MSFG 401K FS 2016



	Crowe Horwath LLP
	Independent Member Crowe Horwath International

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Plan Administrator

MainSource Financial Group, Inc. 401(k)

and Employee Stock Ownership Plan

Greensburg, Indiana

We have audited the accompanying statements of net assets available for benefits of MainSource Financial Group, Inc. 401(k) and Employee Stock Ownership Plan as of December 31, 2016 and 2015, and the related statement of changes in net assets available for benefits for the year ended December 31, 2016. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan as of December 31, 2016 and 2015, and the changes in net assets available for benefits for the year ended December 31, 2016 in conformity with U.S. generally accepted accounting principles.

The supplemental Schedule H, Line 4a – Schedule of Delinquent Participant Contributions and supplemental Schedule H, Line 4i — Schedule of Assets (Held at End of Year) as of and for the year ended December 31, 2016 have been subjected to audit procedures performed in conjunction with the audit of MainSource Financial Group, Inc. 401(k) and Employee Stock Ownership Plan’s financial statements. The supplemental schedules are the responsibility of the Plan’s management. Our audit procedures included determining whether the information presented in the supplemental schedules reconcile to the financial statements or the underlying accounting and other records, as applicable, and performing procedures to test the completeness and accuracy of the information presented in the supplemental schedules. In forming our opinion on the supplemental schedule, we evaluated whether the supplemental schedules, including their form and content, are presented in conformity with the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. In our opinion, the supplemental schedules are fairly stated in all material respects in relation to the financial statements as a whole.

/s/ Crowe Horwath LLP

Indianapolis, Indiana

June 26, 2017

MAINSOURCE FINANCIAL GROUP, INC.

401(k) AND EMPLOYEE STOCK OWNERSHIP PLAN

STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS

December 31, 2016 and 2015


	2016		2015
ASSETS

Investments, at fair value (Note 3)		65,325,687	$	55,160,958
Employer contribution receivable	703,586		1,585,437
Notes receivable from participants	80,604		88,141
TOTAL ASSETS	66,109,877		56,834,536

LIABILITIES

Expenses payable	—		82,492
TOTAL LIABILITIES	—		82,492

NET ASSETS AVAILABLE FOR BENEFITS	$	66,109,877	$	56,752,044

See accompanying notes to financial statements.

MAINSOURCE FINANCIAL GROUP, INC.

401(k) AND EMPLOYEE STOCK OWNERSHIP PLAN

STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS

Year ended December 31, 2016


Investment income
Net appreciation in fair value of investments (Note 3)	$	8,888,141
Interest and dividends	1,771,446
Total investment income	10,659,587

Contributions
Employer	2,487,663
Participants	3,144,840
Rollovers	873,057
	6,505,560

Benefits paid to participants	(7,639,214		)
Plan expenses	(168,100		)
Total deductions	(7,807,314		)

Net increase	9,357,833

Net assets available for benefits
Beginning of year	56,752,044

End of year	$	66,109,877

See accompanying notes to financial statements.

NOTE 1 - DESCRIPTION OF PLAN

The following description of MainSource Financial Group, Inc. 401(k) and Employee Stock Ownership Plan (“the Plan”) provides only general information. Participants should refer to the plan agreement for a more complete description of the Plan’s provisions.

General: The Plan is a defined contribution plan covering all employees of the MainSource Financial Group, MainSource Bank, and MainSource Title LLC (collectively, “the Company”) who are age 18 or older. It is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”).

Contributions: Each year, participants may contribute up to 60% of their pretax eligible compensation to the Plan. Participants may also roll over amounts representing distributions from other qualified defined benefit or defined contribution plans. Effective January 1, 2010, new participants are automatically enrolled to defer 3% of eligible compensation subject to the same provisions previously mentioned. The contributions are invested in a Life Cycle Fund that corresponds to the participant’s estimated time of retirement, unless the participant changes the allocation. The Company may, at the discretion of the Board of Directors, make a matching contribution to the Plan to participants who have provided at least one year of service. For 2016, the Company matched the employee contributions at a rate of 80% up to 8% of the participant’s compensation. The Company may also, at the discretion of the Board of Directors, make an additional employer contribution to the Plan to participants with at least one year of service who are employed on the last day of the Plan year. An additional contribution of 2.0% of eligible participants’ compensation was authorized for 2016. The amount of this contribution was $703,586 and is shown as a receivable on the Statement of Net Assets Available for Benefits. This payment was made in March 2017. All contributions are subject to certain limitations.

