the Preferred Stock from and including February 15, 2012 to the settlement date, April 3, 2012. The book value of the preferred stock retired was $20,823. As a result of its successful bid in the offering, the Company retired 21,030 shares of its original sale of 57,000 shares of Preferred Stock on March 29, 2012. The difference between the book value and the bid price of $1,242 was credited to retained earnings. The remaining 35,970 shares were purchased by unrelated third parties. On May 31, 2012 the Company purchased from one of these parties an additional 1,820 shares or $1,820 of the preferred stock at a cost of $1,747. The difference between the book value and the bid price of $60 was credited to retained earnings. On December 5, 2012 the Company purchased an additional 19,050 shares or $19,050 of the preferred stock at a price of $18,927. The difference between the book value and the bid price of $55 was credited to retained earnings. None of the remaining shares of outstanding Preferred Stock are held by the U.S. Treasury. Included in 2012 operating results are $250 of expenses associated with Treasury's auction and the Company's purchase of the Preferred Stock.

The Bank is required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. The reserves required at December 31, 2012 and 2011 were $14,357 and $7,474. The Company had no compensating balance requirements at December 31, 2012 and 2011.

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value


As of December 31, 2012
Available for Sale
U. S. government agency	$	1,600	$	38	$	—		$	1,638
State and municipal		310,552		27,484		(97	)		337,939
Mortgage-backed securities-residential (Government Sponsored Entity)		219,352		7,711		(8	)		227,055
Collateralized mortgage obligations (Government Sponsored Entity)		322,758		4,604		(139	)		327,223
Equity securities		4,939		—		—			4,939
Other securities		3,558		—		(11	)		3,547

Total available for sale	$	862,759	$	39,837	$	(255	)	$	902,341

As of December 31, 2011
Available for Sale
State and municipal	$	320,269	$	24,723	$	(115	)	$	344,877
Mortgage-backed securities-residential (Government Sponsored Entity)		264,619		7,074		(189	)		271,504
Collateralized mortgage obligations (Government Sponsored Entity)		246,985		3,807		(25	)		250,767
Equity securities		5,410		—		—			5,410
Other securities		3,589		—		(57	)		3,532

Total available for sale	$	840,872	$	35,604	$	(386	)	$	876,090

Contractual maturities of securities at December 31, 2012 were as follows. Securities not due at a single maturity or with no maturity at year end are shown separately.

Gross proceeds from sales of securities available for sale during 2012, 2011 and 2010 were $64,176, $366,559, and $111,564. Gross gains of $1,944, $11,440 and $3,018 and gross losses of $77, $83, and $39 were realized on those sales in 2012, 2011 and 2010, respectively. The tax provision related to these net realized gains was $635, $3,861, and $1,049 respectively.

Securities with a carrying value of $259,613 and $206,639 were pledged at December 31, 2012 and 2011 to secure certain deposits and repurchase agreements, secure future funding needs, and for other purposes as permitted or required by law.

At year end 2012 and 2011, 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 2012 and 2011 presented by length of time the securities have been in a continuous unrealized loss position.

Management 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. 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. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in ASC 325-10 (formerly EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transfer in Securitized Financial Assets). The Company holds no securities that fall within the scope of ASC 325-10.

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 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 under either model, 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, 2012, the Company's security portfolio consisted of 1,006 securities, 33 of which were in an unrealized loss position. Unrealized losses on state and municipal securities of $97 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 temporary illiquidity and the financial crisis affecting these markets and not the expected cash flows of the individual securities. The fair value of these debt securities is expected to recover as the securities approach their maturity date.

At December 31, 2012, 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 $8 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 likely that it will not 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, 2012.

The Company's collateralized mortgage obligation securities portfolio includes agency collateralized mortgage obligations with a market value of $327,223 which had unrealized losses of approximately $139 at December 31, 2012. The Company monitors to insure it has adequate credit support and as of December 31, 2012, the Company believes there is no OTTI and does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. All securities are investment grade.

The unrealized losses on other securities are related to one single issue trust preferred security and has 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 security before its anticipated recovery. The Company performs a quarterly review of this security and based on this review, no evidence of adverse changes in expected cash flows is anticipated. The decline in value is primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not the expected cash flows of the individual security. Currently, the issuer has made all contractual payments and given no indication that they will not be able to make them into the future. The fair value of these debt securities is expected to recover as the securities approach their maturity date. As of December 31, 2012, the Company owned $990 of these securities with an unrealized loss of $11.

In 2012, there was a $500 impairment loss recognized on one equity security reducing its fair value to $250. This amount is shown as an impairment loss on the income statement. During 2010, the Company determined that three of its equity holdings were other than temporarily impaired and wrote down the securities by $97 to their fair value of $136. This amount was included in other income in 2010.

	December 31, 2012			December 31, 2011


Commercial
Commercial and industrial	$	126,965		$	114,367
Agricultural		32,769			20,741
Commercial Real Estate
Farm		62,896			46,308
Hotel		131,495			146,358
Construction and development		25,208			30,746
Other		507,231			540,752
Residential
1-4 family		394,195			365,710
Home equity		224,329			212,202
Consumer
Direct		45,844			51,157
Indirect		2,451			6,038

Total loans		1,553,383			1,534,379
Allowance for loan losses		(32,227	)		(39,889	)

Net loans	$	1,521,156		$	1,494,490

The following tables presents the activity in the allowance for loan losses by portfolio segment for the years ending December 31, 2012 and 2011:

Activity in the allowance for loan losses was as follows for the year ending December 31, 2010:

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, 2012 and 2011:

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2012 and 2011:

December 31, 2012	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Interest Income Recognized		Cash Basis Interest Recognized


With an allowance recorded
Commercial
Commercial and industrial	$	305	$	305	$	150
Agricultural				—		—
Commercial Real Estate
Farm		922		922		442
Hotel
Construction and development		742		644		240
Other		9,727		9,419		2,385
Residential
1-4 Family
Home Equity
Consumer
Direct
Indirect

Subtotal — impaired with allowance recorded		11,696		11,290		3,217
With no related allowance recorded
Commercial
Commercial and industrial		2,115		1,492			$	76	$	76
Agricultural		1		—
Commercial Real Estate
Farm		741		663				9		9
Hotel		6,257		5,968
Construction and development		2,685		1,499				108		108
Other		20,047		14,384				129		129
Residential
1-4 Family		13,110	$	11,548				3		3
Home Equity		2,801		2,627				17		17
Consumer
Direct		1,083		1,066				9		9
Indirect		19		17				7		7

Subtotal — impaired with no allowance recorded	$	48,859	$	39,264		—	$	358	$	358

Total impaired loans	$	60,555	$	50,554	$	3,217	$	358	$	358

December 31, 2011	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Interest Income Recognized		Cash Basis Interest Recognized


With an allowance recorded
Commercial
Commercial and industrial	$	3,130	$	3,057	$	1,193
Agricultural
Commercial Real Estate
Farm		486		486		193
Hotel		5,385		5,385		100
Construction and development		5,558		5,476		2,371
Other		14,400		14,322		2,812
Residential
1-4 Family
Home Equity
Consumer
Direct
Indirect

Subtotal — impaired with allowance recorded	$	28,959	$	28,726	$	6,669
With no related allowance recorded
Commercial
Commercial and industrial	$	2,720	$	2,030	$	—	$	22	$	22
Agricultural		351		57
Commercial Real Estate
Farm		579		531
Hotel		876		384
Construction and development		2,996		1,839				1		1
Other		16,325		12,726				135		135
Residential
1-4 Family		12,344		12,045				8		8
Home Equity		2,548		2,477				8		8
Consumer
Direct		1,096		1,083				9		9
Indirect		35		33				5		5

Subtotal — impaired with no allowance recorded	$	39,870	$	33,205	$	—	$	188	$	188

Total impaired loans	$	68,829	$	61,931	$	6,669	$	188	$	188

The following table presents the average recorded investment of impaired loans in 2012 and 2011.

