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.

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 director options are tracked separately. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

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

The following table summarizes stock option activity:


	Three Months Ended
	March 31, 2016
		Weighted
		Average
		Exercise
Options (restated for stock dividends and splits)	Shares	Price
Outstanding, beginning of year	310,665	$	12.83
Granted	—		—
Exercised	(28,075)		15.20
Forfeited or expired	(2,625)		18.04
Outstanding at end of year	279,965	$	12.54
Exercisable at year end	238,715	$	12.10
Fully vested and expected to vest	277,754	$	12.52

The following table details stock options outstanding:


	March 31,		December 31,
	2016		2015
Stock options vested and currently exercisable:
Number		238,715		269,415
Weighted average exercise price	$	12.10	$	12.48
Aggregate intrinsic value	$	2,145	$	2,801
Weighted average remaining life (in years)		3.7		3.6

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 $22 and $43 in stock compensation expense during the three months ended March 31, 2016 and 2015, respectively to salaries and employee benefits. There have been no options granted in the first quarter of 2016 or 2015.

Unrecognized stock option compensation expense related to unvested awards for the remainder of 2016 and beyond is estimated as follows:


Year	(in thousands)
April 2016 - December 2016	$	64
2017		35

During 2015 and the first quarter of 2016, 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 24,152 shares of common stock were granted in the first quarter of 2016 at a weighted average cost of $21.47 per share. A total of 11,171 shares of common stock were granted in the first quarter of 2015 at a weighted average cost of $19.57 per share.

A summary of changes in the Company’s nonvested restricted shares for 2016 follows:


		Weighted Average
	Restricted	Grant Date
	Shares	Fair Value
Nonvested at January 1, 2016	101,631	$	16.57
Granted	24,152		21.47
Vested	(1,000)		13.67
Forfeited	—		—
Nonvested at March 31, 2016	124,783	$	17.54

As of March 31, 2016, there was $908 of total unrecognized compensation costs related to nonvested restricted stock awards granted under the 2015 Plan that will be recognized over the remaining vesting period of approximately 1.9 years. The recognized compensation costs related to the plans were $149 and $152 for the three month periods ending March 31, 2016 and 2015 respectively.

Additionally, in the first quarters of 2016 and 2015, the Committee voted to grant performance share units to certain executive officers pursuant to the Company’s LTIP. 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 or 2018, 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:


			Evaluated
Performance Measure	Weight		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 16,152 performance share units were granted in the first quarter of 2016 at a weighted average cost of $21.41 per share. A total of 11,171 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. $26 and $0 of expense was recognized on these awards in the first quarter of 2016 and 2015. A total of $557 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 date of the 2015 annual meeting of shareholders. Due to the addition of two new directors to the Board of Directors during the second half of 2015 and the first quarter of 2016, additional shares were granted to these individuals upon their joining the Board of Directors. The shares granted were based on each new director’s pro rata time on the Board.

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
2015	4Q	1,341		19.89
2016	1Q	358		19.89

A total of $89 and $90 was recognized as other expense in the first quarter of 2016 and 2015 respectively.