10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2015

COMMISSION FILE NUMBER 0-12422

MAINSOURCE FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

INDIANA	35-1562245
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)
2105 NORTH STATE ROAD 3 BYPASS, GREENSBURG,
INDIANA	47240
(Address of principal executive offices)	(Zip Code)

(812) 663-6734

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report.)

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 x 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 (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No 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. (Check one):

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

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

As of November 6, 2015 there were outstanding 21,577,659 shares of common stock, without par value, of the registrant.

MAINSOURCE FINANCIAL GROUP, INC.

FORM 10-Q

INDEX

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements	3
Consolidated Balance Sheets	3
Consolidated Statements of Income	4
Consolidated Statements of Comprehensive Income	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 3. Quantitative and Qualitative Disclosures About Market Risk	49
Item 4. Controls and Procedures	49
PART II. OTHER INFORMATION	50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 6. Exhibits	50
Signatures	52

2

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

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

Item 1.  Financial Statements

	(Unaudited)
	September 30,			December 31,
	2015			2014
Assets
Cash and due from banks	$	86,728		$	60,662
Money market funds and federal funds sold	25,625			1,823
Cash and cash equivalents	112,353			62,485
Interest bearing time deposits	1,960			1,915
Securities available for sale	909,498			867,760
Loans held for sale	4,821			8,282
Loans, net of allowance for loan losses of $22,023 in 2015 and $23,250 in 2014	2,059,469			1,934,515
FHLB and other stock, at cost	11,070			13,854
Premises and equipment, net	62,399			60,527
Goodwill	75,953			73,450
Purchased intangible assets	5,032			5,096
Cash surrender value of life insurance	62,146			62,002
Interest receivable and other assets	31,914			32,630
Total assets	$	3,336,615		$	3,122,516
Liabilities
Deposits
Noninterest bearing	$	606,218		$	513,393
Interest bearing	2,001,380			1,954,928
Total deposits	2,607,598			2,468,321
Short term borrowings	39,439			26,349
Federal Home Loan Bank (FHLB) advances	255,416			214,413
Subordinated debentures	41,239			41,239
Other liabilities	14,867			11,532
Total liabilities	2,958,559			2,761,854
Shareholders’ equity
Preferred stock, no par value: Authorized shares - 400,000; Issued shares - 0 Outstanding shares — 0 Aggregate liquidation preference — $0
Common stock $.50 stated value: Authorized shares - 100,000,000 Issued shares — 22,265,766 in 2015 and 22,222,727 in 2014 Outstanding shares — 21,589,959 in 2015 and 21,687,525 in 2014	11,193			11,159
Treasury stock — 675,807 in 2015 and 535,202 in 2014 at cost	(11,593		)	(8,701		)
Additional paid-in capital	247,340			246,635
Retained earnings	115,631			97,856
Accumulated other comprehensive income	15,485			13,713
Total shareholders’ equity	378,056			360,662
Total liabilities and shareholders’ equity	$	3,336,615		$	3,122,516

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

3

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands except per share data)

	(unaudited)
	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Interest income
Loans, including fees	$	22,040		$	19,220		$	64,858		$	57,588
Securities	6,045			5,888			17,719			18,289
Other interest income	28			20			96			55
Total interest income	28,113			25,128			82,673			75,932
Interest expense
Deposits	915			844			2,708			2,764
Federal Home Loan Bank advances	773			862			2,501			2,562
Subordinated debentures	318			312			942			975
Other borrowings	19			21			36			60
Total interest expense	2,025			2,039			6,187			6,361
Net interest income	26,088			23,089			76,486			69,571
Provision for loan losses	800			—			800			1,500
Net interest income after provision for loan losses	25,288			23,089			75,686			68,071
Non-interest income
Mortgage banking	2,270			1,677			6,734			4,655
Trust and investment product fees	1,204			1,087			3,664			3,503
Service charges on deposit accounts	6,102			5,429			16,221			15,321
Net realized gains/(loss) on securities (includes $45 and $360 accumulated other comprehensive income (AOCI) reclassifications for realized net gains on available-for-sale securities in 2015 and includes $— and (4) accumulated other comprehensive income reclassifications for realized net (losses) on available-for-sale securities in 2014)	45			—			360			(4		)
Increase in cash surrender value of life insurance	310			328			931			978
Interchange income	2,256			1,912			6,445			5,671
(Loss) on sale and write-down of OREO	(19		)	(9		)	(63		)	(47		)
Other income	1,176			634			3,312			1,342
Total non-interest income	13,344			11,058			37,604			31,419
Non-interest expense
Salaries and employee benefits	14,674			13,000			43,185			40,272
Net occupancy	2,064			1,819			6,276			5,731
Equipment	2,823			2,669			8,381			7,568
Intangibles amortization	431			389			1,270			1,253
Telecommunications	410			430			1,290			1,298
Stationery printing and supplies	302			317			894			876
FDIC assessment	435			385			1,245			1,185
Marketing	948			769			2,413			2,127
Collection expense	263			156			769			987
Prepayment penalty on FHLB advance	—			—			2,364			—
Consultant expense	250			350			750			1,050
Branch acquisition expense	617			—			617			—
Interchange expense	696			605			1,986			1,666
Other expenses	2,722			2,288			7,942			7,172
Total non-interest expense	26,635			23,177			79,382			71,185
Income before income tax	11,997			10,970			33,908			28,305
Income tax expense (includes $16 and $126 income tax expense from AOCI reclassification items in 2015 and $— and ($1) income tax expense from AOCI reclassification items in 2014)	2,886			2,513			7,474			5,869
Net income	$	9,111		$	8,457		$	26,434		$	22,436
Cash dividends declared per common share	$	0.14		$	0.11		$	0.40		$	0.31
Net income per common share — basic	$	0.42		$	0.41		$	1.22		$	1.10
Net income per common share — diluted	$	0.42		$	0.41		$	1.21		$	1.09

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

4

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar amounts in thousands)

	(unaudited)						(unaudited)
	Three months ended						Nine months ended
	September 30,						September 30,
	2015			2014			2015			2014
Net income	$	9,111		$	8,457		$	26,434		$	22,436
Other comprehensive income/(loss):
Unrealized holding gains/(losses) on securities available for sale	6,723			(1,597		)	3,044			16,039
Reclassification adjustment for (gains)/losses included in net income	(45		)	—			(360		)	4
Tax effect	(2,271		)	542			(912		)	(5,437		)
Other comprehensive income/(loss)	4,407			(1,055		)	1,772			10,606
Comprehensive income	$	13,518		$	7,402		$	28,206		$	33,042

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

5

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

	(unaudited) Nine months ended September 30
	2015			2014
Operating Activities
Net income	$	26,434		$	22,436
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	800			1,500
Depreciation expense	4,733			4,375
Securities amortization, net	2,332			1,417
Stock based compensation expense	633			551
Stock portion of director retainer fee expense	230			270
Amortization of purchased intangible assets	1,270			1,253
Amortization of mortgage servicing rights	1,034			750
Recovery of valuation allowance on mortgage servicing rights	(175		)	(50		)
Earnings on cash surrender value of life insurance policies	(931		)	(978		)
Gain on life insurance benefit	(307		)	—
Securities (gains)/losses, net	(360		)	4
Loss on sale and write-down of OREO	63			47
Gain on loans sold	(4,381		)	(2,914		)
Loans originated for sale	(183,802		)	(115,118		)
Proceeds from loan sales	191,644			119,252
Prepayment penalty on FHLB advance	2,364			—
Change in other assets and liabilities	2,072			2,192
Net cash provided by operating activities	43,653			34,987
Investing Activities
Net change in short term investments	(45		)	(1,915		)
Purchases of securities available for sale	(284,755		)	(35,236		)
Proceeds from calls, maturities, and payments on securities available for sale	104,182			78,891
Proceeds from sales of securities available for sale	139,547			21,972
Proceeds from sale of OREO	1,352			3,002
Proceeds from life insurance benefit	1,094			588
Loan originations and payment, net	(101,145		)	(87,977		)
Purchases of premises and equipment	(5,543		)	(3,575		)
Proceeds from sale of portfolio loans	11,356			—
Cash received for branch acquisition, net	57,083			—
Proceeds from redemption of FHLB stock	2,784			4
Net cash (used) by investing activities	(74,090		)	(24,246		)
Financing Activities
Net change in deposits	40,251			21,071
Net change in short term borrowings	13,090			(4,104		)
Repayment of FHLB advances	(546,361		)	(722,515		)
Proceeds from FHLB advances	585,000			715,000
Proceeds from exercise of stock options, including tax benefit	264			60
Purchase of treasury shares	(3,280		)	(319		)
Repayment of subordinated debentures, net	—			(5,000		)
Cash dividends on common stock	(8,659		)	(6,340		)
Net cash provided/(used) by financing activities	80,305			(2,147		)
Net change in cash and cash equivalents	49,868			8,594
Cash and cash equivalents, beginning of year	62,485			61,320
Cash and cash equivalents, end of period	$	112,353		$	69,914
Supplemental cash flow information
Interest paid	$	6,233		$	6,669
Income taxes paid	3,285			2,405
Supplemental non cash disclosure
Loan balances transferred to loans held for sale	$	11,356		$	—
Loan balances transferred to foreclosed real estate	1,164			2,119

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

6

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

NOTE 1 - BASIS OF PRESENTATION

The significant accounting policies followed by MainSource Financial Group, Inc. (“Company”) for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. The consolidated interim financial statements have been prepared according to accounting principles generally accepted in the United States of America and in accordance with the instructions for Form 10-Q. The interim statements do not include all information and footnotes normally included in the annual financial statements. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements and all such adjustments are of a normal recurring nature. Some items in prior period financial statements were reclassified to conform to current presentation. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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 2015 Plan by the Company’s shareholders at the 2015 Annual Meeting of Shareholders held on April 29, 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 Stock Incentive Plan (the “2007 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.  The 2007 Plan was in replacement of a similar plan adopted in 2003, the 2003 Stock Option Plan (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. However, no further awards of stock or options will be made under the 2007 Plan following shareholder approval of the 2015 Plan.

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.

7

The following table summarizes stock option activity:

	Nine Months Ended September 30, 2015
	Shares		Weighted Average Exercise Price
Outstanding, beginning of year	377,790		$	13.46
Granted	—		—
Exercised	(23,500	)	9.89
Forfeited or expired	(37,100	)	20.27
Outstanding, period end	317,190		$	12.91
Options exercisable at period end	229,738		$	12.42
Fully vested and expected to vest	313,186		$	12.89

The following table details stock options outstanding:

	September 30, 2015		December 31, 2014
Stock options vested and currently exercisable:
Number	229,738		288,938
Weighted average exercise price	$	12.42	$	13.24
Aggregate intrinsic value	$	1,824	$	2,219
Weighted average remaining life (in years)	3.5		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 $48 and $133 in stock compensation expense during the three and nine months ended September 30, 2015 and $42 and $124 in stock compensation expense during the three and nine months ended September 30, 2014 to salaries and employee benefits. There were no options granted in 2015, 29,389 options granted in the first quarter of 2014, 1,938 options granted in the second quarter of 2014, and no options granted in the third 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)
October 2015 - December 2015	$	60
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 Long Term Incentive Plan (“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

8

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 for employees vest as follows — 100% on the third anniversary of the date of grant. A total of 28,955 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	28,955		19.57
Vested	(18,248	)	12.71
Forfeited	—		—
Nonvested at September 30, 2015	102,630		$	16.59

As of September 30, 2015, there was $876 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 1.3 years. The recognized compensation costs related to the 2007 Plan were $143 and $125 for the three month periods ending September 30, 2015 and 2014 respectively and $447 and $427 for the nine month periods ending September 30, 2015 and 2014 respectively.

Additionally, in the first quarter of 2015, the Committee voted to grant performance share units to certain executive officers pursuant to the Company’s LTIP, subject to and effective upon 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 is 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 16,205 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. $27 of expense was recognized on these awards in the third quarter and $53 for the first nine months of 2015.  A total of $264 will be expensed in future periods if the Target level is achieved.

9

In the second quarter of 2015, members of the Board of Directors received their entire annual retainer in restricted Company stock for the following Board year ended with the 2016 annual meeting of shareholders. The 2015 award vests 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, 2015, and February 1, 2016. The value of the 2015 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
2015     2Q	14,084	$	19.89

A total of $70 and $90 was recognized as other expense in the third quarter of 2015 and 2014 respectively for these grants and $230 and $270 was recognized in the first nine months of 2015 and 2014 respectively.

In late 2014, the Company announced a stock repurchase program pursuant to which the Company may repurchase up to 5.0% of its outstanding shares of common stock, or approximately 1,085,000 shares prior to December 31, 2015.  During the first quarter of 2015, the Company repurchased 27,400 shares at a total cost of $520.  In the second quarter of 2015, the Company repurchased 93,685 shares at a total cost of $1,883.  In the third quarter of 2015, the Company repurchased 35,725 shares at a total cost of $731.

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NOTE 3 - SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
As of September 30, 2015
Available for Sale
U. S. government agency	$	533	$	10	$	—		$	543
State and municipal	332,462		16,613		(259		)	348,816
Mortgage-backed securities-residential (Government Sponsored Entity)	299,294		4,553		(2		)	303,845
Collateralized mortgage obligations (Government Sponsored Entity)	246,533		3,470		(923		)	249,080
Equity securities	4,689		—		—			4,689
Other securities	2,525		—		—			2,525
Total available for sale	$	886,036	$	24,646	$	(1,184	)	$	909,498

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
As of December 31, 2014
Available for Sale
U. S. government agency	$	652	$	10	$	(1	)	$	661
State and municipal	316,048		18,603		(353		)	334,298
Mortgage-backed securities-residential (Government Sponsored Entity)	178,534		4,071		(433		)	182,172
Collateralized mortgage obligations (Government Sponsored Entity)	344,556		2,743		(3,862		)	343,437
Equity securities	4,689		—		—			4,689
Other securities	2,503		—		—			2,503
Total available for sale	846,982		$	25,427	$	(4,649	)	$	867,760

The amortized cost and fair value of the investment securities portfolio are shown by expected maturity.  Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity or with no maturity are shown separately.

	Available for Sale
September 30, 2015	Amortized Cost		Fair Value
Within one year	$	16,091	$	16,238
One through five years	49,709		51,860
Six through ten years	129,057		136,194
After ten years	140,663		147,592
Mortgage-backed securities-residential (Government Sponsored Entity)	299,294		303,845
Collateralized mortgage obligations (Government Sponsored Entity)	246,533		249,080
Equity securities	4,689		4,689
Total available for sale securities	$	886,036	$	909,498

Proceeds from sales of securities available for sale were $139,547 and $21,972 for the nine months ended September 30, 2015 and 2014, respectively. Gross gains of $1,515 and $542 and gross losses of $1,155 and $546 were realized on these sales during 2015 and 2014, respectively.

Proceeds from sales of securities available for sale were $57,208 and $0 for the three months ended September 30, 2015 and 2014, respectively. Gross gains of $203 and $0 and gross losses of $158 and $0 were realized on these sales during 2015 and 2014, respectively.

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Below is a summary of securities with unrealized losses as of September 30, 2015 and December 31, 2014 presented by length of time the securities have been in a continuous unrealized loss position.

	Less than 12 months					12 months or longer					Total
September 30, 2015 Description of securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. government agency	$	—	$	—		$	—	$	—		$	—	$	—
State and municipal	31,492		(234		)	309		(25		)	31,801		(259		)
Mortgage-backed securities-residential (GSE’s)	4,949		(2		)	—		—			4,949		(2		)
Collateralized mortgage obligations (GSE’s)	23,995		(107		)	60,315		(816		)	84,310		(923		)
Other securities	—		—			—		—			—		—
Total temporarily impaired	$	60,436	$	(343	)	$	60,624	$	(841	)	$	121,060	$	(1,184	)

December 31, 2014 Description of securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S government agency	$	122	$	(1	)	$	—	$	—		$	122	$	(1	)
State and municipal	16,659		(147		)	13,340		(206		)	29,999		(353		)
Mortgage-backed securities-residential (GSE’s)	24,925		(51		)	32,541		(382		)	57,466		(433		)
Collateralized mortgage obligations (GSE’s)	21,775		(114		)	150,094		(3,748		)	171,869		(3,862		)
Other securities	—		—			—		—			—		—
Total temporarily impaired	$	63,481	$	(313	)	$	195,975	$	(4,336	)	$	259,456	$	(4,649	)

12

Other-Than-Temporary-Impairment

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.

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 an entity 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 September 30, 2015, the Company’s securities portfolio consisted of 977 securities, 83 of which were in an unrealized loss position.  Unrealized losses on state and municipal securities of $259 have not been recognized into income because management has the ability to hold for a period of time sufficient to allow for any anticipated recovery in fair value and it is unlikely that management will be required to sell the securities before their anticipated recovery. The decline in value is primarily attributable to changes in interest rates. The Company monitors the financial condition of these issuers. The fair value of these debt securities is expected to recover as the securities approach their maturity date.

At September 30, 2015, almost 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 $2 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 September 30, 2015.

The Company’s collateralized mortgage obligation securities portfolio includes agency collateralized mortgage obligations with a market value of $84,310 which had unrealized losses of approximately $923 at September 30, 2015. As noted above, the decline in fair value is attributable to changes in interest rates and illiquidity and not credit quality. The Company monitors to insure it has adequate credit support and as of September 30, 2015, 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.

13

NOTE 4 - LOANS AND ALLOWANCE

Loans were as follows:

	September 30, 2015			December 31, 2014
Commercial
Commercial and industrial	$	394,462		$	275,646
Agricultural	24,065			46,784
Commercial Real Estate
Farm	74,966			76,849
Hotel	45,650			74,962
Construction and development	86,702			61,640
Other	666,584			666,417
Residential
1-4 family	440,776			435,336
Home equity	294,332			274,159
Consumer
Direct	53,468			45,360
Indirect	487			612
Total loans	2,081,492			1,957,765
Allowance for loan losses	(22,023		)	(23,250		)
Net loans	$	2,059,469		$	1,934,515

The Company purchased some financing receivables in the fourth quarter of 2014 and the third quarter of 2015. The investment by portfolio class at September 30, 2015 is as follows.  These loans are included in the above table and all other tables below in the recorded investment amount.

	September 30, 2015		December 31, 2014
Commercial and industrial	$	19,611	$	26,152
Construction and development	226		2,037
Other real estate	85,768		98,436
1-4 family	44,294		36,490
Home equity	20,176		16,278
Direct	3,081		2,006
Total Purchased Loans	$	173,156	$	181,399

The Company also purchased some credit impaired loans during 2014. These loans had a net balance of under $1,000 at December 31, 2014 so additional disclosures were not made due to their immateriality.

Activity in the allowance for loan losses for the three months ended September 30, 2015 and 2014 was as follows:

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, July 1, 2015	$	5,394		$	12,689		$	3,264		$	1,126		$	22,473
Provision charged to expense	1,331			(1,349		)	154			664			800
Losses charged off	(773		)	(101		)	(401		)	(1,076		)	(2,351		)
Recoveries	246			307			71			477			1,101
Balance, September 30, 2015	$	6,198		$	11,546		$	3,088		$	1,191		$	22,023

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, July 1, 2014	$	3,201		$	16,994		$	3,110		$	562		$	23,867
Provision charged to expense	(685		)	(548		)	464			769			—
Losses charged off	(17		)	(131		)	(548		)	(795		)	(1,491		)
Recoveries	975			673			183			342			2,173
Balance, September 30, 2014	$	3,474		$	16,988		$	3,209		$	878		$	24,549

14

Activity in the allowance for loan losses for the nine months ended September 30, 2015 and 2014 and the recorded investment of loans and allowances by portfolio segment and impairment method as of September 30, 2015 and December 31, 2014 were as follows:

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, January 1, 2015	$	2,977		$	15,605		$	3,501		$	1,167		$	23,250
Provision charged to expense	3,822			(5,298		)	927			1,349			800
Losses charged off	(900		)	(538		)	(1,606		)	(2,576		)	(5,620		)
Recoveries	299			1,777			266			1,251			3,593
Balance, September 30, 2015	$	6,198		$	11,546		$	3,088		$	1,191		$	22,023

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, January 1, 2014	$	3,291		$	20,210		$	3,409		$	699		$	27,609
Provision charged to expense	(699		)	(548		)	1,427			1,320			1,500
Losses charged off	(166		)	(4,786		)	(1,925		)	(2,166		)	(9,043		)
Recoveries	1,048			2,112			298			1,025			4,483
Balance, September 30, 2014	$	3,474		$	16,988		$	3,209		$	878		$	24,549

	Commercial		Commercial Real Estate		Residential		Consumer		Total
As of September 30, 2015
Ending Balance individually evaluated for impairment	$	259	$	1,198	$	172	$	—	$	1,629
Ending Balance collectively evaluated for impairment	5,939		10,348		2,916		1,191		20,394
Total ending allowance balance	$	6,198	$	11,546	$	3,088	$	1,191	$	22,023
Loans
Ending Balance individually evaluated for impairment	$	1,155	$	9,159	$	9,375	$	119	$	19,808
Ending Balance collectively evaluated for impairment	417,372		864,743		725,733		53,836		2,061,684
Total ending loan balance excludes $6,128 of accrued interest	$	418,527	$	873,902	$	735,108	$	53,955	$	2,081,492

15

As of December 31, 2014	Commercial		Commercial Real Estate		Residential		Consumer		Total
Ending Balance individually evaluated for impairment	$	162	$	705	$	183	$	—	$	1,050
Ending Balance collectively evaluated for impairment	2,815		14,900		3,318		1,167		22,200
Total ending allowance balance	$	2,977	$	15,605	$	3,501	$	1,167	$	23,250
Loans
Ending Balance individually evaluated for impairment	$	705	$	24,722	$	10,662	$	220	$	36,309
Ending Balance collectively evaluated for impairment	321,725		855,146		698,833		45,752		1,921,456
Total ending loan balance excludes $5,605 of accrued interest	$	322,430	$	879,868	$	709,495	$	45,972	$	1,957,765

The allowance for loans collectively evaluated for impairment consists of reserves on groups of similar loans based on historical loss experience adjusted for other factors, as well as reserves on certain loans that are classified but determined not to be impaired based on an analysis which incorporates probability of default with a loss given default scenario. The reserves on these loans totaled $1,723 at September 30, 2015 and $2,426 at December 31, 2014.

The recorded investment in loans excludes accrued interest receivable due to immateriality.

The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2015 and December 31, 2014.  Performing troubled debt restructurings totaling $2,801 and $7,499 were excluded as allowed by ASC 310-40.

September 30, 2015	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded
Commercial
Commercial and industrial	$	726	$	339	$	259
Agricultural	—		—		—
Commercial Real Estate
Farm	—		—		—
Hotel	—		—		—
Construction and development	—		—		—
Other	2,579		2,479		1,198
Residential
1-4 Family	1,366		1,318		168
Home Equity	161		161		4
Consumer
Direct	—		—		—
Subtotal — impaired with allowance recorded	4,832		4,297		1,629
With no related allowance recorded
Commercial
Commercial & industrial	830		816
Agricultural	—		—
Commercial Real Estate
Farm	574		349
Hotel	—		—
Construction and development
Other	4,986		3,530
Residential
1-4 Family	6,395		5,473
Home Equity	2,723		2,423
Consumer
Direct	131		119
Indirect	—		—
Subtotal — impaired with allowance recorded	15,639		12,710		—
Total impaired loans	$	20,471	$	17,007	$	1,629

16

December 31, 2014	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded
Commercial
Commercial and industrial	$	82	$	64	$	12
Agriculture	397		150		150
Commercial Real Estate
Farm	76		76		21
Hotel	—		—		—
Construction and development	—		—		—
Other	979		889		684
Residential
1-4 Family	1,543		1,478		178
Home Equity	167		167		5
Consumer
Direct	—		—		—
Indirect	—		—		—
Subtotal — impaired with allowance recorded	3,244		2,824		1,050
With no related allowance recorded
Commercial
Commercial & industrial	761		491
Agricultural	—		—
Commercial Real Estate
Farm	864		616
Hotel	11,423		11,377
Construction and development	84		78
Other	5,848		4,186
Residential
1-4 Family	7,325		6,400
Home Equity	2,847		2,618
Consumer
Direct	238		213
Indirect	7		7
Subtotal — impaired with allowance recorded	29,397		25,986		—
Total impaired loans	$	32,641	$	28,810	$	1,050

17

The following tables present the average balance of impaired loans and interest income and cash basis interest recognized for the nine months ending September 30, 2015 and September 30, 2014, excluding performing troubled debt restructurings as allowed by ASC 310-40.

Nine months ended September 30, 2015	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	1,256	$	12	$	12
Agricultural	38		—		—
Commercial Real Estate
Farm	424		4		4
Hotel	3,563		—		—
Construction and development	20		47		47
Other	5,753		141		141
Residential
1-4 Family	7,527		43		43
Home Equity	2,221		10		10
Consumer
Direct	134		14		14
Indirect	2		5		5
	$	20,938	$	276	$	276

Nine months ended September 30, 2014	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	247	$	9	$	9
Agricultural	206		—		—
Commercial Real Estate
Farm	921		—		—
Hotel	6,225		—		—
Construction and development	318		—		—
Other	10,305		75		75
Residential
1-4 Family	8,108		16		16
Home Equity	2,472		11		11
Consumer
Direct	276		7		7
Indirect	6		6		6
	$	29,084	$	124	$	124

The following tables present the average balance of impaired loans and interest income and cash basis interest recognized for the three months ending September 30, 2015 and September 30, 2014, excluding performing troubled debt restructurings as allowed by ASC 310-40.

Three months ended September 30, 2015	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	1,677	$	6	$	6
Agricultural	—		—		—
Commercial Real Estate
Farm	405		—		—
Hotel	—		—		—
Construction and development	—		—		—
Other	6,298		86		86
Residential
1-4 Family	7,343		8		8
Home Equity	2,707		2		2
Consumer
Direct	162		4		4
Indirect	—		1		1
	$	18,592	$	107	$	107

18

Three months ended September 30, 2014	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	211	$	1	$	1
Agricultural	412		—		—
Commercial Real Estate
Farm	852		—		—
Hotel	12,450		—		—
Construction and development	78		—		—
Other	8,656		4		4
Residential
1-4 Family	7,449		11		11
Home Equity	2,629		4		4
Consumer
Direct	104		2		2
Indirect	2		5		5
	$	32,843	$	27	$	27

19

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2015 and December 31, 2014:

	Non-accrual				Past due over 90 days and still accruing
	September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
Commercial
Commercial and industrial	$	1,002	$	479	$	—	$	—
Agricultural	—		150		—		—
Commercial Real Estate
Farm	348		692		—		—
Hotel	—		—		—		—
Construction and development	—		78		—		—
Other	5,187		3,744		75		—
Residential
1-4 Family	5,171		6,428		—		—
Home Equity	1,706		1,841		—		—
Consumer
Direct	94		177		—		—
Indirect	—		7		—		—
Total	$	13,508	$	13,596	$	75	$	—

The following tables present the aging of the recorded investment in past due loans as of September 30, 2015 and December 31, 2014 by class of loans:

September 30, 2015	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	$	394,462	$	—	$	79	$	287	$	366	$	394,096
Agricultural	24,065		—		—		—		—		24,065
Commercial Real Estate
Farm	74,966		—		—		119		119		74,847
Hotel	45,650		—		—		—		—		45,650
Construction and development	86,702		—		—		—		—		86,702
Other	666,584		456		432		3,055		3,943		662,641
Residential
1-4 Family	440,776		1,155		1,569		2,596		5,320		435,456
Home Equity	294,332		712		455		1,176		2,343		291,989
Consumer
Direct	53,468		58		43		33		134		53,334
Indirect	487		—		—		—		—		487
Total — excludes $6,128 of accrued interest	$	2,081,492	$	2,381	$	2,578	$	7,266	$	12,225	$	2,069,267
December 31, 2014	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	$	275,646	$	441	$	75	$	210	$	726	$	274,920
Agricultural	46,784		—		—		—		—		46,784
Commercial Real Estate
Farm	76,849		—		—		327		327		76,522
Hotel	74,962		—		—		—		—		74,962
Construction and development	61,640		—		78		—		78		61,562
Other	666,417		933		755		1,919		3,607		662,810
Residential
1-4 Family	435,336		6,217		1,719		3,186		11,122		424,214
Home Equity	274,159		751		250		1,521		2,522		271,637
Consumer
Direct	45,360		91		17		162		270		45,090
Indirect	612		6		7		—		13		599
Total — excludes $5,605 of accrued interest	$	1,957,765	$	8,439	$	2,901	$	7,325	$	18,665	$	1,939,100

20

Troubled Debt Restructurings

From time to time, the terms of certain loans are modified as troubled debt restructurings. The modification of the terms of such loans include 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.