	2012		2011


Commercial
Commercial and industrial	$	4,401	$	6,438
Agricultural		23		103
Commercial Real Estate
Farm		1,180		1,110
Hotel		2,388		7,271
Construction and development		4,751		9,467
Other		25,716		29,079
Residential
1-4 family		11,778		11,825
Home equity		2,719		1,974
Consumer
Direct		1,041		1,143
Indirect		41		58

Total loans	$	54,038	$	68,468

The following table presents the recorded investment in non-accrual and loans past due over 90 days still on accrual by class of loans as of December 31, 2012 and 2011:

	Non-accrual				Past due over 90 days and still accruing


December 31,	2012		2011		2012		2011

Commercial
Commercial and industrial	$	1,777	$	2,518	$	—	$	—
Agricultural		—		57		—		—
Commercial Real Estate
Farm		1,584		1,016		—		—
Hotel		—		384		—		—
Construction and development		1,657		3,240		565		—
Other		17,442		21,060		—		3,259
Residential
1-4 Family		10,392		10,873		—		—
Home Equity		2,216		2,105		—		—
Consumer
Direct		366		242		—		7
Indirect		17		33		—		—

Total	$	35,451	$	41,528	$	565	$	3,266

The following table presents the aging of the recorded investment in past due loans as of December 31, 2012 and 2011 by class of loans:

December 31, 2012	Total Loans		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due


Commercial
Commercial and industrial	$	126,965	$	1,421	$	311	$	1,094	$	2,826	$	124,139
Agricultural		32,769		—		—		—		—		32,769
Commercial Real Estate
Farm		62,896		158		—		1,417		1,575		61,321
Hotel		131,495		—		—		—		—		131,495
Construction and development		25,208		—		—		2,121		2,121		23,087
Other		507,231		2,516		1,208		10,607		14,331		492,900
Residential
1-4 Family		394,195		7,788		2,605		5,492		15,885		378,310
Home Equity		224,329		1,170		357		1,428		2,955		221,374
Consumer
Direct		45,844		182		49		242		473		45,371
Indirect		2,451		33		12		5		50		2,401

Total — excludes $5,206 of accrued interest	$	1,553,383	$	13,268	$	4,542	$	22,406	$	40,216	$	1,513,167

December 31, 2011	Total Loans		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due


Commercial
Commercial and industrial	$	114,367	$	1,139	$	655	$	1,831	$	3,625	$	110,742
Agricultural		20,741						57		57		20,684
Commercial Real Estate
Farm		46,308				58		905		963		45,345
Hotel		146,358						384		384		145,974
Construction and development		30,746		61				3,179		3,240		27,506
Other		540,752		4,249		3,576		16,529		24,354		516,398
Residential
1-4 Family		365,710		9,327		2,233		7,182		18,742		346,968
Home Equity		212,202		1,417		500		1,491		3,408		208,794
Consumer
Direct		51,157		382		146		129		657		50,500
Indirect		6,038		87		24		16		127		5,911

Total — excludes $5,835 of accrued interest	$	1,534,379	$	16,662	$	7,192	$	31,703	$	55,557	$	1,478,822

During the year ending December 31, 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan or an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from 60 months to 30 years. Modifications involving an extension of the maturity date were for periods ranging from 6 months to 14 months.

The following tables present loans by class modified as troubled debt restructurings that occurred during the years ending December 31, 2012 and 2011:

The troubled debt restructurings described above increased the allowance for loan losses by $10 and $30 and resulted in charge offs of $2,477 and $3,062 during the year ending December 31, 2012 and 2011 respectively.

The following tables present loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the years ending December 31, 2012 and 2011:

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. The troubled debt restructurings that subsequently defaulted described above increased the allowance for loan losses by $256 and $178 and resulted in charge offs of $1,192 and $594 during the years ending December 31, 2012 and 2011 respectively.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the company's internal underwriting policy.

The Company has allocated $567 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2012. The Company has committed to lend additional amounts totaling $0 to customers with outstanding loans that are classified as troubled debt restructurings. At December 31, 2011, the comparable numbers were $3,013 of specific reserves and $0 of commitments. The total of troubled debt restructurings at December 31, 2012 and 2011 was $15,102 and $20,402 respectively.

The terms of certain other loans were modified during year ending December 31, 2012 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of December 31, 2012 of $18,612. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

The Company categorizes loans into risk categories based on relevant information about the ability of the borrower to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes commercial and commercial real estate loans individually by classifying the loans as to credit risk. This analysis includes credit relationships with an outstanding balance greater than $1 million on an annual basis. The Company uses the following definitions for risk ratings:

Special Mention — Loans classified as special mention have above average risk that requires management's ongoing attention. The borrower may demonstrated inability to generate profits or to maintain net worth, chronic delinquency and /or a demonstrated lack of willingness or capacity to meet obligations.

Substandard — Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are classified by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Non-accrual — Loans classified as non-accrual are loans where the further accrual of interest is stopped because payment in full of principal and interest is not expected. In most cases, the principal and interest has been in default for a period of 90 days or more.

As of December 31, 2012 and 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Loans not analyzed individually as part of the above described process are classified by delinquency. These loans are primarily residential mortgage and consumer loans. All consumer loans fully or partially secured by 1-4 residential real estate that are 60-89 days will be classified as Watch. If loans are greater than 90 days past due, they will be classified as Substandard. Consumer loans not secured by 1-4 family residential real estate that are 60-119 days past due will be classified Substandard while loans greater

than 119 days will be classified as Loss. As of December 31, 2012 and 2011, the performing/non performing loans by category of loans is as follows:

Activity in the real estate owned assets, which are included in interest receivable and other assets in the consolidated balance sheets, was as follows:

The value of the sale amount above is the carrying value of the property when it was sold.

Expenses related to foreclosed assets included in other expenses in the consolidated statements of income, were as follows:

ASC 820 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or using market data utilizing pricing models, primarily Interactive Data Corporation (IDC), that vary based upon asset class and include available trade, bid, and other market information. Matrix pricing is used for most municipals, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities. The grouping of securities is done according to insurer, credit support, state of issuance, and rating to incorporate additional spreads and municipal curves. For the general market municipals, the Thomson Municipal Market Data curve is used to determine the initial curve for determining the price, movement, and yield relationships with the municipal market (Level 2 inputs). Level 3 securities are largely comprised of small, local municipality issuances. Fair values are derived through consideration of funding type, maturity and other features of the issuance, and include reviewing financial statements, earnings forecasts, industry trends and the valuation of comparative issuers. In most cases, the book value of the security is used as the fair value as meaningful pricing data is not readily available. The fair values are determined by a third party and reviewed by the Company's investment advisor who reports to the Company's Asset/Liability and Investments Manager who reports to the Company's Chief Financial Officer. Twice a year, a sample of prices supplied by the pricing agent is validated by comparison to prices obtained from other third party sources.

The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals or industry accepted valuation methods. In a limited number of situations, the Company's appraisal department is determining the value of appraisal. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the loan officers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value. These adjustments typically range from 0%-50%. Impaired loans are evaluated quarterly for additional impairment and take into account changing market conditions, specific information in the market the property is located, and the overall economic climate as well as overall changes in the credit. The Company's Appraisal Manager has the overall responsibility for all appraisals. The Company's loan officer responsible for the loan, the special assets officer, as well as the senior officers of the Company review the adjustments made to the appraisal for market and disposal costs on the loan.

The fair value of servicing rights is based on a valuation model from a third party that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. The inputs used include estimates of prepayment speeds, discount rate, cost to service, contractual servicing fee income, late fees, and float income. The most significant assumption used to value mortgage servicing rights is prepayment rate. Prepayment rates are estimated based on published industry consensus prepayment rates. The most significant unobservable assumption is the discount rate. At December 31, 2012 the constant prepayment speed (PSA) used was 332 and the discount rate was 10.0%. At December 31, 2011 the constant prepayment speed (PSA) used was 317 and the discount rate was 9.0%. The Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 3 inputs). On a quarterly basis, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. If the carrying amount of an individual tranche exceeds fair value, impairment is recorded on that tranche so that the servicing asset is carried at fair value. Fair value is determined at a tranche level, based on market prices for comparable mortgage servicing contracts, when available, or alternatively based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data.

The fair value of other real estate owned is measured based on the value of the collateral securing those assets and is determined using several methods. The fair value of real estate is generally determined based on appraisals by qualified licensed appraisers (third party). The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis. Appraisals for both collateral-dependent impaired loans and other real estate owned are performed by certified general appraisers whose qualifications and licenses have been

reviewed and verified by the Company. Once received, a member of the Appraisal Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Fair values are reviewed on at least an annual basis. The Company normally applies an internal discount to the value of appraisals used in the fair value evaluation of OREO. The deductions take into account changing business factors and market conditions. These deductions range from 0% to 50%. As noted in the impaired loans discussion above, the Company's Appraisal Manager has the overall responsibility for all appraisals. The Appraisal Manager reports to the Vice President of Credit Administration who reports to the Chief Credit Officer of the Company.

