NOTE 22 — 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.

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


	2016	2015	2014
Risk-free interest rate	NA	NA	2.08	%
Expected term (years)	NA	NA	7.00
Expected stock price volatility	NA	NA	28.04	%
Dividend yield	NA	NA	2.49	%

A summary of the activity in the Company’s stock incentive plans for 2016 follows:


				Weighted
				Average
		Weighted		Remaining
		Average		Contractual	Aggregate
		Exercise		Term	Intrinsic
Options	Shares	Price		(years)	Value
Outstanding, beginning of year	310,665	$	12.83
Granted	—		—
Exercised	(111,595)		13.94
Forfeited or expired	(5,956)		16.07
Outstanding at end of period	193,114	$	12.09	4.0	$	4,309
Exercisable at end of period	181,710	$	11.83	3.8	$	4,101
Fully vested and expected to vest	192,542	$	12.07	4.0	$	4,299

Information related to the Company’s stock incentive plans during each year follows:


	2016		2015		2014
Intrinsic value of options exercised	$	1,306	$	244	$	55
Cash received from option exercises		1,556		294		66
Tax benefit realized from option exercises		164		31		—
Weighted average (per share) fair value of options granted		NA		NA		3.78

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of the Company’s common stock as of the reporting date for those options where the exercise price is less than the market price.

The Company recorded $91, $180, and $160 in stock option compensation expense during 2016, 2015, and 2014 to salaries and employee benefits. As of December 31, 2016, there was $30 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. The cost is expected to be recognized over a weighted‑average period of 1.0 years.

In the second quarter of each of 2016, 2015 and 2014, the Executive Compensation Committee of the Board of Directors of the Company granted restricted stock awards to certain executive officers and other employees pursuant to the Company’s LTIP. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the issue date. The value of the awards was determined by multiplying the award amount by the closing price of a share of Company common stock on the grant date. The restricted stock awards vest as follows — 100% on the third anniversary of the date of grant. A total of 50,152, 28,955, and 33,836 shares of common stock of the Company were granted in 2016, 2015 and 2014 respectively.

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


		Weighted Average
	Restricted	Grant Date
	Shares	Fair Value
Nonvested at January 1, 2016	101,631	$	16.57
Granted	50,152		22.48
Vested	(43,244)		14.75
Forfeited	(4,220)		20.00
Nonvested at December 31, 2016	104,319	$	20.03

As of December 31, 2016, there was $1,101 of total unrecognized compensation costs related to nonvested restricted stock awards granted under the 2015 and 2007 Plans that will be recognized over the remaining vesting period of approximately 2.32 years. The recognized compensation costs related to the 2007 Plan were $670, $584, and $487 for 2016, 2015, and 2014 respectively.

Additionally, in the first quarter of 2016 and 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. 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).

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 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. A total of $240 and $79 of expense was recognized on these awards in 2016 and 2015 respectively. A total of $344 will be expensed in future periods if the Target level is achieved.

In the second quarters of 2014, 2015, and 2016, members of the Board of Directors received their entire annual retainer in restricted Company stock for the following year. The awards vest quarterly for all directors who remain 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, and February 1, of the following year. The value of the retainer awards was determined by multiplying the award amount by the closing price of the stock on the issuance date.

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


Quarter		Shares	Price per Share
2014	2Q	21,780	$	16.53
2015	2Q	14,084		19.89
2015	4Q	1,341		19.89
2016	1Q	358		19.89
2016	2Q	17,976		21.89

A total of $382, $315, and $359 was recognized as expense in 2016, 2015, and 2014 for these grants.

In late 2014, the Company announced a stock repurchase program pursuant to which the Company could repurchase up to 5.0% of its outstanding shares of common stock, or approximately 1,085,000 shares prior to December 31, 2015. During 2015, the Company repurchased 169,110 shares at a total cost of $3,381. The program expired on December 31, 2015.