The total of troubled debt restructurings at September 30, 2015 and December 31, 2014 was $8,547 and $23,325 respectively. Included in the TDR totals are non-accrual loans of $2,263 and $575 at September 30, 2015 and December 31, 2014, loans classified as TDRs that are accruing of $3,483 at September 30, 2015 and $15,251 at December 31, 2014, and loans of $2,801 at September 30, 2015 and $7,499 at December 31, 2014, that relate to loans classified as TDRs in which there was an A/B split and the B note was charged off and the A note is a performing loan.  This last group of loans is excluded from non-performing loans.  The Company has allocated $897 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2015. 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, 2014, the comparable numbers were $485 of specific reserves and $0 of commitments.

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine month period ending September 30, 2015:

		Pre-Modification		Post-Modification
For the nine		Outstanding Recorded		Outstanding Recorded
month period ending September 30, 2015	Number of Loans	Investment		Investment
Commercial
Commercial and industrial	3	$	216	$	216
Commercial real estate
Other	8	1,610		1,349
Residential
1-4 Family	3	215		215
Home Equity	2	44		44
Total	16	$	2,085	$	1,824

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine month period ending September 30, 2014:

		Pre-Modification		Post-Modification
For the nine		Outstanding Recorded		Outstanding Recorded
month period ending September 30, 2014	Number of Loans	Investment		Investment
Commercial real estate
Hotel	2	$	15,362	$	11,550
Other	2	1,015		1,015
Residential
1-4 Family	1	140		140
Home Equity	1	34		34
Consumer
Direct	1	26		26
Total	7	$	16,577	$	12,765

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending September 30, 2015:

		Pre-Modification		Post-Modification
For the three		Outstanding Recorded		Outstanding Recorded
month period ending September 30, 2015	Number of Loans	Investment		Investment
Commercial real estate
Other	1	$	42	$	42
Residential
1-4 Family	3	215		215
Home Equity	1	38		38
Total	5	$	295	$	295

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending September 30, 2014:

21

		Pre-Modification		Post-Modification
For the three		Outstanding Recorded		Outstanding Recorded
month period ending September 30, 2014	Number of Loans	Investment		Investment
Residential
Home Equity	1	$	34	$	34
Consumer
Direct	1	26		26
Total	2	$	60	$	60

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the nine month period ending September 30, 2015:

For the nine month period ending September 30, 2015	Number of Loans	Recorded Investment
Commercial real estate:
Other	3	$	863
Residential
1-4 Family	1	152
Home Equity	1	47
Total	5	$	1,062

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the nine month period ending September 30, 2014:

For the nine month period ending September 30, 2014	Number of Loans	Recorded Investment
Commercial real estate:
Other	1	$	1,431
Residential
1-4 Family	1	53
Home Equity	1	14
Total	3	$	1,498

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three month period ending September 30, 2015:

For the three month period ending September 30, 2015	Number of Loans	Recorded Investment
Commercial real estate:
Other	2	$	835
Residential
1-4 Family	1	152
Home Equity	1	47
Total	4	$	1,034

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three month period ending September 30, 2014:

For the three month period ending September 30, 2014	Number of Loans	Recorded Investment
Residential:
Home Equity	1	$	14
Total	1	$	14

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 $0 and $0 and resulted in charge offs of $0 and $0 during the three month period ending September 30, 2015 and 2014, respectively.  For the nine month periods ending September 30, 2015 and 2014, the troubled debt restructurings that subsequently defaulted increased the allowance for loan losses by $0 and $0 and resulted in charge offs of $0 and $36.

22

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 terms of certain other loans were modified during the three month period ending September 30, 2015 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of September 30, 2015 of $5,511. 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 significant.

Credit Quality Indicators

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 have demonstrated the 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.

23

As of September 30, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

September 30, 2015	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	343,520	$	7,356	$	1,729	$	953
Agricultural	24,065		—		—		—
Commercial Real Estate
Farm	74,073		263		282		348
Hotel	42,921		2,729		—		—
Construction and development	86,702		—		—		—
Other	540,319		11,174		5,967		4,006
Total	$	1,111,600	$	21,522	$	7,978	$	5,307

At December 31, 2014, the risk category of loans by class of loans was as follows:

December 31, 2014	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	226,731	$	9,926	$	1,596	$	35
Agricultural	46,634		—		—		150
Commercial Real Estate
Farm	75,191		966		—		692
Hotel	60,704		2,835		11,423		—
Construction and development	60,971		372		219		78
Other	525,758		20,823		9,689		2,323
Total	$	995,989	$	34,922	$	22,927	$	3,278

Loans not analyzed individually as part of the above described process are classified by delinquency. These loans are primarily smaller (<$250) commercial, smaller commercial real estate (<$250), residential mortgage and consumer loans. All commercial, commercial real estate, consumer loans fully or partially secured by 1-4  family 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. Smaller commercial and commercial real estate loans on non-accrual are included in the non-accrual tables above.  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 September 30, 2015 and December 31, 2014, the grading of loans by category of loans is as follows:

September 30, 2015	Performing		Watch		Substandard
Commercial
Commercial and industrial	$	40,776	$	79	$	49
Commercial Real Estate
Other	103,708		154		1,256
Total	$	144,484	$	233	$	1,305

December 31, 2014	Performing		Watch		Substandard
Commercial
Commercial and industrial	$	36,839	$	75	$	444
Commercial Real Estate
Other	106,247		156		1,421
Total	$	143,086	$	231	$	1,865

September 30, 2015	Performing		Watch		Substandard
Residential
1-4 Family	$	436,611	$	1,569	$	2,596
Home Equity	292,701		455		1,176
Total	$	729,312	$	2,024	$	3,772

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December 31, 2014	Performing		Watch		Substandard
Residential
1-4 Family	$	430,431	$	1,719	$	3,186
Home Equity	272,388		250		1,521
Total	$	702,819	$	1,969	$	4,707

September 30, 2015	Performing		Substandard		Loss
Consumer
Direct	$	53,392	$	43	$	33
Indirect	487		—		—
Total	$	53,879	$	43	$	33

December 31, 2014	Performing		Substandard		Loss
Consumer
Direct	$	45,181	$	142	$	37
Indirect	605		7		—
Total	$	45,786	$	149	$	37

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NOTE 5 — OTHER REAL ESTATE OWNED

Other real estate owned is recorded in other assets on the balance sheet. Activity in other real estate owned was as follows:

	Three months ended September 30						Nine months ended September 30
	2015			2014			2015			2014
Beginning Balance	$	2,065		$	3,723		$	2,688		$	4,120
Transfer to other real estate owned	801			220			1,164			2,119
Sales — out of other real estate owned	(429		)	(753		)	(1,377		)	(2,929		)
Write-down	—			—			(38		)	(120		)
Ending Balance — September 30	$	2,437		$	3,190		$	2,437		$	3,190

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

Activity in the valuation account for other real estate was as follows:

	Three months ended September 30						Nine months ended September 30
	2015			2014			2015			2014
Beginning Balance	$	(323	)	$	(391	)	$	(448	)	$	(1,328	)
Impairments during year	—			—			(38		)	(120		)
Recovery on impairments	—			—			—			—
Reductions	37			33			200			1,090
Ending Balance — September 30	$	(286	)	$	(358	)	$	(286	)	$	(358	)

Expenses related to foreclosed assets for the period ending September 30 include:

	Three months ended September 30				Nine months ended September 30
	2015		2014		2015		2014
Write downs	$	—	$	—	$	38	$	120
Losses / (gains) on sales	19		9		25		(73		)
Net loss	$	19	$	9	$	63	$	47
Operating expenses	$	30	$	28	$	124	$	120

Foreclosed residential real estate properties included in other real estate and repossessed assets on the Consolidated Balance Sheets totaled $1,235 and $1,261 at September 30, 2015 and December 31, 2014, respectively. Retail mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements totaled $2,573 and $2,653 at September 30, 2015 and December 31, 2104, respectively.

NOTE 6 — DEPOSITS & REPURCHASE AGREEMENTS

	September 30, 2015		December 31, 2014
Noninterest-bearing demand	$	606,218	$	513,393
Interest-bearing demand	1,058,510		1,054,780
Savings	602,576		559,761
Certificates of deposit of $250 or more	74,781		56,495
Other certificates and time deposits	265,513		283,892
Total deposits	$	2,607,598	$	2,468,321

The Company has entered into repurchase agreements with some of its customers.  The agreements are one day in length.  At September 30, 2015, these agreements totaled $34,439 and were secured by a pledged amount of $46,801 of mortgage backed securities.  Management monitors the fair value of the securities on a regular basis.  If the fair value of the securities declined to an amount approximating these agreements, more securities would be pledged.

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NOTE 7 - EARNINGS PER SHARE

Earnings per common share (EPS) were computed as follows:

	September 30, 2015					September 30, 2014
For the three months ended:	Net Income		Weighted Average Shares	Per Share Amount		Net Income		Weighted Average Shares	Per Share Amount
Basic earnings per common share:
Net income available to common shareholders	$	9,111	21,615,263	$	0.42	$	8,457	20,459,709	$	0.41
Effect of dilutive warrants			171,062					72,978
Effect of dilutive stock options			110,636					68,757
Net income available to common shareholders and assumed conversions	$	9,111	21,896,961	$	0.42	$	8,457	20,601,444	$	0.41

Stock options for 0 common shares in 2015 and stock options for 123,964 common shares in 2014 were not considered in computing diluted earnings per share because they were antidilutive.

	September 30, 2015					September 30, 2014
For the nine months ended:	Net Income		Weighted Average Shares	Per Share Amount		Net Income		Weighted Average Shares	Per Share Amount
Basic earnings per common share:
Net income available to common shareholders	$	26,434	21,658,088	$	1.22	$	22,436	20,448,054	$	1.10
Effect of dilutive warrants			152,171					67,184
Effect of dilutive stock options			103,053					66,102
Net income available to common shareholders and assumed conversions	$	26,434	21,913,312	$	1.21	$	22,436	20,581,340	$	1.09

Stock options for 10,210 common shares in 2015 and stock options for 176,211 common shares in 2014 were not considered in computing diluted earnings per share because they were antidilutive.

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NOTE 8 — FAIR VALUE

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. 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 as well as costs to sell. 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 Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 3 inputs).

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 as well as disposal costs.  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). The mortgage banking derivative is classified as Interest receivable and other assets on the balance sheet.

The fair value of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2).  The fair value derivatives are classified as Interest receivable and other assets and Other liabilities on the balance sheet.

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Assets and Liabilities Measured on a Recurring Basis

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 September 30, 2015 Using:
						Significant
				Quoted Prices in		Other			Significant
				Active Markets for		Observable			Unobservable
	Carrying			Identical Assets		Inputs			Inputs
(Dollars in thousands)	Value			(Level 1)		(Level 2)			(Level 3)
Financial Assets/Liabilities
Investment securities available-for sale
U. S. government agency	$	543				$	543
States and municipals	348,816					337,469			$	11,347
Mortgage-backed securities — residential —Government Sponsored Entity	303,845					303,845
Collateralized mortgage obligations — Government Sponsored Entity	249,080					249,080
Equity securities	4,689			$	4,689
Other securities	2,525								2,525
Total investment securities available-for-sale	$	909,498		$	4,689	$	890,937		$	13,872
Mortgage banking derivative	$	925				$	925
Interest rate swap asset	$	1,798				$	1,798
Interest rate swap liability	$	(1,798	)			$	(1,798	)

				Fair Value Measurements at December 31, 2014 Using:
						Significant
				Quoted Prices in		Other			Significant
				Active Markets for		Observable			Unobservable
	Carrying			Identical Assets		Inputs			Inputs
(Dollars in thousands)	Value			(Level 1)		(Level 2)			(Level 3)
Financial Assets/Liabilities
Investment securities available-for sale
U. S. government agency	$	661				$	661
States and municipals	334,298					321,488			$	12,810
Mortgage-backed securities — residential —Government Sponsored Entity	182,172					182,172
Collateralized mortgage obligations — Government Sponsored Entity	343,437					343,437
Equity securities	4,689			$	4,689
Other securities	2,503								2,503
Total investment securities available-for-sale	$	867,760		$	4,689	$	847,758		$	15,313
Mortgage banking derivative	$	975				$	975
Interest rate swap asset	$	56				$	56
Interest rate swap liability	$	(56	)			$	(56	)

There were no transfers between Level 1 and Level 2 during the third quarter of 2015 or 2014 or the first nine months of 2015 or 2014.

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The table 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 three month periods ended September 30, 2015 and 2014:

Three months ended September 30:

States and municipal	2015			2014
Beginning balance, July 1	$	11,863		$	13,083
Total gains or losses (realized / unrealized)
Included in other comprehensive income	(6		)	(8		)
Settlements	(510		)	(218		)
Ending balance, September 30	$	11,347		$	12,857

Other securities	2015			2014
Beginning balance, July 1	$	2,527		$	2,511
Total gains or losses (realized / unrealized)
Included in other comprehensive income	(2		)	(4		)
Ending balance, September 30	$	2,525		$	2,507

Nine months ended September 30:

States and municipal	2015			2014
Beginning balance, January 1	$	12,810		$	14,420
Total gains or losses (realized / unrealized)
Included in other comprehensive income	(36		)	15
Settlements	(1,427		)	(1,578		)
Ending balance, September 30	$	11,347		$	12,857

Equity securities	2015		2014
Beginning balance, January 1	$	—	$	250
Total gains or losses (realized / unrealized)
Settlements	—		(250		)
Ending balance, September 30	$	—	$	—

Other securities	2015		2014
Beginning balance, January 1	$	2,503	$	2,526
Total gains or losses (realized / unrealized)
Included in other comprehensive income	22		(19		)
Ending balance, September 30	$	2,525	$	2,507

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 include 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.

30

Assets and Liabilities Measured on a Non-Recurring Basis

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

			Fair Value Measurements at September 30, 2015 Using
	September 30, 2015		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	$	81			$	81
Other commercial real estate	1,092				1,092
Total impaired loans	$	1,173			$	1,173
Impaired servicing rights	$	1,101			$	1,101

			Fair Value Measurements at December 31, 2014 Using
	December 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans
Farm real estate	$	55			$	55
Other commercial real estate	1,235				1,235
Total impaired loans	$	1,290			$	1,290
Impaired servicing rights	$	1,854			$	1,854
Other real estate owned
Construction and development	$	21			$	21
Other commercial real estate	291				291
1-4 Family	150				150
Total other real estate owned	$	462			$	462

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Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $2,530, with a valuation allowance of $1,357 at September 30, 2015. The Company recorded a charge of $426 to provision expense associated with these loans for the three months ended September 30, 2015 and a charge of $1,281 to provision expense associated with these loans for the nine month period ending September 30, 2015. The Company recorded a charge of $1,061 to provision expense associated with these loans for the three months ended September 30, 2014 and a charge of $941 to provision expense associated with these loans for the nine month period ending September 30, 2014. At December 31, 2014, impaired loans had a gross carrying amount of $2,056 with a valuation allowance of $766. A breakdown of these loans by portfolio class at September 30, 2015 is as follows:

	Gross Balance		Valuation Allowance		Net
Commercial and industrial	$	339	$	258	$	81
Other commercial real estate	2,191		1,099		1,092
Ending Balance	$	2,530	$	1,357	$	1,173

Impaired tranches of servicing rights were carried at a fair value of $1,101, which is made up of the gross outstanding balance of $1,326 net of a valuation allowance of $225. A $25 credit to earnings was made to the valuation allowance in the third quarter of 2015 and a credit of $175 was made to the valuation allowance in the first nine months of 2015.  A recovery of $50 was included in both the third quarter and the nine month period ending September 30, 2014.  At December 31, 2014, impaired servicing rights were carried at a fair value of $1,854 which was made up of the gross outstanding balance of $2,254, net of a valuation allowance of $400.

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 September 30, 2015 and December 31, 2014. Impaired commercial loans, 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.  The fair value of the mortgage servicing rights is valued based on present value of future cash flows to be received taking into account the coupon rate on the mortgage as well as estimated prepayment speeds.

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September 30, 2015	Fair Value (in thousands)		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired Loans:
Commercial and industrial	$	81	Fair value of collateral	Adjustment for collateral value	57% 57% Avg
Other commercial real estate	1,092		Sales comparison approach	Adjustment for differences between comparable sales, type of property, current status of property	0%-20% 11% Avg
	$	1,173
Mortgage servicing rights	$	1,101	Cash flow analysis	Discount rate	10%

December 31, 2014	Fair Value (in thousands)		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired Loans:
Farm real estate	$	55	Sales comparison approach	Adjustment for differences between comparable sales	40% 40% Avg
Other commercial real estate	1,235		Sales comparison approach	Adjustment for differences between comparable sales, type of property, current status of property	20%-45% 36% Avg
	$	1,290
Other real estate owned:
Construction and development	$	21	Sales comparison approach	Adjustment for differences between comparable sales.	15% 15% Avg
Other commercial real estate and 1-4 family	441		Sales comparison approach	Adjustment for differences between comparable sales.	10%-19% 11% Avg
	$	462
Mortgage servicing rights	$	1,854	Cash flow analysis	Discount rate	10%

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The carrying amounts and estimated fair values of financial instruments, not previously presented, is as follows:

September 30, 2015	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets:
Cash and cash equivalents	$	112,353		$	86,728		$	25,625				$	112,353
Interest bearing time deposits	1,960						1,960					1,960
Loans including loans held for sale, net	2,063,117						4,957			$	2,132,058	2,137,015
FHLB and other stock	11,070											N/A
Interest receivable	10,720						4,592			6,128		10,720
Financial liabilities
Deposits	(2,607,598		)	(606,218		)	(2,000,841		)			(2,607,059		)
Other borrowings	(39,439		)				(39,439		)			(39,439		)
FHLB advances	(255,416		)				(259,460		)			(259,460		)
Interest payable	(553		)				(553		)			(553		)
Subordinated debentures	(41,239		)				(24,212		)			(24,212		)

December 31, 2014	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets:
Cash and cash equivalents	$	62,485		$	60,662		$	1,823				$	62,485
Interest bearing time deposits	1,915						1,915					1,915
Loans including loans held for sale, net	1,941,507						8,514			$	1,946,843	1,955,357
FHLB and other stock	13,854											N/A
Interest receivable	10,064						4,459			5,605		10,064
Financial liabilities
Deposits	(2,468,321		)	(513,393		)	(1,952,833		)			(2,466,226		)
Other borrowings	(26,349		)				(26,349		)			(26,349		)
FHLB advances	(214,413		)				(219,050		)			(219,050		)
Interest payable	(599		)				(599		)			(599		)
Subordinated debentures	(41,239		)				(24,212		)			(24,212		)

The difference between the loan balance included above and the amounts shown in Note 4 are the impaired loans discussed above.

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

(a) Cash and Cash Equivalents

The carrying amounts of cash, short-term instruments, and interest bearing time deposits 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.

(b) FHLB and other stock

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

(c) Loans, Net

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.

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(d) Deposits

The fair values disclosed for non-interest bearing deposits are, by definition, 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 1 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.

(e) Borrowings

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 2 classification.

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

(f) Accrued Interest Receivable/Payable

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.

NOTE 9 — REGULATORY CAPITAL

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 four 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.

On July 2, 2013, the Federal Reserve approved a final rule that establishes an integrated regulatory capital framework. The rule implements the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. In general, under the new rules, minimum requirements have increased for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the new rules include a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations. The new rules also change the methodology for calculating risk-weighted assets to enhance risk sensitivity and became effective on January 1, 2015.

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Actual and required capital amounts and ratios are presented below:

					Required for
	Actual				Adequate Capital				To Be Well Capitalized
September 30, 2015	Amount		Ratio		Amount		Ratio		Amount		Ratio
MainSource Financial Group
Total capital (to risk-weighted assets)	$	344,309	15.6	%	$	176,782	8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	322,286		14.6		132,587		6.0		N/A		N/A
Common equity Tier 1 capital (to risk-weighted assets	281,286		12.7		99,440		4.5		N/A		N/A
Tier 1 capital (to average assets)	322,286		10.0		128,302		4.0		N/A		N/A
MainSource Bank
Total capital (to risk-weighted assets)	329,420		14.9	%	177,083		8.0	%	$	231,354	10.0	%
Tier 1 capital (to risk-weighted assets)	307,397		13.9		132,812		6.0		177,083		8.0
Common equity Tier 1 capital (to risk-weighted assets	307,397		13.9		99,609		4.5		143,880		6.5
Tier 1 capital (to average assets)	307,397		9.7		127,153		4.0		158,942		5.0

					Required for				To Comply with
	Actual				Adequate Capital				Regulatory Agreement
December 31, 2014	Amount		Ratio		Amount		Ratio		Amount		Ratio
MainSource Financial Group
Total capital (to risk-weighted assets)	$	332,726	16.0	%	$	165,975	8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	309,476		14.9		82,988		4.0		N/A		N/A
Tier 1 capital (to average assets)	309,476		10.2		121,014		4.0		N/A		N/A
MainSource Bank
Total capital (to risk-weighted assets)	321,005		15.6	%	164,648		8.0	%	$	205,810	10.0	%
Tier 1 capital (to risk-weighted assets)	297,755		14.5		82,324		4.0		123,486		6.0
Tier 1 capital (to average assets)	297,755		9.9		119,880		4.0		149,850		5.0

Management believes as of September 30, 2015, the Company and the Bank (as defined in Item 2 below) met all capital adequacy requirements to which they are subject to be considered well-capitalized. The Company is a source of additional financial strength to the Bank with its $8,500 in cash and its ability to downstream additional capital to the Bank.

NOTE 10 — INCOME TAXES

In accordance with ASC 740-270-50-1, Accounting for Interim Reporting, the provision for income taxes was recorded at September 30, 2015 and 2014 based on the current estimate of the effective annual rate.  The effective tax rate for the third quarter of 2015 was 24.1% versus 22.9% for the same period 2014.  For the first nine months of 2015 and 2014, the effective tax rate was 22.0% and 20.7% respectively. The increase was due to the increase in pre-tax income in the third quarter and first nine months of 2015 while tax exempt income remained relatively flat.

NOTE 11 — DERIVATIVES

The Bank executes interest rate swaps with commercial banking customers to facilitate their risk management strategies. These derivative positions relate to transactions in which the Bank enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution.  The Bank agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Bank agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the customer to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institutions offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Bank’s results of operations.  The notional amounts of these interest rate swaps and the offsetting counterparty derivative instruments were $45.2 million at September 30, 2015 and $2.0 million at December 31, 2014.

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Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Bank’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. There are provisions in the agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, the Bank minimizes credit risk through credit approvals, limits, and monitoring procedures.

The fair value hedges are summarized below:

	September 30, 2015				December 31, 2014
	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in Other Assets:
Interest Rate Swaps	$	45,236	$	1,798	$	1,991	$	56
Included in Other Liabilities:
Interest Rate Swaps	$	45,236	$	1,798	$	1,991	$	56

The effect of derivative instruments on the Consolidated Statement of Income is presented below:

	Nine Months Ended September 30,
	2015		2014
Interest Rate Swaps — Fee Income
Included in Other Income / (Expense)	$	548	$	—

	Three Months Ended September 30,
	2015		2014
Interest Rate Swaps — Fee Income
Included in Other Income / (Expense)	$	399	$	—

NOTE 12 — ACQUISITION

In August, 2015, the Company completed its purchase of five Old National Bank branches located in Batesville, Brownstown, Richmond, and Portland, Indiana and Union City, Ohio. As of the date of acquisition, the Company acquired $37 million in loans, $99 million in deposits, and $1 million in property. Goodwill of $2.5 million and a core deposit intangible of $1.2 million were also recorded. $57 million of cash was received at purchase. The Company incurred $617 of expenses related to the acquisition of these branches.  The core deposit intangible asset is being amortized over 10 years. Goodwill and the core deposit intangible will be deducted for tax purposes over 15 years.

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MAINSOURCE FINANCIAL GROUP, INC.

FORM 10-Q

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

(Dollar amounts in thousands except per share data)

Overview

MainSource Financial Group, Inc. (the “Company”) is a financial holding company whose principal activity is the ownership and management of its subsidiary bank, MainSource Bank (the “Bank”) headquartered in Greensburg, Indiana.  Through its non-bank affiliates, the Company provides services incidental to the business of banking.  The Bank operates under a state charter and is subject to regulation by its state regulatory agency and the Federal Deposit Insurance Corporation.

Forward-Looking Statements

Except for historical information contained herein, the discussion in this report includes certain forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements include, but are not limited to, statements regarding the Company’s plans, objectives, expectations and intentions and other statements contained in this report that are not historical facts. Other statements identified by words such as “expects,” “anticipates,” “will,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “targets,” “positioned,” “projects,” or words of similar meaning generally are intended to identify forward-looking statements. 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, the impact of our continuing acquisition strategy, and other factors, including the risk factors set forth in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, and in other reports the Company files from time to time with the Securities and Exchange Commission.

Results of Operations

Net income for the third quarter of 2015 was $9,111 compared to net income of $8,457 for the third quarter of 2014. The increase in net income was primarily attributable to an increase in net interest income of $2,999,  increased mortgage banking income of $593,  increased service charges (primarily overdraft fees) of $673, increased interchange income of $344, and increased trust and investment product fees of $117.  Offsetting these increases were a provision for loan losses of $800, an increase in salaries and employee benefits of $1,674, equipment expenses of $154, net occupancy expenses of $245, and branch acquisition expenses of $617.  The majority of the increases are the result of the acquisition of MBT Bancorp in the fourth quarter of 2014.  The increase in the allowance for loan losses is a result of organic loan growth in the third quarter of 2015.  The Company incurred $617 of conversion expenses related to the acquisition of five Old National branches in the third quarter of 2015.  Diluted earnings per common share for the third quarter of 2015 totaled $0.42, a $0.01 increase from the $0.41 reported in the same period a year ago. Key measures of the financial performance of the Company are return on average shareholders’ equity and return on average assets. Return on average shareholders’ equity was 9.71% for the third quarter of 2015 while return on average assets was 1.10% for the same period, compared to 10.17% and 1.18% respectively, in the third quarter of 2014.

For the nine months ended September 30, 2015, net income was $26,434 compared to net income of $22,436 for the same period a year ago.  The increase in net income was primarily attributable to an increase in net interest income of $6,915, increased mortgage banking income of $2,079, increased interchange income of $774, increased service charges of $900, a gain on a life insurance policy of $307, and a loss on sales of fixed assets of $500 in 2014, offset by an increase in salaries and employee benefits of $2,913, increased net occupancy expenses of $545, increased equipment expenses of $813, a prepayment penalty on a FHLB advance of $2,364, and branch acquisition expenses of $617.  Diluted earnings per share were $1.21 for the first nine months of 2015 compared to $1.09 for the same period in 2014. Return on average shareholders’ equity was 9.57% for the first nine months of 2015 while return on average assets was 1.10% for the same period, compared to 9.33% and 1.05% in the first nine months of 2014.

Net Interest Income

The volume and yield of earning assets and interest-bearing liabilities influence net interest income. Net interest income reflects the mix of interest-bearing and non-interest-bearing liabilities that fund earning assets, as well as interest spreads between the rates earned on these assets and the rates paid on interest-bearing liabilities. Third quarter net interest income of $26,088 in 2015 was an increase of 13.0% versus the third quarter of 2014. Average earning assets were $391 million higher in the third quarter of 2015 compared to

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2014 with the majority of the increase attributable to loan growth and securities growth, The growth came from the acquisitions of MBT Bancorp in the fourth quarter of 2014, and the five Old National branches in the third quarter of 2015 as well as from organic loan growth.  Also affecting margin was an increase in average demand deposits, NOW accounts, and savings accounts of $340 million which were partially offset by increases in higher costing CD’s of $20 million.  Net interest margin, on a fully-taxable equivalent basis, was 3.72% for the third quarter of 2015, a nine basis point decrease compared to 3.81% for the same period a year ago and three basis point decrease on a linked quarter basis.