The fair value of mortgage banking derivatives are based on derivative valuation models using market data inputs as of the valuation date (Level 2).

Assets and liabilities measured at fair value under ASC 820 on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below:

			Fair Value Measurements at December 31, 2012 Using:

	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Financial Assets
Investment securities available-for-sale
U. S. government agency	$	1,638			$	1,638
States and municipal		337,939				322,469		15,470
Mortgage-backed securities — Residential — Government Sponsored Entity		227,055				227,055
Collateralized mortgage obligations — Government Sponsored Entity		327,223				327,223
Equity securities		4,939		4,689				250
Other securities		3,547				990		2,557

Total investment securities available-for-sale	$	902,341	$	4,689	$	879,375	$	18,277

Mortgage banking derivative	$	2,200			$	2,200

			Fair Value Measurements at December 31, 2011 Using:

(Dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Financial Assets
Investment securities available-for-sale States and municipal	$	344,877			$	321,321	$	23,556
Mortgage-backed securities — residential — Government Sponsored Entity		271,504				271,504
Collateralized mortgage obligations — Government Sponsored Entity		250,767				250,767
Equity securities		5,410		4,660				750
Other securities		3,532				945		2,587

Total investment securities available-for-sale	$	876,090	$	4,660	$	844,537	$	26,893

Mortgage banking derivative	$	460			$	460

There have been no transfers between Level 1 and 2 during the two years ending December 31, 2012 and 2011.

The tables below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2012 and 2011:

Transfers out of level 3 were securities that were called by the issuer early in the second quarter of 2011. The Company felt that as of March 31, 2011, the established call price was no longer indicative of a Level 3 value and transferred them to Level 2. Transfers into Level 3 were local municipal securities where the Company's pricing service no longer priced these securities due to the illiquidity of those securities. These investments are carried at fair value, which approximate book value and are classified as Level 3. The municipal transfer into Level 2 was a security that was acquired late in the second quarter. Pricing was not available on this security at the end of the second quarter and resulted in a Level 3 valuation. Pricing was obtained in the third quarter which resulted in a transfer into Level 2.

The Company's state and municipal security valuations were supported by analysis prepared by an independent third party. Fair values are derived through consideration of funding type, maturity and other features of the issuance, and include reviewing financial statements, earnings forecasts, industry trends and the valuation of comparative issuers. In most cases, the book value of the security is used as the fair value as meaningful pricing data is not readily available.

The Company's equity security valuation was supported by an analysis prepared by the Company's Investments Manager. Fair value is derived through consideration of funding type, maturity and other features of the issuance, and includes reviewing financial statements, earnings forecasts, industry trends and the valuation of comparative issuers. In this case, the book value of the security is used as the fair value as meaningful pricing data is not readily available.

The Company's other security valuation was supported by analysis prepared by an independent third party. Fair values are derived through consideration of funding type, maturity and other features of the issuance, and include reviewing financial statements, earnings forecasts, industry trends and the valuation of comparative issuers. In most cases, the book value of the security is used as the fair value as meaningful pricing data is not readily available.

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurements at December 31, 2012 Using

	December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)

Assets:
Impaired loans
Commercial and industrial	$	155			$	155
Farm real estate		480				480
Construction and development		404				404
Other		4,936				4,936

Total impaired loans	$	5,975			$	5,975
Impaired servicing rights	$	2,942			$	2,942
Other real estate owned/assets held for sale
Construction and development	$	1,764			$	1,764
Other		803				803
1-4 Family		95				95

	$	2,662			$	2,662

			Fair Value Measurements at December 31, 2011 Using:

	December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)

Assets:
Impaired loans
Commercial and industrial	$	519			$	519
Agricultural		43				43
Farm		292				292
Construction and development		763				763
Other		6,125				6,125

Total impaired loans	$	7,742			$	7,742
Impaired servicing rights	$	4,000			$	4,000
Other real estate owned/assets held for sale
Construction and development	$	1,538			$	1,538
Other commercial real estate		1,830				1,830

	$	3,368			$	3,368

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $9,151, with a valuation allowance of $3,176, resulting in an additional provision for loan losses of $1,958 in 2012. A breakdown on these loans by portfolio class is as follows:

At December 31, 2011, impaired loans had a gross carrying amount of $11,399, with a valuation allowance of $3,657, resulting in an additional provision for loan losses of $2,928 for the year ending December 31, 2011.

Impaired tranches of servicing rights were carried at a fair value of $2,942, which is made up of the gross outstanding balance of $4,067, net of a valuation allowance of $1,125. A charge of $676 was included in 2012 earnings. In 2011, impaired servicing rights were written down to a fair value of $4,000, resulting in a valuation allowance of $449. The gross outstanding balance was $4,449, net of a valuation allowance of $449. A credit of $45 was included in 2011 earnings.

Other real estate owned/assets held for sale is evaluated at the time a property is acquired through foreclosure or moved to held for sale or shortly thereafter. Fair value is based on appraisals by qualified licensed appraisers. At December 31, 2012, the fair value is made up of the gross outstanding balance of $4,334, net a valuation allowance of $1,672. At December 31, 2011, the fair value is made up of the gross outstanding balance of $5,647, net a valuation allowance of $2,279. During 2012, these properties were written down by $647 which was included in 2012 earnings. During 2011, these properties were written down by $2,150 which was included in 2011 earnings. A breakdown of these properties by portfolio class at December 31, 2012 is as follows:

The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2012. Impaired commercial, commercial real estate loans, and other real estate owned that are deemed collateral dependent are valued based on the fair value of the underlying collateral. These estimates are based on the most recently available appraisals with certain adjustments made based on the type of property, age of appraisal, current status of the property and other related factors to estimate the current value of the collateral.

	Fair Value (in thousands)		Valuation Technique(s)	Unobservable Input(s)	Range


Impaired Loans:
Commercial & industrial	$	155	Liquidation value of inventory	Management adjustment	15% 15% Avg
Farm real estate		480	Sales comparison approach	Adjustment for differences between comparable sales	35-40% 37% Avg
Construction and development		404	Sales comparison approach	Adjustment for differences between comparable sales	10%-50% 41% Avg
Other	$	4,936 5,975	Sales comparison approach	Adjustment for differences between comparable sales, type of property, current status of property	0%-60% 32% Avg
Other real estate owned:
Construction and development	$	1,764	Sales comparison approach	Adjustment for differences between comparable sales.	10%-26% 15% Avg
Other and 1-4 family	$	898 2,662	Sales comparison approach	Adjustment for differences between comparable sales.	2%-35% 17% Avg
Mortgage servicing rights	$	2,942	Cash flow analysis	Discount rate	10%

Carrying amount and estimated fair values of financial instruments, not previously presented, at year end were as follows:

December 31, 2012	Carrying Amount			Level 1			Level 2				Total


Assets
Cash and cash equivalents	$	65,650		$	58,100		$	7,550			$	65,650
Loans including loans held for sale, net		1,564,433						17,025		1,538,489		1,555,514
Restricted stock		15,639										N/A
Interest receivable		9,827						4,621		5,206		9,827
Liabilities
Deposits		(2,185,054	)		(405,167	)		(1,780,511	)			(2,185,678	)
Other borrowings		(34,519	)					(34,519	)			(34,519	)
FHLB advances		(141,052	)					(152,018	)			(152,018	)
Interest payable		(1,195	)					(1,195	)			(1,195	)
Subordinated debentures		(50,418	)					(31,763	)			(31,763	)

The difference between the loan balance included above and the amounts shown in Note 5 are the impaired loans discussed above.

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

The carrying amounts of cash and short-term instruments approximate fair values and are classified as either Level 1 or Level 2. Noninterest bearing deposits are Level 1 whereas interest bearing due from bank accounts and fed funds sold are Level 2.

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

Fair values of loans are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

The fair values disclosed for non-interest bearing deposits are equal to the amount payable on demand at the reporting date resulting in a Level 1 classification. The carrying amounts of variable rate interest bearing deposits approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate interest bearing deposits are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

The carrying amounts of borrowings under repurchase agreements approximate their fair values resulting in a Level 2 classification.

