STOCK-BASED COMPENSATION

12 Months Ended

Dec. 31, 2011

STOCK-BASED COMPENSATION

STOCK-BASED COMPENSATION

NOTE 23 — STOCK-BASED COMPENSATION

        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.

	2011			2010			2009
Risk-free interest rate		2.36	%		3.04	%		2.27	%
Expected term (years)		7.00			7.00			6.58
Expected stock price volatility		61.41	%		57.06	%		40.94	%
Dividend yield		0.46	%		0.63	%		9.81	%

        A summary of the activity in the 2007 Stock Incentive Plan and the 2003 Plan for 2011 follows:

Options (restated for stock dividends and splits)	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (years)		Aggregate Intrinsic Value
Outstanding, beginning of year		409,783		$	13.30
Granted		14,500			8.72
Exercised		—			—
Forfeited or expired		(27,560	)		11.15
Outstanding at end of year		396,723		$	13.26		5.1	$	437
Exercisable at year end		311,154		$	14.19		4.5	$	294
Fully vested and expected to vest		392,274		$	13.31		5.1	$	430

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

	2011		2010		2009
Intrinsic value of options exercised	$	—	$	—	$	—
Cash received from option exercises		—		—		—
Tax benefit realized from option exercises		—		—		—
Weighted average (per share) fair value of options granted		5.16		3.59		0.88

        As of December 31, 2011, there was $118 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 2.0 years.

        During the second quarter of 2011, 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 date, April 8, 2011 ($9.68). The stock restricted 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. Additionally, the restricted stock, to the extent vested, will not become transferable until such time as the Treasury Department no longer holds shares of preferred stock of the Company, provided that 25% of the restricted stock will become transferable as each 25% of the preferred stock is repurchased by the Company, and provided further that the grantee will be permitted to sell the stock if necessary to pay any any tax liability resulting from the vesting of the stock. A total of 46,244 shares of restricted common stock of the Company were granted under the 2007 Stock Incentive Plan. A total of 391,589 remain to be granted under this plan.

        A summary of changes in the Company's nonvested shares for 2011 follows:

	Shares		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2011		0		0
Granted		46,244	$	9.68
Vested		0		0
Forfeited		0		0
Nonvested at December 31, 2011		46,244	$	9.68

        As of December 31, 2011, there was $340 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 2.2 years. The recognized compensation costs related to the 2007 Stock Incentive Plan was $107 and $0 for the 2011 and 2010 respectively.

        During the second quarter of 2011, members of the Board of Directors of the Company were given the option of having their annual retainer paid in cash, Company stock, or a combination of cash and stock. The annual retainer is paid quarterly, on May 1, August 1, November 1, and February 1, 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 were 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 ($9.53 for the second quarter payouts, $8.80 for the third quarter payouts, and $9.44 for the fourth quarter). The shares issued vest immediately. A total of 6,750 shares of common stock were granted to directors during the second quarter of 2011. 7,902 shares of common stock were granted to directors during the third quarter of 2011, and 9,130 shares of common stock were granted to directors during the fourth quarter of 2011. A total of $220 was recognized as expense in 2011 for these grants.