Net interest income was $6,915 higher in the first nine months of 2015 compared to 2014.  Average earnings assets were $312 million higher in the first nine months of 2015 compared to 2014 with almost all of the increase again attributable to loan growth.  Also affecting margin was an increase in average demand, NOW accounts, and savings accounts of $312 million.  For the first nine months of 2015, the Company’s net interest margin was 3.76% compared to 3.85% for the first nine months of 2014.

The following tables summarize net interest income (on a tax-equivalent basis) for the three month periods ending September 30, 2015 and 2014.

39

Average Balance Sheet and Net Interest Analysis (Taxable Equivalent Basis)* - three months ended September 30

	2015							2014
	Average Balance			Interest		Average Rate***		Average Balance			Interest		Average Rate ***
Assets
Short-term investments	$	19,418		$	10	0.20	%	$	10,066		$	9	0.35	%
Federal funds sold and money market accounts	24,653			18		0.29		14,234			11		0.31
Securities
Taxable	560,466			3,010		2.13		531,965			2,964		2.21
Non-taxable*	329,303			4,588		5.53		303,611			4,498		5.88
Total securities	889,769			7,598		3.39		835,576			7,462		3.54
Loans**
Commercial*	1,260,161			14,089		4.44		1,010,393			11,633		4.57
Residential real estate	439,570			4,577		4.13		408,050			4,420		4.24
Consumer	335,169			3,573		4.23		298,957			3,253		4.32
Total loans	2,034,900			22,239		4.34		1,717,400			19,306		4.46
Total earning assets	2,968,740			29,865		3.99		2,577,276			26,788		4.12
Cash and due from banks	50,188							39,539
Unrealized gains (losses) on securities	18,768							18,874
Allowance for loan losses	(22,601		)					(24,248		)
Premises and equipment, net	61,480							54,917
Intangible assets	77,556							68,939
Accrued interest receivable and other assets	128,753							117,668
Total Assets	$	3,282,884						$	2,852,965
Liabilities
Interest-bearing deposits DDA, savings, and money market accounts	$	1,674,027		$	483	0.11	%	$	1,465,523		$	401	0.11
Certificates of deposit	337,868			432		0.51		318,275			443		0.55
Total interest-bearing deposits	2,011,895			915		0.18		1,783,798			844		0.19
Short-term borrowings	37,335			19		0.20		32,728			21		0.25
Subordinated debentures	40,000			318		3.15		40,000			312		3.09
Notes payable and FHLB borrowings	178,389			773		1.72		182,182			862		1.88
Total interest-bearing liabilities	2,267,619			2,025		0.35		2,038,708			2,039		0.40
Demand deposits	587,527							455,767
Other liabilities	55,437							28,516
Total liabilities	2,910,583							2,522,991
Shareholders’ equity	372,301							329,974
Total liabilities and shareholders’ equity	$	3,282,884						$	2,852,965
Net interest income				$	27,840	3.72	****				$	24,749	3.81	****
Conversion of tax exempt income to a fully taxable equivalent basis using a marginal rate of 35%				$	1,752						$	1,660

*	Adjusted to reflect income related to securities and loans exempt from Federal income taxes of 35%
**	Nonaccruing loans have been included in the average balances.
***	Annualized
****	Net interest income divided by total earning assets.

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Volume/Rate Analysis of Changes in Net Interest Income

(Tax Equivalent Basis)

	3Q 2015 vs 3Q 2014
	Volume		Rate			Total
Interest income
Loans	$	3,475	$	(542	)	$	2,933
Securities	468		(332		)	136
Federal funds sold and money market funds	8		(1		)	7
Short-term investments	6		(5		)	1
Total interest income	3,957		(880		)	3,077
Interest expense
Interest-bearing DDA, savings, and money market accounts	$	59	$	23		$	82
Certificates of deposit	26		(37		)	(11		)
Borrowings	3		(94		)	(91		)
Subordinated debentures	—		6			6
Total interest expense	88		(102		)	(14		)
Change in net interest income	3,869		(778		)	3,091
Change in tax equivalent adjustment						92
Change in net interest income before tax equivalent adjustment						$	2,999

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.

41

The following tables summarize net interest income (on a tax-equivalent basis) for the nine month periods ending September 30, 2015 and 2014.

Average Balance Sheet and Net Interest Analysis (Taxable Equivalent Basis)* - nine months ended September 30

	2015							2014
	Average Balance			Interest		Average Rate***		Average Balance			Interest		Average Rate ***
Assets
Short-term investments	$	28,112		$	51	0.24	%	$	11,173		$	25	0.30	%
Federal funds sold and money market accounts	20,883			45		0.29		13,210			30		0.30
Securities
Taxable	545,076			8,780		2.15		559,263			9,377		2.24
Non-taxable*	320,305			13,509		5.64		308,281			13,711		5.95
Total securities	865,381			22,289		3.44		867,544			23,088		3.56
Loans**
Commercial*	1,227,272			41,314		4.50		997,977			34,692		4.65
Residential real estate	438,217			13,676		4.17		408,086			13,423		4.40
Consumer	323,863			10,435		4.31		294,100			9,737		4.43
Total loans	1,989,352			65,425		4.40		1,700,163			57,852		4.55
Total earning assets	2,903,728			87,810		4.04		2,592,090			80,995		4.18
Cash and due from banks	47,821							41,797
Unrealized gains (losses) on securities	22,231							14,706
Allowance for loan losses	(23,328		)					(26,336		)
Premises and equipment, net	61,011							55,146
Intangible assets	77,923							69,356
Accrued interest receivable and other assets	122,121							115,444
Total Assets	$	3,211,507						$	2,862,203
Liabilities
Interest-bearing deposits DDA, savings, and money market accounts	$	1,649,107		$	1,471	0.12	%	$	1,448,213		$	1,139	0.11
Certificates of deposit	335,993			1,237		0.49		342,452			1,625		0.63
Total interest-bearing deposits	1,985,100			2,708		0.18		1,790,665			2,764		0.21
Short-term borrowings	28,004			36		0.17		32,735			60		0.25
Subordinated debentures	40,000			942		3.15		41,389			975		3.15
Notes payable and FHLB borrowings	187,240			2,501		1.79		200,330			2,562		1.71
Total interest-bearing liabilities	2,240,344			6,187		0.37		2,065,119			6,361		0.41
Demand deposits	560,604							449,873
Other liabilities	41,159							25,657
Total liabilities	2,842,107							2,540,649
Shareholders’ equity	369,400							321,554
Total liabilities and shareholders’ equity	$	3,211,507						$	2,862,203
Net interest income				$	81,623	3.76	****				$	74,634	3.85	****
Conversion of tax exempt income to a fully taxable equivalent basis using a marginal rate of 35%				$	5,137						$	5,063

*	Adjusted to reflect income related to securities and loans exempt from Federal income taxes of 35%
**	Nonaccruing loans have been included in the average balances.
***	Annualized
****	Net interest income divided by total earning assets.

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Volume/Rate Analysis of Changes in Net Interest Income

(Tax Equivalent Basis)

	Nine months 2015 vs Nine months 2014
	Volume			Rate			Total
Interest income
Loans	$	9,574		$	(2,001	)	$	7,573
Securities	(57		)	(742		)	(799		)
Federal funds sold and money market funds	17			(2		)	15
Short-term investments	31			(5		)	26
Total interest income	9,565			(2,750		)	6,815
Interest expense
Interest-bearing DDA, savings, and money market accounts	$	169		$	163		$	332
Certificates of deposit	(30		)	(358		)	(388		)
Borrowings	(207		)	122			(85		)
Subordinated debentures	(33		)	—			(33		)
Total interest expense	(101		)	(73		)	(174		)
Change in net interest income	9,666			(2,677		)	6,989
Change in tax equivalent adjustment							74
Change in net interest income before tax equivalent adjustment							$	6,915

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

Provision for Loan Losses

See “Loans, Credit Risk and the Allowance and Provision for Probable Loan Losses” below.

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Non-interest Income

Third quarter non-interest income for 2015 was $13,344 compared to $11,058 for the third quarter of 2014.  Contributing to the increase of $2,286 was an increase in mortgage banking income of $593, service charges on deposit accounts of $673, and interchange income of $344.  Increased mortgage loan offices and officers led to increased mortgage banking income.  Another reason for the increase in mortgage banking was the continued low interest rate environment.  Increased deposit accounts led to higher fee income.  Part of these increases were the result of the MBT Bancorp acquisition in the fourth quarter of 2014 and the additional customers as a result of the acquisition.  In addition, the Company has realized organic growth in deposit accounts.

For the nine months ended September 30, 2015, non-interest income was $37,604 compared to $31,419 for the same period a year ago. Contributing to the increase of $6,185 were increases in mortgage banking of $2,079, service charges of $900,  securities gains of $364, interchange income of $774, a gain on a life insurance policy of $307, and a loss on fixed assets of $500 in 2014.  Favorable pricing in 2015 allowed the Company to recognize some securities gains. The Company had a life insurance policy claim in the first quarter of 2015 and recorded a loss on fixed assets in the first quarter of 2014 with the announcement of the closing of several branches.

Non-interest Expense

The Company’s non-interest expense was $26,635 for the third quarter of 2015, compared to $23,177 for the same period in 2014.  The primary reasons for the increase were an increase in salary and employee benefits of $1,674, increased equipment expenses of $154, increased occupancy costs of $245, and branch acquisition expenses of $617.  These increases were primarily due to the acquisition of MBT Bancorp in the fourth quarter of 2014 as well as $250 in severance costs related to an internal reorganization.  The Company’s efficiency ratio was 64.7% for the third quarter of 2015 compared to 64.7% for the same period a year ago.

For the nine months ended September 30, 2015, non-interest expense was $79,382 compared to $71,185 for the same period a year ago. Contributing to the increase of $8,197 were a prepayment penalty on a FHLB advance of $2,364 in 2015, increases in salaries and employee benefits of $2,913, equipment expenses of $813, occupancy expenses of $545, and branch acquisition expenses of $617.  The Company’s efficiency ratio was 66.6% for the first nine months of 2015 compared to 67.1% for the same period a year ago.

Income Taxes

The effective tax rate for the third quarter of 2015 was 24.1% versus 22.9% for the same period 2014.  The increase was due to the increase in pre-tax income in the third quarter of 2015 while tax exempt income remained relatively flat.

The effective tax rate for the first nine months of 2015 was 22.0% compared to 20.7% for the same period a year ago.  Similar to the third quarter, the increase in the effective tax rate was due to the increase in income before taxes while tax exempt income remained relatively flat.

Financial Condition

Total assets at September 30, 2015 were $3,336,615, a 6.9% increase from total assets of $3,122,516 as of December 31, 2014.  Average earning assets represented 90.4% of average total assets for the third quarter of 2015 and 90.3% for the same period in 2014. Average loans represented 78.7% of average deposits in the third quarter of 2015 and 76.8% for the comparable period in 2014.  Average loans as a percent of average assets were 62.3% and 60.2% for the three month periods ended September 30, 2015 and 2014 respectively.

Deposits increased 5.6% at September 30, 2015 compared to December 31, 2014.  Noninterest bearing deposits and savings deposits increased $136 million and were offset by a reduction of $93 million in higher-priced CD balances.

Shareholders’ equity was $378 million on September 30, 2015 compared to $361 million on December 31, 2014.  Book value (shareholders’ equity) per common share was $17.51 at September 30, 2015 versus $16.63 at year-end 2014. Accumulated other comprehensive income increased book value per share by $0.72 at September 30, 2015 and increased book value per share by $0.63 at December 31, 2014.  Depending on market conditions, the unrealized gain or loss on securities available for sale can cause fluctuations in shareholders’ equity.

44

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

Loans remain the Company’s largest concentration of assets and, by their nature, carry a higher degree of 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 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 allocation policy. The Company believes it has no undue concentrations of loans.

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, nonaccrual 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 75 commercial credit relationships. This equates to approximately all relationships above $3,675.

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.

Total loans (excluding loans held for sale) increased $123,727 from year end 2014.  $37,129 of this increase was related to the acquisition of the five Old National Bank branches in the third quarter of 2015.  Residential real estate loans continue to represent a significant portion of the total loan portfolio. Such loans represented 21.2% of total loans at September 30, 2015 and 22.2% at December 31, 2014. On September 30, 2015, the Company had $4,821 of loans held for sale, which was a $3,461 decrease from the year-end balance of $8,282. The Company generally retains the servicing rights on mortgages sold.

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 and real estate loans are reclassified to nonaccrual status at or before becoming 90 days past due. Interest previously recorded is reversed and charged against current income. Subsequent interest payments collected on nonaccrual loans are thereafter applied as a reduction of the loan’s principal balance. Non-performing loans were as follows (non-accrual loans + loans past due 90 days and still accruing + troubled debt restructurings):

	September 30, 2015			June 30, 2015			March 31, 2015			December 31, 2014			September 30, 2014
Amount	$	16,893		$	20,032		$	17,580		$	28,839		$	32,446
Percent of loans	0.81		%	1.00		%	0.89		%	1.47		%	1.85		%

Of the $16,893 of non-performing loans at September 30, 2015, $4,297 had a specific reserve allocated of $1,629.

A reconciliation of the non-performing assets for the first nine months of 2015 and 2014 is as follows:

	2015			2014
Beginning Balance - NPA - January 1,	$	31,527		$	30,663
Non-accrual
Add: New non-accruals	10,472			8,841
Less: To accrual/payoff/restructured	(7,369		)	(8,390		)
Less: To OREO	(1,164		)	(2,119		)
Less: Net Charge offs	(2,027		)	(4,560		)
Increase/(Decrease): Non-accrual loans	(88		)	(6,228		)
Other Real Estate Owned (OREO)
Add: New OREO properties	1,164			2,119
Less: OREO sold	(1,377		)	(2,929		)
Less: OREO losses (write-downs)	(38		)	(120		)
Increase/(Decrease): OREO	(251		)	(930		)
Increase/(Decrease): Repossessions	—			—
Increase/(Decrease): 90 Days Delinquent	75			45
Increase/(Decrease): TDR’s	(11,933		)	12,086
Total NPA change	(12,197		)	4,973
Ending Balance - NPA - September 30	$	19,330		$	35,636

The large decrease in TDR’s in 2015 is due to the sale of two large loans in 2015.

45

At September 30, 2015, the Company had only six non-accrual loans over $250 and none over $1,000.  This was a small increase from the number at December 31, 2014. These loans are primarily real estate backed loans. The Company is working with these borrowers in an attempt to minimize its losses. In the course of resolving problem loans, the Company may choose to restructure the contractual terms of certain loans. The Company attempts to work out an alternative payment schedule with the borrower in order to avoid foreclosure actions. Any loans that are modified are reviewed by the Company to identify if a troubled debt restructuring has occurred, which is when for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession to the borrower that it would not otherwise consider. Terms may be modified to fit the ability of the borrower to repay in line with its current financial status and could include reduction of the stated interest rate, other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Company 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 Company continued to see a reduction in its Special Mention and Substandard Loans in the third quarter of 2015.  These loans decreased $28.3 million from the end of 2014.  The loans upgraded were the result of overall improvement in the underlying fundamentals of the credit. As a result of these reductions, the allowance for loan losses for commercial real estate loans has decreased significantly from December 31, 2014.

46

The provision for loan losses was $800 in the third quarter of 2015 compared to $0 for the same period in 2014 and $0 for the second quarter of 2015. The increase in provision expense from 2014 was primarily due to the growth in loan balances.  For the first nine months of 2015 and 2014, the provision for loan loss was $800 and $1,500, respectively.  The decrease in provision expense from 2014 was primarily due to the relative stabilization in the amount of non-performing and watch lists loans.  The amount of new non-accrual loans in the third quarter of 2015 was approximately 50% lower than the second quarter of 2015.

Net charge-offs were $1,250 for the third quarter of 2015 compared to a net recovery of $682 for the same period a year ago and net charge offs of $2,027 for the first nine months of 2015 compared to $4,560 a year ago. Most of the charge offs for the quarter were small dollar amounts.

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 allowance for loan losses as of September 30, 2015 was considered adequate by management.  The allowance for loan losses was $22,023 as of September 30, 2015 and represented 1.06% of total outstanding loans compared to $23,250 as of December 31, 2014 or 1.19% of total outstanding loans.  The slight decrease in the percentage was due to the continued improvement in nonperforming loans for the quarter.

Investment Securities

Investment securities offer flexibility in the Company’s management of interest rate risk and are an important source of liquidity as a response to changing characteristics of assets and liabilities. The Company’s investment policy prohibits trading activities and does not allow investment in high-risk derivative products, junk bonds or foreign investments.

As of September 30, 2015, the Company had $909,498 of investment securities. All of these securities were classified as “available for sale” (“AFS”) and were carried at fair value with unrealized gains and losses, net of taxes, reported as a separate component of shareholders’ equity. An unrealized pre-tax gain of $23,462 was recorded to adjust the AFS portfolio to current market value at September 30, 2015, compared to an unrealized pre-tax gain of $20,778 at December 31, 2014. Unrealized losses on AFS securities have not been recognized into income because management does not intend to sell and does not expect to be required to sell these securities for the foreseeable future and the decline in fair value is largely due to temporary illiquidity and the financial crisis affecting these markets and not necessarily the expected cash flows of the individual securities. The fair value is expected to recover as the securities approach their maturity dates.  All securities in the Company’s portfolio are performing as expected with no disruption in cash flows and all rated securities are rated investment grade.

Sources of Funds

The Company relies primarily on customer deposits, securities sold under agreements to repurchase and shareholders’ equity to fund earning assets. FHLB advances are also used to provide additional funding.

Deposits generated within local markets provide the major source of funding for earning assets. Average total deposits funded 87.7% and 86.3% of total average earning assets for the nine month periods ending September 30, 2015 and 2014. Total interest-bearing deposits averaged 78.0% and 79.9% of average total deposits for the nine month periods ending September 30, 2015 and 2014, respectively. Management constantly strives to increase the percentage of transaction-related deposits to total deposits due to the positive effect on earnings.

The Company had FHLB advances of $255,416 outstanding at September 30, 2015. These advances have interest rates ranging from 0.49% to 4.80%.  These advances were a combination of short term and long-term advances with approximately $91,000 maturing in 2016, $20,000 maturing in 2017, $45,000 maturing in 2018, and $99,000 maturing in 2019 and beyond.

Capital Resources

Total shareholders’ equity was $378,056 at September 30, 2015, which was an increase of $17,394 compared to the $360,662 of shareholders’ equity at December 31, 2014. The increase in shareholders’ equity was primarily attributable to the Company’s net income of $26,434, activity in stock option and restricted stock programs of $1,127,  and other comprehensive income of $1,772, offset by common dividends paid of $8,659 and purchase of treasury stock of $3,280 for the first nine months of 2015.

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 consists of shareholders’ equity, excluding accumulated other

47

comprehensive income/loss, while Tier 1 capital consists of core capital less goodwill and intangibles. Trust preferred securities 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 trust preferred securities cannot constitute more than 25% of the total core capital of the Company. Consequently, the amount of trust preferred securities in excess of the 25% limitation constitutes Tier 2 capital of the Company. Total regulatory capital consists of Tier 1, certain debt instruments and a portion of the allowance for loan losses. On January 1, 2015 the Federal Reserve established an integrated regulatory framework that required a new ratio of common equity Tier 1 capital to risk-weighted assets as well raising the minimum ratio of Tier 1 capital to risk-weighted assets.  At September 30, 2015, Tier 1 capital to total average assets was 10.0%. Common equity Tier 1 capital to risk-adjusted assets was 12.7%.  Tier 1 capital to risk-adjusted assets was 14.6%. Total capital to risk-adjusted assets was 15.6%. All four ratios exceed all required ratios established for bank holding companies.  Risk-adjusted capital levels of the Bank exceed regulatory definitions of well-capitalized institutions.

The Company declared and paid common dividends of $0.14 per share in the third quarter of 2015 versus $0.11 per share for the third quarter of 2014.  The Company has increased its common dividend in the last few quarters as its net income has increased and its credit metrics have continued to improve.

48

Liquidity

Liquidity management involves maintaining sufficient cash levels to fund operations and to meet the requirements of borrowers, depositors, and creditors. Higher levels of liquidity bear higher corresponding costs, measured in terms of lower yields on short-term, more liquid earning assets, and higher interest expense involved in extending liability maturities. Liquid assets include cash and cash equivalents, loans and securities maturing within one year, and money market instruments. In addition, the Company holds 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 and extending the contractual maturity of liabilities, supports liquidity and limits reliance on volatile short-term purchased funds. Short-term funding needs 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 that provide a sizable source of relatively stable and low-cost funds. Average core deposits funded approximately 83.3% of total earning assets for the nine months ended September 30, 2015 and 86.4% for the same period in 2014.

Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs in the present economic environment. In addition, the Bank has access to the Federal Home Loan Bank for borrowing purposes.

Interest Rate Risk

Asset/liability management strategies are developed by the Company to manage market risk. Market risk is the risk of loss in financial instruments including investments, loans, deposits and borrowings arising from adverse changes in prices/rates. Interest rate risk is the Company’s primary market risk exposure, and represents the sensitivity of earnings to changes in market interest rates.

Effective asset/liability management requires the maintenance of a proper ratio between maturing or repriceable interest-earning assets and interest-bearing liabilities. 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.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk of the Company encompasses exposure to both liquidity and interest rate risk and is reviewed monthly by the Asset/Liability Committee and quarterly by the Credit and Risk Committee of the Board of Directors. There have been no material changes in the quantitative and qualitative disclosures about market risks as of September 30, 2015 from the analysis and disclosures provided in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Item 4. Controls and Procedures

As of the end of the quarterly period covered by this report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)). Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were, 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.

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s  third fiscal quarter of 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

49

PART II. OTHER INFORMATION

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

(c)           Issuer Purchases of Equity Securities

The Company purchased the following equity securities of the Company during the quarter ended September 30, 2015:

Period	Total Number of Shares (or Units) Purchased	Average Price Paid Per Share (or Unit)		Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs
July 1-31, 2015	—	$	—	—	963,915
August 1-31, 2015	10,000	$	20.46	10,000	953,915
September 1-30, 2015	25,725	$	20.48	25,725	928,190
Total:	35,725	$	20.47	35,725	928,190

The above amounts include 35,725 shares repurchased pursuant to the Company’s previously announced Stock Repurchase Program.  On December 19, 2014, the Board of Directors of the Company authorized a stock repurchase program effective January 1, 2015. Under the program, the Company is authorized to repurchase up to 5.0% of its currently outstanding common stock, or approximately 1,085,000 shares. The program will expire December 31, 2015, unless completed sooner or otherwise extended by the Board.

Item 6. Exhibits

3.1	Amended and Restated Articles of Incorporation of MainSource Financial Group, Inc. (incorporated by reference to Exhibit 3.1 to the Report on Form 8K of the registrant filed December 13, 2013 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)).
31.1	Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Executive Officer
31.2	Certification pursuant to Rule 13a-14(a)/15d-14(a) by Chief Financial Officer

*A management contract or compensatory plan or agreement.

The following exhibits shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 and Sections 11 and 12 of the Securities Act of 1933, and are not incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent the Company specifically incorporates them by reference.

32.1	Certification pursuant to Section 1350 by Chief Executive Officer
32.2	Certification pursuant to Section 1350 by Chief Financial Officer

50

101 The following financial statements and notes from the MainSource Financial Group Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, 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 Cash Flows; and (v) the Notes to the condensed consolidated financial statements.

51

MAINSOURCE FINANCIAL GROUP, INC.

FORM 10-Q

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MAINSOURCE FINANCIAL GROUP, INC.

November 6, 2015

/s/ Archie M. Brown, Jr.

Archie M. Brown, Jr.

President and Chief Executive Officer

November 6, 2015

/s/ James M. Anderson

James M. Anderson

Executive Vice President & Chief Financial Officer

52

EX-31.1

EXHIBIT 31.1

Sarbanes-Oxley Act of 2002. Section 302 Certification of Chief Financial Officer

I, Archie M. Brown, Jr. certify that:

1. I have reviewed this quarterly report on Form 10-Q of MainSource Financial Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 6, 2015

/s/ Archie M. Brown, Jr.

[Signature]

President & Chief Executive Officer

[Title]

EX-31.2

EXHIBIT 31.2

Sarbanes-Oxley Act of 2002. Section 302 Certification of Chief Financial Officer

I, James M. Anderson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MainSource Financial Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a - 15(f) and 15d - 15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 6, 2015

/s/ James M. Anderson

[Signature]

Executive Vice President & Chief Financial Officer

[Title]

EX-32.1

EXHIBIT 32.1

SARBANES-OXLEY ACT OF 2002, SECTION 906 CERTIFICATION BY CHIEF EXECUTIVE OFFICER

As an accompaniment to the Quarterly Report of MainSource Financial Group, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Archie M. Brown, Jr. Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

·The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

·The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented.

This certification is based on inquiries that I have made, or have caused to be made, in a good faith effort on my part to be a responsible and competent chief executive officer serving the Company and its many constituencies.

This certification merely accompanies and is not part of the Report, shall not be deemed filed for purposes of the Securities Exchange Act of 1934, and may not be used for any purpose other than compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Date: November 6, 2015

/s/ Archie M. Brown, Jr.

EX-32.2

EXHIBIT 32.2

SARBANES-OXLEY ACT OF 2002, SECTION 906 CERTIFICATION BY CHIEF FINANCIAL OFFICER

As an accompaniment to the Quarterly Report of MainSource Financial Group, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James M. Anderson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

·The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

·The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented.

This certification is based on inquiries that I have made, or have caused to be made, in a good faith effort on my part to be a responsible and competent chief executive officer serving the Company and its many constituencies.