The fair values of the Company's FHLB advances are estimated using discounted cash flow analyses based on the current borrowing rates resulting in a Level 2 classification.

The fair values of the Company's subordinated debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification based on the level of the asset or liability with which the accrual is associated.

Operating Leases: The Company leases certain branch properties under operating leases. Rent expense was $1,126, $933, and $940 for 2012, 2011, and 2010. Rent commitments, before considering renewal options that generally are present, were as follows:

The Company tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. Impairment exists when a reporting unit's carrying value of goodwill exceeds its fair value. At June 30, 2012, the Company's reporting unit had positive equity and the Company elected to perform a quantitative assessment to determine if the fair value of the reporting unit exceeded its carrying value, including goodwill. The quantitative assessment indicated that the fair value of the reporting unit exceeded its carrying value, resulting in no impairment.

A discussion of goodwill acquired in 2012 can be found at Note 26. During 2010, the insurance business was sold, including the associated goodwill of $990.

Aggregate amortization expense was $1,835, $1,939, and $2,066 for 2012, 2011, and 2010.

Securities sold under repurchase agreements ("agreements") consist of obligations secured by securities issued by government-sponsored entities, and a safekeeping agent holds such collateral. The balance at December 31, 2012 and 2011 was $25,794 and $25,789 respectively. The maximum amount of outstanding agreements at any month-end during 2012, 2011, and 2010 totaled $30,974, $40,960, and $50,513. The daily average of such agreements during 2012, 2011, and 2010 totaled $28,243, $30,404, and $39,737. The weighted average rate was 0.20%, 0.44%, and 0.55% at December 31, 2012, 2011, and 2010 while the weighted average rate during 2012, 2011, and 2010 was approximately 0.34%, 0.52%, and 0.64% respectively. The majority of the agreements at December 31, 2012 mature within 30 days.

The majority of the FHLB advances are secured by mortgage loans totaling approximately 160% of the advance under a blanket security agreement. The advances are subject to restrictions or penalties in the event of prepayment. Of the $141,052 in advances at December 31, 2012, $105,000 or 74% of the advances contained options whereby the FHLB may convert the fixed rate advance to an adjustable rate advance, at which time the Company may prepay the advance without a penalty. Of the $151,427 in advances at December 31, 2011, $120,000 or 79% of the advances contained such options.

The Company formed four separate trusts in 2002, 2003, and 2006 that issued floating rate trust preferred securities as part of pooled offerings. The Company issued subordinated debentures to the trusts in exchange for the proceeds of the offerings, which debentures represent the sole asset of the trusts. The Company acquired two trusts from a prior acquisition — Harrodsburg Statutory Trust I and Independence Bancorp Statutory Trust I. In accordance with accounting guidelines, the trusts are not consolidated with the Company's financial statements, but rather the subordinated debentures are shown as a liability, because the Company is not considered the primary beneficiary of the trusts. The Company's investment in the common stock of the trust was $1,518 and is included in interest receivable and other assets on the consolidated balance sheets. Interest payments are payable quarterly in arrears and the Company has the option to defer interest payments from time to time for a period not to exceed 20 consecutive quarters. The subordinated debentures mature in 30 years from issuance and can be called anytime after five years at par. The subordinated debentures may be included in Tier 1 capital (with certain limitations) under current regulatory guidelines and interpretations. The following table summarizes the other terms of each issuance.

Loans serviced for others are not included in the accompanying consolidated balance sheets. Loan servicing fee income was $1,864, $2,104, and $1,890 for 2012, 2011, and 2010. The unpaid principal balances of loans serviced for others totaled $758,074 and $780,388 at December 31, 2012 and 2011. Custodial escrow balances maintained in connection with serviced loans were $8,296 and $10,423 at year end 2012 and 2011. The weighted average amortization period is 4.2 years. Mortgage servicing rights are included in other assets on the consolidated balance sheets. The fair value of capitalized mortgage servicing assets is based on comparable market values and expected cash flows, with impairment assessed based on portfolio characteristics including product type and interest rates. The carrying value of capitalized mortgage servicing rights was $4,350 and $5,412 at year end 2012 and 2011. Fair value at year-end 2012 was determined using a discount rate of 10%, and prepayment speeds ranging from 112% to 505%, depending on the stratification of the specific right. Fair value at year-end 2011 was determined using a discount rate of 9%, and prepayment speeds ranging from 231% to 396%, depending on the stratification of the specific right. The notional amount of interest rate lock commitments to make 1-4 family residential mortgage loans intended to be sold on the secondary market totaled $66.7 million and $51.7 million at December 31, 2012 and 2011, respectively. The estimated fair value of these commitments totaled $2,200 and $460 at December 31, 2012 and 2011, respectively, and is included in other assets on the consolidated balance sheet.

Effective tax rates differ from the federal statutory rate of 35% applied to income before income taxes due to the following:

December 31	2012			2011


Assets
Allowance for loan losses	$	12,427		$	15,393
State net operating loss carryforward		5,898			5,673
Credit carryforwards		8,595			7,448
OREO write-downs		953			1,520
Other		2,765			1,278

Total assets		30,638			31,312

Liabilities
Depreciation		(3,664	)		(3,204	)
Mortgage servicing rights		(1,722	)		(2,135	)
Unrealized gain on securities AFS		(13,854	)		(12,326	)
Deferred loan fees/costs		(1,241	)		(855	)
Other		(2,407	)		(1,783	)

Total liabilities		(22,888	)		(20,303	)

Less: Valuation allowance		(5,916	)		(6,039	)

Net deferred tax asset	$	1,834		$	4,970

The Company has $2,585 of alternative minimum tax credit carryforwards, which under current tax law have no expiration period. The Company has general business credit carryforwards of $6,010 that begin to expire in 2027.

The Company has an Indiana state operating loss carryforward of $106,760, which begins to expire in 2019. The Company maintains a valuation allowance to reduce these carryforward items and other Indiana deferred tax assets to the amount expected to be realized.

A valuation allowance for deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets depends on the ability of the Company to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing jurisdictions. At December 31, 2012, the largest component of deferred tax assets is associated with the allowance for loan losses. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. With the exception of the deferred tax asset associated with the Company's Indiana deferred tax assets, no valuation allowance for deferred tax assets are considered necessary at December 31, 2012 or 2011.

Retained earnings of the subsidiary bank includes approximately $13,112 for which no deferred income tax liability has been recognized. This amount represents an allocation of previously acquired institutions to bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses including redemption of bank stock or excess dividends, or loss of "bank" status would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amount for the Company was approximately $4,589 at each of December 31, 2012 and 2011.

The Company does not have any unrecognized tax benefits during any periods presented and does not expect this to significantly change in the next twelve months.

There were no interest and penalties recorded in the income statement during any period and no amounts accrued for interest and penalties at December 31, 2012, or 2011.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the states of Indiana and Illinois. The Company is no longer subject to examination by taxing authorities for years before 2009.

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

Financial instruments whose contract amount represents credit risk as of December 31 were as follows:

Commitments to make loans are generally made for periods of 60 days or less. Interest rates on fixed rate commitments range from 1.99% to 19.8% with maturities ranging from 1 year to 16 years.

The Company's principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described in Note 19. As of December 31, 2012, the Bank could, without prior approval, declare dividends of approximately $32,390.

The Company maintains an Automatic Dividend Reinvestment Plan. The plan enables shareholders to elect to have their cash dividends on all or a portion of shares held automatically reinvested in additional shares of the Company's common stock. The stock is purchased by the Company's transfer agent on the open market and credited to participant accounts at fair market value. Dividends are reinvested on a quarterly basis.

Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. Failure to meet capital requirements can initiate regulatory action. Risk adjusted capital levels of the Company's subsidiary bank exceed regulatory definitions of well-capitalized institutions.

Management believes as of December 31, 2012, the Company and Bank meet all capital adequacy requirements to which they are subject. The holding company is a source of additional financial strength with its $7.1 million in cash and its ability to downstream additional capital to the Bank.

There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification in any of the undercapitalized categories can result in actions by regulators that could have a material effect on operations. At December 31, 2012 and 2011, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective actions. There are no conditions or events since that notification that management believes have changed the Bank's category.

The Federal Deposit Insurance Corporation and the Indiana Department of Financial Institutions notified MainSource Bank that, effective March 16, 2012, it was no longer subject to the informal agreement entered into on April 22, 2010, which had required the Bank to retain higher capital levels than the minimums set forth above.

