NOTE 2 - STOCK PLANS AND STOCK BASED COMPENSATION

On January 19, 2015, the Board of Directors adopted and approved the MainSource Financial Group, Inc. 2015 Stock Incentive Plan (“the 2015 Plan”) which was effective following the approval of the Plan by the Company’s shareholders at the 2015 Annual Meeting of Shareholders held on April 30, 2015. The 2015 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, share awards of restricted stock performance share units and other equity based awards. Incentive stock options may be granted only to employees. An aggregate of 1,000,000 shares of common stock are reserved for issuance under the 2015 Plan. Shares issuable under the 2015 Plan may be authorized and unissued shares of common stock or treasury shares. The 2015 Plan is in addition to, and not in replacement of, a similar plan adopted in 2007 (the “2007 Plan”). The 2007 Stock Incentive Plan provided for the grant of incentive stock options, nonstatutory stock options, stock bonuses and restricted stock awards. An aggregate of 650,000 shares of common stock were reserved for issuance under the 2007 Stock Incentive Plan. However, no further awards of stock or options will be made under the 2007 Plan following shareholder approval of the 2015 Plan. The 2007 Plan was in replacement of a similar plan adopted in 2003 (the “2003 Plan”). Any stock or option awards that were previously issued under the 2007 Plan or 2003 Plan have not been terminated as a result of the adoption of the 2015 Plan, but will continue in accordance with the applicable plan terms and the agreements pursuant to which such stock or option awards 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.

All share-based payments to employees, including grants of employee stock options, are recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values. For options with graded vesting, the Company values the stock option grants and recognizes compensation expense as if each vesting portion of the award was a single award.

The following table summarizes stock option activity:

	Three Months Ended March 31, 2015
	Shares		Weighted Average Exercise Price
Outstanding, beginning of year	377,790		$	13.46
Granted	—		—
Exercised	(12,350	)	10.07
Forfeited or expired	(35,700	)	20.57
Outstanding, period end	329,740		$	12.80
Options exercisable at period end	240,888		$	12.29
Fully vested and expected to vest	323,564		$	12.77

The following table details stock options outstanding:

	March 31, 2015		December 31, 2014
Stock options vested and currently exercisable:
Number	240,888		288,938
Weighted average exercise price	$	12.29	$	13.24
Aggregate intrinsic value	$	1,769	$	2,219
Weighted average remaining life (in years)	4.0		3.8

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date. The Company recorded $43 in stock compensation expense during the three month ended March 31, 2015 and $41 in stock compensation expense during the three months ended March 31, 2014 to salaries and employee benefits. There were no options granted in the first quarter of 2015 and 29,389 options granted in the first quarter of 2014. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. Expected volatilities are based on historical volatility of the Company’s stock, and other factors. Expected dividends are based on dividend trends and the market price of the Company’s stock price at grant. The Company uses historical data to estimate option exercises within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

Unrecognized stock option compensation expense related to unvested awards for the remainder of 2015 and beyond is estimated as follows:

Year	(in thousands)
April 2015 - December 2015	$	134
2016	93
2017	38

During 2014 and the first quarter of 2015, the Executive Compensation Committee of the Board of Directors of the Company granted restricted stock awards to certain executive officers and other employees pursuant to the Company’s LTIP. 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. The restricted stock awards vest as follows — 100% on the third anniversary of the date of grant. A total of 11,171 shares of common stock were granted in the first quarter of 2015 at a weighted average cost of $19.57 per share.

A summary of changes in the Company’s nonvested restricted shares for 2015 follows:

	Restricted Shares	Weighted Average Grant Date Fair Value
Nonvested at January 1, 2015	91,923	$	14.88
Granted	11,171	19.57
Vested	—	—
Forfeited	—	—
Nonvested at March 31, 2015	103,094	$	15.39

As of March 31, 2015, there was $832 of total unrecognized compensation costs related to nonvested restricted stock awards granted under the 2007 Plan that will be recognized over the remaining vesting period of approximately 1.4 years. The recognized compensation costs related to the 2007 Plan was $152 and $234 for the first three months of 2015 and 2014 respectively.

Additionally, in the first quarter of 2015, the Committee granted performance share units to certain executive officers pursuant to the Company’s LTIP, subject to the approval of the 2015 Plan by the Company’s shareholders at the 2015 Annual Meeting of Shareholders held on April 29, 2015. The Committee established performance measures, goals and payout calibration for the Performance Share Units. At the end of each three-year performance period, the Committee will certify the results of the performance measures and goals and will pay the earned awards out in cash or shares of Company common stock. Dividends earned during each three-year performance period will be accrued and paid at the end of the performance period, based upon the final number of shares earned. The performance measures and goals are based on financial and shareholder measures, and are evaluated relative to internal goals and the performance of the Company’s peers. Once the performance measures and goals were established, the Committee established threshold, target and superior levels of performance. The LTIP payout of shares will begin once the Company achieves the pre-established threshold (thus, no payout will occur if the performance is equal to or below the threshold). Each executive’s target payout is achieved once the performance equals the target level, and the maximum payout is achieved once the performance equals the superior level (with interpolation between discrete points).

Performance	Payout
Threshold	0	%
Target	100	%
Superior	150	%

The grant of Performance Share Units by the Committee will be evidenced by an award agreement between the executive and the Company which provides that each executive will receive shares of Company stock when the Company’s actual performance as compared to its peers and long-term goals exceeds certain thresholds, determined as of December 31, 2017, provided the executive remains employed by the Company on such date. The executive’s eligibility for the payout of shares is determined based on the following measures:

Performance Measure	Weight		Evaluated vs.
Return on Assets	50	%	Peer
Total Shareholder Return	25	%	Peer
Earnings Per Share	25	%	Goal

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. The performance share units are earned over the three year period of the award. A total of 11,171 shares of performance share units were granted in the first quarter of 2015 at a weighted average cost of $19.57 per share. Compensation expense is recognized over the three year performance period of the awards based on the fair value of the stock at the issue date and the anticipated achievement level of the target performance. Quarterly, the performance measures will be reevaluated and adjustments made to the expense recorded in the financial statements, if needed, to reflect the new revised achievement levels. No expense was recognized on these awards in the first quarter of 2015. A total of $219 will be expensed in future periods if the Target level is achieved.

In the second quarter of 2014, members of the Board of Directors received their entire annual retainer in restricted Company stock for the following Board year ended with the 2015 annual meeting of shareholders. The 2014 award vested quarterly for all directors who remained on the Board of Directors on the vesting date, with 25% of the award vesting on each of May 1, August 1, and November 1, 2014, and February 1, 2015. The value of the 2014 retainer award was determined by multiplying the award amount by the closing price of the stock on the issuance date.

For all awards, other expense is recognized over the three month period of the awards based on the fair value of the stock at the issue dates. Shares awarded by quarter were as follows:

Quarter			Shares		Price per Share
2014	2Q		21,780		$	16.53

A total of $90 and $89 was recognized as other expense in the first three months of 2015 and 2014 respectively for these grants.

In late 2014, the Company announced a stock repurchase program pursuant to which up to 5.0% of the Corporation’s outstanding shares of common stock, or approximately 1,085,000 shares, may be repurchased. During the first quarter of 2015, the Company repurchased 27,400 shares at a total cost of $520.