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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

For the fiscal year ended December 31, 2010

Commission file number 0-12422

MAINSOURCE FINANCIAL GROUP, INC.(Exact name of registrant as specified in its charter)

Indiana(State or other jurisdiction
of incorporation or organization)

35-1562245(I.R.S. Employer
Identification No.)2105 North State Road 3 Bypass
Greensburg, Indiana 47240(Address of principal executive offices) (Zip code)Registrant's telephone number, including area code:(812) 663-6734Securities registered pursuant to Section 12(b) of the Act:Title of each class Common shares, no par value

Name of each exchange on which registered The NASDAQ Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act: None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
o No ý

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 ý 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 during the previous 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. 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.

Large accelerated filer o

Accelerated filer ý

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 Act). Yes o No
ý

The aggregate market value (not necessarily a reliable indication of the price at which more than a limited number of shares would trade) of the voting stock held by
non-affiliates of the registrant was $144,377,716 as of June 30, 2010.

As
of March 10, 2011, there were outstanding 20,136,362 common shares, without par value, of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Documents

Part of Form 10-K
Into Which IncorporatedDefinitive Proxy Statement for Annual
Meeting of Shareholders to be held
April 27, 2011

Part III (Items 10 through 14)




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FORM 10-K
TABLE OF CONTENTS



PART I

PageItem 1

Business

3Item 1A

Risk Factors

9Item 1B

Unresolved Staff Comments

15Item 2

Properties

15Item 3

Legal Proceedings

15Item 4

(Removed and Reserved)

15PART IIItem 5

Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

16Item 6

Selected Financial Data

18Item 7

Management's Discussion and Analysis of Financial Condition and Results of Operations

19Item 7A

Quantitative and Qualitative Disclosures About Market Risk

30Item 8

Financial Statements and Supplementary Data

31Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

66Item 9A

Controls and Procedures

66Item 9B

Other Information

66PART IIIItem 10

Directors, Executive Officers and Corporate Governance

See belowItem 11

Executive Compensation

See belowItem 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

See belowItem 13

Certain Relationships and Related Transactions and Director Independence

See belowItem 14

Principal Accounting Fees and Services

See belowPART IVItem 15

Exhibits, Financial Statement Schedules

67


Pursuant
to General Instruction G, the information called for by Items 10-14 is omitted by MainSource Financial Group, Inc. since MainSource Financial Group,
Inc. will file with the Commission a definitive proxy statement to shareholders pursuant to Regulation 14A not later than 120 days after the close of the fiscal year containing the
information required by Items 10-14.

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PART I.

(Dollar amounts in thousands except per share data)

ITEM 1.   BUSINESS

General

MainSource Financial Group, Inc. ("MainSource" or the "Company") is a financial holding company based in Greensburg, Indiana. As
of December 31, 2010, the Company operated one banking subsidiary: MainSource Bank ("the Bank"), an Indiana state chartered bank. Through its non-bank affiliates, the Company
provides services incidental to the business of banking. Since its formation in 1982, the Company has acquired and established various institutions and financial services companies and may acquire
additional financial institutions and financial services companies in the future. For further discussion of the business of the Company see Management's Discussion and Analysis in Part II,
Item 7.

As
of December 31, 2010, the Company operated 80 branch banking offices in Indiana, Illinois, Ohio and Kentucky. As of December 31, 2010, the Company had consolidated
assets of $2,769,312, consolidated deposits of $2,211,564 and shareholders' equity of $302,570.

Through
the Bank, the Company offers a broad range of financial services, including: accepting time and transaction deposits; making consumer, commercial, agribusiness and real estate
mortgage loans; renting safe deposit facilities; providing personal and corporate trust services; and providing other corporate services such as letters of credit and repurchase agreements.

The
lending activities of the Bank are separated into primarily the categories of commercial/agricultural, real estate and consumer. Loans are originated by the lending officers of the
Bank subject to limitations set forth in lending policies. The Board of Directors of the Bank monitors concentrations of credit, problem and past due loans and charge-offs of uncollectible
loans and approves loan policy. The Bank maintains conservative loan policies and underwriting practices in order to address and manage loan risks. These policies and practices include granting loans
on a sound and collectible basis, serving the legitimate needs of the community and the general market area while obtaining a balance between maximum yield and minimum risk, ensuring that primary and
secondary sources of repayment are adequate in relation to the amount of the loan, developing and maintaining adequate diversification of the loan portfolio as a whole and of the loans within each
category and developing and applying adequate collection policies.

Commercial
loans include secured and unsecured loans, including real estate loans, to individuals and companies and to governmental units predominantly within the market area of the Bank
for a myriad of business purposes.

Agricultural
loans are generated in the Bank's markets. Most of the loans are real estate loans on farm properties. Loans are also made for agricultural production and such loans are
generally reviewed annually.

Residential
real estate lending has been the largest component of the loan portfolio for many years. The Bank generates residential mortgages for its own portfolio. However, the Company
elects to sell the majority of its fixed rate mortgages into the secondary market while maintaining the servicing of such loans. At December 31, 2010, the Company was servicing a
$782 million residential real estate loan portfolio. By originating loans for sale in the secondary market, the Company can more fully satisfy customer demand for fixed rate residential
mortgages and increase fee income, while reducing the risk of loss caused by rising interest rates.

The
principal source of revenues for the Company is interest and fees on loans, which accounted for 59.8% of total revenues in 2010, 63.2% in 2009 and 67.9% in 2008.

The
Company's investment securities portfolio is primarily comprised of U. S. Treasuries, state and municipal bonds, U. S. government sponsored entity's mortgage-backed securities and
corporate securities. The Company has classified its entire investment portfolio as available for sale, with fair value changes reported separately in shareholders' equity. Funds invested in the
investment portfolio generally represent funds not immediately required to meet loan demand. Income related to the Company's investment portfolio accounted for 16.6% of total revenues in 2010, 14.8%
in 2009 and 15.0% in 2008. As of December 31, 2010, the Company had not identified any securities as being "high risk" as defined by the FFIEC Supervisory Policy Statement on Securities
Activities.

The
primary source of funds for the Bank is deposits generated in local market areas. To attract and retain stable depositors, the Bank markets various programs for demand, savings and
time deposit accounts. These programs include interest and non-interest bearing demand and individual retirement accounts.

Currently,
national retailing and manufacturing subsidiaries, brokerage and insurance firms and credit unions are fierce competitors within the financial services industry. Mergers
between financial institutions within Indiana and neighboring states,

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which
became permissible under the Interstate Banking and Branching Efficiency Act of 1994, have also added competitive pressure.

The
branches of the Bank are located in predominantly non-metropolitan areas and the Bank's business is centered in loans and deposits generated within markets considered
largely rural in nature. In addition to competing vigorously with other banks, thrift institutions, credit unions and finance companies located within their service areas, we also compete, directly
and indirectly, with all providers of financial services.

Employees

As of December 31, 2010, the Company and its subsidiaries had 926 full-time equivalent employees to whom they
provide a variety of benefits and with whom they enjoy excellent relations. None of our employees are subject to collective bargaining agreements.

Regulation and Supervision

The Company is a financial holding company ("FHC") within the meaning of the Bank Holding Company Act of 1956, as amended. As a
financial holding company, the Company is subject to regulation by the Federal Reserve Board ("FRB"). The Bank is an Indiana state chartered bank subject to supervision and regulation by the Federal
Deposit Insurance Corporation ("FDIC") and the Indiana Department of Financial Institutions. The following is a discussion of material statutes and regulations affecting the Company and the Bank. The
discussion is qualified in its entirety by reference to such statutes and regulations.



Generally, the BHC Act governs the acquisition and control of banks and nonbanking companies by bank holding companies. A bank holding
company is subject to regulation under the BHC Act and is required to register with the FRB under the BHC Act. The BHC Act requires a bank holding company to file an annual report of its operations
and such additional information as the FRB may require. The FRB has issued regulations under the BHC Act requiring a bank holding company to serve as a source of financial and managerial strength to
its subsidiary banks. It is the policy of the FRB that, pursuant to this requirement, a bank holding company should stand ready to use its resources to provide adequate capital funds to its subsidiary
banks during periods of financial stress or adversity.