This certification merely accompanies and is not part of the Report, shall not be deemed filed for purposes of the Securities Exchange Act of 1934, and may not be used for any purpose other than compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Date: November 6, 2015

/s/ James M. Anderson

XML

OTHER REAL ESTATE OWNED (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Activity in other real estate owned
Beginning Balance	$ 2,065	$ 3,723	$ 2,688	$ 4,120	$ 4,120
Transfer to other real estate owned	801	220	1,164	2,119
Sale - Out of other real estate owned	(429)	(753)	(1,377)	(2,929)
Write-down			(38)	(120)
Ending Balance	2,437	3,190	2,437	3,190	2,688
Foreclosed residential real estate			1,235		1,261
Retail mortgage loans, foreclosure proceedings in process			2,573		2,653
Valuation allowance on other real estate owned
Beginning Balance	(323)	(391)	(448)	(1,328)	(1,328)
Impairments during year			(38)	(120)
Reductions	37	33	200	1,090
Ending Balance	(286)	(358)	(286)	(358)	$ (448)
Net loss on OREO activity which is included in non-interest income and expenses related to foreclosed assets
Write-down			38	120
Losses/(gains) on sales	19	9	25	(73)
Net loss	19	9	63	47
Operating expenses	$ 30	$ 28	$ 124	$ 120

XML

REGULATORY CAPITAL (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2015 USD ($) item	Dec. 31, 2014 USD ($)	Sep. 30, 2014 USD ($)	Dec. 31, 2013 USD ($)
REGULATORY CAPITAL
Number of ratios calculated according to the regulations for determining assigned capital category | item	4
Total capital (to risk-weighted assets)
Actual, Amount	$ 344,309	$ 332,726
Required for Adequate Capital, Amount	$ 176,782	$ 165,975
Actual, Ratio	15.60%	16.00%
Required for Adequate Capital, Ratio	8.00%	8.00%
Tier 1 capital (to risk-weighted assets)
Actual, Amount	$ 322,286	$ 309,476
Required for Adequate Capital, Amount	$ 132,587	$ 82,988
Actual, Ratio	14.60%	14.90%
Required for Adequate Capital, Ratio	6.00%	4.00%
Common equity Tier 1 capital (to risk-weighted assets)
Actual, Amount	$ 281,286
Required for Adequate Capital, Amount	$ 99,440
Actual, Ratio	12.70%
Required for Adequate Capital, Ratio	4.50%
Tier 1 capital (to average assets)
Actual, Amount	$ 322,286	$ 309,476
Required for Adequate Capital, Amount	$ 128,302	$ 121,014
Actual, Ratio (as a percent)	10.00%	10.20%
Required for Adequate Capital, Ratio	4.00%	4.00%
Cash	$ 112,353	$ 62,485	$ 69,914	$ 61,320
Minimum | Prior To Federal Reserve Corrective Action Rules
Tier 1 capital (to risk-weighted assets)
Required for Adequate Capital, Ratio	4.00%
Minimum | Federal Reserve Corrective Action Rules
Basel III and Dodd Frank Rules
Required minimum conservation buffer percentage	2.50%
Required minimum Tier 1 capital to risk weighted assets (as a percent )	4.50%
Tier 1 capital (to risk-weighted assets)
Required for Adequate Capital, Ratio	6.00%
Tier 1 capital (to average assets)
Required for Adequate Capital, Ratio	4.00%
Parent Company
Tier 1 capital (to average assets)
Cash	$ 8,500
MainSource Bank
Basel III and Dodd Frank Rules
Tier 1 leverage capital required to be well capitalized to average assets (as a percent)	5.00%	5.00%
Total capital (to risk-weighted assets)
Actual, Amount	$ 329,420	$ 321,005
Required for Adequate Capital, Amount	177,083	164,648
To Be Well Capitalized, Amount	$ 231,354	$ 205,810
Actual, Ratio	14.90%	15.60%
Required for Adequate Capital, Ratio	8.00%	8.00%
To Be Well Capitalized, Ratio	10.00%	10.00%
Tier 1 capital (to risk-weighted assets)
Actual, Amount	$ 307,397	$ 297,755
Required for Adequate Capital, Amount	132,812	82,324
To Be Well Capitalized, Amount	$ 177,083	$ 123,486
Actual, Ratio	13.90%	14.50%
Required for Adequate Capital, Ratio	6.00%	4.00%
To Be Well Capitalized, Ratio	8.00%	6.00%
Common equity Tier 1 capital (to risk-weighted assets)
Actual, Amount	$ 307,397
Required for Adequate Capital, Amount	99,609
To Be Well Capitalized, Amount	$ 143,880
Actual, Ratio	13.90%
Required for Adequate Capital, Ratio	4.50%
To Be Well Capitalized, Ratio	6.50%
Tier 1 capital (to average assets)
Actual, Amount	$ 307,397	$ 297,755
Required for Adequate Capital, Amount	127,153	119,880
To Be Well Capitalized, Amount	$ 158,942	$ 149,850
Actual, Ratio (as a percent)	9.70%	9.90%
Required for Adequate Capital, Ratio	4.00%	4.00%
To Be Well Capitalized, Ratio	5.00%	5.00%

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LOANS AND ALLOWANCE (Details) - USD ($) $ in Thousands	Sep. 30, 2015	Jun. 30, 2015	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Dec. 31, 2013
Loans and allowance
Total loans	$ 2,081,492		$ 1,957,765
Allowance for loan losses	(22,023)	$ (22,473)	(23,250)	$ (24,549)	$ (23,867)	$ (27,609)
Net loans	2,059,469		1,934,515
Financing receivables	173,156		181,399
Commercial and industrial
Loans and allowance
Financing receivables	19,611		26,152
Construction and development
Loans and allowance
Financing receivables	226		2,037
Other real estate
Loans and allowance
Financing receivables	85,768		98,436
1-4 family
Loans and allowance
Financing receivables	44,294		36,490
Home equity
Loans and allowance
Financing receivables	20,176		16,278
Direct
Loans and allowance
Financing receivables	3,081		2,006
Commercial
Loans and allowance
Total loans	418,527		322,430
Allowance for loan losses	(6,198)	(5,394)	(2,977)	(3,474)	(3,201)	(3,291)
Carrying amount of credit impaired loans acquired from acquisition			1,000
Commercial | Commercial and industrial
Loans and allowance
Total loans	394,462		275,646
Commercial | Agricultural
Loans and allowance
Total loans	24,065		46,784
Commercial Real Estate
Loans and allowance
Total loans	873,902		879,868
Allowance for loan losses	(11,546)	(12,689)	(15,605)	(16,988)	(16,994)	(20,210)
Commercial Real Estate | Farm
Loans and allowance
Total loans	74,966		76,849
Commercial Real Estate | Hotel
Loans and allowance
Total loans	45,650		74,962
Commercial Real Estate | Construction and development
Loans and allowance
Total loans	86,702		61,640
Commercial Real Estate | Other
Loans and allowance
Total loans	666,584		666,417
Residential
Loans and allowance
Total loans	735,108		709,495
Allowance for loan losses	(3,088)	(3,264)	(3,501)	(3,209)	(3,110)	(3,409)
Residential | 1-4 family
Loans and allowance
Total loans	440,776		435,336
Residential | Home equity
Loans and allowance
Total loans	294,332		274,159
Consumer
Loans and allowance
Total loans	53,955		45,972
Allowance for loan losses	(1,191)	$ (1,126)	(1,167)	$ (878)	$ (562)	$ (699)
Consumer | Direct
Loans and allowance
Total loans	53,468		45,360
Consumer | Indirect
Loans and allowance
Total loans	$ 487		$ 612

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EARNINGS PER SHARE (Tables)

9 Months Ended

Sep. 30, 2015

EARNINGS PER SHARE

Schedule of earnings per common share (EPS) computation

	September 30, 2015					September 30, 2014
For the three months ended:	Net Income		Weighted Average Shares	Per Share Amount		Net Income		Weighted Average Shares	Per Share Amount
Basic earnings per common share:
Net income available to common shareholders	$	9,111	21,615,263	$	0.42	$	8,457	20,459,709	$	0.41
Effect of dilutive warrants			171,062					72,978
Effect of dilutive stock options			110,636					68,757
Net income available to common shareholders and assumed conversions	$	9,111	21,896,961	$	0.42	$	8,457	20,601,444	$	0.41

	September 30, 2015					September 30, 2014
For the nine months ended:	Net Income		Weighted Average Shares	Per Share Amount		Net Income		Weighted Average Shares	Per Share Amount
Basic earnings per common share:
Net income available to common shareholders	$	26,434	21,658,088	$	1.22	$	22,436	20,448,054	$	1.10
Effect of dilutive warrants			152,171					67,184
Effect of dilutive stock options			103,053					66,102
Net income available to common shareholders and assumed conversions	$	26,434	21,913,312	$	1.21	$	22,436	20,581,340	$	1.09

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DERIVATIVES (Details) - Interest Rate Swap - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2015	Dec. 31, 2014
Other Income
Derivatives, Fair Value [Line Items]
Fee Income	$ 399	$ 548
Other Assets
Derivatives, Fair Value [Line Items]
Notional amount, assets	45,236	45,236	$ 1,991
Fair value, assets	1,798	1,798	56
Other Liabilities
Derivatives, Fair Value [Line Items]
Notional amount, liabilities	45,236	45,236	1,991
Fair value, liabilities	$ 1,798	$ 1,798	$ 56

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FAIR VALUE (Details)	9 Months Ended
	Sep. 30, 2015 item
FAIR VALUE.
Number of times a sample of prices supplied by the pricing agent is validated by comparison to prices obtained from other third party sources	2
Minimum | Impaired Loans
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value
Adjustments for differences between the comparable sales and income (as a percent)	0.00%
Minimum | Other real estate owned
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value
Adjustments for differences between the comparable sales and income (as a percent)	0.00%
Maximum | Impaired Loans
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value
Adjustments for differences between the comparable sales and income (as a percent)	50.00%
Maximum | Other real estate owned
Quantitative information about level 3 fair value measurements for financial instruments measured at fair value
Adjustments for differences between the comparable sales and income (as a percent)	50.00%

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LOANS AND ALLOWANCE (Details 5) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015 USD ($) item	Sep. 30, 2014 USD ($) item	Sep. 30, 2015 USD ($) item	Sep. 30, 2014 USD ($) item	Dec. 31, 2014 USD ($)
Additional disclosures
Total of troubled debt restructurings	$ 8,547		$ 8,547		$ 23,325
Allocated specific reserves	897		897		485
Amounts Company has committed to lend to customers with outstanding loans classified as troubled debt restructurings	$ 0		$ 0		0
Loans by class modified as troubled debt restructurings
Number of Loans | item	5	2	16	7
Pre-Modification Outstanding Recorded Investment	$ 295	$ 60	$ 2,085	$ 16,577
Post-Modification Outstanding Recorded Investment	$ 295	$ 60	$ 1,824	$ 12,765
Loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification
Number of Loans | item	4	1	5	3
Recorded Investment	$ 1,034	$ 14	$ 1,062	$ 1,498
Period of contractually past due loans under the modified terms, to be considered in payment default			90 days
Allowance for loan losses increased due to troubled debt restructurings	0	0	$ 0	0
Charge offs due to troubled debt restructurings	0	$ 0	0	$ 36
Recorded investment of loans modified other than troubled debt restructurings	5,511		5,511
Accruing
Additional disclosures
Total of troubled debt restructurings	3,483		3,483		15,251
Non-accrual
Additional disclosures
Total of troubled debt restructurings	2,263		2,263		575
Split note whereas part of the note is charged-off and part is performing
Additional disclosures
Total of troubled debt restructurings	$ 2,801		$ 2,801		$ 7,499
Commercial | Commercial and industrial
Loans by class modified as troubled debt restructurings
Number of Loans | item			3
Pre-Modification Outstanding Recorded Investment			$ 216
Post-Modification Outstanding Recorded Investment			$ 216
Commercial Real Estate | Other
Loans by class modified as troubled debt restructurings
Number of Loans | item	1		8	2
Pre-Modification Outstanding Recorded Investment	$ 42		$ 1,610	$ 1,015
Post-Modification Outstanding Recorded Investment	$ 42		$ 1,349	$ 1,015
Loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification
Number of Loans | item	2		3	1
Recorded Investment	$ 835		$ 863	$ 1,431
Commercial Real Estate | Hotel
Loans by class modified as troubled debt restructurings
Number of Loans | item				2
Pre-Modification Outstanding Recorded Investment				$ 15,362
Post-Modification Outstanding Recorded Investment				$ 11,550
Residential | 1-4 family
Loans by class modified as troubled debt restructurings
Number of Loans | item	3		3	1
Pre-Modification Outstanding Recorded Investment	$ 215		$ 215	$ 140
Post-Modification Outstanding Recorded Investment	$ 215		$ 215	$ 140
Loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification
Number of Loans | item	1		1	1
Recorded Investment	$ 152		$ 152	$ 53
Residential | Home equity
Loans by class modified as troubled debt restructurings
Number of Loans | item	1	1	2	1
Pre-Modification Outstanding Recorded Investment	$ 38	$ 34	$ 44	$ 34
Post-Modification Outstanding Recorded Investment	$ 38	$ 34	$ 44	$ 34
Loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification
Number of Loans | item	1	1	1	1
Recorded Investment	$ 47	$ 14	$ 47	$ 14
Consumer | Direct
Loans by class modified as troubled debt restructurings
Number of Loans | item		1		1
Pre-Modification Outstanding Recorded Investment		$ 26		$ 26
Post-Modification Outstanding Recorded Investment		$ 26		$ 26

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FAIR VALUE (Details 6) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Financial assets
Interest bearing time deposits	$ 1,960	$ 1,915
FHLB and other stock	11,070	13,854
Interest receivable	6,128	5,605
Level 1
Financial assets
Cash and cash equivalents	86,728	60,662
Financial liabilities
Deposits	(606,218)	(513,393)
Level 2
Financial assets
Cash and cash equivalents	25,625	1,823
Interest bearing time deposits	1,960	1,915
Loan including loans held for sale, net	4,957	8,514
Interest receivable	4,592	4,459
Financial liabilities
Deposits	(2,000,841)	(1,952,833)
Other borrowings	(39,439)	(26,349)
FHLB advances	(259,460)	(219,050)
Interest payable	(553)	(599)
Subordinated debentures	(24,212)	(24,212)
Level 3
Financial assets
Loan including loans held for sale, net	2,132,058	1,946,843
Interest receivable	6,128	5,605
Carrying Value
Financial assets
Cash and cash equivalents	112,353	62,485
Interest bearing time deposits	1,960	1,915
Loan including loans held for sale, net	2,063,117	1,941,507
FHLB and other stock	11,070	13,854
Interest receivable	10,720	10,064
Financial liabilities
Deposits	(2,607,598)	(2,468,321)
Other borrowings	(39,439)	(26,349)
FHLB advances	(255,416)	(214,413)
Interest payable	(553)	(599)
Subordinated debentures	(41,239)	(41,239)
Fair Value
Financial assets
Cash and cash equivalents	112,353	62,485
Interest bearing time deposits	1,960	1,915
Loan including loans held for sale, net	2,137,015	1,955,357
Interest receivable	10,720	10,064
Financial liabilities
Deposits	(2,607,059)	(2,466,226)
Other borrowings	(39,439)	(26,349)
FHLB advances	(259,460)	(219,050)
Interest payable	(553)	(599)
Subordinated debentures	$ (24,212)	$ (24,212)

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STOCK PLANS AND STOCK BASED COMPENSATION

9 Months Ended

Sep. 30, 2015

STOCK PLANS AND STOCK BASED COMPENSATION

STOCK PLANS AND STOCK BASED COMPENSATION

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 2015 Plan by the Company’s shareholders at the 2015 Annual Meeting of Shareholders held on April 29, 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 Stock Incentive Plan (the “2007 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.  The 2007 Plan was in replacement of a similar plan adopted in 2003, the 2003 Stock Option Plan (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. However, no further awards of stock or options will be made under the 2007 Plan following shareholder approval of the 2015 Plan.

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:

	Nine Months Ended September 30, 2015
	Shares		Weighted Average Exercise Price
Outstanding, beginning of year	377,790		$	13.46
Granted	—		—
Exercised	(23,500	)	9.89
Forfeited or expired	(37,100	)	20.27
Outstanding, period end	317,190		$	12.91
Options exercisable at period end	229,738		$	12.42
Fully vested and expected to vest	313,186		$	12.89

The following table details stock options outstanding:

	September 30, 2015		December 31, 2014
Stock options vested and currently exercisable:
Number	229,738		288,938
Weighted average exercise price	$	12.42	$	13.24
Aggregate intrinsic value	$	1,824	$	2,219
Weighted average remaining life (in years)	3.5		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 $48 and $133 in stock compensation expense during the three and nine months ended September 30, 2015 and $42 and $124 in stock compensation expense during the three and nine months ended September 30, 2014 to salaries and employee benefits. There were no options granted in 2015, 29,389 options granted in the first quarter of 2014, 1,938 options granted in the second quarter of 2014, and no options granted in the third 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)
October 2015 - December 2015	$	60
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 Long Term Incentive Plan (“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 for employees vest as follows — 100% on the third anniversary of the date of grant. A total of 28,955 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	28,955		19.57
Vested	(18,248	)	12.71
Forfeited	—		—
Nonvested at September 30, 2015	102,630		$	16.59

As of September 30, 2015, there was $876 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 1.3 years. The recognized compensation costs related to the 2007 Plan were $143 and $125 for the three month periods ending September 30, 2015 and 2014 respectively and $447 and $427 for the nine month periods ending September 30, 2015 and 2014 respectively.

Additionally, in the first quarter of 2015, the Committee voted to grant performance share units to certain executive officers pursuant to the Company’s LTIP, subject to and effective upon 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 is 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 16,205 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. $27 of expense was recognized on these awards in the third quarter and $53 for the first nine months of 2015.  A total of $264 will be expensed in future periods if the Target level is achieved.

In the second quarter of 2015, members of the Board of Directors received their entire annual retainer in restricted Company stock for the following Board year ended with the 2016 annual meeting of shareholders. The 2015 award vests 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, 2015, and February 1, 2016. The value of the 2015 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
2015     2Q	14,084	$	19.89

A total of $70 and $90 was recognized as other expense in the third quarter of 2015 and 2014 respectively for these grants and $230 and $270 was recognized in the first nine months of 2015 and 2014 respectively.

In late 2014, the Company announced a stock repurchase program pursuant to which the Company may repurchase up to 5.0% of its outstanding shares of common stock, or approximately 1,085,000 shares prior to December 31, 2015.  During the first quarter of 2015, the Company repurchased 27,400 shares at a total cost of $520.  In the second quarter of 2015, the Company repurchased 93,685 shares at a total cost of $1,883.  In the third quarter of 2015, the Company repurchased 35,725 shares at a total cost of $731.

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FAIR VALUE (Details 2) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014	Sep. 30, 2014
Financial Assets/Liabilities
Total securities available-for-sale	$ 909,498	$ 867,760
Transfers of assets from Level 1 to Level 2	0		$ 0
Transfers of assets from Level 2 to Level 1	0		0
Transfer of liabilities from Level 1 to Level 2	0		0
Transfer of liabilities from Level 2 to Level 1	0		$ 0
U. S. government agency
Financial Assets/Liabilities
Total securities available-for-sale	543	661
State and municipal
Financial Assets/Liabilities
Total securities available-for-sale	348,816	334,298
Mortgage-backed securities-residential (Government Sponsored Entity)
Financial Assets/Liabilities
Total securities available-for-sale	303,845	182,172
Collateralized mortgage obligations (Government Sponsored Entity)
Financial Assets/Liabilities
Total securities available-for-sale	249,080	343,437
Equity securities
Financial Assets/Liabilities
Total securities available-for-sale	4,689	4,689
Other securities
Financial Assets/Liabilities
Total securities available-for-sale	2,525	2,503
Recurring basis | Carrying Value
Financial Assets/Liabilities
Total securities available-for-sale	909,498	867,760
Mortgage banking derivatives	925	975
Recurring basis | Carrying Value | Interest Rate Swap
Financial Assets/Liabilities
Fair value, assets	1,798	56
Derivative liability, fair value	(1,798)	(56)
Recurring basis | Carrying Value | U. S. government agency
Financial Assets/Liabilities
Total securities available-for-sale	543	661
Recurring basis | Carrying Value | State and municipal
Financial Assets/Liabilities
Total securities available-for-sale	348,816	334,298
Recurring basis | Carrying Value | Mortgage-backed securities-residential (Government Sponsored Entity)
Financial Assets/Liabilities
Total securities available-for-sale	303,845	182,172
Recurring basis | Carrying Value | Collateralized mortgage obligations (Government Sponsored Entity)
Financial Assets/Liabilities
Total securities available-for-sale	249,080	343,437
Recurring basis | Carrying Value | Equity securities
Financial Assets/Liabilities
Total securities available-for-sale	4,689	4,689
Recurring basis | Carrying Value | Other securities
Financial Assets/Liabilities
Total securities available-for-sale	2,525	2,503
Recurring basis | Fair Value | Level 1
Financial Assets/Liabilities
Total securities available-for-sale	4,689	4,689
Recurring basis | Fair Value | Level 1 | Equity securities
Financial Assets/Liabilities
Total securities available-for-sale	4,689	4,689
Recurring basis | Fair Value | Level 2
Financial Assets/Liabilities
Total securities available-for-sale	890,937	847,758
Mortgage banking derivatives	925	975
Recurring basis | Fair Value | Level 2 | Interest Rate Swap
Financial Assets/Liabilities
Fair value, assets	1,798	56
Derivative liability, fair value	(1,798)	(56)
Recurring basis | Fair Value | Level 2 | U. S. government agency
Financial Assets/Liabilities
Total securities available-for-sale	543	661
Recurring basis | Fair Value | Level 2 | State and municipal
Financial Assets/Liabilities
Total securities available-for-sale	337,469	321,488
Recurring basis | Fair Value | Level 2 | Mortgage-backed securities-residential (Government Sponsored Entity)
Financial Assets/Liabilities
Total securities available-for-sale	303,845	182,172
Recurring basis | Fair Value | Level 2 | Collateralized mortgage obligations (Government Sponsored Entity)
Financial Assets/Liabilities
Total securities available-for-sale	249,080	343,437
Recurring basis | Fair Value | Level 3
Financial Assets/Liabilities
Total securities available-for-sale	13,872	15,313
Recurring basis | Fair Value | Level 3 | State and municipal
Financial Assets/Liabilities
Total securities available-for-sale	11,347	12,810
Recurring basis | Fair Value | Level 3 | Other securities
Financial Assets/Liabilities
Total securities available-for-sale	$ 2,525	$ 2,503

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STOCK PLANS AND STOCK BASED COMPENSATION (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended				9 Months Ended		12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014	Jan. 19, 2015	Apr. 26, 2007
Compensation expense disclosure
Compensation expense	$ 70	$ 90			$ 230	$ 270
Stock options
Shares
Outstanding, beginning of year (in shares)					377,790
Granted (in shares)		0	1,938	29,389	0
Exercised (in shares)					(23,500)
Forfeited or expired (in shares)					(37,100)
Outstanding, period end (in shares)	317,190				317,190		377,790
Exercisable at year end (in shares)	229,738				229,738		288,938
Fully vested and expected to vest(in shares)	313,186				313,186
Weighted Average Exercise Price
Outstanding, beginning of year (in dollars per share)					$ 13.46
Exercised (in dollars per share)					9.89
Forfeited or expired (in dollars per share)					20.27
Outstanding, period end (in dollars per share)	$ 12.91				12.91		$ 13.46
Exercisable at year end (in dollars per share)	12.42				12.42		$ 13.24
Fully vested and expected to vest (in dollars per share)	$ 12.89				$ 12.89
Aggregate Intrinsic Value
Number (in shares)	229,738				229,738		288,938
Weighted average exercise price (in dollars per share)	$ 12.42				$ 12.42		$ 13.24
Aggregate intrinsic value	$ 1,824				$ 1,824		$ 2,219
Weighted average remaining life (in years)					3 years 6 months		3 years 9 months 18 days
Compensation expense disclosure
Compensation expense	$ 48	$ 42			$ 133	124
Unrecognized stock option compensation expense related to unvested awards
October 2015 - December 2015					60
2016					93
2017					$ 38
Restricted stock
Compensation expense disclosure
Granted (in shares)					28,955
2007 Plan
Stock-based compensation
Number of shares reserved for issuance under the plan									650,000
Number of shares available for grant	0				0
2007 Plan | Restricted stock
Compensation expense disclosure
Compensation expense	$ 143	$ 125			$ 447	$ 427
2015 Plan
Stock-based compensation
Number of shares reserved for issuance under the plan								1,000,000

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DERIVATIVES (Tables)

9 Months Ended

Sep. 30, 2015

DERIVATIVES

Schedule of fair value hedges

	September 30, 2015				December 31, 2014
	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in Other Assets:
Interest Rate Swaps	$	45,236	$	1,798	$	1,991	$	56
Included in Other Liabilities:
Interest Rate Swaps	$	45,236	$	1,798	$	1,991	$	56

Summary of the effect of derivative instruments on the Consolidated Statement of Income

	Nine Months Ended September 30,
	2015		2014
Interest Rate Swaps — Fee Income
Included in Other Income / (Expense)	$	548	$	—

	Three Months Ended September 30,
	2015		2014
Interest Rate Swaps — Fee Income
Included in Other Income / (Expense)	$	399	$	—

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FAIR VALUE (Details 3) - Level 3 - Recurring basis - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
State and municipal
Reconciliation and income statement classification of gains and losses
Balance at the beginning of the period	$ 11,863	$ 13,083	$ 12,810	$ 14,420
Included in other comprehensive income	(6)	(8)	(36)	15
Settlements	(510)	(218)	(1,427)	(1,578)
Balance at the end of the period	11,347	12,857	11,347	12,857
Equity securities
Reconciliation and income statement classification of gains and losses
Balance at the beginning of the period				250
Settlements				(250)
Other securities
Reconciliation and income statement classification of gains and losses
Balance at the beginning of the period	2,527	2,511	2,503	2,526
Included in other comprehensive income	(2)	(4)	22	(19)
Balance at the end of the period	$ 2,525	$ 2,507	$ 2,525	$ 2,507

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STOCK PLANS AND STOCK BASED COMPENSATION (Details 2) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended				9 Months Ended
	Sep. 30, 2015	Jun. 30, 2015	Mar. 31, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Stock-based compensation
Closing price of common stock (in dollars per share)		$ 19.89
Additional disclosures
Compensation expense	$ 70			$ 90	$ 230	$ 270
Shares awarded		14,084
Restricted stock
Shares
Nonvested at the beginning of the period (in shares)			91,923		91,923
Granted (in shares)					28,955
Vested (in shares)					(18,248)
Nonvested at the end of the period (in shares)	102,630				102,630
Weighted Average Grant Date Fair Value
Nonvested at the beginning of the period (in dollars per share)			$ 14.88		$ 14.88
Granted (in dollars per share)					19.57
Vested (in dollars per share)					12.71
Nonvested at the end of the period (in dollars per share)	$ 16.59				$ 16.59
Restricted stock | Executive officers and other employees
Shares
Granted (in shares)			28,955
Weighted Average Grant Date Fair Value
Granted (in dollars per share)			$ 19.57
Additional disclosures
Vesting percentage of stock awards on third anniversary of grant date	100.00%				100.00%
Restricted stock | Directors
Additional disclosures
Quarterly vesting percentage of stock awards	25.00%				25.00%
2007 Plan | Restricted stock
Additional disclosures
Compensation cost to be expensed in the future	$ 876				$ 876
Weighted-average period of expected recognition of the cost					1 year 3 months 18 days
Compensation expense	$ 143			$ 125	$ 447	$ 427

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STOCK PLANS AND STOCK BASED COMPENSATION (Details 3) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended				9 Months Ended
	Sep. 30, 2015	Jun. 30, 2015	Mar. 31, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Additional disclosures
Compensation expense	$ 70			$ 90	$ 230	$ 270
Common Stock
Stock repurchase program
Percentage of common stock shares authorized to repurchase							5.00%
Number of common stock shares authorized to repurchase							1,085,000
Number of common stock shares repurchased	35,725	93,685	27,400
Value of common stock shares repurchased	$ 731	$ 1,883	$ 520
Performance share units | Executive officers
Performance Measures
Return on assets criteria (as a percent)					50.00%
Total shareholder return criteria (as a percent)					25.00%
Earnings per share criteria (as a percent)					25.00%
Vesting period					3 years
Shares
Granted (in shares)			16,205
Weighted Average Grant Date Fair Value
Granted (in dollars per share)			$ 19.57
Additional disclosures
Compensation expense	27				$ 53
Compensation cost to be expensed in the future	$ 264				$ 264
Threshold | Performance share units | Executive officers
Stock-based compensation
Performance paid upon achievement of target levels (as a percent)					0.00%
Target | Performance share units | Executive officers
Stock-based compensation
Performance paid upon achievement of target levels (as a percent)					100.00%
Superior | Performance share units | Executive officers
Stock-based compensation
Performance paid upon achievement of target levels (as a percent)					150.00%