The Company has a defined-contribution retirement plan in which substantially all employees may participate. The Company matches 80% of the first 8% of eligible employees' contributions and makes additional contributions based on employee compensation and the overall profitability of the Company. Expense was $2,377 in 2012, $2,269 in 2011, and $2,014 in 2010. The Company made an additional contribution in 2012, 2011 and 2010 based on the overall profitability of the Company.

The Company has entered into transactions with certain directors, executive officers, significant shareholders and their affiliates or associates (related parties).

The aggregate amount of loans, as defined, to such related parties was as follows:

Deposits from related parties held by the Company at December 31, 2012 and 2011 totaled $5,788 and $2,641.

On January 16, 2007, the Company's Board of Directors adopted and approved the MainSource Financial Group, Inc. 2007 Stock Incentive Plan (the "2007 Stock Incentive Plan") effective upon the approval of the Plan by the Company's shareholders, which occurred on April 26, 2007 at the Company's annual meeting of shareholders. The 2007 Stock Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, stock bonuses and restricted stock awards. Incentive stock options may be granted only to employees. An aggregate of 650,000 shares of common stock are reserved for issuance under the 2007 Stock Incentive Plan. Shares issuable under the 2007 Stock Incentive Plan may be authorized and unissued shares of common stock or treasury shares. The 2007 Stock Incentive Plan is in addition to, and not in replacement of, a similar plan adopted in 2003 (the "2003 Plan"). However, no further awards of options will be made under the 2003 Plan. Unexercised options, which were previously issued

under the 2003 Plan, were not terminated, but continued in accordance with the 2003 Plan and the agreements pursuant to which the options were issued.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company's common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. Employee and management options are tracked separately. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The fair value of options granted was determined using the following weighted average assumptions as of grant date.

A summary of the activity in the 2007 Stock Incentive Plan and the 2003 Plan for 2012 follows:

Information related to the 2007 Stock Incentive Plan and the 2003 Plan during each year follows:

As of December 31, 2012, there was $385 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted-average period of 2.8 years.

During the second quarter of 2011 and 2012, the Compensation Committee of the Board of Directors of the Company granted restricted stock awards to certain executive officers pursuant to the Company's annual performance-based incentive bonus plan. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the issue date. The value of the awards was determined by multiplying the award amount by the closing price of a share of Company common stock on the grant dates, April 25, 2012 ($11.85) and April 8, 2011 ($9.68). The restricted stock awards vest as follows — 80% on the second anniversary of the date of grant and 20% on the third anniversary of the date of grant. A total of 48,061 shares of common stock of the Company were granted in 2012 and 46,244 shares of common stock of the Company were granted in 2011under the 2007 Stock Incentive Plan.

As of December 31, 2012, there was $719 of total unrecognized compensation costs related to nonvested restricted stock awards granted under the 2007 Stock Incentive Plan that will be recognized over the remaining vesting period of approximately 1.75 years. The recognized compensation costs related to the 2007 Stock Incentive Plan was $322 and $107 for the 2012 and 2011 respectively.

Beginning with the retainer paid to the Board in 2011, members of the Board of Directors of the Company can make an annual election to have their retainer paid in cash, Company stock, or a combination of cash and stock during the following year. The annual retainer is paid quarterly, on May 1, August 1, November 1, and February 1 of each year, for all directors serving on the Board on those dates. Other expense is recognized over the three month period of the awards based on the fair value of the stock at the issue dates. The value of the quarterly awards is determined by multiplying the award amount by the average closing price of a share of Company common stock on the five trading days prior to the issuance of the stock. The shares issued vest immediately. Shares awarded by quarter were as follows:

A total of $338 was recognized as expense in 2012 for these grants and $220 was recognized as expense in 2011.

Year Ended December 31, 2012	Net Income/(Loss)				Per Share Amount


Basic Loss Per Common Share
Net income	$	27,258
Preferred dividends and discount accretion		(2,110	)
Redemption of preferred shares		1,357

		26,505		20,265,761	$	1.31
Effect of dilutive stock options				58,896

Diluted (Loss) Per Common Share
Net income attributable to common shareholders and assumed conversions	$	26,505		20,324,657	$	1.30

Year Ended December 31, 2011

Basic Earnings Per Common Share
Net income	$	23,813
Preferred dividends and discount accretion		(3,054	)

		20,759		20,179,512	$	1.03
Effect of dilutive stock options				41,615

Diluted Earnings Per Common Share
Net income available to common shareholders and assumed conversions	$	20,759		20,221,127	$	1.03

Year Ended December 31, 2010

Basic Earnings Per Common Share
Net income	$	14,802
Preferred dividends and discount accretion		(3,054	)

		11,748		20,136,362	$	0.58
Effect of dilutive stock options				18,022

Diluted Earnings Per Common Share
Net income available to common shareholders and assumed conversions	$	11,748		20,154,384	$	0.58

Stock options for 289,544, 254,850, and 262,441 shares of common stock were not considered in computing diluted earnings per common share for 2012, 2011 and 2010 because they were antidilutive. Stock warrants for 571,906 shares of common stock were not considered in computing earnings per share in 2012, 2011 and 2010 because they were antidilutive.

The first quarter of 2012 earnings per share amount of $0.32/share is $0.06 higher than the amount reported in the first quarter 10Q due to the redemption of preferred stock in the first quarter.

Year Ended December 31	2012			2011			2010


Income
Dividends from subsidiaries	$	47,800		$	2,825		$	1,119
Fees from subsidiaries		19,024			19,624			17,669
Other Income		(845	)		176			233

Total income		65,979			22,625			19,021
Expenses
Interest expense		1,825			1,737			1,755
Salaries and benefits		11,238			11,388			11,062
Professional fees		1,465			2,534			1,275
Other expenses		13,655			13,173			12,223

Total expenses		28,183			28,832			26,315

Income (loss) before income taxes and equity in undistributed income of subsidiaries		37,796			(6,207	)		(7,294	)
Income tax (benefit)		(3,377	)		(3,069	)		(2,989	)

Income (loss) before equity in undistributed income of subsidiaries		41,173			(3,138	)		(4,305	)
Equity in undistributed income (loss) of subsidiaries		(13,915	)		26,951			19,107

Net income	$	27,258		$	23,813		$	14,802

Year Ended December 31	2012			2011			2010


Operating Activities
Net income	$	27,258		$	23,813		$	14,802
Undistributed (income)/loss of subsidiaries		13,915			(26,951	)		(19,107	)
Changes in other assets and liabilities		2,862			2,699			1,838

Net cash provided/(used) by operating activities		44,035			(439	)		(2,467	)
Investing Activities
Cash received from subsidiaries		—			—			1,287
Purchase of security AFS		—			—			(39	)
Purchases of equipment		(1,230	)		(2,166	)		(1,766	)

Net cash used by investing activities		(1,230	)		(2,166	)		(518	)
Financing Activities
Proceeds from exercise of stock options		120			—			—
Repurchase of preferred stock		(40,255	)		—			—
Cash dividends on preferred stock		(1,967	)		(2,850	)		(2,850	)
Cash dividends on common stock		(1,623	)		(807	)		(805	)

Net cash used by financing activities		(43,725	)		(3,657	)		(3,655	)

Net change in cash and cash equivalents		(920	)		(6,262	)		(6,640	)
Cash and cash equivalents, beginning of year		8,022			14,284			20,924

Cash and cash equivalents, end of year	$	7,102		$	8,022		$	14,284

In December, 2012, the Company purchased a branch in Shelbyville, Kentucky. As of the date of acquisition, the Company acquired $27 million in loans and $37 million in deposits. Goodwill of $1 million and a core deposit intangible of $0.2 million were also recorded. $7.5 million of cash was received at purchase. The Company is in the process of completing its purchase accounting on this acquisition and may have adjustments to goodwill, core deposits, or fixed assets in 2013. The core deposit intangible asset is being amortized over 10 years. Goodwill and the core deposit intangible will be deducted for tax purposes over 15 years.

In September, 2012, the Company purchased a brokerage firm in Seymour, Indiana for a cash payment of $1.6 million and future cash payments to be made of $0.4 million. As of the date of acquisition, the Company acquired a customer relationship intangible asset of $1.0 million, a non-compete intangible asset of $0.1 million, and goodwill of $0.8 million. The customer relationship intangible asset is being amortized over 13 years and the non-compete intangible asset is being amortized over 5 years. Goodwill and the intangible assets will be deducted for tax purposes over 15 years.