The
acquisition of 5% or more of the voting shares of any bank or bank holding company generally requires the prior approval of the FRB and is subject to applicable federal and state
law, including the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal") for interstate transactions. The FRB evaluates acquisition applications
based on, among other things, competitive factors, supervisory factors, adequacy of financial and managerial resources, and banking and community needs considerations.

The
BHC Act also prohibits, with certain exceptions, a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any
"nonbanking" company unless the nonbanking activities are found by the FRB to be "so closely related to banking . . . as to be a proper incident thereto." Under current regulations of the FRB, a bank
holding company and its nonbank subsidiaries are permitted, among other activities, to engage in such banking-related business ventures as consumer finance, equipment leasing, data processing,
mortgage banking, financial and investment advice, and securities brokerage services. The BHC Act does not place territorial restrictions on the activities of a bank holding company or its nonbank
subsidiaries.

Federal
law prohibits acquisition of "control" of a bank or bank holding company without prior notice to certain federal bank regulators. "Control" is defined in certain cases as the
acquisition of as little as 10% of the outstanding shares of any class of voting stock. Furthermore, under certain circumstances, a bank holding company may not be able to purchase its own stock,
where the gross consideration will equal 10% or more of the company's net worth, without obtaining approval of the FRB. Under the Federal Reserve Act, banks and their affiliates are subject to certain
requirements and restrictions when dealing with each other (affiliate transactions include transactions between a bank and its bank holding company).



The Gramm-Leach-Bliley Financial Modernization Act of 1999 (the "Modernization Act") was enacted on November 12, 1999. The
Modernization Act, which amended the BHC Act, provides the following:

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The
Company initially qualified as a financial holding company in December, 2004. Thus the Company is authorized to operate as a financial holding company and is eligible to engage in,
or acquire companies engaged in, the broader range of activities that are permitted by the Modernization Act. These activities include those that are determined to be "financial in nature," including
insurance underwriting, securities underwriting and dealing, and making merchant banking investments in commercial and financial companies. If a banking subsidiary ceases to be "well capitalized" or
"well managed" under applicable regulatory standards, the FRB may, among other things, place limitations on our ability to conduct these broader financial activities or, if the deficiencies persist,
require us to divest the banking subsidiary. In addition, if a banking subsidiary receives a rating of less than satisfactory under the Community Reinvestment Act of 1977 ("CRA"), we would be
prohibited from engaging in any additional activities other than those permissible for bank holding companies that are not financial holding companies.



In 1970, Congress enacted the Currency and Foreign Transactions Reporting Act, commonly known as the Bank Secrecy Act (the "BSA"). The
BSA requires financial institutions to maintain records of certain customers and currency transactions and to report certain domestic and foreign currency transactions, which may have a high degree of
usefulness in criminal, tax, or regulatory investigations or proceedings. Under this law, financial institutions are required to develop a BSA compliance program.

In
2001, the President signed into law comprehensive anti-terrorism legislation known as the USA Patriot Act. Title III of the USA Patriot Act requires financial
institutions, including the Company and the Bank, to help prevent and detect international money laundering and the financing of terrorism and prosecute those involved in such activities. The
Department of the Treasury has adopted additional requirements to further implement Title III.

Under
these regulations, a mechanism has been established for law enforcement officials to communicate names of suspected terrorists and money launderers to financial institutions to
enable financial institutions to promptly locate accounts and transactions involving those suspects. Financial institutions receiving names of suspects must search their account and transaction
records for potential matches and report positive results to the U.S. Department of the Treasury Financial Crimes Enforcement Network ("FinCEN"). Each financial institution must designate a point of
contact to receive information requests. These regulations outline how financial institutions can share information concerning suspected terrorist and money laundering activity with other financial
institutions under the protection of a statutory safe harbor if each financial institution notifies FinCEN of its intent to share information. The Department of the Treasury has also adopted
regulations intended to prevent money laundering and terrorist financing through correspondent accounts maintained by U.S. financial institutions on behalf of foreign banks. Financial institutions are
required to take reasonable steps to ensure that they are not providing banking services directly or indirectly to foreign shell banks. In addition, banks must have procedures in place to verify the
identity of the persons with whom they deal.



The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires, among other things, federal bank regulatory
authorities to take "prompt corrective action" with respect to banks which do not meet minimum capital requirements. For these purposes, FDICIA establishes five capital tiers: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The FDIC has adopted regulations to implement the prompt corrective action provisions of
FDICIA.

"Undercapitalized"
banks are subject to growth limitations and are required to submit a capital restoration plan. A bank's compliance with such plan is required to be guaranteed by the
bank's parent holding company. If an "undercapitalized" bank fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized. "Significantly undercapitalized" banks are
subject to one or more restrictions, including an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cease receipt of deposits
from correspondent banks, and restrictions on compensation of executive officers. "Critically undercapitalized" institutions may not, beginning 60 days after becoming "critically
undercapitalized," make any payment of principal or interest on certain subordinated debt or extend credit for a highly leveraged transaction or enter into any transaction outside the ordinary course
of business. In addition, "critically undercapitalized" institutions are subject to appointment of a receiver or conservator.

A
"well capitalized" institution is one that has a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 6%, a
leverage ratio of at least 5% and is not subject to regulatory direction to maintain a specific level for any capital measure. An "adequately capitalized" institution is one that has ratios greater
than 8%, 4% and 4%. An institution is "undercapitalized" if its respective ratios are less than 8%, 4% and 4%. "Significantly undercapitalized" institutions have ratios of

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less
than 6%, 3% and 3%. An institution is deemed to be "critically undercapitalized" if it has a ratio of tangible equity to total assets that is 2% or less.



The Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"), which became law on July 30, 2002, added new legal requirements for
public companies affecting corporate governance, accounting and corporate reporting. The Sarbanes-Oxley Act provides for, among other things:

The
SEC has been delegated the task of enacting rules to implement various provisions of the Sarbanes-Oxley Act. In addition, each of the national stock exchanges developed new corporate
governance rules, including rules strengthening director independence requirements for boards, the adoption of corporate governance codes and charters for the nominating, corporate governance and
audit committees.



The deposits of the Bank are insured to the maximum extent permitted by law by the Deposit Insurance Fund ("DIF") of the FDIC, which
was created in 2006 as the result of the merger of the Bank Insurance Fund and the Savings Association Insurance Fund in accordance with the Federal Deposit Insurance Reform Act of 2005 (the "FDI
Act"). The FDI Act provided for several additional changes to the deposit insurance system, including adjusting the deposit insurance limits every 5 years beginning in 2011 based on an
inflation index, increasing the insurance limit for retirement
accounts from $100 to $250, and allocating an aggregate of $4.7 billion of one-time credits to banks to offset the insurance premiums charged to such banks by the FDIC.

During
the second quarter of 2009, the FDIC levied an industry-wide special assessment charge on insured financial institutions as part of the agency's efforts to rebuild the
DIF. In November 2009, the FDIC amended regulations that required insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all
of the years 2010-2012. The prepaid assessments will be applied against future quarterly assessments (as they may be so revised) until the prepaid assessment is exhausted or the balance of the
prepayment is returned, whichever occurs first.

In
addition, on January 12, 2010, the FDIC announced that it would seek public comment on whether financial institutions with compensation plans that encourage risky behavior
should be charged higher deposit assessment rates than such financial institutions would otherwise be charged. The FDIC is not precluded from changing assessment rates or from further revising the
risk-based assessment system during the prepayment period or thereafter. Thus, the Company may also be required to pay significantly higher FDIC insurance assessment premiums in the future
because market developments have significantly depleted the DIF and reduced the ratio of reserves to insured deposits.

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The Company is a legal entity separate and distinct from the Bank. There are various legal limitations on the extent to which the Bank
can supply funds to the Company. The principal source of the Company's funds consists of dividends from the Bank. State and Federal law restricts the amount of dividends that may be paid by banks. In
addition, the Bank is subject to certain restrictions on extensions of credit to the Company, on investments in the stock or other securities of the Company and in taking such stock or securities as
collateral for loans.