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BASIS OF PRESENTATION

9 Months Ended

Sep. 30, 2015

BASIS OF PRESENTATION

BASIS OF PRESENTATION

NOTE 1 - BASIS OF PRESENTATION

The significant accounting policies followed by MainSource Financial Group, Inc. (“Company”) for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. The consolidated interim financial statements have been prepared according to accounting principles generally accepted in the United States of America and in accordance with the instructions for Form 10-Q. The interim statements do not include all information and footnotes normally included in the annual financial statements. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements and all such adjustments are of a normal recurring nature. Some items in prior period financial statements were reclassified to conform to current presentation. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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SECURITIES (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015 USD ($) item	Sep. 30, 2014 USD ($)	Sep. 30, 2015 USD ($) item	Sep. 30, 2014 USD ($)	Dec. 31, 2014 USD ($)
Available for sale securities
Amortized Cost	$ 886,036		$ 886,036		$ 846,982
Gross Unrealized Gains	24,646		24,646		25,427
Gross Unrealized Losses	(1,184)		(1,184)		(4,649)
Fair Value	909,498		909,498		867,760
Available for Sale, Amortized Cost
Within one year	16,091		16,091
One through five years	49,709		49,709
Six through ten years	129,057		129,057
After ten years	140,663		140,663
Equity securities	4,689		4,689
Total available for sale securities	886,036		886,036		846,982
Available for Sale, Fair Value
Within one year	16,238		16,238
One through five years	51,860		51,860
Six through ten years	136,194		136,194
After ten years	147,592		147,592
Equity securities	4,689		4,689
Fair Value	909,498		909,498		867,760
Available for sale securities
Gross proceeds from sales of securities	57,208	$ 0	139,547	$ 21,972
Gross gains realized on sales	203	0	1,515	542
Gross losses realized on sales	158	$ 0	1,155	$ 546
Securities in a continuous unrealized loss position with unrealized losses presented by length of time
Less than 12 months, Fair Value	60,436		60,436		63,481
Less than 12 months, Unrealized Losses	(343)		(343)		(313)
12 months or longer, Fair Value	60,624		60,624		195,975
12 months or longer, Unrealized Losses	(841)		(841)		(4,336)
Total Fair Value	121,060		121,060		259,456
Total Unrealized Losses	$ (1,184)		$ (1,184)		(4,649)
Other-Than-Temporary-Impairment
Number of general segments segregated in investment securities portfolio | item			2
Number of security in the portfolio | item			977
Number of portfolio security in unrealized loss position | item	83		83
Decline in fair value of security attributable to change in interest rates and illiquidity			$ 2
U. S. government agency
Available for sale securities
Amortized Cost	$ 533		533		652
Gross Unrealized Gains	10		10		10
Gross Unrealized Losses					(1)
Fair Value	543		543		661
Available for Sale, Amortized Cost
Total available for sale securities	533		533		652
Available for Sale, Fair Value
Fair Value	543		543		661
Securities in a continuous unrealized loss position with unrealized losses presented by length of time
Less than 12 months, Fair Value					122
Less than 12 months, Unrealized Losses					(1)
Total Fair Value					122
Total Unrealized Losses					(1)
State and municipal
Available for sale securities
Amortized Cost	332,462		332,462		316,048
Gross Unrealized Gains	16,613		16,613		18,603
Gross Unrealized Losses	(259)		(259)		(353)
Fair Value	348,816		348,816		334,298
Available for Sale, Amortized Cost
Total available for sale securities	332,462		332,462		316,048
Available for Sale, Fair Value
Fair Value	348,816		348,816		334,298
Securities in a continuous unrealized loss position with unrealized losses presented by length of time
Less than 12 months, Fair Value	31,492		31,492		16,659
Less than 12 months, Unrealized Losses	(234)		(234)		(147)
12 months or longer, Fair Value	309		309		13,340
12 months or longer, Unrealized Losses	(25)		(25)		(206)
Total Fair Value	31,801		31,801		29,999
Total Unrealized Losses	(259)		(259)		(353)
Mortgage-backed securities-residential (Government Sponsored Entity)
Available for sale securities
Amortized Cost	299,294		299,294		178,534
Gross Unrealized Gains	4,553		4,553		4,071
Gross Unrealized Losses	(2)		(2)		(433)
Fair Value	303,845		303,845		182,172
Available for Sale, Amortized Cost
Debt securities without single maturity date	299,294		299,294
Total available for sale securities	299,294		299,294		178,534
Available for Sale, Fair Value
Debt securities without single maturity date	303,845		303,845
Fair Value	303,845		303,845		182,172
Securities in a continuous unrealized loss position with unrealized losses presented by length of time
Less than 12 months, Fair Value	4,949		4,949		24,925
Less than 12 months, Unrealized Losses	(2)		(2)		(51)
12 months or longer, Fair Value					32,541
12 months or longer, Unrealized Losses					(382)
Total Fair Value	4,949		4,949		57,466
Total Unrealized Losses	(2)		(2)		(433)
Collateralized mortgage obligations (Government Sponsored Entity)
Available for sale securities
Amortized Cost	246,533		246,533		344,556
Gross Unrealized Gains	3,470		3,470		2,743
Gross Unrealized Losses	(923)		(923)		(3,862)
Fair Value	249,080		249,080		343,437
Other than temporary impairment on available for sale securities			0
Available for Sale, Amortized Cost
Debt securities without single maturity date	246,533		246,533
Total available for sale securities	246,533		246,533		344,556
Available for Sale, Fair Value
Debt securities without single maturity date	249,080		249,080
Fair Value	249,080		249,080		343,437
Securities in a continuous unrealized loss position with unrealized losses presented by length of time
Less than 12 months, Fair Value	23,995		23,995		21,775
Less than 12 months, Unrealized Losses	(107)		(107)		(114)
12 months or longer, Fair Value	60,315		60,315		150,094
12 months or longer, Unrealized Losses	(816)		(816)		(3,748)
Total Fair Value	84,310		84,310		171,869
Total Unrealized Losses	(923)		(923)		(3,862)
Equity securities
Available for sale securities
Amortized Cost	4,689		4,689		4,689
Fair Value	4,689		4,689		4,689
Available for Sale, Amortized Cost
Total available for sale securities	4,689		4,689		4,689
Available for Sale, Fair Value
Fair Value	4,689		4,689		4,689
Other securities
Available for sale securities
Amortized Cost	2,525		2,525		2,503
Fair Value	2,525		2,525		2,503
Available for Sale, Amortized Cost
Total available for sale securities	2,525		2,525		2,503
Available for Sale, Fair Value
Fair Value	$ 2,525		$ 2,525		$ 2,503

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DEPOSITS & REPURCHASE AGREEMENTS (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2015	Dec. 31, 2014
DEPOSITS & REPURCHASE AGREEMENTS
Non-interest-bearing demand	$ 606,218	$ 513,393
Interest-bearing demand	1,058,510	1,054,780
Savings	602,576	559,761
Certificates of deposit of $250 or more	74,781	56,495
Other certificates and time deposits	265,513	283,892
Total deposits	$ 2,607,598	$ 2,468,321
REPURCHASE AGREEMENTS
Repurchase agreement, term	1 day
Securities under repurchase agreements	$ 34,439
Pledged amount of mortgage backed securities	$ 46,801

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CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Assets
Cash and due from banks	$ 86,728	$ 60,662
Money market funds and federal funds sold	25,625	1,823
Cash and cash equivalents	112,353	62,485
Interest bearing time deposits	1,960	1,915
Securities available for sale	909,498	867,760
Loans held for sale	4,821	8,282
Loans, net of allowance for loan losses of $22,023 in 2015 and $23,250 in 2014	2,059,469	1,934,515
FHLB and other stock, at cost	11,070	13,854
Premises and equipment, net	62,399	60,527
Goodwill	75,953	73,450
Purchased intangible assets	5,032	5,096
Cash surrender value of life insurance	62,146	62,002
Interest receivable and other assets	31,914	32,630
Total assets	3,336,615	3,122,516
Deposits
Noninterest bearing	606,218	513,393
Interest bearing	2,001,380	1,954,928
Total deposits	2,607,598	2,468,321
Short term borrowings	39,439	26,349
Federal Home Loan Bank (FHLB) advances	255,416	214,413
Subordinated debentures	41,239	41,239
Other liabilities	14,867	11,532
Total liabilities	$ 2,958,559	$ 2,761,854
Shareholders' equity
Preferred stock, no par value Authorized shares - 400,000 Issued shares - 0 Outstanding shares - 0 Aggregate liquidation preference $0
Common stock $.50 stated value: Authorized shares - 100,000,000 Issued shares - 22,265,766 in 2015 and 22,222,727 in 2014 Outstanding shares - 21,589,959 in 2015 and 21,687,525 in 2014	$ 11,193	$ 11,159
Treasury stock - 675,807 in 2015 and 535,202 in 2014 at cost	(11,593)	(8,701)
Additional paid-in capital	247,340	246,635
Retained earnings	115,631	97,856
Accumulated other comprehensive income	15,485	13,713
Total shareholders' equity	378,056	360,662
Total liabilities and shareholders' equity	$ 3,336,615	$ 3,122,516

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FAIR VALUE (Details 4) - Non-recurring basis - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Assets:
Total impaired loans	$ 1,173		$ 1,173		$ 1,290
Impaired servicing rights	1,101		1,101		1,854
Other real estate owned/assets held for sale					462
Recorded investment of impaired loans	2,530		2,530		2,056
Valuation allowance of impaired loans	1,357		1,357		766
Provision expenses of impaired loans	426	$ 1,061	1,281	$ 941
Gross outstanding balance of servicing rights	1,326		1,326		2,254
Valuation allowance of servicing rights			225		400
Change occurred in the valuation allowance	25	$ 50	175	$ 50
Breakdown of properties by portfolio class
Other real estate owned/assets held for sale					462
Commercial and industrial
Assets:
Total impaired loans	81		81
Recorded investment of impaired loans	339		339
Valuation allowance of impaired loans	258		258
Farm
Assets:
Total impaired loans					55
Construction and development
Assets:
Other real estate owned/assets held for sale					21
Breakdown of properties by portfolio class
Other real estate owned/assets held for sale					21
Other commercial real estate
Assets:
Total impaired loans	1,092		1,092		1,235
Other real estate owned/assets held for sale					291
Recorded investment of impaired loans	2,191		2,191
Valuation allowance of impaired loans	1,099		1,099
Breakdown of properties by portfolio class
Other real estate owned/assets held for sale					291
1-4 family
Assets:
Other real estate owned/assets held for sale					150
Breakdown of properties by portfolio class
Other real estate owned/assets held for sale					150
Level 3
Assets:
Total impaired loans	1,173		1,173		1,290
Impaired servicing rights	1,101		1,101		1,854
Other real estate owned/assets held for sale					462
Breakdown of properties by portfolio class
Other real estate owned/assets held for sale					462
Level 3 | Commercial and industrial
Assets:
Total impaired loans	81		81
Level 3 | Farm
Assets:
Total impaired loans					55
Level 3 | Construction and development
Assets:
Other real estate owned/assets held for sale					21
Breakdown of properties by portfolio class
Other real estate owned/assets held for sale					21
Level 3 | Other commercial real estate
Assets:
Total impaired loans	$ 1,092		$ 1,092		1,235
Other real estate owned/assets held for sale					291
Breakdown of properties by portfolio class
Other real estate owned/assets held for sale					291
Level 3 | 1-4 family
Assets:
Other real estate owned/assets held for sale					150
Breakdown of properties by portfolio class
Other real estate owned/assets held for sale					$ 150

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	$ 9,111	$ 8,457	$ 26,434	$ 22,436
Other comprehensive income/(loss):
Unrealized holding gains/(losses) on securities available for sale	6,723	(1,597)	3,044	16,039
Reclassification adjustment for (gains)/losses included in net income	(45)		(360)	4
Tax effect	(2,271)	542	(912)	(5,437)
Other comprehensive income/(loss)	4,407	(1,055)	1,772	10,606
Comprehensive income	$ 13,518	$ 7,402	$ 28,206	$ 33,042

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LOANS AND ALLOWANCE (Details 3) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Dec. 31, 2014
Unpaid Principal Balance
With an allowance recorded	$ 4,832		$ 4,832		$ 3,244
With no related allowance recorded	15,639		15,639		29,397
Total impaired loans	20,471		20,471		32,641
Recorded Investment
With an allowance recorded	4,297		4,297		2,824
With no related allowance recorded	12,710		12,710		25,986
Total impaired loans	17,007		17,007		28,810
Allowance for Loan Losses Allocated
With an allowance recorded	1,629		1,629		1,050
Total impaired loans	1,629		1,629		1,050
Average recorded investment
Average Balance	18,592	$ 32,843	20,938	$ 29,084
Interest Income Recognized
Total impaired loans - interest income recognized	107	27	276	124
Cash Basis Income Recognized
Total impaired loans - cash basis income recognized	107	27	276	124
Performing troubled debt restructurings excluded as allowed	2,801		2,801		7,499
Commercial
Allowance for Loan Losses Allocated
With an allowance recorded	259		259		162
Commercial | Commercial and industrial
Unpaid Principal Balance
With an allowance recorded	726		726		82
With no related allowance recorded	830		830		761
Recorded Investment
With an allowance recorded	339		339		64
With no related allowance recorded	816		816		491
Allowance for Loan Losses Allocated
With an allowance recorded	259		259		12
Average recorded investment
Average Balance	1,677	211	1,256	247
Interest Income Recognized
Total impaired loans - interest income recognized	6	1	12	9
Cash Basis Income Recognized
Total impaired loans - cash basis income recognized	6	1	12	9
Commercial | Agricultural
Unpaid Principal Balance
With an allowance recorded					397
Recorded Investment
With an allowance recorded					150
Allowance for Loan Losses Allocated
With an allowance recorded					150
Average recorded investment
Average Balance		412	38	206
Commercial Real Estate
Allowance for Loan Losses Allocated
With an allowance recorded	1,198		1,198		705
Commercial Real Estate | Farm
Unpaid Principal Balance
With an allowance recorded					76
With no related allowance recorded	574		574		864
Recorded Investment
With an allowance recorded					76
With no related allowance recorded	349		349		616
Allowance for Loan Losses Allocated
With an allowance recorded					21
Average recorded investment
Average Balance	405	852	424	921
Interest Income Recognized
Total impaired loans - interest income recognized			4
Cash Basis Income Recognized
Total impaired loans - cash basis income recognized			4
Commercial Real Estate | Hotel
Unpaid Principal Balance
With no related allowance recorded					11,423
Recorded Investment
With no related allowance recorded					11,377
Average recorded investment
Average Balance		12,450	3,563	6,225
Commercial Real Estate | Construction and development
Unpaid Principal Balance
With no related allowance recorded					84
Recorded Investment
With no related allowance recorded					78
Average recorded investment
Average Balance		78	20	318
Interest Income Recognized
Total impaired loans - interest income recognized			47
Cash Basis Income Recognized
Total impaired loans - cash basis income recognized			47
Commercial Real Estate | Other
Unpaid Principal Balance
With an allowance recorded	2,579		2,579		979
With no related allowance recorded	4,986		4,986		5,848
Recorded Investment
With an allowance recorded	2,479		2,479		889
With no related allowance recorded	3,530		3,530		4,186
Allowance for Loan Losses Allocated
With an allowance recorded	1,198		1,198		684
Average recorded investment
Average Balance	6,298	8,656	5,753	10,305
Interest Income Recognized
Total impaired loans - interest income recognized	86	4	141	75
Cash Basis Income Recognized
Total impaired loans - cash basis income recognized	86	4	141	75
Residential
Allowance for Loan Losses Allocated
With an allowance recorded	172		172		183
Residential | 1-4 family
Unpaid Principal Balance
With an allowance recorded	1,366		1,366		1,543
With no related allowance recorded	6,395		6,395		7,325
Recorded Investment
With an allowance recorded	1,318		1,318		1,478
With no related allowance recorded	5,473		5,473		6,400
Allowance for Loan Losses Allocated
With an allowance recorded	168		168		178
Average recorded investment
Average Balance	7,343	7,449	7,527	8,108
Interest Income Recognized
Total impaired loans - interest income recognized	8	11	43	16
Cash Basis Income Recognized
Total impaired loans - cash basis income recognized	8	11	43	16
Residential | Home equity
Unpaid Principal Balance
With an allowance recorded	161		161		167
With no related allowance recorded	2,723		2,723		2,847
Recorded Investment
With an allowance recorded	161		161		167
With no related allowance recorded	2,423		2,423		2,618
Allowance for Loan Losses Allocated
With an allowance recorded	4		4		5
Average recorded investment
Average Balance	2,707	2,629	2,221	2,472
Interest Income Recognized
Total impaired loans - interest income recognized	2	4	10	11
Cash Basis Income Recognized
Total impaired loans - cash basis income recognized	2	4	10	11
Consumer | Direct
Unpaid Principal Balance
With no related allowance recorded	131		131		238
Recorded Investment
With no related allowance recorded	119		119		213
Average recorded investment
Average Balance	162	104	134	276
Interest Income Recognized
Total impaired loans - interest income recognized	4	2	14	7
Cash Basis Income Recognized
Total impaired loans - cash basis income recognized	4	2	14	7
Consumer | Indirect
Unpaid Principal Balance
With no related allowance recorded					7
Recorded Investment
With no related allowance recorded					$ 7
Average recorded investment
Average Balance		2	2	6
Interest Income Recognized
Total impaired loans - interest income recognized	1	5	5	6
Cash Basis Income Recognized
Total impaired loans - cash basis income recognized	$ 1	$ 5	$ 5	$ 6

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LOANS AND ALLOWANCE (Tables)

9 Months Ended

Sep. 30, 2015

LOANS AND ALLOWANCE

Schedule of loans

	September 30, 2015			December 31, 2014
Commercial
Commercial and industrial	$	394,462		$	275,646
Agricultural	24,065			46,784
Commercial Real Estate
Farm	74,966			76,849
Hotel	45,650			74,962
Construction and development	86,702			61,640
Other	666,584			666,417
Residential
1-4 family	440,776			435,336
Home equity	294,332			274,159
Consumer
Direct	53,468			45,360
Indirect	487			612
Total loans	2,081,492			1,957,765
Allowance for loan losses	(22,023		)	(23,250		)
Net loans	$	2,059,469		$	1,934,515

Schedule of loans acquired through purchase

The investment by portfolio class at September 30, 2015 is as follows.  These loans are included in the above table and all other tables below in the recorded investment amount.

	September 30, 2015		December 31, 2014
Commercial and industrial	$	19,611	$	26,152
Construction and development	226		2,037
Other real estate	85,768		98,436
1-4 family	44,294		36,490
Home equity	20,176		16,278
Direct	3,081		2,006
Total Purchased Loans	$	173,156	$	181,399

Schedule of activity in the allowance for loan losses

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, July 1, 2015	$	5,394		$	12,689		$	3,264		$	1,126		$	22,473
Provision charged to expense	1,331			(1,349		)	154			664			800
Losses charged off	(773		)	(101		)	(401		)	(1,076		)	(2,351		)
Recoveries	246			307			71			477			1,101
Balance, September 30, 2015	$	6,198		$	11,546		$	3,088		$	1,191		$	22,023

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, July 1, 2014	$	3,201		$	16,994		$	3,110		$	562		$	23,867
Provision charged to expense	(685		)	(548		)	464			769			—
Losses charged off	(17		)	(131		)	(548		)	(795		)	(1,491		)
Recoveries	975			673			183			342			2,173
Balance, September 30, 2014	$	3,474		$	16,988		$	3,209		$	878		$	24,549

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, January 1, 2015	$	2,977		$	15,605		$	3,501		$	1,167		$	23,250
Provision charged to expense	3,822			(5,298		)	927			1,349			800
Losses charged off	(900		)	(538		)	(1,606		)	(2,576		)	(5,620		)
Recoveries	299			1,777			266			1,251			3,593
Balance, September 30, 2015	$	6,198		$	11,546		$	3,088		$	1,191		$	22,023

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, January 1, 2014	$	3,291		$	20,210		$	3,409		$	699		$	27,609
Provision charged to expense	(699		)	(548		)	1,427			1,320			1,500
Losses charged off	(166		)	(4,786		)	(1,925		)	(2,166		)	(9,043		)
Recoveries	1,048			2,112			298			1,025			4,483
Balance, September 30, 2014	$	3,474		$	16,988		$	3,209		$	878		$	24,549

Schedule of balance in the allowance for loan losses and the recorded investment by portfolio segment and impairment method

	Commercial		Commercial Real Estate		Residential		Consumer		Total
As of September 30, 2015
Ending Balance individually evaluated for impairment	$	259	$	1,198	$	172	$	—	$	1,629
Ending Balance collectively evaluated for impairment	5,939		10,348		2,916		1,191		20,394
Total ending allowance balance	$	6,198	$	11,546	$	3,088	$	1,191	$	22,023
Loans
Ending Balance individually evaluated for impairment	$	1,155	$	9,159	$	9,375	$	119	$	19,808
Ending Balance collectively evaluated for impairment	417,372		864,743		725,733		53,836		2,061,684
Total ending loan balance excludes $6,128 of accrued interest	$	418,527	$	873,902	$	735,108	$	53,955	$	2,081,492

As of December 31, 2014	Commercial		Commercial Real Estate		Residential		Consumer		Total
Ending Balance individually evaluated for impairment	$	162	$	705	$	183	$	—	$	1,050
Ending Balance collectively evaluated for impairment	2,815		14,900		3,318		1,167		22,200
Total ending allowance balance	$	2,977	$	15,605	$	3,501	$	1,167	$	23,250
Loans
Ending Balance individually evaluated for impairment	$	705	$	24,722	$	10,662	$	220	$	36,309
Ending Balance collectively evaluated for impairment	321,725		855,146		698,833		45,752		1,921,456
Total ending loan balance excludes $5,605 of accrued interest	$	322,430	$	879,868	$	709,495	$	45,972	$	1,957,765

Schedule of loans individually evaluated for impairment by class of loans

September 30, 2015	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded
Commercial
Commercial and industrial	$	726	$	339	$	259
Agricultural	—		—		—
Commercial Real Estate
Farm	—		—		—
Hotel	—		—		—
Construction and development	—		—		—
Other	2,579		2,479		1,198
Residential
1-4 Family	1,366		1,318		168
Home Equity	161		161		4
Consumer
Direct	—		—		—
Subtotal — impaired with allowance recorded	4,832		4,297		1,629
With no related allowance recorded
Commercial
Commercial & industrial	830		816
Agricultural	—		—
Commercial Real Estate
Farm	574		349
Hotel	—		—
Construction and development
Other	4,986		3,530
Residential
1-4 Family	6,395		5,473
Home Equity	2,723		2,423
Consumer
Direct	131		119
Indirect	—		—
Subtotal — impaired with allowance recorded	15,639		12,710		—
Total impaired loans	$	20,471	$	17,007	$	1,629

December 31, 2014	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded
Commercial
Commercial and industrial	$	82	$	64	$	12
Agriculture	397		150		150
Commercial Real Estate
Farm	76		76		21
Hotel	—		—		—
Construction and development	—		—		—
Other	979		889		684
Residential
1-4 Family	1,543		1,478		178
Home Equity	167		167		5
Consumer
Direct	—		—		—
Indirect	—		—		—
Subtotal — impaired with allowance recorded	3,244		2,824		1,050
With no related allowance recorded
Commercial
Commercial & industrial	761		491
Agricultural	—		—
Commercial Real Estate
Farm	864		616
Hotel	11,423		11,377
Construction and development	84		78
Other	5,848		4,186
Residential
1-4 Family	7,325		6,400
Home Equity	2,847		2,618
Consumer
Direct	238		213
Indirect	7		7
Subtotal — impaired with allowance recorded	29,397		25,986		—
Total impaired loans	$	32,641	$	28,810	$	1,050

Schedule of average balance of impaired loans and interest income and cash basis interest recognized

Nine months ended September 30, 2015	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	1,256	$	12	$	12
Agricultural	38		—		—
Commercial Real Estate
Farm	424		4		4
Hotel	3,563		—		—
Construction and development	20		47		47
Other	5,753		141		141
Residential
1-4 Family	7,527		43		43
Home Equity	2,221		10		10
Consumer
Direct	134		14		14
Indirect	2		5		5
	$	20,938	$	276	$	276

Nine months ended September 30, 2014	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	247	$	9	$	9
Agricultural	206		—		—
Commercial Real Estate
Farm	921		—		—
Hotel	6,225		—		—
Construction and development	318		—		—
Other	10,305		75		75
Residential
1-4 Family	8,108		16		16
Home Equity	2,472		11		11
Consumer
Direct	276		7		7
Indirect	6		6		6
	$	29,084	$	124	$	124

Three months ended September 30, 2015	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	1,677	$	6	$	6
Agricultural	—		—		—
Commercial Real Estate
Farm	405		—		—
Hotel	—		—		—
Construction and development	—		—		—
Other	6,298		86		86
Residential
1-4 Family	7,343		8		8
Home Equity	2,707		2		2
Consumer
Direct	162		4		4
Indirect	—		1		1
	$	18,592	$	107	$	107

Three months ended September 30, 2014	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	211	$	1	$	1
Agricultural	412		—		—
Commercial Real Estate
Farm	852		—		—
Hotel	12,450		—		—
Construction and development	78		—		—
Other	8,656		4		4
Residential
1-4 Family	7,449		11		11
Home Equity	2,629		4		4
Consumer
Direct	104		2		2
Indirect	2		5		5
	$	32,843	$	27	$	27

Schedule of recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans

	Non-accrual				Past due over 90 days and still accruing
	September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
Commercial
Commercial and industrial	$	1,002	$	479	$	—	$	—
Agricultural	—		150		—		—
Commercial Real Estate
Farm	348		692		—		—
Hotel	—		—		—		—
Construction and development	—		78		—		—
Other	5,187		3,744		75		—
Residential
1-4 Family	5,171		6,428		—		—
Home Equity	1,706		1,841		—		—
Consumer
Direct	94		177		—		—
Indirect	—		7		—		—
Total	$	13,508	$	13,596	$	75	$	—

Schedule of aging of the recorded investment in past due loans

September 30, 2015	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	$	394,462	$	—	$	79	$	287	$	366	$	394,096
Agricultural	24,065		—		—		—		—		24,065
Commercial Real Estate
Farm	74,966		—		—		119		119		74,847
Hotel	45,650		—		—		—		—		45,650
Construction and development	86,702		—		—		—		—		86,702
Other	666,584		456		432		3,055		3,943		662,641
Residential
1-4 Family	440,776		1,155		1,569		2,596		5,320		435,456
Home Equity	294,332		712		455		1,176		2,343		291,989
Consumer
Direct	53,468		58		43		33		134		53,334
Indirect	487		—		—		—		—		487
Total — excludes $6,128 of accrued interest	$	2,081,492	$	2,381	$	2,578	$	7,266	$	12,225	$	2,069,267
December 31, 2014	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	$	275,646	$	441	$	75	$	210	$	726	$	274,920
Agricultural	46,784		—		—		—		—		46,784
Commercial Real Estate
Farm	76,849		—		—		327		327		76,522
Hotel	74,962		—		—		—		—		74,962
Construction and development	61,640		—		78		—		78		61,562
Other	666,417		933		755		1,919		3,607		662,810
Residential
1-4 Family	435,336		6,217		1,719		3,186		11,122		424,214
Home Equity	274,159		751		250		1,521		2,522		271,637
Consumer
Direct	45,360		91		17		162		270		45,090
Indirect	612		6		7		—		13		599
Total — excludes $5,605 of accrued interest	$	1,957,765	$	8,439	$	2,901	$	7,325	$	18,665	$	1,939,100

Schedule of loans by class modified as troubled debt restructurings

		Pre-Modification		Post-Modification
For the nine		Outstanding Recorded		Outstanding Recorded
month period ending September 30, 2015	Number of Loans	Investment		Investment
Commercial
Commercial and industrial	3	$	216	$	216
Commercial real estate
Other	8	1,610		1,349
Residential
1-4 Family	3	215		215
Home Equity	2	44		44
Total	16	$	2,085	$	1,824

		Pre-Modification		Post-Modification
For the nine		Outstanding Recorded		Outstanding Recorded
month period ending September 30, 2014	Number of Loans	Investment		Investment
Commercial real estate
Hotel	2	$	15,362	$	11,550
Other	2	1,015		1,015
Residential
1-4 Family	1	140		140
Home Equity	1	34		34
Consumer
Direct	1	26		26
Total	7	$	16,577	$	12,765

		Pre-Modification		Post-Modification
For the three		Outstanding Recorded		Outstanding Recorded
month period ending September 30, 2015	Number of Loans	Investment		Investment
Commercial real estate
Other	1	$	42	$	42
Residential
1-4 Family	3	215		215
Home Equity	1	38		38
Total	5	$	295	$	295

		Pre-Modification		Post-Modification
For the three		Outstanding Recorded		Outstanding Recorded
month period ending September 30, 2014	Number of Loans	Investment		Investment
Residential
Home Equity	1	$	34	$	34
Consumer
Direct	1	26		26
Total	2	$	60	$	60

Schedule of loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification

For the nine month period ending September 30, 2015	Number of Loans	Recorded Investment
Commercial real estate:
Other	3	$	863
Residential
1-4 Family	1	152
Home Equity	1	47
Total	5	$	1,062