In October, 2012, the Company purchased a brokerage firm in Indianapolis, Indiana for a cash payment of $0.4 million and future cash payments to be made of $0.2 million. As of the date of acquisition, the Company acquired a customer relationship intangible asset of $0.3 million, a small non-compete intangible asset, and goodwill of $0.2 million. The customer relationship intangible asset is being amortized over 13 years and the non-compete intangible asset is being amortized over 5 years. Goodwill and the intangible assets will be deducted for tax purposes over 15 years.

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

On January 23, 2013, the Company announced its plan to close 8 branch offices of MainSource Bank effective April 26, 2013. The branch offices to be closed are located in Redkey, Cambridge City, Fountain City, East Enterprise, Trafalgar, Covington and Fortville, Indiana, and the northside branch located in Troy, Ohio. As of December 31, 2012, the 8 branches had approximately $88 million in total deposits.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

In connection with its audits for the three most recent fiscal years ended December 31, 2012, there have been no disagreements with the Company's independent registered public accounting firm on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.

As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are, to the best of their knowledge, effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms as of such date.

Our management has evaluated our internal control over financial reporting and there were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

MainSource Financial Group, Inc. (the "Corporation") is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on management's best estimates and judgments.

We, as management of the Corporation, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by management and tested for reliability through a program of internal audits and other management testing. 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.

Management assessed the Corporation's system of internal control over financial reporting as of December 31, 2012, in relation to criteria for effective internal control over financial reporting as described in "Internal Control — Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that as of December 31, 2012, its system of internal controls over financial reporting is effective and meets the criteria of the "Internal Control — Integrated Framework". Crowe Horwath LLP, independent registered public accounting firm, has issued an attestation report dated March 14, 2013 on the Corporation's internal control over financial reporting. This report is incorporated by reference in Item 8 above, under the heading "Report of Independent Registered Public Accounting Firm".

Financial Statements filed as part of this Form 10-K are included under Part II, Item 8, above.

All schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or related notes in Part II, Item 8 above.

3.1 Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q of the registrant for the quarter ended June 30, 2009 filed August 10, 2009 with the Commission (Commission File No. 0-12422)).

3.2 Amended and Restated Bylaws of MainSource Financial Group, Inc. dated July 19, 2010 (incorporated by reference to Exhibit 3.1 to the Report on Form 8-K of the registrant filed July 22, 2010 with the Commission (Commission File No. 0-12422)).

4.1 Indenture dated as of December 19, 2002 between the Registrant, as issuer, and State Street Bank and Trust Company of Connecticut, N.A., as trustee, re: floating rate junior subordinated deferrable interest debentures due 2032 (incorporated by reference to Exhibit 4.6 to the Annual Report on Form 10-K of the registrant for the fiscal year ended December 31, 2002 filed March 28, 2003 with the Commission (Commission File No. 0-12422)).

4.2 Amended and Restated Declaration of Trust dated as of December 19, 2002 among State Street Bank and Trust Company of Connecticut, N.A., as institutional trustee, the Registrant, as sponsor, and James L. Saner Sr., Donald A. Benziger and James M. Anderson, as administrators (incorporated by reference to Exhibit 4.7 to the Annual Report on Form 10-K of the registrant for the fiscal year ended December 31, 2002 filed March 28, 2003 with the Commission (Commission File No. 0-12422)).

4.3 Guarantee Agreement dated as of December 19, 2002 between the Registrant, and State Street Bank and Trust Company of Connecticut, N.A (incorporated by reference to Exhibit 4.8 to the Annual Report on Form 10-K of the registrant for the fiscal year ended December 31, 2002 filed March 28, 2003 with the Commission (Commission File No. 0-12422)).

4.4 Indenture dated as of April 1, 2003 between the Registrant, as issuer, and U.S. Bank, N.A., as trustee, re: floating rate junior subordinated deferrable interest debentures due 2033 (incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of the registrant for the quarter ended June 30, 2003 filed August 14, 2003 with the Commission (Commission File No. 0-12422)).

4.5 Amended and Restated Declaration of Trust dated as of April 1, 2003 among U.S. Bank, N.A., as institutional trustee, the Registrant, as sponsor, and James L. Saner Sr., Donald A. Benziger and James M. Anderson, as administrators (incorporated by reference to Exhibit 4.2 to the Quarterly Report on Form 10-Q of the registrant for the quarter ended June 30, 2003 filed August 14, 2003 with the Commission (Commission File No. 0-12422)).

4.6 Guarantee Agreement dated as of April 1, 2003 between the Registrant, and U.S. Bank, N.A (incorporated by reference to Exhibit 4.3 to the Quarterly Report on Form 10-Q of the registrant for the quarter ended June 30, 2003 filed August 14, 2003 with the Commission (Commission File No. 0-12422)).

4.7 Indenture dated as of June 12, 2003 between the Registrant, as issuer, and The Bank of New York, as trustee, re: rate junior subordinated deferrable interest debentures due (incorporated by reference to Exhibit 4.4 to the Quarterly Report on Form 10-Q of the registrant for the quarter ended June 30, 2003 filed August 14, 2003 with the Commission (Commission File No. 0-12422)).

4.8 Amended and Restated Declaration of Trust dated as of June 12, 2003 among The Bank of New York, as institutional trustee, the Registrant, as sponsor, and James L. Saner Sr., Donald A. Benziger and James M. Anderson, as administrators (incorporated by reference to Exhibit 4.5 to the Quarterly Report on Form 10-Q of the registrant for the quarter ended June 30, 2003 filed August 14, 2003 with the Commission (Commission File No. 0-12422)).

4.9 Guarantee Agreement dated as of June 12, 2003 between the Registrant, and The Bank of New York (incorporated by reference to Exhibit 4.6 to the Quarterly Report on Form 10-Q of the registrant for the quarter ended June 30, 2003 filed August 14, 2003 with the Commission (Commission File No. 0-12422)).

4.10 Form of Amended and Restated Declaration of Trust dated as of October 13, 2006, of MainSource Statutory Trust IV, among MainSource Financial Group, Inc. as sponsor, Wells Fargo Delaware Trust Company as Delaware trustee and Wells Fargo

Bank, National Association, as institutional trustee (incorporated by reference to Exhibit 10.1 to the periodic report on Form 8-K of the registrant filed October 17, 2006 with the Commission (Commission File No. 0-12422)).

4.11 Form of Indenture dated as of October 13, 2006, between MainSource Financial Group, Inc. and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 10.2 to the periodic report on Form 8-K of the registrant filed October 17, 2006 with the Commission (Commission File No. 0-12422)).

4.12 Form of Guarantee Agreement dated as of October 13, 2006, between MainSource Financial Group, Inc., as guarantor, and Wells Fargo Bank, National Association, as guarantee trustee (incorporated by reference to Exhibit 10.3 to the periodic report on Form 8-K of the registrant filed October 17, 2006 with the Commission (Commission File No. 0-12422)).

4.13 Form of Certificate for the MainSource Financial Group, Inc. Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to Exhibit 4.1 to the Report on Form 8-K of the registrant filed January 20, 2009 with the Commission (Commission File No. 0-12422)).

4.14 Warrant for the Purchase of Shares of MainSource Financial Group, Inc. Common Stock (incorporated by reference to Exhibit 4.2 to the Report on Form 8-K of the registrant filed January 20, 2009 with the Commission (Commission File No. 0-12422)).

10.1 Registrant's 2003 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K of the registrant for the fiscal year ended December 31, 2003 filed March 12, 2004 with the Commission (Commission File No. 0-12422)).*

10.2 Form of Stock Option Agreement Under 2003 Stock Option Plan for Directors of Registrant dated May 19, 2003 (incorporated by reference to Exhibit 10.2 to the Annual Report on Form 10-K of the registrant for the fiscal year ended December 31, 2003 filed March 12, 2004 with the Commission (Commission File No. 0-12422)).*

10.3 Form of Stock Option Agreement Under 2003 Stock Option Plan for Officers of Registrant (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the registrant filed February 24, 2005 with the Commission (Commission File No. 0-12422)).*

10.4 Letter Agreement between MainSource Financial Group, Inc. and Archie M. Brown, Jr. (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the registrant filed July 24, 2008 with the Commission (Commission File No. 0-12422)).*

10.5 Form of Indemnification Agreement for Directors and Certain Officers of Registrant (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the registrant filed February 24, 2005 with the Commission (Commission File No. 0-12422)).