As discussed above, the Company and the Bank must meet certain minimum capital requirements mandated by each of their state or federal
regulators. These regulatory agencies require BHCs and banks to maintain certain minimum ratios of primary capital to total assets and total capital to total assets. The FRB requires BHCs to maintain
a minimum Tier 1 leverage ratio of 3% capital to total assets; however, for all but the most highly rated institutions which do not anticipate significant growth, the minimum Tier 1
leverage ratio is 3% plus an additional cushion of 100 to 200 basis points. As of December 31, 2010, the Company's leverage ratio of capital to total assets was 9.7%. The FRB and FDIC each have
approved the imposition of "risk-adjusted" capital ratios on BHCs and financial institutions. The Company's Tier 1 Capital to Risk-Weighted Assets Ratio was 15.5% and
its Total Capital to Risk-Weighted Assets Ratio was 16.8% at December 31, 2010. The Bank had capital to asset ratios and risk- adjusted capital ratios at
December 31, 2010, in excess of the applicable minimum regulatory requirements



In October 2008, the Emergency Economic Stabilization Act of 2008 ("EESA") was enacted. The EESA authorizes Treasury to purchase from
financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity
securities issued by financial institutions and their holding companies in a troubled asset relief program ("TARP"). The purpose of TARP is to restore confidence and stability to the U.S. banking
system and to encourage financial institutions to increase their lending to customers and to each other. EESA also increased the amount of deposit insurance provided by the FDIC.

The
U.S. Department of the Treasury ("Treasury"), working with the Federal Reserve Board, established late in 2008 the TARP Capital Purchase Program ("CPP"), which was intended to
stabilize the financial services industry. One of the components of the CPP included a $250 billion voluntary capital purchase program for certain qualified and healthy banking institutions.
Pursuant to the CPP, Treasury purchased from the Company 57,000 shares of $1,000 par value senior perpetual preferred securities at a price of $57 million equal to approximately 3.0% of the
Company's then risk-weighted assets. Such preferred shares pay a dividend of 5% for the first five years and will increase to 9% thereafter. In addition, subject to certain limited exceptions, as a
participant in the CPP, the Company is prohibited from (a) increasing its dividend to common shareholders and (b) conducting share repurchases without prior approval of the Treasury. In
connection with the Company's participation in the CPP, Treasury also received a warrant for the purchase of common stock in the amount of 571,906 shares at a strike price of $14.95 per share. The
warrant expires on January 16, 2019.



On February 17, 2009, President Barack Obama signed the American Recovery and Reinvestment Act of 2009 ("ARRA"), more commonly
known as the economic stimulus or economic recovery package. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health and
education needs. In addition, ARRA imposes new executive compensation and corporate governance limits on current and future participants in the CPP, including the Company, which are in addition to
those previously announced by Treasury. The new limits remain in place until the participant has redeemed the preferred stock sold to Treasury, which is now permitted under ARRA without penalty and
without the need to raise new capital, subject to Treasury's consultation with the recipient's appropriate federal regulator. On June 10, 2009, Treasury released an interim final rule,
effective June 15, 2009, that provided guidance on the compensation and governance standards for participants in the CPP, and promulgated regulations to implement the restrictions and standards
set forth in ARRA. Among other things, Treasury's final rule and ARRA significantly expanded the executive compensation restrictions previously imposed by EESA.



On July 21, 2010, President Obama signed into law the sweeping financial regulatory reform act entitled the "Dodd-Frank Wall
Street Reform and Consumer Protection Act" (Dodd-Frank Act) that implements far-reaching
changes to the regulation of the financial services industry, including provisions that, among other things will:

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The
Dodd-Frank Act includes certain provisions concerning the capital regulations of the United States banking regulators, which are often referred to as the "Collins Amendment." These
provisions are intended to subject bank holding companies to the same capital requirements as their bank subsidiaries and to eliminate or significantly reduce the use of hybrid capital instruments,
especially trust preferred securities, as regulatory capital. Under the Collins Amendment, trust preferred securities issued by a company, such as the Company, with total consolidated assets of less
than $15 billion before May 19, 2010 and treated as regulatory capital are grandfathered, but any such securities issued later are not eligible as regulatory capital. The banking
regulators must develop regulations setting minimum risk-based and leverage capital requirements for holding companies and banks on a consolidated basis that are no less stringent than the generally
applicable requirements in effect for depository institutions under prompt corrective action regulations. The banking regulators also must seek to make capital standards countercyclical so that the
required levels of capital increase in times of economic expansion and decrease in times of economic contraction. The Act requires these new capital regulations to be adopted by the Federal Reserve in
final form 18 months after the date of enactment of the Dodd-Frank Act (July 21, 2010). To date, no proposed regulations have been issued.

Many
aspects of the act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Company, its customers or
the financial industry more generally. Provisions in the legislation that affect deposit insurance assessments and payment of interest on demand deposits could increase the costs associated with
deposits as well as place limitations on certain revenues those deposits may generate.



In addition to the laws and regulations discussed above, Congress, the United States Department of the Treasury ("Treasury") and the
federal banking regulators, including the FDIC, have taken broad action since early September 2008 to address volatility in the U.S. banking system and financial markets.

On
May 20, 2009, the Helping Families Save Their Homes Act of 2009, which extended the temporary increase in the standard maximum deposit insurance amount provided by the FDIC to
$250 per depositor through December 31, 2013, was signed into law. This extension of the temporary $250 coverage limit (pursuant to EESA) became effective immediately upon the President's
signature. The legislation provides that the standard maximum deposit insurance amount provided by the FDIC will return to $100 on January 1, 2014.

On
October 22, 2009, the Federal Reserve issued a comprehensive proposal on incentive compensation policies (the "Incentive Compensation Proposal") intended to ensure that the
incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. This guidance sets
expectations for banking organizations concerning their incentive compensation arrangements and related risk-management, control and governance processes. The Incentive Compensation
Proposal, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon three primary principles:
(i) balanced risk-taking incentives, (ii) compatibility with effective controls and risk management, and (iii) strong corporate governance. Any deficiencies in
compensation practices that are identified may be incorporated into the organization's supervisory ratings, which can affect its ability

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to
make acquisitions or perform other actions. In addition, under the Incentive Compensation Proposal, the Federal Reserve in appropriate circumstances may take enforcement action against a banking
organization.

In
addition, on February 7, 2011, the Federal Reserve, along with other federal banking agencies, the National Credit Union Administration, the SEC, and the Federal Housing
Finance Agency, published for comment a proposed rule that would regulate incentive-based compensation for entities deemed to be a "covered financial institution", which would not include the Company
and the Bank based on current definitions in the proposed rule. These proposed rules incorporate many of the executive compensation principles described above, including a prohibition on compensation
practices that encourage covered persons to take inappropriate risks by providing such person with excessive compensation. Comments are due within 45 days of publication in the Federal
Register.

On
January 14, 2010, the current administration announced a proposal to impose a fee (the "Financial Crisis Responsibility Fee") on those financial institutions that benefited
from recent actions taken by the U.S. government to stabilize the financial system. If implemented as initially proposed, the Financial Crisis Responsibility Fee will be applied to firms with over
$50 billion in consolidated assets, and, therefore, by its terms would not apply to the Company. The Financial Crisis Responsibility Fee was not included in the Dodd-Frank Act. On
February 14, 2011, the administration included a revised Financial Crisis Responsibility Fee in its proposed fiscal 2012 budget.



In addition to the specific legislation described above, various additional legislation is currently being considered by Congress. This
legislation may change banking statutes and the Company's operating environment in substantial and unpredictable ways and may increase reporting requirements and governance. If enacted, such
legislation could increase or decrease the cost of doing business, limit or expand permissible activities, or affect the competitive balance among banks, savings associations, credit unions, and other
financial institutions. The Company cannot predict whether any potential legislation will be enacted and, if enacted, the effect that it, or any implementing regulations, would have on its business,
results of operations, or financial condition.

ITEM 1A.    RISK FACTORS

In addition to the other information contained in this report, the following risks may affect us. If any of these risks actually occur,
our business, financial condition or results of operations may suffer. As a result, the price of our common shares could decline.