Participant Accounts: Each participant’s account is credited with the participant’s own contribution and their share of the Company’s contributions and is charged with their withdrawals and an allocation of administrative expenses. The allocation of the Company’s matching contribution is based on participant deferrals and compensation. The allocation of any additional discretionary Company contribution is based on compensation. Allocation of earnings is based on participants’ account balances. The benefit to which a participant is entitled is that provided from the participant’s vested account.

Vesting: Participants are immediately vested in their own contributions and rollovers plus earnings thereon. Vesting in the Company’s matching contribution and additional employer contribution portion of their accounts plus earnings thereon is based on years of service, as defined in the Plan, based on the following schedule:


Years of Service		Vesting Percentage

1		0
2		20
3		40
4		60
5		80
6		100

A participant is entitled to 100% of his or her account balance upon retirement, death, or disability.

Forfeitures: Forfeited balances of terminated participants’ nonvested accounts may be used to offset future employer matching contributions or administrative expenses of the Plan. At December 31, 2016 and 2015, forfeited accounts totaled $107,931 and $22,125, respectively. During 2016, $89,181 of the forfeiture account was used to offset employer matching contributions and administrative expenses.

Payment of Benefits: Upon termination of service, a participant may elect to receive an amount equal to the value of his or her vested interest in their account in the form of a lump sum or installment payments. Balances are generally paid as a single lump-sum distribution.

Administrative and Investment Management Expenses: Plan recordkeeping, accounting, and trustee fees are paid by the Plan and are reflected in the financial statements as plan expenses. Fees related to the administration of notes receivable from participants are

charged directly to the participant’s account and are included in plan expenses. Investment management fees are charged to the Plan as a reduction of investment return and included in the investment income (loss) reported by the Plan.

Notes Receivable from Participants: Participants may borrow from the Plan. The amount that can be borrowed is a maximum generally equal to the lesser of $50,000 or 50% of their vested account balance. Loan terms generally range from 1 to 5 years; however, they may be as long as 30 years for the purchase of a primary residence. The loans are secured by the vested balance in the participant’s account and bear interest at a rate commensurate with prevailing rates as determined by the plan administrator. Principal and interest payments are made through payroll deductions.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting: The financial statements of the Plan are prepared under the accrual basis of accounting based on U.S. generally accepted accounting principles.

Investment Valuation and Income Recognition: The Plan’s investments are reported at fair value. Purchases and sales of securities are recorded on a trade date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date. Net appreciation (depreciation) includes the Plan’s gains and losses on investments bought and sold as well as held during the year. Investment management fees are netted into the returns on the mutual fund investments.

Use of Estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires the plan administrator to make estimates and assumptions that affect certain reported amounts and disclosures, and actual results may differ from those estimates.

Risks and Uncertainties: The Plan provides for various investment options. The underlying investment securities are exposed to various risks such as interest rate, market, liquidity and credit risk. Due to the level of risk associated with certain investment securities and the sensitivity of certain fair value estimates to changes in valuation assumptions, it is at least reasonably possible that changes in risks in the near term could materially affect participants’ account balances and the amounts reported in the statement of net assets available for benefits.

Notes Receivable from Participants: Notes receivable from participants are reported at their unpaid principal balance plus any accrued, but unpaid interest, with no allowance for credit losses, as repayments of principal and interest are received through payroll deductions and the notes are collateralized by the participants’ account balances.

Payment of Benefits: Benefits are recorded when paid.

Concentration of Credit Risk: At December 31, 2016 and 2015, approximately 27% and 26%, respectively, of the Plan’s assets were invested in MainSource Financial Group, Inc. common stock. This stock has full voting rights.

NOTE 3 — FAIR VALUE MEASUREMENTS

Fair Value: Fair value is the price that would be received by the Plan for an asset or paid by the Plan to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date in the Plan’s principal or most advantageous market for the asset or liability. Fair value measurements are determined by maximizing the use of observable inputs and minimizing the use of unobservable inputs when measuring fair value. The hierarchy places the highest priority on unadjusted quoted market prices in active markets for identical assets or liabilities (level 1 measurements) and gives the lowest priority to unobservable inputs (level 3 measurements). The three levels of inputs within the fair value hierarchy are defined as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Plan 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 the Plan’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

In some cases, a valuation technique used to measure fair value may include inputs from multiple levels of the fair value hierarchy. The lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy. Transfers between hierarchy measurement levels are recognized by the Plan as of the end of the reporting period.