10.6 Registrant's 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.9 to the Report on Form 10-K of the registrant for the year ending December 31, 2007, filed March 17, 2008 with the Commission (Commission File No. 0-12422)).*

10.7 Form of Award Agreement for Archie M. Brown, Jr. under the MainSource Financial Group, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Report on Form 8-K of the registrant filed July 24, 2008 with the Commission (Commission File No. 0-12422)).*

10.8 Form of Stock Award Agreement under the MainSource Financial Group, Inc. 2007 Stock Incentive Plan (for Executives) (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the registrant filed February 27, 2009 with the Commission (Commission File No. 0-12422)).*

10.9 Letter Agreement, dated January 16, 2009, between MainSource Financial Group, Inc. and the United States Department of Treasury, which includes the Securities Purchase Agreement-Standard Terms attached thereto (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the registrant filed January 20, 2009 with the Commission (Commission File No. 0-12422)).

10.10 Form of Senior Executive Officer Letter Agreement (incorporated by reference to Exhibit 10.2 to the Report on Form 8-K of the registrant filed January 20, 2009 with the Commission (Commission File No. 0-12422)).*

10.11 Form of Waiver (incorporated by reference to Exhibit 10.3 to the Report on Form 8-K of the registrant filed January 20, 2009 with the Commission (Commission File No. 0-12422)).

10.12 Consulting Agreement, Restrictive Covenants, and Releases dated January 24, 2011, between Jeffrey C. Smith and MainSource Financial Group, Inc. (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the registrant filed on January 28, 2011 with the Commission (Commission File No. 0-12422)).*

10.13 Form of Restricted Stock Award Agreement (for Executives) under the MainSource Financial Group, Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of the registrant filed on August 8, 2011, for the quarter ending June 30, 2011, with the Commission (Commission File No. 0-12422)).*

10.14 Change in Control Agreement with Archie M. Brown, Jr. dated November 14, 2011 (incorporated by reference to Exhibit 99.1 to the Report on Form 8-K of the registrant filed on November 17, 2011 with the Commission (Commission File No. 0-12422)).*

10.15 Change in Control Agreement with James M. Anderson dated November 14, 2011 (incorporated by reference to Exhibit 99.2 to the Report on Form 8-K of the registrant filed on November 17, 2011 with the Commission (Commission File No. 0-12422)).*

10.16 Change in Control Agreement with Daryl R. Tressler dated November 14, 2011 (incorporated by reference to Exhibit 99.3 to the Report on Form 8-K of the registrant filed on November 17, 2011 with the Commission (Commission File No. 0-12422)).*

10.17 Change in Control Agreement with William J. Goodwin dated November 14, 2011 (incorporated by reference to Exhibit 99.4 to the Report on Form 8-K of the registrant filed on November 17, 2011 with the Commission (Commission File No. 0-12422)).*

10.18 MainSource Financial Group, Inc. Short-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the registrant filed on May 1, 2012 with the Commission (Commission File No. 0-12422)).*

10.19 Change in Control Agreement with Chris Harrison dated May 4, 2012(incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the registrant filed on May 10, 2012 with the Commission (Commission File No. 0-12422)).*

14 Code of Ethical Conduct (incorporated by reference to Exhibit 14 to the Annual Report on Form 10-K of the registrant for the fiscal year ended December 31, 2003 filed March 12, 2004 with the Commission (Commission File No. 0-12422)).

31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 by Chief Executive Officer

31.2 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 by Chief Financial Officer

32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer

32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer

99.1 Subsequent fiscal year certification of the Principal Executive Officer pursuant to Section 111(b) of the Emergency Economic Stabilization Act of 2008 for the fiscal year ended December 31, 2012.

99.2 Subsequent fiscal year certification of the Principal Financial Officer pursuant to Section 111(b) of the Emergency Economic Stabilization Act of 2008 for the fiscal year ended December 31, 2012.

101 The following financial statements and notes from the MainSource Financial Group Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Income; (iii) Condensed Consolidated Statements of Comprehensive Income; (iv) Condensed Consolidated Statements of Shareholders' Equity; (v) Condensed Consolidated Statements of Cash Flow; and (vi) the Notes to the condensed consolidated financial statements.**

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of March, 2013.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed by the following persons on behalf of the registrant and in the capacities with the Company and on the dates indicated.


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


Large accelerated filer o	Accelerated filer ý	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Documents		Part of Form 10-K Into Which Incorporated

Definitive Proxy Statement for Annual Meeting of Shareholders to be held April 23, 2013		Part III (Items 10 through 14)


PART I		Page
Item 1	Business	3
Item 1A	Risk Factors	9
Item 1B	Unresolved Staff Comments	14
Item 2	Properties	14
Item 3	Legal Proceedings	14
Item 4	Mine Safety Disclosures	14

PART II
Item 5	Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
Item 6	Selected Financial Data	17
Item 7	Management's Discussion and Analysis of Financial Condition and Results of Operations	18
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	30
Item 8	Financial Statements and Supplementary Data	31
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	72
Item 9A	Controls and Procedures	72
Item 9B	Other Information	72

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	73

	Market Prices

2012	Q1		Q2		Q3		Q4

High	$	12.12	$	12.05	$	13.00	$	12.97
Low	$	8.84	$	10.80	$	11.27	$	11.50
2011	Q1		Q2		Q3		Q4

High	$	10.60	$	10.05	$	9.24	$	9.89
Low	$	8.74	$	6.98	$	7.46	$	7.66
	Cash Dividends
2012	Q1		Q2		Q3		Q4

	$	0.01	$	0.01	$	0.03	$	0.03
2011	Q1		Q2		Q3		Q4

	$	0.01	$	0.01	$	0.01	$	0.01

Period		Average Price Paid Per Share (or Unit) (1)


October 2012	—		—	—	0
November 2012	—		—	—	0
December 2012	19,050	$	993.54	—	0

Total:	19,050	$	993.54	—	0




MainSource Financial Group	100.00	99.75	31.27	64.83	55.02	78.60
NASDAQ MARKET INDEX (U.S.)	100.00	59.46	85.55	100.03	98.22	113.85
NASDAQ Bank Stocks Index	100.00	76.08	62.00	69.36	60.76	70.34

	2012		2011		2010		2009		2008


Types of loans
Commercial and industrial	$	123,140	$	107,538	$	163,651	$	195,509	$	226,696
Agricultural production financing		45,879		32,325		36,596		41,889		40,334
Farm real estate		68,013		58,424		37,634		45,332		45,918
Commercial real estate mortgage		480,879		509,887		525,578		551,670		515,964
Construction and development		31,694		37,078		84,152		142,472		173,551
Residential real estate mortgage		753,230		730,374		759,409		813,602		877,145
Consumer		50,548		58,753		73,951		94,973		115,993

Total loans	$	1,553,383	$	1,534,379	$	1,680,971	$	1,885,447	$	1,995,601

	Within 1 Year		1-5 Years		Over 5 years		Total


Loan Type
Commercial and industrial	$	44,242	$	37,693	$	41,205	$	123,140
Agricultural production financing		28,184		14,711		2,984		45,879
Construction and development		14,722		9,781		7,191		31,694

Totals	$	87,148	$	62,185	$	51,380	$	200,713

Percent		43%		31%		26%		100%

Rate Sensitivity
Fixed Rate	$	5,147	$	41,780	$	22,095	$	69,022
Variable Rate		104,154		18,751		8,786		131,691

Totals	$	109,301	$	60,531	$	30,881	$	200,713

	2012		2011		2010		2009		2008


Non-accruing loans	$	35,451	$	41,528	$	68,236	$	77,074	$	55,671
Troubled debt restructurings		15,102		20,402		22,250		11,843		—
Accruing loans contractually past due 90 days or more		565		3,266		990		3,279		3,639

Total	$	51,118	$	65,196	$	91,476	$	92,196	$	59,310

% of total loans		3.29%		4.25%		5.44%		4.89%		2.97%

	Within 1 Year		2-5 Yrs		6-10 Yrs		Beyond 10 Years		Total 2012


Available for sale
US government agency	$	—	$	—	$	1,638		—	$	1,638
State and municipal		6,857		52,613		100,781		177,688		337,939
Mortgage-backed securities		6		67		67,289		486,916		554,278
Other securities		—		2,557		—		990		3,547