Risks Related to the Company's Business

Difficult conditions in the capital markets and the economy generally have affected and may continue to materially adversely affect our business and results of operations.

From December 2007 through June 2009, the U.S. economy was in recession. Business activity across a wide range of industries and
regions in the U.S. was greatly reduced. Although economic conditions have begun to improve, certain sectors, such as real estate, remain weak and unemployment remains high. Local governments and many
businesses are still in serious difficulty due to lower consumer spending and the lack of liquidity in the credit markets.

Market
conditions also led to the failure or merger of several prominent financial institutions and numerous regional and community-based financial institutions. These failures, as well
as projected future failures, have had a significant negative impact on the capitalization level of the deposit insurance fund of the FDIC, which, in turn, has led to a significant increase in deposit
insurance premiums paid by financial institutions.

The
Company's financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing
those loans, as well as demand for loans and other products and services that the Company offers, is highly dependent upon the business environment in the markets where the Company operates and in the
United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, low unemployment, high
business and investor confidence, and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or
business confidence; limitations on the availability or increases in the cost of credit and capital; increases in inflation or interest rates; high unemployment, natural disasters, or a combination of
these or other factors.

During
2010, the business environment has continued to be adverse for many households and businesses in the United States and worldwide. While economic conditions in the United States
and worldwide have begun to improve, there can be no assurance that this improvement will continue. Such conditions have affected, and could continue to adversely affect, the credit quality of the
Company's loans, results of operations and financial condition.

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Recently enacted and potential further financial regulatory reforms could have a significant impact on our business, financial condition and results of operations.

On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act")
into law. The Dodd-Frank Act is expected to have a broad impact on the financial services industry, including significant regulatory and compliance changes. Many of the requirements called for in the
Dodd-Frank Act will be implemented over time and most will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the
provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on our operations is unclear.
The changes resulting from the Dodd-Frank Act may impact the profitability of business activities, require changes to certain business practices, impose more stringent capital, liquidity and leverage
requirements or otherwise adversely affect our business. In particular, the potential impact of the Dodd-Frank Act on our operations and activities, both currently and prospectively, include, among
others:

Further,
we may be required to invest significant management attention and resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements
under the Dodd-Frank Act, which may negatively impact results of operations and financial condition.

We
cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be
adopted, how such changes may be interpreted and enforced or how such changes may affect us. However, the costs of complying with any additional laws or regulations could have a material adverse
effect on our financial condition and results of operations.

Like most banking organizations, a significant portion of our assets consists of loans, which if not repaid could result in losses to the Company.

As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to their terms and that the
collateral securing the payment of their loans (if any) may not be sufficient to assure repayment. Credit losses could have a material adverse effect on our operating results.

As
of December 31, 2010, our total loan portfolio was approximately $1,680,971 or 61% of our total assets. Three major components of the loan portfolio are loans principally
secured by real estate, approximately $1,431,757 or 85% of total loans; other commercial loans, approximately $178,678 or 11% of total loans; and consumer loans, approximately $70,536 or 4% of total
loans. Our credit risk with respect to our consumer installment loan portfolio and commercial loan portfolio relates principally to the general creditworthiness of individuals and businesses within
our local market area. Our credit risk with respect to our residential and commercial real estate mortgage and construction loan portfolio relates principally to the general creditworthiness of
individuals and businesses and the value of real estate serving as security for the repayment of the loans. A related risk in connection with loans secured by commercial real estate is the effect of
unknown or unexpected environmental contamination, which could make the real estate effectively unmarketable or otherwise significantly reduce its value as security. Credit issues, particularly within
our residential and commercial real estate mortgage and construction loan portfolio, may continue to broaden during 2011 depending on the severity and duration of the declining economy and the current
credit cycle.

Our allowance for loan losses may not be sufficient to cover actual loan losses, which could adversely affect our earnings.

We maintain an allowance for loan losses at a level estimated by management to be sufficient to cover probable incurred loan losses in
our loan portfolio. Loan losses will likely occur in the future and may occur at a rate greater than we have experienced to date. In determining the size of the allowance, our management makes various
assumptions and judgments about the collectability of our loan portfolio, including the diversification by industry of our commercial loan portfolio, the effect of changes in the local real estate
markets on collateral values, the results of recent regulatory examinations, the effects on the loan portfolio of current

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economic
indicators and their probable impact on borrowers, the amount of charge-offs for the period, the amount of nonperforming loans and related collateral security, and the evaluation
of our loan portfolio by an external loan review. If our assumptions and judgments prove to be incorrect, our current allowance may not be sufficient and adjustments may be necessary to allow for
different economic conditions or adverse developments in our loan portfolio. Additionally, continuing deterioration in economic conditions affecting borrowers, new information regarding existing
loans, identification of additional problem loans and other factors, both within and outside the Company's control, may require an increase in the allowance for loan losses. Federal and state
regulators also periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments
different than those of our management. Any increase in our allowance for loan losses or loan charge-offs could have an adverse effect on our operating results and financial condition.
There can be no assurance that our monitoring procedures and policies will reduce certain lending risks or that our allowance for loan losses will be adequate to cover actual losses.

If we foreclose on collateral property, we may be subject to the increased costs associated with ownership of real property, resulting in reduced revenues and earnings.

We may have to foreclose on collateral property to protect our investment and may thereafter own and operate such property, in which
case we will be exposed to the risks inherent in the ownership of real estate. The amount that we, as a mortgagee, may realize after a default is dependent upon factors outside of our control,
including, but not limited to: (i) general or local economic conditions; (ii) neighborhood values; (iii) interest rates; (iv) real estate tax rates; (v) operating
expenses of the mortgaged properties; (vi) environmental remediation liabilities; (vii) ability to obtain and maintain adequate occupancy of the properties; (viii) zoning laws;
(ix) governmental rules, regulations and fiscal policies; and (x) acts of God. Certain expenditures associated with the ownership of real estate, principally real estate taxes,
insurance, and maintenance costs, may adversely affect the income from the real estate. Therefore, the cost of operating real property may exceed the income earned from such property, and we may have
to advance funds in order to protect our investment, or we may be required to dispose of the real property at a loss. The foregoing expenditures and costs could adversely affect our ability to
generate revenues, resulting in reduced levels of profitability.

Significant interest rate volatility could reduce our profitability.

Our results of operations are affected principally by net interest income, which is the difference between interest earned on loans and
investments and interest expense paid on deposits and other borrowings. We cannot predict or control changes in interest rates. National, regional and local economic conditions and the policies of
regulatory authorities, including monetary policies of the Board of Governors of the Federal Reserve System, affect market interest rates.
While we have instituted policies and procedures designed to manage the risks from changes in market interest rates, at any given time our assets and liabilities will likely be affected differently by
a given change in interest rates, principally because we do not match the maturities of our loans and investments precisely with our deposits and other funding sources. Changes in interest rates may
also affect the level of voluntary prepayments on our loans and the level of financing or refinancing by customers. As of December 31, 2010, we had a negative interest rate gap of 22% of
interest earning assets in the one-year time frame. Although this is within our internal policy limits, our earnings will be adversely affected in periods of rising interest rates because,
during such periods, the interest expense paid on deposits and borrowings will generally increase more rapidly than the interest income earned on loans and investments. If such an interest rate
increase occurred gradually, we would use our established procedures to attempt to mitigate the effects over time. However, if such an interest rate increase occurred rapidly, or interest rates
exhibited volatile increases and decreases, we might be unable to mitigate the effects, and our net interest income could suffer significant adverse effects. While management intends to continue to
take measures to mitigate interest rate risk, we cannot assure you that such measures will be entirely effective in minimizing our exposure to the risk of rapid changes in interest rates.

We may be required to pay significantly higher Federal Deposit Insurance Corporation (FDIC) premiums in the future.