For the nine month period ending September 30, 2014	Number of Loans	Recorded Investment
Commercial real estate:
Other	1	$	1,431
Residential
1-4 Family	1	53
Home Equity	1	14
Total	3	$	1,498

For the three month period ending September 30, 2015	Number of Loans	Recorded Investment
Commercial real estate:
Other	2	$	835
Residential
1-4 Family	1	152
Home Equity	1	47
Total	4	$	1,034

For the three month period ending September 30, 2014	Number of Loans	Recorded Investment
Residential:
Home Equity	1	$	14
Total	1	$	14

Schedule of risk category of loans by class of loans

September 30, 2015	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	343,520	$	7,356	$	1,729	$	953
Agricultural	24,065		—		—		—
Commercial Real Estate
Farm	74,073		263		282		348
Hotel	42,921		2,729		—		—
Construction and development	86,702		—		—		—
Other	540,319		11,174		5,967		4,006
Total	$	1,111,600	$	21,522	$	7,978	$	5,307

December 31, 2014	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	226,731	$	9,926	$	1,596	$	35
Agricultural	46,634		—		—		150
Commercial Real Estate
Farm	75,191		966		—		692
Hotel	60,704		2,835		11,423		—
Construction and development	60,971		372		219		78
Other	525,758		20,823		9,689		2,323
Total	$	995,989	$	34,922	$	22,927	$	3,278

Schedule of performing/non performing loans by category of loans

September 30, 2015	Performing		Watch		Substandard
Commercial
Commercial and industrial	$	40,776	$	79	$	49
Commercial Real Estate
Other	103,708		154		1,256
Total	$	144,484	$	233	$	1,305

December 31, 2014	Performing		Watch		Substandard
Commercial
Commercial and industrial	$	36,839	$	75	$	444
Commercial Real Estate
Other	106,247		156		1,421
Total	$	143,086	$	231	$	1,865

September 30, 2015	Performing		Watch		Substandard
Residential
1-4 Family	$	436,611	$	1,569	$	2,596
Home Equity	292,701		455		1,176
Total	$	729,312	$	2,024	$	3,772

December 31, 2014	Performing		Watch		Substandard
Residential
1-4 Family	$	430,431	$	1,719	$	3,186
Home Equity	272,388		250		1,521
Total	$	702,819	$	1,969	$	4,707

September 30, 2015	Performing		Substandard		Loss
Consumer
Direct	$	53,392	$	43	$	33
Indirect	487		—		—
Total	$	53,879	$	43	$	33

December 31, 2014	Performing		Substandard		Loss
Consumer
Direct	$	45,181	$	142	$	37
Indirect	605		7		—
Total	$	45,786	$	149	$	37

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LOANS AND ALLOWANCE (Details 4) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
Recorded investment in nonaccrual and loans past due over 90 days still on accrual and aging of recorded investment in past due
Non-accrual	$ 13,508	$ 13,596
Past due over 90 days and still accruing	75
Aging of the recorded investment in past due loans
Total ending loan balance excluding accrued interest	2,081,492	1,957,765
30-59 Days Past Due	2,381	8,439
60-89 Days Past Due	2,578	2,901
Greater than 90 Days Past Due	7,266	7,325
Total Past Due	12,225	18,665
Loans Not Past Due	2,069,267	1,939,100
Accrued interest	6,128	5,605
Commercial
Aging of the recorded investment in past due loans
Total ending loan balance excluding accrued interest	418,527	322,430
Commercial | Commercial and industrial
Recorded investment in nonaccrual and loans past due over 90 days still on accrual and aging of recorded investment in past due
Non-accrual	1,002	479
Aging of the recorded investment in past due loans
Total ending loan balance excluding accrued interest	394,462	275,646
30-59 Days Past Due		441
60-89 Days Past Due	79	75
Greater than 90 Days Past Due	287	210
Total Past Due	366	726
Loans Not Past Due	394,096	274,920
Commercial | Agricultural
Recorded investment in nonaccrual and loans past due over 90 days still on accrual and aging of recorded investment in past due
Non-accrual		150
Aging of the recorded investment in past due loans
Total ending loan balance excluding accrued interest	24,065	46,784
Loans Not Past Due	24,065	46,784
Commercial Real Estate
Aging of the recorded investment in past due loans
Total ending loan balance excluding accrued interest	873,902	879,868
Commercial Real Estate | Farm
Recorded investment in nonaccrual and loans past due over 90 days still on accrual and aging of recorded investment in past due
Non-accrual	348	692
Aging of the recorded investment in past due loans
Total ending loan balance excluding accrued interest	74,966	76,849
Greater than 90 Days Past Due	119	327
Total Past Due	119	327
Loans Not Past Due	74,847	76,522
Commercial Real Estate | Hotel
Aging of the recorded investment in past due loans
Total ending loan balance excluding accrued interest	45,650	74,962
Loans Not Past Due	45,650	74,962
Commercial Real Estate | Construction and development
Recorded investment in nonaccrual and loans past due over 90 days still on accrual and aging of recorded investment in past due
Non-accrual		78
Aging of the recorded investment in past due loans
Total ending loan balance excluding accrued interest	86,702	61,640
60-89 Days Past Due		78
Total Past Due		78
Loans Not Past Due	86,702	61,562
Commercial Real Estate | Other
Recorded investment in nonaccrual and loans past due over 90 days still on accrual and aging of recorded investment in past due
Non-accrual	5,187	3,744
Past due over 90 days and still accruing	75
Aging of the recorded investment in past due loans
Total ending loan balance excluding accrued interest	666,584	666,417
30-59 Days Past Due	456	933
60-89 Days Past Due	432	755
Greater than 90 Days Past Due	3,055	1,919
Total Past Due	3,943	3,607
Loans Not Past Due	662,641	662,810
Residential
Aging of the recorded investment in past due loans
Total ending loan balance excluding accrued interest	735,108	709,495
Residential | 1-4 family
Recorded investment in nonaccrual and loans past due over 90 days still on accrual and aging of recorded investment in past due
Non-accrual	5,171	6,428
Aging of the recorded investment in past due loans
Total ending loan balance excluding accrued interest	440,776	435,336
30-59 Days Past Due	1,155	6,217
60-89 Days Past Due	1,569	1,719
Greater than 90 Days Past Due	2,596	3,186
Total Past Due	5,320	11,122
Loans Not Past Due	435,456	424,214
Residential | Home equity
Recorded investment in nonaccrual and loans past due over 90 days still on accrual and aging of recorded investment in past due
Non-accrual	1,706	1,841
Aging of the recorded investment in past due loans
Total ending loan balance excluding accrued interest	294,332	274,159
30-59 Days Past Due	712	751
60-89 Days Past Due	455	250
Greater than 90 Days Past Due	1,176	1,521
Total Past Due	2,343	2,522
Loans Not Past Due	291,989	271,637
Consumer
Aging of the recorded investment in past due loans
Total ending loan balance excluding accrued interest	53,955	45,972
Consumer | Direct
Recorded investment in nonaccrual and loans past due over 90 days still on accrual and aging of recorded investment in past due
Non-accrual	94	177
Aging of the recorded investment in past due loans
Total ending loan balance excluding accrued interest	53,468	45,360
30-59 Days Past Due	58	91
60-89 Days Past Due	43	17
Greater than 90 Days Past Due	33	162
Total Past Due	134	270
Loans Not Past Due	53,334	45,090
Consumer | Indirect
Recorded investment in nonaccrual and loans past due over 90 days still on accrual and aging of recorded investment in past due
Non-accrual		7
Aging of the recorded investment in past due loans
Total ending loan balance excluding accrued interest	487	612
30-59 Days Past Due		6
60-89 Days Past Due		7
Total Past Due		13
Loans Not Past Due	$ 487	$ 599

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DEPOSITS & REPURCHASE AGREEMENTS (Tables)

9 Months Ended

Sep. 30, 2015

DEPOSITS & REPURCHASE AGREEMENTS

Schedule of deposits

	September 30, 2015		December 31, 2014
Noninterest-bearing demand	$	606,218	$	513,393
Interest-bearing demand	1,058,510		1,054,780
Savings	602,576		559,761
Certificates of deposit of $250 or more	74,781		56,495
Other certificates and time deposits	265,513		283,892
Total deposits	$	2,607,598	$	2,468,321

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Operating Activities
Net income	$ 26,434	$ 22,436
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	800	1,500
Depreciation expense	4,733	4,375
Securities amortization, net	2,332	1,417
Stock based compensation expense	633	551
Stock portion of director retainer fee expense	230	270
Amortization of purchased intangible assets	1,270	1,253
Amortization of mortgage servicing rights	1,034	750
Recovery of valuation allowance on mortgage servicing rights	(175)	(50)
Earnings on cash surrender value of life insurance policies	(931)	(978)
Gain on life insurance benefit	(307)
Securities gains/ losses, net	(360)	4
Loss on sale and write-down of OREO	63	47
Gain on loans sold	(4,381)	(2,914)
Loans originated for sale	(183,802)	(115,118)
Proceeds from loan sales	191,644	119,252
Prepayment penalty on FHLB advance	2,364
Change in other assets and liabilities	2,072	2,192
Net cash provided by operating activities	43,653	34,987
Investing Activities
Net change in short term investments	(45)	(1,915)
Purchases of securities available for sale	(284,755)	(35,236)
Proceeds from calls, maturities, and payments on securities available for sale	104,182	78,891
Proceeds from sales of securities available for sale	139,547	21,972
Proceeds from sale of OREO	1,352	3,002
Proceeds from life insurance benefit	1,094	588
Loan originations and payment, net	(101,145)	(87,977)
Purchases of premises and equipment	(5,543)	(3,575)
Proceeds from sale of portfolio loans	11,356
Cash received for branch acquisition, net	57,083
Proceeds from redemption of FHLB stock	2,784	4
Net cash (used) by investing activities	(74,090)	(24,246)
Financing Activities
Net change in deposits	40,251	21,071
Net change in short term borrowings	13,090	(4,104)
Repayment of FHLB advances	(546,361)	(722,515)
Proceeds from FHLB advances	585,000	715,000
Proceeds from exercise of stock options, including tax benefit	264	60
Purchase of treasury shares	(3,280)	(319)
Repayment of subordinated debentures, net		(5,000)
Cash dividends on common stock	(8,659)	(6,340)
Net cash provided/(used) by financing activities	80,305	(2,147)
Net change in cash and cash equivalents	49,868	8,594
Cash and cash equivalents, beginning of year	62,485	61,320
Cash and cash equivalents, end of period	112,353	69,914
Supplemental cash flow information
Interest paid	6,233	6,669
Income taxes paid	3,285	2,405
Supplemental non cash disclosure
Loan balances transferred to loans held for sale	11,356
Loan balances transferred to foreclosed real estate	$ 1,164	$ 2,119

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CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2015	Dec. 31, 2014
CONSOLIDATED BALANCE SHEETS
Loans, allowance for loan losses (in dollars)	$ 22,023	$ 23,250
Preferred stock, par value	$ 0	$ 0
Preferred stock, Authorized shares	400,000	400,000
Preferred stock, Issued shares	0	0
Preferred stock, Outstanding shares	0	0
Preferred stock, Aggregate liquidation preference (in dollars)	$ 0	$ 0
Common stock, stated value (in dollars per share)	$ 0.50	$ 0.50
Common stock, Authorized shares	100,000,000	100,000,000
Common stock, Issued shares	22,265,766	22,222,727
Common stock, Outstanding shares	21,589,959	21,687,525
Treasury stock, shares	675,807	535,202

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INCOME TAXES

9 Months Ended

Sep. 30, 2015

INCOME TAXES

INCOME TAXES

NOTE 10 — INCOME TAXES

In accordance with ASC 740-270-50-1, Accounting for Interim Reporting, the provision for income taxes was recorded at September 30, 2015 and 2014 based on the current estimate of the effective annual rate.  The effective tax rate for the third quarter of 2015 was 24.1% versus 22.9% for the same period 2014.  For the first nine months of 2015 and 2014, the effective tax rate was 22.0% and 20.7% respectively. The increase was due to the increase in pre-tax income in the third quarter and first nine months of 2015 while tax exempt income remained relatively flat.

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Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2015	Nov. 06, 2015
Document and Entity Information
Entity Registrant Name	MAINSOURCE FINANCIAL GROUP
Entity Central Index Key	0000720002
Document Type	10-Q
Document Period End Date	Sep. 30, 2015
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		21,577,659
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	Q3

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DERIVATIVES

9 Months Ended

Sep. 30, 2015

DERIVATIVES

DERIVATIVES

NOTE 11 — DERIVATIVES

The Bank executes interest rate swaps with commercial banking customers to facilitate their risk management strategies. These derivative positions relate to transactions in which the Bank enters into an interest rate swap with a customer while at the same time entering into an offsetting interest rate swap with another financial institution.  The Bank agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on the same notional amount at a fixed interest rate. At the same time, the Bank agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the customer to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institutions offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Bank’s results of operations.  The notional amounts of these interest rate swaps and the offsetting counterparty derivative instruments were $45.2 million at September 30, 2015 and $2.0 million at December 31, 2014.

Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Bank’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. There are provisions in the agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, the Bank minimizes credit risk through credit approvals, limits, and monitoring procedures.

The fair value hedges are summarized below:

	September 30, 2015				December 31, 2014
	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in Other Assets:
Interest Rate Swaps	$	45,236	$	1,798	$	1,991	$	56
Included in Other Liabilities:
Interest Rate Swaps	$	45,236	$	1,798	$	1,991	$	56

The effect of derivative instruments on the Consolidated Statement of Income is presented below:

	Nine Months Ended September 30,
	2015		2014
Interest Rate Swaps — Fee Income
Included in Other Income / (Expense)	$	548	$	—

	Three Months Ended September 30,
	2015		2014
Interest Rate Swaps — Fee Income
Included in Other Income / (Expense)	$	399	$	—

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CONSOLIDATED STATEMENTS OF INCOME - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Interest income
Loans, including fees	$ 22,040	$ 19,220	$ 64,858	$ 57,588
Securities	6,045	5,888	17,719	18,289
Other interest income	28	20	96	55
Total interest income	28,113	25,128	82,673	75,932
Interest expense
Deposits	915	844	2,708	2,764
Federal Home Loan Bank advances	773	862	2,501	2,562
Subordinated debentures	318	312	942	975
Other borrowings	19	21	36	60
Total interest expense	2,025	2,039	6,187	6,361
Net interest income	26,088	23,089	76,486	69,571
Provision for loan losses	800		800	1,500
Net interest income after provision for loan losses	25,288	23,089	75,686	68,071
Non-interest income
Mortgage banking	2,270	1,677	6,734	4,655
Trust and investment product fees	1,204	1,087	3,664	3,503
Service charges on deposit accounts	6,102	5,429	16,221	15,321
Net realized gains/(loss) on securities (includes $45 and $360 accumulated other comprehensive income (AOCI) reclassifications for realized net gains on available-for-sale securities in 2015 and includes $- and (4) accumulated other comprehensive income reclassifications for realized net (losses) on available-for-sale securities in 2014)	45		360	(4)
Increase in cash surrender value of life insurance	310	328	931	978
Interchange income	2,256	1,912	6,445	5,671
(Loss) on sale and write-down of OREO	(19)	(9)	(63)	(47)
Other income	1,176	634	3,312	1,342
Total non-interest income	13,344	11,058	37,604	31,419
Non-interest expense
Salaries and employee benefits	14,674	13,000	43,185	40,272
Net occupancy	2,064	1,819	6,276	5,731
Equipment	2,823	2,669	8,381	7,568
Intangibles amortization	431	389	1,270	1,253
Telecommunications	410	430	1,290	1,298
Stationery printing and supplies	302	317	894	876
FDIC assessment	435	385	1,245	1,185
Marketing	948	769	2,413	2,127
Collection expense	263	156	769	987
Prepayment penalty on FHLB advance			2,364
Consultant expense	250	350	750	1,050
Branch acquisition expense	617		617
Interchange expense	696	605	1,986	1,666
Other expenses	2,722	2,288	7,942	7,172
Total non-interest expense	26,635	23,177	79,382	71,185
Income before income tax	11,997	10,970	33,908	28,305
Income tax expense (includes $16 and $126 income tax expense from AOCI reclassification items in 2015 and $- and ($1) income tax expense from AOCI reclassification items in 2014)	2,886	2,513	7,474	5,869
Net income	$ 9,111	$ 8,457	$ 26,434	$ 22,436
Cash dividends declared per common share (in dollars per share)	$ 0.14	$ 0.11	$ 0.40	$ 0.31
Net income per common share -basic (in dollars per share)	0.42	0.41	1.22	1.10
Net income per common share - diluted (in dollars per share)	$ 0.42	$ 0.41	$ 1.21	$ 1.09

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OTHER REAL ESTATE OWNED

9 Months Ended

Sep. 30, 2015

OTHER REAL ESTATE OWNED

OTHER REAL ESTATE OWNED

NOTE 5 — OTHER REAL ESTATE OWNED

Other real estate owned is recorded in other assets on the balance sheet. Activity in other real estate owned was as follows:

	Three months ended September 30						Nine months ended September 30
	2015			2014			2015			2014
Beginning Balance	$	2,065		$	3,723		$	2,688		$	4,120
Transfer to other real estate owned	801			220			1,164			2,119
Sales — out of other real estate owned	(429		)	(753		)	(1,377		)	(2,929		)
Write-down	—			—			(38		)	(120		)
Ending Balance — September 30	$	2,437		$	3,190		$	2,437		$	3,190

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

Activity in the valuation account for other real estate was as follows:

	Three months ended September 30						Nine months ended September 30
	2015			2014			2015			2014
Beginning Balance	$	(323	)	$	(391	)	$	(448	)	$	(1,328	)
Impairments during year	—			—			(38		)	(120		)
Recovery on impairments	—			—			—			—
Reductions	37			33			200			1,090
Ending Balance — September 30	$	(286	)	$	(358	)	$	(286	)	$	(358	)

Expenses related to foreclosed assets for the period ending September 30 include:

	Three months ended September 30				Nine months ended September 30
	2015		2014		2015		2014
Write downs	$	—	$	—	$	38	$	120
Losses / (gains) on sales	19		9		25		(73		)
Net loss	$	19	$	9	$	63	$	47
Operating expenses	$	30	$	28	$	124	$	120

Foreclosed residential real estate properties included in other real estate and repossessed assets on the Consolidated Balance Sheets totaled $1,235 and $1,261 at September 30, 2015 and December 31, 2014, respectively. Retail mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements totaled $2,573 and $2,653 at September 30, 2015 and December 31, 2104, respectively.

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LOANS AND ALLOWANCE

9 Months Ended

Sep. 30, 2015

LOANS AND ALLOWANCE

LOANS AND ALLOWANCE

NOTE 4 - LOANS AND ALLOWANCE

Loans were as follows:

	September 30, 2015			December 31, 2014
Commercial
Commercial and industrial	$	394,462		$	275,646
Agricultural	24,065			46,784
Commercial Real Estate
Farm	74,966			76,849
Hotel	45,650			74,962
Construction and development	86,702			61,640
Other	666,584			666,417
Residential
1-4 family	440,776			435,336
Home equity	294,332			274,159
Consumer
Direct	53,468			45,360
Indirect	487			612
Total loans	2,081,492			1,957,765
Allowance for loan losses	(22,023		)	(23,250		)
Net loans	$	2,059,469		$	1,934,515

The Company purchased some financing receivables in the fourth quarter of 2014 and the third quarter of 2015. The investment by portfolio class at September 30, 2015 is as follows.  These loans are included in the above table and all other tables below in the recorded investment amount.

	September 30, 2015		December 31, 2014
Commercial and industrial	$	19,611	$	26,152
Construction and development	226		2,037
Other real estate	85,768		98,436
1-4 family	44,294		36,490
Home equity	20,176		16,278
Direct	3,081		2,006
Total Purchased Loans	$	173,156	$	181,399

The Company also purchased some credit impaired loans during 2014. These loans had a net balance of under $1,000 at December 31, 2014 so additional disclosures were not made due to their immateriality.

Activity in the allowance for loan losses for the three months ended September 30, 2015 and 2014 was as follows:

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, July 1, 2015	$	5,394		$	12,689		$	3,264		$	1,126		$	22,473
Provision charged to expense	1,331			(1,349		)	154			664			800
Losses charged off	(773		)	(101		)	(401		)	(1,076		)	(2,351		)
Recoveries	246			307			71			477			1,101
Balance, September 30, 2015	$	6,198		$	11,546		$	3,088		$	1,191		$	22,023

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, July 1, 2014	$	3,201		$	16,994		$	3,110		$	562		$	23,867
Provision charged to expense	(685		)	(548		)	464			769			—
Losses charged off	(17		)	(131		)	(548		)	(795		)	(1,491		)
Recoveries	975			673			183			342			2,173
Balance, September 30, 2014	$	3,474		$	16,988		$	3,209		$	878		$	24,549

Activity in the allowance for loan losses for the nine months ended September 30, 2015 and 2014 and the recorded investment of loans and allowances by portfolio segment and impairment method as of September 30, 2015 and December 31, 2014 were as follows:

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, January 1, 2015	$	2,977		$	15,605		$	3,501		$	1,167		$	23,250
Provision charged to expense	3,822			(5,298		)	927			1,349			800
Losses charged off	(900		)	(538		)	(1,606		)	(2,576		)	(5,620		)
Recoveries	299			1,777			266			1,251			3,593
Balance, September 30, 2015	$	6,198		$	11,546		$	3,088		$	1,191		$	22,023

	Commercial			Commercial Real Estate			Residential			Consumer			Total
Allowance for loan loss
Balance, January 1, 2014	$	3,291		$	20,210		$	3,409		$	699		$	27,609
Provision charged to expense	(699		)	(548		)	1,427			1,320			1,500
Losses charged off	(166		)	(4,786		)	(1,925		)	(2,166		)	(9,043		)
Recoveries	1,048			2,112			298			1,025			4,483
Balance, September 30, 2014	$	3,474		$	16,988		$	3,209		$	878		$	24,549

	Commercial		Commercial Real Estate		Residential		Consumer		Total
As of September 30, 2015
Ending Balance individually evaluated for impairment	$	259	$	1,198	$	172	$	—	$	1,629
Ending Balance collectively evaluated for impairment	5,939		10,348		2,916		1,191		20,394
Total ending allowance balance	$	6,198	$	11,546	$	3,088	$	1,191	$	22,023
Loans
Ending Balance individually evaluated for impairment	$	1,155	$	9,159	$	9,375	$	119	$	19,808
Ending Balance collectively evaluated for impairment	417,372		864,743		725,733		53,836		2,061,684
Total ending loan balance excludes $6,128 of accrued interest	$	418,527	$	873,902	$	735,108	$	53,955	$	2,081,492

As of December 31, 2014	Commercial		Commercial Real Estate		Residential		Consumer		Total
Ending Balance individually evaluated for impairment	$	162	$	705	$	183	$	—	$	1,050
Ending Balance collectively evaluated for impairment	2,815		14,900		3,318		1,167		22,200
Total ending allowance balance	$	2,977	$	15,605	$	3,501	$	1,167	$	23,250
Loans
Ending Balance individually evaluated for impairment	$	705	$	24,722	$	10,662	$	220	$	36,309
Ending Balance collectively evaluated for impairment	321,725		855,146		698,833		45,752		1,921,456
Total ending loan balance excludes $5,605 of accrued interest	$	322,430	$	879,868	$	709,495	$	45,972	$	1,957,765

The allowance for loans collectively evaluated for impairment consists of reserves on groups of similar loans based on historical loss experience adjusted for other factors, as well as reserves on certain loans that are classified but determined not to be impaired based on an analysis which incorporates probability of default with a loss given default scenario. The reserves on these loans totaled $1,723 at September 30, 2015 and $2,426 at December 31, 2014.

The recorded investment in loans excludes accrued interest receivable due to immateriality.

The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2015 and December 31, 2014.  Performing troubled debt restructurings totaling $2,801 and $7,499 were excluded as allowed by ASC 310-40.

September 30, 2015	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded
Commercial
Commercial and industrial	$	726	$	339	$	259
Agricultural	—		—		—
Commercial Real Estate
Farm	—		—		—
Hotel	—		—		—
Construction and development	—		—		—
Other	2,579		2,479		1,198
Residential
1-4 Family	1,366		1,318		168
Home Equity	161		161		4
Consumer
Direct	—		—		—
Subtotal — impaired with allowance recorded	4,832		4,297		1,629
With no related allowance recorded
Commercial
Commercial & industrial	830		816
Agricultural	—		—
Commercial Real Estate
Farm	574		349
Hotel	—		—
Construction and development
Other	4,986		3,530
Residential
1-4 Family	6,395		5,473
Home Equity	2,723		2,423
Consumer
Direct	131		119
Indirect	—		—
Subtotal — impaired with allowance recorded	15,639		12,710		—
Total impaired loans	$	20,471	$	17,007	$	1,629

December 31, 2014	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With an allowance recorded
Commercial
Commercial and industrial	$	82	$	64	$	12
Agriculture	397		150		150
Commercial Real Estate
Farm	76		76		21
Hotel	—		—		—
Construction and development	—		—		—
Other	979		889		684
Residential
1-4 Family	1,543		1,478		178
Home Equity	167		167		5
Consumer
Direct	—		—		—
Indirect	—		—		—
Subtotal — impaired with allowance recorded	3,244		2,824		1,050
With no related allowance recorded
Commercial
Commercial & industrial	761		491
Agricultural	—		—
Commercial Real Estate
Farm	864		616
Hotel	11,423		11,377
Construction and development	84		78
Other	5,848		4,186
Residential
1-4 Family	7,325		6,400
Home Equity	2,847		2,618
Consumer
Direct	238		213
Indirect	7		7
Subtotal — impaired with allowance recorded	29,397		25,986		—
Total impaired loans	$	32,641	$	28,810	$	1,050

The following tables present the average balance of impaired loans and interest income and cash basis interest recognized for the nine months ending September 30, 2015 and September 30, 2014, excluding performing troubled debt restructurings as allowed by ASC 310-40.

Nine months ended September 30, 2015	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	1,256	$	12	$	12
Agricultural	38		—		—
Commercial Real Estate
Farm	424		4		4
Hotel	3,563		—		—
Construction and development	20		47		47
Other	5,753		141		141
Residential
1-4 Family	7,527		43		43
Home Equity	2,221		10		10
Consumer
Direct	134		14		14
Indirect	2		5		5
	$	20,938	$	276	$	276

Nine months ended September 30, 2014	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	247	$	9	$	9
Agricultural	206		—		—
Commercial Real Estate
Farm	921		—		—
Hotel	6,225		—		—
Construction and development	318		—		—
Other	10,305		75		75
Residential
1-4 Family	8,108		16		16
Home Equity	2,472		11		11
Consumer
Direct	276		7		7
Indirect	6		6		6
	$	29,084	$	124	$	124

The following tables present the average balance of impaired loans and interest income and cash basis interest recognized for the three months ending September 30, 2015 and September 30, 2014, excluding performing troubled debt restructurings as allowed by ASC 310-40.