The following descriptions of the valuation methods and assumptions used by the Plan to estimate the fair values of investments apply to investments held directly by the Plan.

Mutual funds and money market funds: The fair values of mutual fund and money market fund investments are determined by obtaining quoted prices on nationally recognized securities exchanges (level 1 inputs).

Company common stock: The fair value of MainSource Financial Group, Inc. common stock is determined by obtaining quoted prices from a nationally recognized exchange (level 1 inputs).

Stable value fund: The fair value of participation units in the Federated Capital Preservation Fund — Institutional Service Pricing Class, a stable value collective trust, is based upon the net asset values of such fund, as reported in the audited financial statements of the fund. The fund invests in conventional and synthetic investment contracts issued by life insurance companies, banks, and other financial institutions, with the objective of providing a high level of return that is consistent with also providing stability of investment return, preservation of capital and liquidity to pay plan benefits of its retirement plan investors. The fund provides for daily redemptions by the Plan at reported net asset value per share, with no advance notification requirement for the purpose of funding a bona fide benefit payment, making a Participant loan, honoring an employee-directed transfer of the employee’s interest in the plan to another investment election, or paying trust fees. Withdrawals from the Fund for any other purpose generally require 12 months advance written notice.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Investments measured at fair value on a recurring basis are summarized below


			Fair Value Measurements at December 31, 2016 Using
			Quoted Prices in			Significant
			Active Markets			Other		Significant
			for Identical			Observable		Unobservable
			Assets			Inputs		Inputs
	Total		(Level 1)			(Level 2)		(Level 3)
Investments:
Company common stock	$	18,149,440	$	18,149,440		$	—	$	—
Money market fund	4,424		4,424			—		—
Mutual funds	43,830,395		43,830,395			—		—
Stable value fund*	3,341,428		—			—		—
Total	$	65,325,687	$		61,984,259	$		$	—

There were no transfers between Level 1 and Level 2 during 2016.


			Fair Value Measurements at December 31, 2015 Using
			Quoted Prices in		Significant
			Active Markets		Other		Significant
			for Identical		Observable		Unobservable
			Assets		Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Investments:
Company common stock	$	14,721,679	$	14,721,679	$	—	$	—
Money market fund	30,054		30,054		—		—
Mutual funds	37,052,591		37,052,591		—		—
Stable value fund*	3,356,634		—		—		—
Total	$	55,160,958	$	51,804,324	$	—	$	—

*Investments measured at fair value using net asset value per share (or its equivalent) as a practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in the hierarchy tables for such investments are intended to permit reconciliation of the fair value hierarchy to the investments at fair value line item presented in the statement of net assets available for benefits.

NOTE 4 - PLAN TERMINATION

Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time, subject to the provisions of ERISA and its related regulations. In the event of the Plan’s termination, participants will become 100% vested in their accounts.

NOTE 5 - PARTY-IN-INTEREST TRANSACTIONS

Parties in interest are defined under Department of Labor’s regulations as any fiduciary of the Plan, any party rendering service to the Plan, the employer, and certain others. Certain professional fees related to the administration of the Plan were paid by the Company. Fees paid by the Plan in 2016 to Crowe Horwath LLP, the auditors, of $23,000 qualify as party-in-interest transactions.

The Plan’s investments in MainSource Financial Group, Inc. common stock at December 31, 2016 and 2015 qualify as party-in-interest investments. Fees paid by the Plan in 2016 to Swerdlin & Company, the recordkeeper, of $95,415 qualify as party-in-interest transactions. Fees paid by the Plan in 2016 to First Bankers Trust Services, the trustee, of $23,420 qualify as party-in-interest transactions. Custodial fees to TD Ameritrade of $26,265 also qualify as party-in-interest transactions.

The Plan received dividend income from investments in MainSource Financial Group, Inc. common stock. These dividends qualify as party-in-interest transactions. The total dividends received from the MainSource Financial Group, Inc. common stock in 2016 was $369,618.