Insured institution failures during the past several years, as well as deterioration in banking and economic conditions, have
significantly increased FDIC loss provisions, resulting in a decline in the designated reserve ratio to historical lows. The FDIC expects the higher rate of insured institution failures to continue
for the next few years compared to the past; thus, the reserve ratio may continue to decline. In addition the Dodd-Frank Act permanently implemented FDIC insurance coverage for all deposit
accounts up to $250,000 and revised the insurance premium assessment base from all domestic deposits to the average of total assets less tangible equity. The minimum reserve ratio of the deposit
insurance fund has been increased from 1.15% to 1.35%, with the increase to be covered by assessments on insured institutions with assets over $10 billion until the new reserve ratio is
reached. If financial institution failures continue and the FDIC reserve continues to decline, actions taken by the FDIC to increase assessment rates or enact special assessments could have an adverse
impact on our results of operation.

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Future growth or operating results may require the Company to raise additional capital but that capital may not be available or it may be dilutive.

The Company is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations.
To the extent the Company's future operating results erode capital or the Company elects to expand through loan growth or acquisition it may be required to raise capital. The Company's ability to
raise capital will depend on conditions in the capital markets, which are outside of its control, and on the Company's financial performance. Accordingly, the Company cannot be assured of its ability
to raise capital if needed or on favorable terms. If the Company cannot raise additional capital when needed, it will be subject to increased regulatory supervision and the imposition of restrictions
on its growth and business. These could negatively impact the Company's ability to operate or further expand its operations through acquisitions or the establishment of additional branches and may
result in increases in operating expenses and reductions in revenues that could have a material adverse effect on its financial condition and results of operations.

We rely heavily on our management and other key personnel, and the loss of any of them may adversely affect our operations.

We are and will continue to be dependent upon the services of our management team. The loss of any of our senior managers could have an
adverse effect on our growth and performance because of their skills, knowledge of the markets in which we operate and years of industry experience and the difficulty of promptly finding qualified
replacement personnel. The loss of key personnel in a particular market could have an adverse effect on our performance in that market because it may be difficult to find qualified replacement
personnel who are already located in or would be willing to relocate to a non-metropolitan market.

Our
ability to retain key officers and employees may be further impacted by executive compensation and governance restrictions applicable to participants in Treasury's CPP, including
restrictions on total compensation, equity compensation and severance payments. Additionally, recent proposed regulations issued by banking regulators regarding executive compensation may also impact
our ability to compensate executives and, as a result, to attract and retain qualified personnel.

The geographic concentration of our markets makes our business highly susceptible to local economic conditions.

Unlike larger banking organizations that are more geographically diversified, our operations are currently concentrated in 31 counties
in Indiana, three counties in Illinois, two counties in Ohio, and three counties in Kentucky. As a result of this geographic concentration in four fairly contiguous markets, our financial results
depend largely upon economic conditions in these market areas. A deterioration in economic conditions in one or all of these markets could result in one or more of the
following:

If we do not adjust to rapid changes in the financial services industry, our financial performance may suffer.

We face substantial competition for deposit, credit and trust relationships, as well as other sources of funding in the communities we
serve. Competing providers include other banks, thrifts and trust companies, insurance companies, mortgage banking operations, credit unions, finance companies, money market funds and other financial
and nonfinancial companies which may offer products functionally equivalent to those offered by our banks. Competing providers may have greater financial resources than we do and offer services within
and outside the market areas we serve. In addition to this challenge of attracting and retaining customers for traditional banking services, our competitors now include securities dealers, brokers,
mortgage bankers, investment advisors and finance and insurance companies who seek to offer one-stop financial services to their customers that may include services that banks have not
been able or allowed to offer to their customers in the past. The increasingly competitive environment is primarily a result of changes in regulation, changes in technology and product delivery
systems and the accelerating pace of consolidation among financial service providers. If we are unable to adjust both to increased competition for traditional banking services and changing customer
needs and preferences, it could adversely affect our financial performance and your investment in our common stock.

Our historical growth and financial performance trends may not continue if our acquisition strategy is not successful.

Growth in asset size and earnings through acquisitions has been an important part of our business strategy. As consolidation of the
banking industry continues, the competition for suitable acquisition candidates may increase. We compete with other banking companies for acquisition opportunities, and many of these competitors have
greater financial resources and acquisition experience than we do and may be able to pay more for an acquisition than we are able or willing to pay. We also may need additional debt or

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equity
financing in the future to fund acquisitions. We may not be able to obtain additional financing or, if available, it may not be in amounts and on terms acceptable to us. We may use our common
stock as the consideration for an acquisition or we may issue additional common stock and use the proceeds for the acquisition. Our issuance of additional securities will dilute your equity interest
in us and may have a dilutive effect on our earnings per share. If we are unable to locate suitable acquisition candidates willing to sell on terms acceptable to us, or we are otherwise unable to
obtain additional debt or equity financing necessary for us to continue our acquisition strategy, we would be required to find other methods to grow our business and we may not grow at the same rate
we have in the past, or at all.

Acquisitions entail risks which could negatively affect our operations.

Acquisitions involve numerous risks, including:

Any
of these acquisition risks could result in unexpected losses or expenses and thereby reduce the expected benefits of the acquisition.

Unanticipated costs related to our acquisitions could reduce MainSource's future earnings per share.

MainSource believes it has reasonably estimated the likely costs of integrating the operations of the banks it acquires into MainSource
and the incremental costs of operating such banks as a part of the MainSource family. However, it is possible that unexpected transaction costs such as taxes, fees or professional expenses or
unexpected future operating expenses, such as increased personnel costs or increased taxes, as well as other types of unanticipated adverse developments, could have a material adverse effect on the
results of operations and financial condition of MainSource. If unexpected costs are incurred, acquisitions could have a dilutive effect on MainSource's earnings per share. Current accounting guidance
requires expensing of acquisition costs. In prior years, these costs could be capitalized. In other words, if MainSource incurs such unexpected costs and expenses as a result of its acquisitions,
MainSource believes that the earnings per share of MainSource common stock could be less than they would have been if those acquisitions had not been completed.

MainSource may be unable to successfully integrate the operations of the banks it has acquired and may acquire in the future and retain employees of such banks.

MainSource's acquisition strategy involves the integration of the banks MainSource has acquired and may acquire in the future as
MainSource subsidiary banks. The difficulties of integrating the operations of such banks with MainSource and its other subsidiary banks include:

The
process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of MainSource, its subsidiary banks and the banks MainSource
has acquired and may acquire in the future and the loss of key personnel. The integration of such banks as MainSource subsidiary banks requires the experience and expertise of certain key employees of
such banks who are expected to be retained by MainSource. We cannot be sure, however, that MainSource will be successful in retaining these employees for the time period necessary to successfully
integrate such banks' operations as subsidiary banks of MainSource. The diversion of management's attention and any delays or difficulties encountered in connection with the mergers, along with the
integration of the banks as MainSource subsidiary banks, could have an adverse effect on the business and results of operation of MainSource.

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Risks Relating to the Banking Industry

Changes in governmental regulation and legislation could limit our future performance and growth.

We are subject to extensive state and federal regulation, supervision and legislation that govern almost all aspects of our operations,
as well as any acquisitions we may propose to make. Any change in applicable federal or state laws or regulations could have a substantial impact on us, our subsidiary banks and our operations. While
we cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on us, these changes could reduce the value of your
investment.

Changes in regulation or oversight may have a material adverse impact on our operations.

We are subject to extensive regulation, supervision and examination by the Indiana Department of Financial Institutions, the Federal
Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission and other regulatory bodies. Such regulation and supervision governs the
activities in which we may engage. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations,
investigations and limitations related to our securities, the classification of our assets and determination of the level of our allowance for loan losses. In light of the current conditions in the
U.S. financial markets and economy, Congress and regulators have increased their focus on the regulation of the financial services industry. Any change in such regulation and oversight, whether in the
form of regulatory policy, regulations, legislation or supervisory action, may have a material adverse impact on our business, financial condition or results of operations.

The Company may be subject to future goodwill impairment charges

During 2009, the Company recorded $80,310 in goodwill impairment charges in the second and fourth quarters. No goodwill impairment
charges were recorded in 2010. While the Company does not currently anticipate that there will be additional impairment charges required in the future, it can make no guarantees that none will be
taken. If more impairment is recorded, it will have a negative impact on future earnings.