Three months ended September 30, 2015	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	1,677	$	6	$	6
Agricultural	—		—		—
Commercial Real Estate
Farm	405		—		—
Hotel	—		—		—
Construction and development	—		—		—
Other	6,298		86		86
Residential
1-4 Family	7,343		8		8
Home Equity	2,707		2		2
Consumer
Direct	162		4		4
Indirect	—		1		1
	$	18,592	$	107	$	107

Three months ended September 30, 2014	Average Balance Impaired Loans		Interest Income Recognized		Cash Basis Income Recognized
Commercial
Commercial & Industrial	$	211	$	1	$	1
Agricultural	412		—		—
Commercial Real Estate
Farm	852		—		—
Hotel	12,450		—		—
Construction and development	78		—		—
Other	8,656		4		4
Residential
1-4 Family	7,449		11		11
Home Equity	2,629		4		4
Consumer
Direct	104		2		2
Indirect	2		5		5
	$	32,843	$	27	$	27

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of September 30, 2015 and December 31, 2014:

	Non-accrual				Past due over 90 days and still accruing
	September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
Commercial
Commercial and industrial	$	1,002	$	479	$	—	$	—
Agricultural	—		150		—		—
Commercial Real Estate
Farm	348		692		—		—
Hotel	—		—		—		—
Construction and development	—		78		—		—
Other	5,187		3,744		75		—
Residential
1-4 Family	5,171		6,428		—		—
Home Equity	1,706		1,841		—		—
Consumer
Direct	94		177		—		—
Indirect	—		7		—		—
Total	$	13,508	$	13,596	$	75	$	—

The following tables present the aging of the recorded investment in past due loans as of September 30, 2015 and December 31, 2014 by class of loans:

September 30, 2015	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	$	394,462	$	—	$	79	$	287	$	366	$	394,096
Agricultural	24,065		—		—		—		—		24,065
Commercial Real Estate
Farm	74,966		—		—		119		119		74,847
Hotel	45,650		—		—		—		—		45,650
Construction and development	86,702		—		—		—		—		86,702
Other	666,584		456		432		3,055		3,943		662,641
Residential
1-4 Family	440,776		1,155		1,569		2,596		5,320		435,456
Home Equity	294,332		712		455		1,176		2,343		291,989
Consumer
Direct	53,468		58		43		33		134		53,334
Indirect	487		—		—		—		—		487
Total — excludes $6,128 of accrued interest	$	2,081,492	$	2,381	$	2,578	$	7,266	$	12,225	$	2,069,267
December 31, 2014	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	$	275,646	$	441	$	75	$	210	$	726	$	274,920
Agricultural	46,784		—		—		—		—		46,784
Commercial Real Estate
Farm	76,849		—		—		327		327		76,522
Hotel	74,962		—		—		—		—		74,962
Construction and development	61,640		—		78		—		78		61,562
Other	666,417		933		755		1,919		3,607		662,810
Residential
1-4 Family	435,336		6,217		1,719		3,186		11,122		424,214
Home Equity	274,159		751		250		1,521		2,522		271,637
Consumer
Direct	45,360		91		17		162		270		45,090
Indirect	612		6		7		—		13		599
Total — excludes $5,605 of accrued interest	$	1,957,765	$	8,439	$	2,901	$	7,325	$	18,665	$	1,939,100

Troubled Debt Restructurings

From time to time, the terms of certain loans are modified as troubled debt restructurings. The modification of the terms of such loans include 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.

The total of troubled debt restructurings at September 30, 2015 and December 31, 2014 was $8,547 and $23,325 respectively. Included in the TDR totals are non-accrual loans of $2,263 and $575 at September 30, 2015 and December 31, 2014, loans classified as TDRs that are accruing of $3,483 at September 30, 2015 and $15,251 at December 31, 2014, and loans of $2,801 at September 30, 2015 and $7,499 at December 31, 2014, that relate to loans classified as TDRs in which there was an A/B split and the B note was charged off and the A note is a performing loan.  This last group of loans is excluded from non-performing loans.  The Company has allocated $897 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2015. 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, 2014, the comparable numbers were $485 of specific reserves and $0 of commitments.

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine month period ending September 30, 2015:

		Pre-Modification		Post-Modification
For the nine		Outstanding Recorded		Outstanding Recorded
month period ending September 30, 2015	Number of Loans	Investment		Investment
Commercial
Commercial and industrial	3	$	216	$	216
Commercial real estate
Other	8	1,610		1,349
Residential
1-4 Family	3	215		215
Home Equity	2	44		44
Total	16	$	2,085	$	1,824

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine month period ending September 30, 2014:

		Pre-Modification		Post-Modification
For the nine		Outstanding Recorded		Outstanding Recorded
month period ending September 30, 2014	Number of Loans	Investment		Investment
Commercial real estate
Hotel	2	$	15,362	$	11,550
Other	2	1,015		1,015
Residential
1-4 Family	1	140		140
Home Equity	1	34		34
Consumer
Direct	1	26		26
Total	7	$	16,577	$	12,765

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending September 30, 2015:

		Pre-Modification		Post-Modification
For the three		Outstanding Recorded		Outstanding Recorded
month period ending September 30, 2015	Number of Loans	Investment		Investment
Commercial real estate
Other	1	$	42	$	42
Residential
1-4 Family	3	215		215
Home Equity	1	38		38
Total	5	$	295	$	295

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending September 30, 2014:

		Pre-Modification		Post-Modification
For the three		Outstanding Recorded		Outstanding Recorded
month period ending September 30, 2014	Number of Loans	Investment		Investment
Residential
Home Equity	1	$	34	$	34
Consumer
Direct	1	26		26
Total	2	$	60	$	60

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the nine month period ending September 30, 2015:

For the nine month period ending September 30, 2015	Number of Loans	Recorded Investment
Commercial real estate:
Other	3	$	863
Residential
1-4 Family	1	152
Home Equity	1	47
Total	5	$	1,062

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the nine month period ending September 30, 2014:

For the nine month period ending September 30, 2014	Number of Loans	Recorded Investment
Commercial real estate:
Other	1	$	1,431
Residential
1-4 Family	1	53
Home Equity	1	14
Total	3	$	1,498

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three month period ending September 30, 2015:

For the three month period ending September 30, 2015	Number of Loans	Recorded Investment
Commercial real estate:
Other	2	$	835
Residential
1-4 Family	1	152
Home Equity	1	47
Total	4	$	1,034

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the three month period ending September 30, 2014:

For the three month period ending September 30, 2014	Number of Loans	Recorded Investment
Residential:
Home Equity	1	$	14
Total	1	$	14

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 $0 and $0 and resulted in charge offs of $0 and $0 during the three month period ending September 30, 2015 and 2014, respectively.  For the nine month periods ending September 30, 2015 and 2014, the troubled debt restructurings that subsequently defaulted increased the allowance for loan losses by $0 and $0 and resulted in charge offs of $0 and $36.

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 terms of certain other loans were modified during the three month period ending September 30, 2015 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of September 30, 2015 of $5,511. 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 significant.

Credit Quality Indicators

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 have demonstrated the 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 September 30, 2015, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

September 30, 2015	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	343,520	$	7,356	$	1,729	$	953
Agricultural	24,065		—		—		—
Commercial Real Estate
Farm	74,073		263		282		348
Hotel	42,921		2,729		—		—
Construction and development	86,702		—		—		—
Other	540,319		11,174		5,967		4,006
Total	$	1,111,600	$	21,522	$	7,978	$	5,307

At December 31, 2014, the risk category of loans by class of loans was as follows:

December 31, 2014	Pass		Special Mention		Substandard		Non-accrual
Commercial
Commercial and industrial	$	226,731	$	9,926	$	1,596	$	35
Agricultural	46,634		—		—		150
Commercial Real Estate
Farm	75,191		966		—		692
Hotel	60,704		2,835		11,423		—
Construction and development	60,971		372		219		78
Other	525,758		20,823		9,689		2,323
Total	$	995,989	$	34,922	$	22,927	$	3,278

Loans not analyzed individually as part of the above described process are classified by delinquency. These loans are primarily smaller (<$250) commercial, smaller commercial real estate (<$250), residential mortgage and consumer loans. All commercial, commercial real estate, consumer loans fully or partially secured by 1-4  family 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. Smaller commercial and commercial real estate loans on non-accrual are included in the non-accrual tables above.  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 September 30, 2015 and December 31, 2014, the grading of loans by category of loans is as follows:

September 30, 2015	Performing		Watch		Substandard
Commercial
Commercial and industrial	$	40,776	$	79	$	49
Commercial Real Estate
Other	103,708		154		1,256
Total	$	144,484	$	233	$	1,305

December 31, 2014	Performing		Watch		Substandard
Commercial
Commercial and industrial	$	36,839	$	75	$	444
Commercial Real Estate
Other	106,247		156		1,421
Total	$	143,086	$	231	$	1,865

September 30, 2015	Performing		Watch		Substandard
Residential
1-4 Family	$	436,611	$	1,569	$	2,596
Home Equity	292,701		455		1,176
Total	$	729,312	$	2,024	$	3,772

December 31, 2014	Performing		Watch		Substandard
Residential
1-4 Family	$	430,431	$	1,719	$	3,186
Home Equity	272,388		250		1,521
Total	$	702,819	$	1,969	$	4,707

September 30, 2015	Performing		Substandard		Loss
Consumer
Direct	$	53,392	$	43	$	33
Indirect	487		—		—
Total	$	53,879	$	43	$	33

December 31, 2014	Performing		Substandard		Loss
Consumer
Direct	$	45,181	$	142	$	37
Indirect	605		7		—
Total	$	45,786	$	149	$	37

XML

OTHER REAL ESTATE OWNED (Tables)

9 Months Ended

Sep. 30, 2015

OTHER REAL ESTATE OWNED

Schedule of activity in other real estate owned

	Three months ended September 30						Nine months ended September 30
	2015			2014			2015			2014
Beginning Balance	$	2,065		$	3,723		$	2,688		$	4,120
Transfer to other real estate owned	801			220			1,164			2,119
Sales — out of other real estate owned	(429		)	(753		)	(1,377		)	(2,929		)
Write-down	—			—			(38		)	(120		)
Ending Balance — September 30	$	2,437		$	3,190		$	2,437		$	3,190

Schedule of activity in the valuation account for other real estate

	Three months ended September 30						Nine months ended September 30
	2015			2014			2015			2014
Beginning Balance	$	(323	)	$	(391	)	$	(448	)	$	(1,328	)
Impairments during year	—			—			(38		)	(120		)
Recovery on impairments	—			—			—			—
Reductions	37			33			200			1,090
Ending Balance — September 30	$	(286	)	$	(358	)	$	(286	)	$	(358	)

Schedule of expenses related to foreclosed assets

	Three months ended September 30				Nine months ended September 30
	2015		2014		2015		2014
Write downs	$	—	$	—	$	38	$	120
Losses / (gains) on sales	19		9		25		(73		)
Net loss	$	19	$	9	$	63	$	47
Operating expenses	$	30	$	28	$	124	$	120

XML

ACQUISITION

9 Months Ended

Sep. 30, 2015

ACQUISITION

ACQUISITION

NOTE 12 — ACQUISITION

In August, 2015, the Company completed its purchase of five Old National Bank branches located in Batesville, Brownstown, Richmond, and Portland, Indiana and Union City, Ohio. As of the date of acquisition, the Company acquired $37 million in loans, $99 million in deposits, and $1 million in property. Goodwill of $2.5 million and a core deposit intangible of $1.2 million were also recorded. $57 million of cash was received at purchase. The Company incurred $617 of expenses related to the acquisition of these branches.  The core deposit intangible asset is being amortized over 10 years. Goodwill and the core deposit intangible will be deducted for tax purposes over 15 years.

XML

FAIR VALUE

9 Months Ended

Sep. 30, 2015

FAIR VALUE.

FAIR VALUE

NOTE 8 — FAIR VALUE

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. 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 as well as costs to sell. 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 Company is able to compare the valuation model inputs and results to widely available published industry data for reasonableness (Level 3 inputs).

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 as well as disposal costs.  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). The mortgage banking derivative is classified as Interest receivable and other assets on the balance sheet.

The fair value of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2).  The fair value derivatives are classified as Interest receivable and other assets and Other liabilities on the balance sheet.

Assets and Liabilities Measured on a Recurring Basis

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 September 30, 2015 Using:
						Significant
				Quoted Prices in		Other			Significant
				Active Markets for		Observable			Unobservable
	Carrying			Identical Assets		Inputs			Inputs
(Dollars in thousands)	Value			(Level 1)		(Level 2)			(Level 3)
Financial Assets/Liabilities
Investment securities available-for sale
U. S. government agency	$	543				$	543
States and municipals	348,816					337,469			$	11,347
Mortgage-backed securities — residential —Government Sponsored Entity	303,845					303,845
Collateralized mortgage obligations — Government Sponsored Entity	249,080					249,080
Equity securities	4,689			$	4,689
Other securities	2,525								2,525
Total investment securities available-for-sale	$	909,498		$	4,689	$	890,937		$	13,872
Mortgage banking derivative	$	925				$	925
Interest rate swap asset	$	1,798				$	1,798
Interest rate swap liability	$	(1,798	)			$	(1,798	)

				Fair Value Measurements at December 31, 2014 Using:
						Significant
				Quoted Prices in		Other			Significant
				Active Markets for		Observable			Unobservable
	Carrying			Identical Assets		Inputs			Inputs
(Dollars in thousands)	Value			(Level 1)		(Level 2)			(Level 3)
Financial Assets/Liabilities
Investment securities available-for sale
U. S. government agency	$	661				$	661
States and municipals	334,298					321,488			$	12,810
Mortgage-backed securities — residential —Government Sponsored Entity	182,172					182,172
Collateralized mortgage obligations — Government Sponsored Entity	343,437					343,437
Equity securities	4,689			$	4,689
Other securities	2,503								2,503
Total investment securities available-for-sale	$	867,760		$	4,689	$	847,758		$	15,313
Mortgage banking derivative	$	975				$	975
Interest rate swap asset	$	56				$	56
Interest rate swap liability	$	(56	)			$	(56	)

There were no transfers between Level 1 and Level 2 during the third quarter of 2015 or 2014 or the first nine months of 2015 or 2014.

The table 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 three month periods ended September 30, 2015 and 2014:

Three months ended September 30:

States and municipal	2015			2014
Beginning balance, July 1	$	11,863		$	13,083
Total gains or losses (realized / unrealized)
Included in other comprehensive income	(6		)	(8		)
Settlements	(510		)	(218		)
Ending balance, September 30	$	11,347		$	12,857

Other securities	2015			2014
Beginning balance, July 1	$	2,527		$	2,511
Total gains or losses (realized / unrealized)
Included in other comprehensive income	(2		)	(4		)
Ending balance, September 30	$	2,525		$	2,507

Nine months ended September 30:

States and municipal	2015			2014
Beginning balance, January 1	$	12,810		$	14,420
Total gains or losses (realized / unrealized)
Included in other comprehensive income	(36		)	15
Settlements	(1,427		)	(1,578		)
Ending balance, September 30	$	11,347		$	12,857

Equity securities	2015		2014
Beginning balance, January 1	$	—	$	250
Total gains or losses (realized / unrealized)
Settlements	—		(250		)
Ending balance, September 30	$	—	$	—

Other securities	2015		2014
Beginning balance, January 1	$	2,503	$	2,526
Total gains or losses (realized / unrealized)
Included in other comprehensive income	22		(19		)
Ending balance, September 30	$	2,525	$	2,507

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 include 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 on a Non-Recurring Basis

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

			Fair Value Measurements at September 30, 2015 Using
	September 30, 2015		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	$	81			$	81
Other commercial real estate	1,092				1,092
Total impaired loans	$	1,173			$	1,173
Impaired servicing rights	$	1,101			$	1,101

			Fair Value Measurements at December 31, 2014 Using
	December 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans
Farm real estate	$	55			$	55
Other commercial real estate	1,235				1,235
Total impaired loans	$	1,290			$	1,290
Impaired servicing rights	$	1,854			$	1,854
Other real estate owned
Construction and development	$	21			$	21
Other commercial real estate	291				291
1-4 Family	150				150
Total other real estate owned	$	462			$	462

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $2,530, with a valuation allowance of $1,357 at September 30, 2015. The Company recorded a charge of $426 to provision expense associated with these loans for the three months ended September 30, 2015 and a charge of $1,281 to provision expense associated with these loans for the nine month period ending September 30, 2015. The Company recorded a charge of $1,061 to provision expense associated with these loans for the three months ended September 30, 2014 and a charge of $941 to provision expense associated with these loans for the nine month period ending September 30, 2014. At December 31, 2014, impaired loans had a gross carrying amount of $2,056 with a valuation allowance of $766. A breakdown of these loans by portfolio class at September 30, 2015 is as follows:

	Gross Balance		Valuation Allowance		Net
Commercial and industrial	$	339	$	258	$	81
Other commercial real estate	2,191		1,099		1,092
Ending Balance	$	2,530	$	1,357	$	1,173

Impaired tranches of servicing rights were carried at a fair value of $1,101, which is made up of the gross outstanding balance of $1,326 net of a valuation allowance of $225. A $25 credit to earnings was made to the valuation allowance in the third quarter of 2015 and a credit of $175 was made to the valuation allowance in the first nine months of 2015.  A recovery of $50 was included in both the third quarter and the nine month period ending September 30, 2014.  At December 31, 2014, impaired servicing rights were carried at a fair value of $1,854 which was made up of the gross outstanding balance of $2,254, net of a valuation allowance of $400.

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 September 30, 2015 and December 31, 2014. Impaired commercial loans, 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.  The fair value of the mortgage servicing rights is valued based on present value of future cash flows to be received taking into account the coupon rate on the mortgage as well as estimated prepayment speeds.

September 30, 2015	Fair Value (in thousands)		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired Loans:
Commercial and industrial	$	81	Fair value of collateral	Adjustment for collateral value	57% 57% Avg
Other commercial real estate	1,092		Sales comparison approach	Adjustment for differences between comparable sales, type of property, current status of property	0%-20% 11% Avg
	$	1,173
Mortgage servicing rights	$	1,101	Cash flow analysis	Discount rate	10%

December 31, 2014	Fair Value (in thousands)		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired Loans:
Farm real estate	$	55	Sales comparison approach	Adjustment for differences between comparable sales	40% 40% Avg
Other commercial real estate	1,235		Sales comparison approach	Adjustment for differences between comparable sales, type of property, current status of property	20%-45% 36% Avg
	$	1,290
Other real estate owned:
Construction and development	$	21	Sales comparison approach	Adjustment for differences between comparable sales.	15% 15% Avg
Other commercial real estate and 1-4 family	441		Sales comparison approach	Adjustment for differences between comparable sales.	10%-19% 11% Avg
	$	462
Mortgage servicing rights	$	1,854	Cash flow analysis	Discount rate	10%

The carrying amounts and estimated fair values of financial instruments, not previously presented, is as follows:

September 30, 2015	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets:
Cash and cash equivalents	$	112,353		$	86,728		$	25,625				$	112,353
Interest bearing time deposits	1,960						1,960					1,960
Loans including loans held for sale, net	2,063,117						4,957			$	2,132,058	2,137,015
FHLB and other stock	11,070											N/A
Interest receivable	10,720						4,592			6,128		10,720
Financial liabilities
Deposits	(2,607,598		)	(606,218		)	(2,000,841		)			(2,607,059		)
Other borrowings	(39,439		)				(39,439		)			(39,439		)
FHLB advances	(255,416		)				(259,460		)			(259,460		)
Interest payable	(553		)				(553		)			(553		)
Subordinated debentures	(41,239		)				(24,212		)			(24,212		)

December 31, 2014	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets:
Cash and cash equivalents	$	62,485		$	60,662		$	1,823				$	62,485
Interest bearing time deposits	1,915						1,915					1,915
Loans including loans held for sale, net	1,941,507						8,514			$	1,946,843	1,955,357
FHLB and other stock	13,854											N/A
Interest receivable	10,064						4,459			5,605		10,064
Financial liabilities
Deposits	(2,468,321		)	(513,393		)	(1,952,833		)			(2,466,226		)
Other borrowings	(26,349		)				(26,349		)			(26,349		)
FHLB advances	(214,413		)				(219,050		)			(219,050		)
Interest payable	(599		)				(599		)			(599		)
Subordinated debentures	(41,239		)				(24,212		)			(24,212		)

The difference between the loan balance included above and the amounts shown in Note 4 are the impaired loans discussed above.

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

(a) Cash and Cash Equivalents

The carrying amounts of cash, short-term instruments, and interest bearing time deposits 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.

(b) FHLB and other stock

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

(c) Loans, Net

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.

(d) Deposits

The fair values disclosed for non-interest bearing deposits are, by definition, 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 1 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.

(e) Borrowings

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 2 classification.

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

(f) Accrued Interest Receivable/Payable

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.

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DEPOSITS & REPURCHASE AGREEMENTS

9 Months Ended

Sep. 30, 2015

DEPOSITS & REPURCHASE AGREEMENTS

DEPOSITS & REPURCHASE AGREEMENTS

NOTE 6 — DEPOSITS & REPURCHASE AGREEMENTS

	September 30, 2015		December 31, 2014
Noninterest-bearing demand	$	606,218	$	513,393
Interest-bearing demand	1,058,510		1,054,780
Savings	602,576		559,761
Certificates of deposit of $250 or more	74,781		56,495
Other certificates and time deposits	265,513		283,892
Total deposits	$	2,607,598	$	2,468,321

The Company has entered into repurchase agreements with some of its customers.  The agreements are one day in length.  At September 30, 2015, these agreements totaled $34,439 and were secured by a pledged amount of $46,801 of mortgage backed securities.  Management monitors the fair value of the securities on a regular basis.  If the fair value of the securities declined to an amount approximating these agreements, more securities would be pledged.

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EARNINGS PER SHARE

9 Months Ended

Sep. 30, 2015

EARNINGS PER SHARE

EARNINGS PER SHARE

NOTE 7 - EARNINGS PER SHARE

Earnings per common share (EPS) were computed as follows:

	September 30, 2015					September 30, 2014
For the three months ended:	Net Income		Weighted Average Shares	Per Share Amount		Net Income		Weighted Average Shares	Per Share Amount
Basic earnings per common share:
Net income available to common shareholders	$	9,111	21,615,263	$	0.42	$	8,457	20,459,709	$	0.41
Effect of dilutive warrants			171,062					72,978
Effect of dilutive stock options			110,636					68,757
Net income available to common shareholders and assumed conversions	$	9,111	21,896,961	$	0.42	$	8,457	20,601,444	$	0.41

Stock options for 0 common shares in 2015 and stock options for 123,964 common shares in 2014 were not considered in computing diluted earnings per share because they were antidilutive.

	September 30, 2015					September 30, 2014
For the nine months ended:	Net Income		Weighted Average Shares	Per Share Amount		Net Income		Weighted Average Shares	Per Share Amount
Basic earnings per common share:
Net income available to common shareholders	$	26,434	21,658,088	$	1.22	$	22,436	20,448,054	$	1.10
Effect of dilutive warrants			152,171					67,184
Effect of dilutive stock options			103,053					66,102
Net income available to common shareholders and assumed conversions	$	26,434	21,913,312	$	1.21	$	22,436	20,581,340	$	1.09

Stock options for 10,210 common shares in 2015 and stock options for 176,211 common shares in 2014 were not considered in computing diluted earnings per share because they were antidilutive.

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REGULATORY CAPITAL

9 Months Ended

Sep. 30, 2015

REGULATORY CAPITAL

REGULATORY CAPITAL

NOTE 9 — REGULATORY CAPITAL

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 four 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.

On July 2, 2013, the Federal Reserve approved a final rule that establishes an integrated regulatory capital framework. The rule implements the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. In general, under the new rules, minimum requirements have increased for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the new rules include a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations. The new rules also change the methodology for calculating risk-weighted assets to enhance risk sensitivity and became effective on January 1, 2015.

Actual and required capital amounts and ratios are presented below:

					Required for
	Actual				Adequate Capital				To Be Well Capitalized
September 30, 2015	Amount		Ratio		Amount		Ratio		Amount		Ratio
MainSource Financial Group
Total capital (to risk-weighted assets)	$	344,309	15.6	%	$	176,782	8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	322,286		14.6		132,587		6.0		N/A		N/A
Common equity Tier 1 capital (to risk-weighted assets	281,286		12.7		99,440		4.5		N/A		N/A
Tier 1 capital (to average assets)	322,286		10.0		128,302		4.0		N/A		N/A
MainSource Bank
Total capital (to risk-weighted assets)	329,420		14.9	%	177,083		8.0	%	$	231,354	10.0	%
Tier 1 capital (to risk-weighted assets)	307,397		13.9		132,812		6.0		177,083		8.0
Common equity Tier 1 capital (to risk-weighted assets	307,397		13.9		99,609		4.5		143,880		6.5
Tier 1 capital (to average assets)	307,397		9.7		127,153		4.0		158,942		5.0

					Required for				To Comply with
	Actual				Adequate Capital				Regulatory Agreement
December 31, 2014	Amount		Ratio		Amount		Ratio		Amount		Ratio
MainSource Financial Group
Total capital (to risk-weighted assets)	$	332,726	16.0	%	$	165,975	8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	309,476		14.9		82,988		4.0		N/A		N/A
Tier 1 capital (to average assets)	309,476		10.2		121,014		4.0		N/A		N/A
MainSource Bank
Total capital (to risk-weighted assets)	321,005		15.6	%	164,648		8.0	%	$	205,810	10.0	%
Tier 1 capital (to risk-weighted assets)	297,755		14.5		82,324		4.0		123,486		6.0
Tier 1 capital (to average assets)	297,755		9.9		119,880		4.0		149,850		5.0

Management believes as of September 30, 2015, the Company and the Bank (as defined in Item 2 below) met all capital adequacy requirements to which they are subject to be considered well-capitalized. The Company is a source of additional financial strength to the Bank with its $8,500 in cash and its ability to downstream additional capital to the Bank.