Notes receivable from participants also reflect party-in-interest transactions.

NOTE 6 - TAX STATUS

The Internal Revenue Service (“IRS”) has determined and informed the Company, by a letter dated May 17, 2017, that the Plan and related trust are designed in accordance with applicable sections of the Internal Revenue Code (“IRC”). Although the Plan has been amended since receiving the determination letter, Plan management believes the Plan is designed and being operated in compliance with the applicable requirements of the IRC. Therefore, they believe the Plan was qualified and the related trust was tax-exempt as of the financial statement date.

MAINSOURCE FINANCIAL GROUP, INC.

401(k) AND EMPLOYEE STOCK OWNERSHIP PLAN

SCHEDULE H, LINE 4a - SCHEDULE OF DELINQUENT PARTICPANT CONTRIBUTIONS

Year ended December 31, 2016

Participant Contributions Transferred Late to Plan

Total That Constitute Nonexempt

Prohibited Transactions

Total Fully Corrected Under VFCP and PTE 2002-51

Check here if Late Participant Loan Repayments are included:

Contributions Not Corrected

Contributions Corrected Outside VFCP

$263

Contributions Pending Correction in VFCP

MAINSOURCE FINANCIAL GROUP, INC.

401(k) AND EMPLOYEE STOCK OWNERSHIP PLAN

SCHEDULE H, LINE 4i - SCHEDULE OF ASSETS (HELD AT END OF YEAR)

December 31, 2016

Name of Plan Sponsor: MainSource Financial Group, Inc.

Employer Identification Number: 35-1562245

Three-Digit Plan Number: 001


		(c)
		Description of
	(b)	Investment
	Identity of Issue,	Including Maturity Date,		(e)
	Borrower, Lessor,	Rate of Interest, Collateral,	(d)	Current
(a)	or Similar Party	Par or Maturity Value	Cost	Value

		Mutual Funds
	Victory RS	Small Cap Growth Fund	**	$	1,722,051
	Federated Investors, Inc.	Total Return Bond Fund	**	4,899,466
	Federated Investors, Inc.	Mid Cap Index Fund	**	3,351,971
	Lazard Funds	Emerging Markets Equity Instl	**	1,144,697
	Prudential Funds	Jennison Mid-Cap Growth Z	**	4,066,802
	Vanguard Funds	Small Cap Index	**	1,685,586
	American Funds	Europacific Growth R5	**	2,086,544
	RidgeWorth	Large Cap Value Equity I	**	3,266,122
	Vanguard Funds	Target Retirement 2015	**	1,205,912
	Vanguard Funds	Target Retirement 2025	**	3,322,323
	Vanguard Funds	Target Retirement 2035	**	3,610,516
	Vanguard Funds	Target Retirement 2045	**	2,033,656
	Vanguard Funds	Target Retirement 2055	**	8,269
	Vanguard Funds	Total Stock Market Index	**	11,149,697
	Vanguard Funds	Total International Stock Index	**	276,783

		Money Market Fund
*	TD Ameritrade	Money Market Fund	**	4,424

		Collective Trust
	Federated Investors, Inc.	Capital Preservation Fund — Institutional Service Pricing Class	**	3,341,428

		Common Stock
*	MainSource Financial Group, Inc.	Common stock	**	18,149,440

		Participant Loans
*	Participant Loans	Bearing interest at rates ranging from 4.25% to 5.00%	**	80,604
				$	65,406,291

*Denotes party in interest

**Participant-directed investments, cost basis not presented

See Report of Independent Registered Public Accounting Firm


	MAINSOURCE FINANCIAL GROUP,
	INC. 401(K) AND EMPLOYEE STOCK OWNERSHIP PLAN

Date: June 26, 2017	/s/ James M. Anderson
	James M. Anderson
	Executive Vice President & Chief
	Financial Officer
	MainSource Financial Group, Inc.


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

FINANCIAL STATEMENTS

STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS	2

STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS	3

NOTES TO FINANCIAL STATEMENTS	4

SUPPLEMENTAL INFORMATION

SCHEDULE H, LINE 4a – SCHEDULE OF DELINQUENT PARTICPANT CONTRIBUTIONS	9

SCHEDULE H, LINE 4i - SCHEDULE OF ASSETS (HELD AT END OF YEAR)	10