Risks Related to the Company's Stock

We may not be able to pay dividends in the future in accordance with past practice.

The Company has traditionally paid a quarterly dividend to common stockholders. The payment of dividends is subject to legal and
regulatory restrictions. Any payment of dividends in the future will depend, in large part, on the Company's earnings, capital requirements, financial condition and other factors considered relevant
by the Company's Board of Directors. Starting in the second quarter of 2009 and continuing to the present, the Company reduced the amount of cash dividends paid. This reduction was made to preserve
capital levels at the Company. The Company may also be limited in the amount of dividends paid out as a result of its participation in the Department of the Treasury Capital Purchase Program.

The price of the Company's common stock may be volatile, which may result in losses for investors.

General market price declines or market volatility in the future could adversely affect the price of the Company's common stock. In
addition, the following factors may cause the market price for shares of the Company's common stock to fluctuate:

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Table of Contents

The Company's participation in Treasury's Capital Purchase Program (CPP) may adversely affect the value of its common stock and the rights of its common stockholders.

The rights of the holders of the Company's common stock may be adversely affected by the Company's participation in the CPP. For
example:

In
addition, terms of the Preferred Shares require that quarterly dividends be paid on the Preferred Shares at the rate of 5% per annum for the first five years and 9% per annum thereafter until the
stock is redeemed by the Company. The payments of these dividends will decrease the excess cash the Company otherwise has available to pay dividends on its common stock and to use for general
corporate purposes, including working capital.

The Company's charter documents and federal regulations may inhibit a takeover, prevent a transaction that may favor or otherwise limit the Company's growth opportunities,
which could cause the market price of the Company's common stock to decline.

Certain provisions of the Company's charter documents and federal regulations could have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to acquire, control of the Company. In addition, the Company must obtain approval from regulatory authorities before acquiring
control of any other company.

ITEM 1B.    UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.    PROPERTIES

As of December 31, 2010, the Company leased an office building from one of its subsidiaries for use as its corporate
headquarters. The Company's subsidiaries own, or lease, all of the facilities from which they conduct business. All leases are comparable to other leases in the respective market areas and do not
contain provisions materially detrimental to the Company or its subsidiaries. As of December 31, 2010 the Company had 80 banking locations. At December 31, 2010, the Company had
approximately $48,861 invested in premises and equipment.

ITEM 3.    LEGAL PROCEEDINGS

The Company and its subsidiaries may be parties (both plaintiff and defendant) to ordinary litigation incidental to the conduct of
business. Management is presently not aware of any material pending or contemplated legal proceedings.

ITEM 4.    (REMOVED AND RESERVED)

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Table of Contents

PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER'S PURCHASES OF EQUITY SECURITIES

Market Information

The Company's Common Stock is traded on the NASDAQ Stock Market under the symbol MSFG. The Common Stock was held by approximately 5,000
shareholders at March 10, 2011. The quarterly high and low closing prices for the Company's common stock as reported by NASDAQ and quarterly cash dividends declared and paid are set forth in
the tables below. All per share data is retroactively restated for all stock dividends and splits.

The
range of known per share prices by calendar quarter, based on actual transactions, excluding commissions, is shown below.

Market Prices2010

Q1

Q2

Q3

Q4High

$
7.40

$
9.00

$
7.67

$
10.76Low

$
4.40

$
6.70

$
5.43

$
7.682009

Q1

Q2

Q3

Q4High

$
15.16

$
10.35

$
7.74

$
7.04Low

$
4.85

$
7.00

$
5.64

$
4.45Cash Dividends2010

Q1

Q2

Q3

Q4$
0.010

$
0.010

$
0.010

$
0.0102009

Q1

Q2

Q3

Q4$
0.145

$
0.050

$
0.050

$
0.010


It is expected that the Company will continue to pay its reduced dividend for the foreseeable future, until the Company determines that its
results of operations, its capital levels and other external factors beyond management's control make it prudent to raise the dividend, and until the Company determines that its earnings are
sufficient to repurchase the preferred shares held by the U.S. Treasury pursuant to Treasury's Capital Purchase Program. As a participant in the U.S. Treasury's Capital Purchase Program, the Company
is prohibited from increasing cash dividends on common stock above $0.145 per share per quarter without prior government permission for a period of three years from the date of participation, which
was
January 16, 2009, unless the preferred shares issued to Treasury are no longer held by Treasury. Additionally, no dividends may be paid on the common stock unless and until all accrued and
unpaid dividends for all past dividend periods owed to the Treasury on the preferred shares are fully paid. See Note 27 to the Consolidated Financial Statements for additional details on the
Company's participation in the Capital Purchase Program.

Equity Compensation Plan Information

The following table sets forth information regarding securities authorized for issuance under the Company's equity compensation plans
as of December 31, 2010:

Plan category

Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)

Weighted-average exercise
price of outstanding options,
warrants and rights
(b)

Number of securities remaining
available for future issuance
under equity compensation
plans (excluding securities
reflected in column (a))
(c)Equity compensation plans approved by security holders


409,783

$
13.30


452,333Equity compensation plans not approved by security holders








Total


409,783

$
13.30


452,333


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Table of Contents

Stock Performance Graph

The following performance graph compares the performance of our common shares to the performance of the NASDAQ Market Index (U.S.) and
the NASDAQ Bank Stocks Index for the 60 months ended December 31, 2010. The graph assumes an investment of $100 in each of the Company's common shares, the NASDAQ Market Index (U.S.) and
the NASDAQ Bank Stocks Index on December 31, 2005.

GRAPHIC

12/31/05

12/31/06

12/31/07

12/31/08

12/31/09

12/31/10MainSource Financial Group


100.00


99.85


92.14


91.91


28.81


59.73NASDAQ MARKET INDEX (U.S.)


100.00


109.52


120.27


71.51


102.89


120.30NASDAQ Bank Stocks Index


100.00


111.01


86.51


65.81


53.63


60.00


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Table of Contents

ITEM 6.    SELECTED FINANCIAL DATA

Selected Financial Data(Dollar amounts in thousands except per share data)

2010

2009

2008

2007

2006Results of OperationsNet interest income

$
101,252

$
98,008

$
87,525

$
74,397

$
68,268Provision for loan losses


35,250


46,310


20,918


5,745


1,819Noninterest income


41,291


40,050


29,697


28,126


23,039Noninterest expense


92,252


167,532


72,773


68,020


59,642Income (loss) before income tax


15,041


(75,784
)

23,531


28,758


29,846Income tax (benefit)


239


(11,645
)

4,379


6,888


7,605Net income (loss)


14,802


(64,139
)

19,152


21,870


22,241Preferred dividends and accretion


(3,054
)

(2,919
)







Net income (loss) available to common shareholders


11,748


(67,058
)

19,152


21,870


22,241Dividends paid on common stock


805


5,135


11,133


10,392


8,944Per Common Share*Earnings (loss) per share (basic)

$
0.58

$
(3.33
)
$
1.00

$
1.17

$
1.30Earnings (loss) per share (diluted)


0.58


(3.33
)

1.00


1.17


1.29Dividends paid


0.04


0.26


0.58


0.56


0.53Book value  end of period


12.24


11.84


14.90


14.22


13.50Market price  end of period


10.41


4.78


15.50


15.56


16.94At Year EndTotal assets

$
2,769,312

$
2,906,530

$
2,899,835

$
2,536,437

$
2,429,773Securities


806,071


714,607


513,310


489,739


485,259Loans, excluding held for sale


1,680,971


1,885,447


1,995,601


1,693,678


1,574,384Allowance for loan losses


42,605


46,648


34,583


14,331


12,792Total deposits


2,211,564


2,270,650


2,009,324


1,901,829


1,859,689Federal Home Loan Bank advances


152,065


222,265


433,167


257,099


208,443Subordinated debentures


50,117


49,966


49,816


41,239


41,239Shareholders' equity


302,570


294,462


299,949


264,102


253,247Financial RatiosReturn on average assets


0.51
%

(2.19
)%

0.73
%

0.90
%

1.06
%Return on average common shareholders' equity


4.86


(22.61
)

6.90


8.49


10.39Allowance for loan losses to total loans (year end, excluding held for sale)


2.53


2.47


1.73


0.85


0.81Allowance for loan losses to total non-performing loans (year end)


46.55


50.60


58.31


69.93


73.18Shareholders' equity to total assets (year end)


10.93


10.13


10.34


10.41


10.42Average equity to average total assets


10.59


11.59


10.57


10.57


10.13Dividend payout ratio


6.85


NM


58.13


47.52


40.21


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Table of Contents

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's Discussion and Analysis
(Dollar amounts in thousands except per share data)

Forward-Looking Statements

Except for historical information contained herein, the discussion in this Annual Report includes certain forward-looking statements
based upon management expectations. 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 this Annual
Report on Form 10-K and in other reports we file from time to time with the Securities and Exchange Commission. The Company intends the forward looking statements set forth herein
to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995.