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LOANS AND ALLOWANCE (Details 2) - USD ($) $ in Thousands			3 Months Ended		9 Months Ended
	Sep. 30, 2015	Dec. 31, 2014	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Dec. 31, 2014
Allowance for loan losses
Balance at the beginning of the period			$ 22,473	$ 23,867	$ 23,250	$ 27,609
Provision charged to expense			800		800	1,500
Losses charged off			(2,351)	(1,491)	(5,620)	(9,043)
Recoveries			1,101	2,173	3,593	4,483
Balance at the end of the period	$ 22,023	$ 23,250	22,023	24,549	22,023	24,549
Allowance for loan losses
Ending Balance individually evaluated for impairment							$ 1,629	$ 1,050
Ending Balance collectively evaluated for impairment							20,394	22,200
Total ending allowance balance	22,023	23,250	22,473	23,867	23,250	27,609	22,023	23,250
Loans
Ending Balance individually evaluated for impairment							19,808	36,309
Ending Balance collectively evaluated for impairment							2,061,684	1,921,456
Total ending loan balance excluding accrued interest							2,081,492	1,957,765
Accrued interest							6,128	5,605
Allowance that includes a probability of default for subject loans	1,723	2,426
Commercial
Allowance for loan losses
Balance at the beginning of the period			5,394	3,201	2,977	3,291
Provision charged to expense			1,331	(685)	3,822	(699)
Losses charged off			(773)	(17)	(900)	(166)
Recoveries			246	975	299	1,048
Balance at the end of the period	6,198	2,977	6,198	3,474	6,198	3,474
Allowance for loan losses
Ending Balance individually evaluated for impairment							259	162
Ending Balance collectively evaluated for impairment							5,939	2,815
Total ending allowance balance	6,198	2,977	5,394	3,201	2,977	3,291	6,198	2,977
Loans
Ending Balance individually evaluated for impairment							1,155	705
Ending Balance collectively evaluated for impairment							417,372	321,725
Total ending loan balance excluding accrued interest							418,527	322,430
Commercial Real Estate
Allowance for loan losses
Balance at the beginning of the period			12,689	16,994	15,605	20,210
Provision charged to expense			(1,349)	(548)	(5,298)	(548)
Losses charged off			(101)	(131)	(538)	(4,786)
Recoveries			307	673	1,777	2,112
Balance at the end of the period	11,546	15,605	11,546	16,988	11,546	16,988
Allowance for loan losses
Ending Balance individually evaluated for impairment							1,198	705
Ending Balance collectively evaluated for impairment							10,348	14,900
Total ending allowance balance	11,546	15,605	12,689	16,994	15,605	20,210	11,546	15,605
Loans
Ending Balance individually evaluated for impairment							9,159	24,722
Ending Balance collectively evaluated for impairment							864,743	855,146
Total ending loan balance excluding accrued interest							873,902	879,868
Residential
Allowance for loan losses
Balance at the beginning of the period			3,264	3,110	3,501	3,409
Provision charged to expense			154	464	927	1,427
Losses charged off			(401)	(548)	(1,606)	(1,925)
Recoveries			71	183	266	298
Balance at the end of the period	3,088	3,501	3,088	3,209	3,088	3,209
Allowance for loan losses
Ending Balance individually evaluated for impairment							172	183
Ending Balance collectively evaluated for impairment							2,916	3,318
Total ending allowance balance	3,088	3,501	3,264	3,110	3,501	3,409	3,088	3,501
Loans
Ending Balance individually evaluated for impairment							9,375	10,662
Ending Balance collectively evaluated for impairment							725,733	698,833
Total ending loan balance excluding accrued interest							735,108	709,495
Consumer
Allowance for loan losses
Balance at the beginning of the period			1,126	562	1,167	699
Provision charged to expense			664	769	1,349	1,320
Losses charged off			(1,076)	(795)	(2,576)	(2,166)
Recoveries			477	342	1,251	1,025
Balance at the end of the period	1,191	1,167	1,191	878	1,191	878
Allowance for loan losses
Ending Balance collectively evaluated for impairment							1,191	1,167
Total ending allowance balance	$ 1,191	$ 1,167	$ 1,126	$ 562	$ 1,167	$ 699	1,191	1,167
Loans
Ending Balance individually evaluated for impairment							119	220
Ending Balance collectively evaluated for impairment							53,836	45,752
Total ending loan balance excluding accrued interest							$ 53,955	$ 45,972

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ACQUISITION (Details) $ in Thousands	1 Months Ended	3 Months Ended	9 Months Ended
	Aug. 31, 2015 USD ($) item	Sep. 30, 2015 USD ($)	Sep. 30, 2015 USD ($)	Dec. 31, 2014 USD ($)
ACQUISITIONS
Acquisition-related costs		$ 617	$ 617
Goodwill		$ 75,953	75,953	$ 73,450
Cash received at purchase			$ 57,083
Branches Located In Ohio and Indiana
ACQUISITIONS
Number of branches acquired | item	5
Acquisition-related costs	$ 617
Loans	37,000
Deposits	99,000
Property	1,000
Goodwill	2,500
Cash received at purchase	$ 57,000
Term over which goodwill and intangible asset will be deducted for tax purpose	15 years
Branches Located In Ohio and Indiana | Core deposit
ACQUISITIONS
Intangible asset	$ 1,200
Intangible asset amortization period	10 years

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SECURITIES (Tables)

9 Months Ended

Sep. 30, 2015

SECURITIES

Schedule of amortized cost and fair value of securities available for sale and related unrealized gains/losses recognized in accumulated other comprehensive income

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
As of September 30, 2015
Available for Sale
U. S. government agency	$	533	$	10	$	—		$	543
State and municipal	332,462		16,613		(259		)	348,816
Mortgage-backed securities-residential (Government Sponsored Entity)	299,294		4,553		(2		)	303,845
Collateralized mortgage obligations (Government Sponsored Entity)	246,533		3,470		(923		)	249,080
Equity securities	4,689		—		—			4,689
Other securities	2,525		—		—			2,525
Total available for sale	$	886,036	$	24,646	$	(1,184	)	$	909,498

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
As of December 31, 2014
Available for Sale
U. S. government agency	$	652	$	10	$	(1	)	$	661
State and municipal	316,048		18,603		(353		)	334,298
Mortgage-backed securities-residential (Government Sponsored Entity)	178,534		4,071		(433		)	182,172
Collateralized mortgage obligations (Government Sponsored Entity)	344,556		2,743		(3,862		)	343,437
Equity securities	4,689		—		—			4,689
Other securities	2,503		—		—			2,503
Total available for sale	846,982		$	25,427	$	(4,649	)	$	867,760

Schedule of contractual maturities of securities

	Available for Sale
September 30, 2015	Amortized Cost		Fair Value
Within one year	$	16,091	$	16,238
One through five years	49,709		51,860
Six through ten years	129,057		136,194
After ten years	140,663		147,592
Mortgage-backed securities-residential (Government Sponsored Entity)	299,294		303,845
Collateralized mortgage obligations (Government Sponsored Entity)	246,533		249,080
Equity securities	4,689		4,689
Total available for sale securities	$	886,036	$	909,498

Schedule of securities in a continuous unrealized loss position with unrealized losses presented by length of time

	Less than 12 months					12 months or longer					Total
September 30, 2015 Description of securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. government agency	$	—	$	—		$	—	$	—		$	—	$	—
State and municipal	31,492		(234		)	309		(25		)	31,801		(259		)
Mortgage-backed securities-residential (GSE’s)	4,949		(2		)	—		—			4,949		(2		)
Collateralized mortgage obligations (GSE’s)	23,995		(107		)	60,315		(816		)	84,310		(923		)
Other securities	—		—			—		—			—		—
Total temporarily impaired	$	60,436	$	(343	)	$	60,624	$	(841	)	$	121,060	$	(1,184	)

December 31, 2014 Description of securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S government agency	$	122	$	(1	)	$	—	$	—		$	122	$	(1	)
State and municipal	16,659		(147		)	13,340		(206		)	29,999		(353		)
Mortgage-backed securities-residential (GSE’s)	24,925		(51		)	32,541		(382		)	57,466		(433		)
Collateralized mortgage obligations (GSE’s)	21,775		(114		)	150,094		(3,748		)	171,869		(3,862		)
Other securities	—		—			—		—			—		—
Total temporarily impaired	$	63,481	$	(313	)	$	195,975	$	(4,336	)	$	259,456	$	(4,649	)

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FAIR VALUE (Tables)

9 Months Ended

Sep. 30, 2015

FAIR VALUE.

Schedule of assets and liabilities measured at fair value on a recurring basis

				Fair Value Measurements at September 30, 2015 Using:
						Significant
				Quoted Prices in		Other			Significant
				Active Markets for		Observable			Unobservable
	Carrying			Identical Assets		Inputs			Inputs
(Dollars in thousands)	Value			(Level 1)		(Level 2)			(Level 3)
Financial Assets/Liabilities
Investment securities available-for sale
U. S. government agency	$	543				$	543
States and municipals	348,816					337,469			$	11,347
Mortgage-backed securities — residential —Government Sponsored Entity	303,845					303,845
Collateralized mortgage obligations — Government Sponsored Entity	249,080					249,080
Equity securities	4,689			$	4,689
Other securities	2,525								2,525
Total investment securities available-for-sale	$	909,498		$	4,689	$	890,937		$	13,872
Mortgage banking derivative	$	925				$	925
Interest rate swap asset	$	1,798				$	1,798
Interest rate swap liability	$	(1,798	)			$	(1,798	)

				Fair Value Measurements at December 31, 2014 Using:
						Significant
				Quoted Prices in		Other			Significant
				Active Markets for		Observable			Unobservable
	Carrying			Identical Assets		Inputs			Inputs
(Dollars in thousands)	Value			(Level 1)		(Level 2)			(Level 3)
Financial Assets/Liabilities
Investment securities available-for sale
U. S. government agency	$	661				$	661
States and municipals	334,298					321,488			$	12,810
Mortgage-backed securities — residential —Government Sponsored Entity	182,172					182,172
Collateralized mortgage obligations — Government Sponsored Entity	343,437					343,437
Equity securities	4,689			$	4,689
Other securities	2,503								2,503
Total investment securities available-for-sale	$	867,760		$	4,689	$	847,758		$	15,313
Mortgage banking derivative	$	975				$	975
Interest rate swap asset	$	56				$	56
Interest rate swap liability	$	(56	)			$	(56	)

Schedule of 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)

Three months ended September 30:

States and municipal	2015			2014
Beginning balance, July 1	$	11,863		$	13,083
Total gains or losses (realized / unrealized)
Included in other comprehensive income	(6		)	(8		)
Settlements	(510		)	(218		)
Ending balance, September 30	$	11,347		$	12,857

Other securities	2015			2014
Beginning balance, July 1	$	2,527		$	2,511
Total gains or losses (realized / unrealized)
Included in other comprehensive income	(2		)	(4		)
Ending balance, September 30	$	2,525		$	2,507

Nine months ended September 30:

States and municipal	2015			2014
Beginning balance, January 1	$	12,810		$	14,420
Total gains or losses (realized / unrealized)
Included in other comprehensive income	(36		)	15
Settlements	(1,427		)	(1,578		)
Ending balance, September 30	$	11,347		$	12,857

Equity securities	2015		2014
Beginning balance, January 1	$	—	$	250
Total gains or losses (realized / unrealized)
Settlements	—		(250		)
Ending balance, September 30	$	—	$	—

Other securities	2015		2014
Beginning balance, January 1	$	2,503	$	2,526
Total gains or losses (realized / unrealized)
Included in other comprehensive income	22		(19		)
Ending balance, September 30	$	2,525	$	2,507

Schedule of assets and liabilities measured at fair value on a non-recurring basis

			Fair Value Measurements at September 30, 2015 Using
	September 30, 2015		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	$	81			$	81
Other commercial real estate	1,092				1,092
Total impaired loans	$	1,173			$	1,173
Impaired servicing rights	$	1,101			$	1,101

			Fair Value Measurements at December 31, 2014 Using
	December 31, 2014		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans
Farm real estate	$	55			$	55
Other commercial real estate	1,235				1,235
Total impaired loans	$	1,290			$	1,290
Impaired servicing rights	$	1,854			$	1,854
Other real estate owned
Construction and development	$	21			$	21
Other commercial real estate	291				291
1-4 Family	150				150
Total other real estate owned	$	462			$	462

Schedule of breakdown of impaired loans by portfolio class

A breakdown of these loans by portfolio class at September 30, 2015 is as follows:

	Gross Balance		Valuation Allowance		Net
Commercial and industrial	$	339	$	258	$	81
Other commercial real estate	2,191		1,099		1,092
Ending Balance	$	2,530	$	1,357	$	1,173

Schedule of quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis

September 30, 2015	Fair Value (in thousands)		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired Loans:
Commercial and industrial	$	81	Fair value of collateral	Adjustment for collateral value	57% 57% Avg
Other commercial real estate	1,092		Sales comparison approach	Adjustment for differences between comparable sales, type of property, current status of property	0%-20% 11% Avg
	$	1,173
Mortgage servicing rights	$	1,101	Cash flow analysis	Discount rate	10%

December 31, 2014	Fair Value (in thousands)		Valuation Technique(s)	Unobservable Input(s)	Range
Impaired Loans:
Farm real estate	$	55	Sales comparison approach	Adjustment for differences between comparable sales	40% 40% Avg
Other commercial real estate	1,235		Sales comparison approach	Adjustment for differences between comparable sales, type of property, current status of property	20%-45% 36% Avg
	$	1,290
Other real estate owned:
Construction and development	$	21	Sales comparison approach	Adjustment for differences between comparable sales.	15% 15% Avg
Other commercial real estate and 1-4 family	441		Sales comparison approach	Adjustment for differences between comparable sales.	10%-19% 11% Avg
	$	462
Mortgage servicing rights	$	1,854	Cash flow analysis	Discount rate	10%

Schedule of carrying amounts and estimated fair values of financial instruments

September 30, 2015	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets:
Cash and cash equivalents	$	112,353		$	86,728		$	25,625				$	112,353
Interest bearing time deposits	1,960						1,960					1,960
Loans including loans held for sale, net	2,063,117						4,957			$	2,132,058	2,137,015
FHLB and other stock	11,070											N/A
Interest receivable	10,720						4,592			6,128		10,720
Financial liabilities
Deposits	(2,607,598		)	(606,218		)	(2,000,841		)			(2,607,059		)
Other borrowings	(39,439		)				(39,439		)			(39,439		)
FHLB advances	(255,416		)				(259,460		)			(259,460		)
Interest payable	(553		)				(553		)			(553		)
Subordinated debentures	(41,239		)				(24,212		)			(24,212		)

December 31, 2014	Carrying Amount			Level 1			Level 2			Level 3		Total
Financial assets:
Cash and cash equivalents	$	62,485		$	60,662		$	1,823				$	62,485
Interest bearing time deposits	1,915						1,915					1,915
Loans including loans held for sale, net	1,941,507						8,514			$	1,946,843	1,955,357
FHLB and other stock	13,854											N/A
Interest receivable	10,064						4,459			5,605		10,064
Financial liabilities
Deposits	(2,468,321		)	(513,393		)	(1,952,833		)			(2,466,226		)
Other borrowings	(26,349		)				(26,349		)			(26,349		)
FHLB advances	(214,413		)				(219,050		)			(219,050		)
Interest payable	(599		)				(599		)			(599		)
Subordinated debentures	(41,239		)				(24,212		)			(24,212		)

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INCOME TAXES (Details)	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Differences between effective tax rates and the federal statutory rate applied to income before income taxes
Effective tax rate (as a percent)	24.10%	22.90%	22.00%	20.70%

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EARNINGS PER SHARE (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2015	Sep. 30, 2014
Net Income
Net income attributable to common shareholders	$ 9,111	$ 8,457	$ 26,434	$ 22,436
Net income attributable to common shareholders and assumed conversions	$ 9,111	$ 8,457	$ 26,434	$ 22,436
Weighted Average Shares
Net income available to common shareholders (in shares)	21,615,263	20,459,709	21,658,088	20,448,054
Effect of dilutive warrants (in shares)	171,062	72,978	152,171	67,184
Effect of dilutive stock options (in shares)	110,636	68,757	103,053	66,102
Net income attributable to common shareholders and assumed conversions (in shares)	21,896,961	20,601,444	21,913,312	20,581,340
Earnings per Common Share
Net income attributable to common shareholders (in dollars per share)	$ 0.42	$ 0.41	$ 1.22	$ 1.10
Net income attributable to common shareholders and assumed conversions (in dollars per share)	$ 0.42	$ 0.41	$ 1.21	$ 1.09
Stock options
Anti-dilutive securities
Common shares not considered in computing diluted earnings per share	0	123,964	10,210	176,211

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CONSOLIDATED STATEMENTS OF INCOME (Parenthetical) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2015	Sep. 30, 2015	Sep. 30, 2014
CONSOLIDATED STATEMENTS OF INCOME
Net realized gains on securities, accumulated other comprehensive income (AOCI) reclassifications for realized net gains/(losses) on available for sale securities	$ 45	$ 360	$ (4)
Income tax expense, AOCI reclassification items	$ 16	$ 126	$ (1)

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SECURITIES

9 Months Ended

Sep. 30, 2015

SECURITIES

SECURITIES

NOTE 3 - SECURITIES

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

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
As of September 30, 2015
Available for Sale
U. S. government agency	$	533	$	10	$	—		$	543
State and municipal	332,462		16,613		(259		)	348,816
Mortgage-backed securities-residential (Government Sponsored Entity)	299,294		4,553		(2		)	303,845
Collateralized mortgage obligations (Government Sponsored Entity)	246,533		3,470		(923		)	249,080
Equity securities	4,689		—		—			4,689
Other securities	2,525		—		—			2,525
Total available for sale	$	886,036	$	24,646	$	(1,184	)	$	909,498

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
As of December 31, 2014
Available for Sale
U. S. government agency	$	652	$	10	$	(1	)	$	661
State and municipal	316,048		18,603		(353		)	334,298
Mortgage-backed securities-residential (Government Sponsored Entity)	178,534		4,071		(433		)	182,172
Collateralized mortgage obligations (Government Sponsored Entity)	344,556		2,743		(3,862		)	343,437
Equity securities	4,689		—		—			4,689
Other securities	2,503		—		—			2,503
Total available for sale	846,982		$	25,427	$	(4,649	)	$	867,760

The amortized cost and fair value of the investment securities portfolio are shown by expected maturity.  Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity or with no maturity are shown separately.

	Available for Sale
September 30, 2015	Amortized Cost		Fair Value
Within one year	$	16,091	$	16,238
One through five years	49,709		51,860
Six through ten years	129,057		136,194
After ten years	140,663		147,592
Mortgage-backed securities-residential (Government Sponsored Entity)	299,294		303,845
Collateralized mortgage obligations (Government Sponsored Entity)	246,533		249,080
Equity securities	4,689		4,689
Total available for sale securities	$	886,036	$	909,498

Proceeds from sales of securities available for sale were $139,547 and $21,972 for the nine months ended September 30, 2015 and 2014, respectively. Gross gains of $1,515 and $542 and gross losses of $1,155 and $546 were realized on these sales during 2015 and 2014, respectively.

Proceeds from sales of securities available for sale were $57,208 and $0 for the three months ended September 30, 2015 and 2014, respectively. Gross gains of $203 and $0 and gross losses of $158 and $0 were realized on these sales during 2015 and 2014, respectively.

Below is a summary of securities with unrealized losses as of September 30, 2015 and December 31, 2014 presented by length of time the securities have been in a continuous unrealized loss position.

	Less than 12 months					12 months or longer					Total
September 30, 2015 Description of securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. government agency	$	—	$	—		$	—	$	—		$	—	$	—
State and municipal	31,492		(234		)	309		(25		)	31,801		(259		)
Mortgage-backed securities-residential (GSE’s)	4,949		(2		)	—		—			4,949		(2		)
Collateralized mortgage obligations (GSE’s)	23,995		(107		)	60,315		(816		)	84,310		(923		)
Other securities	—		—			—		—			—		—
Total temporarily impaired	$	60,436	$	(343	)	$	60,624	$	(841	)	$	121,060	$	(1,184	)

December 31, 2014 Description of securities	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S government agency	$	122	$	(1	)	$	—	$	—		$	122	$	(1	)
State and municipal	16,659		(147		)	13,340		(206		)	29,999		(353		)
Mortgage-backed securities-residential (GSE’s)	24,925		(51		)	32,541		(382		)	57,466		(433		)
Collateralized mortgage obligations (GSE’s)	21,775		(114		)	150,094		(3,748		)	171,869		(3,862		)
Other securities	—		—			—		—			—		—
Total temporarily impaired	$	63,481	$	(313	)	$	195,975	$	(4,336	)	$	259,456	$	(4,649	)

Other-Than-Temporary-Impairment

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.

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 an entity 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 September 30, 2015, the Company’s securities portfolio consisted of 977 securities, 83 of which were in an unrealized loss position.  Unrealized losses on state and municipal securities of $259 have not been recognized into income because management has the ability to hold for a period of time sufficient to allow for any anticipated recovery in fair value and it is unlikely that management will be required to sell the securities before their anticipated recovery. The decline in value is primarily attributable to changes in interest rates. The Company monitors the financial condition of these issuers. The fair value of these debt securities is expected to recover as the securities approach their maturity date.

At September 30, 2015, almost 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 $2 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 September 30, 2015.

The Company’s collateralized mortgage obligation securities portfolio includes agency collateralized mortgage obligations with a market value of $84,310 which had unrealized losses of approximately $923 at September 30, 2015. As noted above, the decline in fair value is attributable to changes in interest rates and illiquidity and not credit quality. The Company monitors to insure it has adequate credit support and as of September 30, 2015, 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.

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REGULATORY CAPITAL (Tables)

9 Months Ended

Sep. 30, 2015

REGULATORY CAPITAL

Schedule of actual and required capital amounts and ratios

					Required for
	Actual				Adequate Capital				To Be Well Capitalized
September 30, 2015	Amount		Ratio		Amount		Ratio		Amount		Ratio
MainSource Financial Group
Total capital (to risk-weighted assets)	$	344,309	15.6	%	$	176,782	8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	322,286		14.6		132,587		6.0		N/A		N/A
Common equity Tier 1 capital (to risk-weighted assets	281,286		12.7		99,440		4.5		N/A		N/A
Tier 1 capital (to average assets)	322,286		10.0		128,302		4.0		N/A		N/A
MainSource Bank
Total capital (to risk-weighted assets)	329,420		14.9	%	177,083		8.0	%	$	231,354	10.0	%
Tier 1 capital (to risk-weighted assets)	307,397		13.9		132,812		6.0		177,083		8.0
Common equity Tier 1 capital (to risk-weighted assets	307,397		13.9		99,609		4.5		143,880		6.5
Tier 1 capital (to average assets)	307,397		9.7		127,153		4.0		158,942		5.0

					Required for				To Comply with
	Actual				Adequate Capital				Regulatory Agreement
December 31, 2014	Amount		Ratio		Amount		Ratio		Amount		Ratio
MainSource Financial Group
Total capital (to risk-weighted assets)	$	332,726	16.0	%	$	165,975	8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	309,476		14.9		82,988		4.0		N/A		N/A
Tier 1 capital (to average assets)	309,476		10.2		121,014		4.0		N/A		N/A
MainSource Bank
Total capital (to risk-weighted assets)	321,005		15.6	%	164,648		8.0	%	$	205,810	10.0	%
Tier 1 capital (to risk-weighted assets)	297,755		14.5		82,324		4.0		123,486		6.0
Tier 1 capital (to average assets)	297,755		9.9		119,880		4.0		149,850		5.0

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LOANS AND ALLOWANCE (Details 6) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2015	Dec. 31, 2014
Risk category of loans
Loans	$ 2,081,492	$ 1,957,765
Pass
Risk category of loans
Loans	1,111,600	995,989
Special Mention
Risk category of loans
Loans	21,522	34,922
Performing
Risk category of loans
Loans	144,484	143,086
Non-accrual
Risk category of loans
Loans	5,307	3,278
Watch
Risk category of loans
Loans	233	231
Substandard
Risk category of loans
Loans	7,978	22,927
Substandard Commercial
Risk category of loans
Loans	1,305	1,865
Minimum
Risk category of loans
Credit relationships with an outstanding balance	$ 1,000
Minimum | Watch
Risk category of loans
Period of loans past due	60 days
Minimum | Substandard
Risk category of loans
Period of loans past due	90 days
Minimum | Loss
Risk category of loans
Period of loans past due	119 days
Maximum | Watch
Risk category of loans
Period of loans past due	89 days
Consumer loans not secured by 1-4 family residential real estate | Minimum | Substandard
Risk category of loans
Period of loans past due	60 days
Consumer loans not secured by 1-4 family residential real estate | Maximum | Substandard
Risk category of loans
Period of loans past due	119 days
Commercial
Risk category of loans
Loans	$ 418,527	322,430
Commercial | Maximum
Risk category of loans
Loans classified by delinquency	250
Commercial | Commercial and industrial
Risk category of loans
Loans	394,462	275,646
Commercial | Commercial and industrial | Pass
Risk category of loans
Loans	343,520	226,731
Commercial | Commercial and industrial | Special Mention
Risk category of loans
Loans	7,356	9,926
Commercial | Commercial and industrial | Performing
Risk category of loans
Loans	40,776	36,839
Commercial | Commercial and industrial | Non-accrual
Risk category of loans
Loans	953	35
Commercial | Commercial and industrial | Watch
Risk category of loans
Loans	79	75
Commercial | Commercial and industrial | Substandard
Risk category of loans
Loans	1,729	1,596
Commercial | Commercial and industrial | Substandard Commercial
Risk category of loans
Loans	49	444
Commercial | Agricultural
Risk category of loans
Loans	24,065	46,784
Commercial | Agricultural | Pass
Risk category of loans
Loans	24,065	46,634
Commercial | Agricultural | Non-accrual
Risk category of loans
Loans		150
Commercial Real Estate
Risk category of loans
Loans	873,902	879,868
Commercial Real Estate | Maximum
Risk category of loans
Loans classified by delinquency	250
Commercial Real Estate | Farm
Risk category of loans
Loans	74,966	76,849
Commercial Real Estate | Farm | Pass
Risk category of loans
Loans	74,073	75,191
Commercial Real Estate | Farm | Special Mention
Risk category of loans
Loans	263	966
Commercial Real Estate | Farm | Non-accrual
Risk category of loans
Loans	348	692
Commercial Real Estate | Farm | Substandard
Risk category of loans
Loans	282
Commercial Real Estate | Hotel
Risk category of loans
Loans	45,650	74,962
Commercial Real Estate | Hotel | Pass
Risk category of loans
Loans	42,921	60,704
Commercial Real Estate | Hotel | Special Mention
Risk category of loans
Loans	2,729	2,835
Commercial Real Estate | Hotel | Substandard
Risk category of loans
Loans		11,423
Commercial Real Estate | Construction and development
Risk category of loans
Loans	86,702	61,640
Commercial Real Estate | Construction and development | Pass
Risk category of loans
Loans	86,702	60,971
Commercial Real Estate | Construction and development | Special Mention
Risk category of loans
Loans		372
Commercial Real Estate | Construction and development | Non-accrual
Risk category of loans
Loans		78
Commercial Real Estate | Construction and development | Substandard
Risk category of loans
Loans		219
Commercial Real Estate | Other
Risk category of loans
Loans	666,584	666,417
Commercial Real Estate | Other | Pass
Risk category of loans
Loans	540,319	525,758
Commercial Real Estate | Other | Special Mention
Risk category of loans
Loans	11,174	20,823
Commercial Real Estate | Other | Performing
Risk category of loans
Loans	103,708	106,247
Commercial Real Estate | Other | Non-accrual
Risk category of loans
Loans	4,006	2,323
Commercial Real Estate | Other | Watch
Risk category of loans
Loans	154	156
Commercial Real Estate | Other | Substandard
Risk category of loans
Loans	5,967	9,689
Commercial Real Estate | Other | Substandard Commercial
Risk category of loans
Loans	1,256	1,421
Residential
Risk category of loans
Loans	735,108	709,495
Residential | Performing
Risk category of loans
Loans	729,312	702,819
Residential | Watch
Risk category of loans
Loans	2,024	1,969
Residential | Substandard Commercial
Risk category of loans
Loans	3,772	4,707
Residential | 1-4 family
Risk category of loans
Loans	440,776	435,336
Residential | 1-4 family | Performing
Risk category of loans
Loans	436,611	430,431
Residential | 1-4 family | Watch
Risk category of loans
Loans	1,569	1,719
Residential | 1-4 family | Substandard Commercial
Risk category of loans
Loans	2,596	3,186
Residential | Home equity
Risk category of loans
Loans	294,332	274,159
Residential | Home equity | Performing
Risk category of loans
Loans	292,701	272,388
Residential | Home equity | Watch
Risk category of loans
Loans	455	250
Residential | Home equity | Substandard Commercial
Risk category of loans
Loans	1,176	1,521
Consumer
Risk category of loans
Loans	53,955	45,972
Consumer | Performing
Risk category of loans
Loans	53,879	45,786
Consumer | Substandard
Risk category of loans
Loans	43	149
Consumer | Loss
Risk category of loans
Loans	33	37
Consumer | Direct
Risk category of loans
Loans	53,468	45,360
Consumer | Direct | Performing
Risk category of loans
Loans	53,392	45,181
Consumer | Direct | Substandard
Risk category of loans
Loans	43	142
Consumer | Direct | Loss
Risk category of loans
Loans	33	37
Consumer | Indirect
Risk category of loans
Loans	487	612
Consumer | Indirect | Performing
Risk category of loans
Loans	$ 487	605
Consumer | Indirect | Substandard
Risk category of loans
Loans		$ 7

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STOCK PLANS AND STOCK BASED COMPENSATION (Tables)

9 Months Ended

Sep. 30, 2015

STOCK PLANS AND STOCK BASED COMPENSATION

Summary of stock option activity

	Nine Months Ended September 30, 2015
	Shares		Weighted Average Exercise Price
Outstanding, beginning of year	377,790		$	13.46
Granted	—		—
Exercised	(23,500	)	9.89
Forfeited or expired	(37,100	)	20.27
Outstanding, period end	317,190		$	12.91
Options exercisable at period end	229,738		$	12.42
Fully vested and expected to vest	313,186		$	12.89

Schedule of details of stock options outstanding

	September 30, 2015		December 31, 2014
Stock options vested and currently exercisable:
Number	229,738		288,938
Weighted average exercise price	$	12.42	$	13.24
Aggregate intrinsic value	$	1,824	$	2,219
Weighted average remaining life (in years)	3.5		3.8

Schedule of unrecognized stock option compensation expense related to unvested awards

Year	(in thousands)
October 2015 - December 2015	$	60
2016	93
2017	38

Summary of changes in the nonvested shares

	Restricted Shares		Weighted Average Grant Date Fair Value
Nonvested at January 1, 2015	91,923		$	14.88
Granted	28,955		19.57
Vested	(18,248	)	12.71
Forfeited	—		—
Nonvested at September 30, 2015	102,630		$	16.59

Summary of executive's payout percentage from the LTIP upon achievement of certain performance levels

Performance	Payout
Threshold	0	%
Target	100	%
Superior	150	%

Schedule of executive's eligibility for payout of shares determined by certain measures

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

Schedule of shares awarded by quarter

Quarter	Shares	Price per Share
2015     2Q	14,084	$	19.89