Total available for sale	$	6,863	$	55,237	$	169,708	$	665,594	$	897,402

Weighted average yield*		6.73%		5.09%		4.53%		3.20%		3.59%

	3 months or less		4-6 months		6-12 months		over 12 months		Total


Amount	$	32,527	$	23,891	$	25,649	$	67,739	$	149,806
Percent		22%		16%		17%		45%

	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years


Time Deposits	$	454,573	$	274,659	$	149,563	$	22,027	$	8,324
FHLB Advances		141,052		35,245		25,657		30,097		50,053
Subordinated Debentures		50,418		—		—		—		50,418
Operating Lease Commitments		5,387		1,026		1,743		979		1,639

Total	$	651,430	$	310,930	$	176,963	$	53,103	$	110,434




+2%	585,912	(67,797	)	21.22%	(88	)
+1%	619,214	(34,495	)	21.69%	(41	)
Base	653,709	—		22.10%	—
-1%	668,411	14,702		21.91%	(19	)
-2%	771,237	117,528		24.35%	225




+2%	644,734	(71,698	)	23.28%	(88)
+1%	679,598	(36,834	)	23.75%	(41)
Base	716,432	—		24.16%	—
-1%	723,324	6,892		23.73%	(43)
-2%	814,930	98,498		25.51%	135



		Crowe Horwath LLP Independent Member Crowe Horwath International

	Available for Sale

	Amortized Cost		Fair Value

Within one year	$	6,722	$	6,857
One through five years		52,535		55,170
Six through ten years		95,047		102,419
After ten years		161,406		178,678
Mortgage-backed securities-residential (Government Sponsored Entity)		219,352		227,055
Collateralized mortgage obligations (Government Sponsored Entity)		322,758		327,223
Equity securities		4,939		4,939

Total available for sale securities	$	862,759	$	902,341

2012	Less than 12 months					12 months or longer				Total


Description of securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses		Fair Value		Unrealized Losses

State and municipal	$	6,646	$	(97	)	$	—	$	—	$	6,646	$	(97	)
Mortgage-backed securities-residential (GSE's)		12,766		(8	)		—		—		12,766		(8	)
Collateralized mortgage obligations (GSE's)		32,330		(139	)		—		—		32,330		(139	)
Other securities		990		(11	)		—		—		990		(11	)

Total temporarily impaired	$	52,732	$	(255	)	$	—	$	—	$	52,732	$	(255	)

2012	Commercial			Commercial Real Estate			Residential			Consumer			Total


Allowance for loan loss
Balance, January 1	$	5,562		$	30,476		$	2,972		$	879		$	39,889
Provision charged to expense		(265	)		4,802			3,490			1,823			9,850
Losses charged off		(1,946	)		(13,553	)		(3,547	)		(3,286	)		(22,332	)
Recoveries		543			2,432			265			1,580			4,820

Balance, December 31	$	3,894		$	24,157		$	3,180		$	996		$	32,227

	2010


Allowance for loan losses
Balances, January 1	$	46,648
Provision for losses		35,250
Recoveries on loans		3,153
Loans charged off		(42,446	)

Balances, December 31	$	42,605

December 31, 2012	Commercial		Commercial Real Estate		Residential		Consumer		Total


Allowance for loan loss
Ending Balance individually evaluated for impairment	$	150	$	3,067		—		—	$	3,217
Ending Balance collectively evaluated for impairment		3,744		21,090		3,180		996		29,010

Total ending allowance balance	$	3,894	$	24,157	$	3,180	$	996	$	32,227

Loans
Ending Balance individually evaluated for impairment	$	1,797	$	33,499	$	14,175	$	1,083	$	50,554
Ending Balance collectively evaluated for impairment		157,937		693,331		604,349		47,212		1,502,829

Total ending loan balance excludes $5,206 of accrued interest	$	159,734	$	726,830	$	618,524	$	48,295	$	1,553,383

December 31	2012		2011


Loans past due 90 days or more still on accrual	$	565	$	3,266
Troubled debt restructurings		15,102		20,402
Non-accrual loans		35,451		41,528

Total	$	51,118	$	65,196

December 31	2010


Average balance of impaired loans during the year	$	94,905
Interest income recognized on impaired loans		108
Cash basis interest included above		108

2012		Recorded Investment


Commercial
Commercial and industrial	3	$	2,195
Commercial real estate:
Development	1		323
Other	9		3,332
Residential
1-4 Family	2		125
Home Equity	1		12

Total	16	$	5,987

December 31, 2012	Pass		Special Mention		Substandard		Non-accrual


Commercial
Commercial and industrial	$	112,564	$	9,824	$	2,800	$	1,777
Agricultural		32,764		—		5		—
Commercial Real Estate
Farm		60,071		1,094		147		1,584
Hotel		83,522		47,973		—		—
Construction and development		18,719		1,465		3,367		1,657
Other		439,702		27,621		22,466		17,442

Total	$	747,342	$	87,977	$	28,785	$	22,460

December 31, 2011	Pass		Special Mention		Substandard		Non-accrual


Commercial
Commercial and industrial	$	93,380	$	11,935	$	6,534	$	2,518
Agricultural		20,150		524		10		57
Commercial Real Estate
Farm		42,847		2,151		294		1,016
Hotel		77,259		51,900		16,815		384
Construction and development		15,498		3,212		8,796		3,240
Other		422,385		66,377		30,930		21,060

Total	$	671,519	$	136,099	$	63,379	$	28,275

December 31, 2012	Performing		Watch		Substandard


Residential
1-4 Family	$	386,098	$	2,605	$	5,492
Home Equity		222,544		357		1,428

Total	$	608,642	$	2,962	$	6,920

December 31, 2012	Performing		Substandard		Loss


Consumer
Direct	$	45,553	$	195	$	96
Indirect		2,434		12		5

Total	$	47,987	$	207	$	101

December 31, 2011	Performing		Watch		Substandard


Residential
1-4 Family	$	356,295	$	2,233	$	7,182
Home Equity		210,211		500		1,491

Total	$	566,506	$	2,733	$	8,673

December 31, 2011	Performing		Substandard		Loss


Consumer
Direct	$	50,882	$	201	$	74
Indirect		5,998		25		15

Total	$	56,880	$	226	$	89

	2012			2011			2010


Beginning Balance	$	15,456		$	11,453		$	10,363
Transfer to other real estate owned		5,286			23,093			11,115
Sale — Out of other real estate owned		(12,089	)		(16,125	)		(9,246	)
Write-down		(1,976	)		(2,965	)		(779	)

Ending Balance	$	6,677		$	15,456		$	11,453

	2012			2011			2010


Beginning Balance — January 1	$	(2,279	)	$	(779	)	$	—
Impairments during year		(1,976	)		(2,965	)		(779	)
Recovery on impairments		—			—			—
Reductions		2,583			1,465			—

Ending Balance — December 31	$	(1,672	)	$	(2,279	)	$	(779	)

	2012			2011			2010


Write-downs	$	1,976		$	2,965		$	779
Losses/(gains)on sales		(617	)		(221	)		318

Net loss	$	1,359		$	2,744		$	1,097

Operating expenses		624			1,152			674

States and municipal	2012			2011


Beginning balance, January 1	$	23,556		$	—
Total gains or losses (realized / unrealized)
Included in earnings
Gains (losses) on securities		361			—
Included in other comprehensive income		(51	)		—
Sales		(7,268	)		—
Settlements		(832	)		—
Purchases		—			1,975
Transfers into Level 2		(296	)		—
Transfers into Level 3		—			21,581

Ending balance, December 31	$	15,470		$	23,556

Other securities	2012			2011


Beginning balance, January 1	$	2,587		$	1,870
Total gains or losses (realized / unrealized)
Included in earnings
Included in other comprehensive income		(30	)		—
Purchases		—			2,587
Transfers in and / or out of Level 3		—			(1,870	)

Ending balance, December 31	$	2,557		$	2,587

	Gross Balance		Valuation Allowance		Net


Construction and development	$	3,222	$	1,458	$	1,764
Other commercial real estate		993		190		803
1-4 Family		119		24		95

Ending Balance	$	4,334	$	1,672	$	2,662