Overview

MainSource Financial Group, Inc. ("MainSource" or the "Company") is a financial holding company whose principal activity is the
ownership and management of its wholly owned subsidiary bank: MainSource Bank headquartered in Greensburg, Indiana (the "Bank"). The Bank operates under an Indiana state charter and is subject to
regulation by the Indiana Department of Financial Institutions and the Federal Deposit Insurance Corporation. Non-banking subsidiaries include MainSource Insurance, LLC, Insurance
Services Marketing, LLC and MainSource Title, LLC. These three subsidiaries are subject to regulation by the Indiana Department of Insurance. The Company sold the property and casualty
and health insurance book of businesses related to MainSource Insurance, LLC in the fourth quarter of 2010, but retained its business relating to annuities and credit life insurance.

Business Strategy

The Company operates under the broad tenets of a long-term strategic plan ("Plan") designed to improve the Company's
financial performance, expand its competitive position and enhance long-term shareholder value. The Plan is premised on the belief of the Company's Board of Directors that it can best
promote long-term shareholder interests by pursuing strategies which will continue to preserve its community-focused philosophy. The dynamics of the Plan assure continually evolving goals,
with the enhancement of shareholder value being the constant, overriding objective. The extent of the Company's success will depend upon how well it anticipates and responds to competitive changes
within its markets, the interest rate environment and other external forces.

Results of Operations

Net income/(loss) attributable to common shareholders was $11,748 in 2010, $(67,058) in 2009, and $19,152 in 2008. Earnings/(loss) per
common share on a fully diluted basis were $0.58 in 2010, $(3.33) in 2009, and $1.00 in 2008. The primary drivers that led to the increase in net income in 2010 were no goodwill impairment charge in
2010 compared to an $80,310 goodwill impairment charge taken in 2009, a reduction in the Company's loan loss provision expense of $11,060, realized gains on sales of investment securities of $1,716,
brokerage income of $631, and an increase in service charge income of $925. Offsetting these items was a decrease in mortgage banking income of $1,386 and an increase in employee costs of $3,796.
Normal merit increases, the full year effect of the de novo office in Columbus, Indiana, and the full year effect of the branch acquisitions in May 2009 were the reasons for the employee costs
increase. The low mortgage interest rate environment during 2009 led to increased refinancing activity in 2009 that subsided during 2010. The primary drivers that led to a reduction in net income from
2008 to 2009 was the aforementioned goodwill impairment charge of $80,310 and an increase in the Company's loan loss provision expense of $25,392. Offsetting these items was an increase in net
interest income of $10,483 and mortgage banking income of $6,463. An increase in earning assets of $311,303 primarily due to acquisition activity resulted in higher net interest income. Key measures
of the operating performance of the Company are return on average assets, return on average common shareholders' equity, and efficiency ratio. The Company's return on average assets was 0.51% for 2010
compared to (2.19)% for 2009 and 0.73% in 2008. The Company's return on average common shareholders' equity was 4.86% in 2010 compared to (22.6)% in 2009 and 6.9% in 2008. The Company's efficiency
ratio, which measures the non-interest expenses of the Company as a percentage of its net interest income (on a fully taxable equivalent basis) and its non-interest income, was
62.5% in 2010 compared to 61.6% in 2009 (excluding the goodwill impairment charge of $80,310) and 60.7% in 2008.

19

---



Table of Contents

Net Interest Income

Net interest income and net interest margin are influenced by the volume and yield or cost of earning assets and interest-bearing
liabilities. Tax equivalent net interest income of $107,541 in 2010 increased from $103,173 in 2009. Net interest margin, on a fully-taxable equivalent basis, was 4.11% for 2010 compared to 3.89% for
the same period a year ago. The Company was able to match reductions in its yield on earning assets with a corresponding larger reduction in its cost of funds. Over the three year period interest
income has been relatively stable as increases in earning assets in 2010 and 2009 have offset decreases in yield. Yields on loans stabilized in 2010 after dropping significantly in 2009. The Federal
Reserve Bank continues to target the fed funds rate at 0%-.25%. A significant portion of the Company's CDs matured in 2010 and we were able to reprice those deposits to current, lower market rates.

The
following table summarizes net interest income (on a tax-equivalent basis) for each of the past three years.

Average Balance Sheet and Net Interest Analysis (Taxable Equivalent Basis)*

2010

2009

2008Assets

Average
Balance

Interest

Average
Rate

Average
Balance

Interest

Average
Rate

Average
Balance

Interest

Average
RateShort-term investments

$
33,037

$
12


0.04
%
$
1,933

$
11


0.57
%
$
1,993

$
36


1.81
%Federal funds sold and money market accounts


44,025


190


0.43


54,496


128


0.23


8,303


158


1.90SecuritiesTaxable


512,749


18,828


3.67


432,091


19,565


4.53


398,851


20,395


5.11Non-taxable*


246,312


15,940


6.47


181,591


11,789


6.49


139,498


8,763


6.28Total securities


759,061


34,768


4.58


613,682


31,354


5.11


538,349


29,158


5.42Loans**Commercial*


1,061,537


62,433


5.88


1,203,955


67,585


5.61


975,499


63,272


6.49Residential real estate


400,994


24,536


6.12


465,462


29,753


6.39


508,019


33,802


6.65Consumer


317,654


18,921


5.96


312,149


19,575


6.27


308,211


22,066


7.16Total loans


1,780,185


105,890


5.95


1,981,566


116,913


5.90


1,791,729


119,140


6.65Total earning assets


2,616,308


140,860


5.38


2,651,677


148,406


5.60


2,340,374


148,492


6.34Cash and due from banks


41,427








44,266








52,698Unrealized gains (losses) on securities


28,074








14,036








1,896Allowance for loan losses


(43,711
)







(46,308
)







(19,747
)Premises and equipment,net


49,696








51,086








43,885Intangible assets


72,765








129,180








138,079Accrued interest receivable and other assets


113,814








86,966








71,367Total assets

$
2,878,373







$
2,930,903







$
2,628,552LiabilitiesInterest-bearing deposits DDA, savings, and money market accounts

$
1,201,145

$
6,184


0.51

$
1,029,035

$
7,177


0.70

$
864,842

$
10,017


1.16Certificates of deposit


798,471


16,978


2.13


928,689


25,320


2.73


873,731


32,052


3.67Total interest-bearing deposits


1,999,616


23,162


1.16


1,957,724


32,497


1.66


1,738,573


42,069


2.42Short-term borrowings


40,320


258


0.64


50,885


442


0.87


44,913


1,293


2.88Subordinated debentures


49,000


1,755


3.58


49,000


2,059


4.20


43,000


2,782


6.47Notes payable and FHLB borrowings


197,769


8,144


4.12


269,443


10,235


3.80


297,333


10,990


3.70Total interest-bearing liabilities


2,286,705


33,319


1.46


2,327,052


45,233


1.94


2,123,819


57,134


2.69Demand deposits


259,607








238,411








203,979Other liabilities


27,209








25,886








23,059Total liabilities


2,573,521








2,591,349








2,350,857Shareholders' equity


304,852








339,554








277,695Total liabilities and shareholders' equity

$
2,878,373


33,319


1.27
***
$
2,930,903


45,233


1.71
***
$
2,628,552


57,134


2.44
***Net interest income




$
107,541


4.11
****



$
103,173


3.89
****



$
91,358


3.90
****Conversion of tax exempt income to a fully taxable equivalent basis using a marginal rate of 35%




$
6,289







$
5,165







$
3,833


---

20

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Table of Contents

The following table sets forth for the periods indicated a summary of the changes in interest income and interest expense resulting from changes
in volume and changes in rates.

Volume/Rate Analysis of Changes in Net Interest Income(Tax Equivalent Basis)

2010 OVER 2009

2009 OVER 2008Volume

Rate

Total

Volume

Rate

TotalInterest incomeLoans

$
(12,014
)
$
991

$
(11,023
)
$
11,211

$
(13,438
)
$
(2,227
)Securities


6,667


(3,253
)

3,414


3,865


(1,669
)

2,196Federal funds sold and money market funds


(47
)

109


62


109


(139
)

(30
)Short-term investments


11


(10
)

1





(25
)

(25
)Total interest income


(5,383
)

(2,163
)

(7,546
)

15,185


(15,271
)

(86
)Interest expenseInterest-bearing DDA, savings, and money market accounts

$
962

$
(1,955
)
$
(993
)
$
1,138

$
(3,978
)
$
(2,840
)Certificates of deposit


(2,770
)

(5,572
)

(8,342
)

1,481


(8,213
)

(6,732
)Borrowings


(2,916
)

641


(2,275
)

(716
)

(890
)

(1,606
)Subordinated debentures





(304
)

(304
)

253


(976
)

(723
)Total interest expense


(4,724
)

(7,190
)

(11,914
)

2,156


(14,057
)

(11,901
)Change in net interest income

$
(659
)
$
5,027


4,368

$
13,029

$
(1,214
)

11,815Change in tax equivalent adjustment








1,124








1,332Change in net interest income before tax equivalent adjustment







$
3,244







$
10,483


Variances not attributed to rate or volume are allocated equally between rate and volume.

Provision for Loan Losses

The Company expensed $35,250 in provision for loan losses in 2010. This level of provision allowed the Company to maintain an adequate
allowance for loan losses. This topic is discussed in detail under the heading "Loans, Credit Risk and the Allowance and Provision for Loan Losses".

Non-interest Income and Expense

Percent Change2010

2009

2008

10/09

09/08Non-interest incomeInsurance commissions

$
1,711

$
2,071

$
2,073


-17.4%


-0.1%Mortgage banking


7,642


9,028


2,565


-15.4%


252.0%Trust and investment product fees


2,363


1,743


1,575


35.6%


10.7%Service charges on deposit accounts


17,462


16,537


14,555


5.6%


13.6%Net realized gains on securities sales


2,979


1,263


1,118


135.9%


13.0%Increase in cash surrender value of life insurance


1,246


890


967


40.0%


-8.0%Interchange income


5,487


5,178


3,600


6.0%


43.8%Other


2,401


3,340


3,244


-28.1%


3.0%Total non-interest income

$
41,291

$
40,050

$
29,697


3.1%


34.9%Non-interest expenseSalaries and employee benefits

$
50,138

$
46,342

$
41,033


8.2%


12.9%Net occupancy


6,654


6,660


6,061


-0.1%


9.9%Equipment


7,855


7,468


6,496


5.2%


15.0%Intangibles amortization


2,066


2,199


2,607


-6.0%


-15.7%Telecommunications


1,882


2,015


1,863


-6.6%


8.2%Stationery, printing, and supplies


1,478


1,608


1,374


-8.1%


17.0%FDIC assessment


4,940


4,976


741


-0.7%


571.5%Marketing


3,412


3,040


1,645


12.2%


84.8%Collection expenses


3,579


3,255


1,225


10.0%


165.7%Goodwill impairment





80,310





-100%


Other


10,248


9,659


9,728


6.1%


-0.7%Total non-interest expense

$
92,252

$
167,532

$
72,773


-44.9%


130.2%


21

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Table of Contents

Non-interest Income

Non-interest income was $41,291 for 2010 compared to $40,050 for the same period in 2009, an increase of $1,241 or 3.1%.
Increases in trust and investment product fees, service charges on deposit accounts, net realized gains on securities sales, increase in cash surrender value of life insurance and interchange income
were the primary causes of the increase. These increases were offset by a reduction in insurance commissions, mortgage banking, and other income. The Company had an increase in the number of financial
advisors in 2010 which equated to increased revenue. A continued emphasis on new account growth yielded additional service charge and interchange income. While the impact of the Dodd-Frank
Act may impact future interchange income, the amount of this impact is impossible to predict. As a result of favorable pricing, the Company recorded gains during 2010 on the sale of securities at a
higher level than 2009. The level of mortgage banking activity leveled off in 2010 from what the Company had experienced in 2009 when mortgage rates were at a record low. While the volume of mortgage
loans sold decreased from $425 million in 2009 to $278 million in 2010, the average gain on the sale of these loans increased to 1.88% in 2010 from 1.32% in 2009. The reduction of
insurance commissions was caused by the sale of the property and casualty book of business during the fourth quarter of 2010. Other Real Estate (ORE) losses were the primary cause of the reduction in
other income. ORE losses were $1,097 in 2010 compared to a net gain of $200 in 2009. The Company's intent is to move these properties as quickly as possible. Only $1,500 of ORE property remains at
December 31, 2010 from what was there at the start of 2010. Non-interest income as a percent of non-interest expense was 44.8% for 2010 compared to 23.9% for 2009. The
increase was caused primarily by the goodwill impairment charge taken in 2009.

Non-interest
income was $40,050 for 2009 compared to $29,697 for the same period in 2008, an increase of $10,353 or 34.9%. Increases in mortgage banking, service charges on
deposit accounts, and interchange income were the primary causes of the increase. The low mortgage rates offered by Freddie Mac throughout the year resulted in increased mortgage refinance activity
throughout 2009. In addition, the Company expanded its geographic footprint and the markets it serves through acquisition activity in the latter part of 2008 and the first half of 2009. An increase in
deposit accounts from the full year effect of recent acquisitions resulted in increased service charges and interchange income. Non-interest income as a percent of non-interest
expense was 23.9% for 2009 compared to 40.8% for 2008. The decrease was caused by the goodwill impairment charge taken in 2009.

Non-interest Expense

Total non-interest expense was $92,252 in 2010 compared to $167,532 in 2009, a decrease of $75,280 and 44.9%. The decrease
was primarily attributable to goodwill impairment charges of $80,310 taken in 2009. Offsetting the goodwill impairment charges in 2009 were increases in salaries and employee benefits, equipment,
marketing, collection, and other expenses. The largest increase was in the salaries and employee benefits area due to normal merit increases, higher mortgage loan commission expense, the de novo
office in Columbus, Indiana, and the full year effect of branch acquisitions in May 2009.

Total
non-interest expense was $167,532 in 2009 compared to $72,773 in 2008, an increase of $94,759 and 130.2%. The increase was primarily attributable to goodwill impairment
charges of $80,310. Based on the Company's annual testing of goodwill for impairment, it was determined that goodwill was impaired and an impairment charge of $45,076 was taken in the second quarter
of 2009 and a $35,234 charge was taken in the fourth quarter. To a smaller degree, additional FDIC premiums of $4,235 and normal employee merit increases, a slight increase in the number of
full-time equivalent employees, and additional branches as a result of acquisition activity caused increases in non-interest expenses.

Income Taxes

The effective tax rate was 1.6% in 2010, 15.4% in 2009, and 18.6% in 2008. The decrease in the Company's effective tax rate from 2009
to 2010 was primarily due to an increase in tax exempt income in 2010 and no goodwill impairment charges in 2010. The decrease in the Company's effective tax rate from 2008 to 2009 was primarily due
to the non-deductibility of a portion of the goodwill impairment taken as well as lower pretax earnings. The Company and its subsidiaries file consolidated income tax returns.

Balance Sheet

At December 31, 2010, total assets were $2,769,312 compared to $2,906,530 at December 31, 2009, an decrease of
$137 million. An increase in investment securities was more than offset by decreases in loans.

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

Loans remain the Company's largest concentration of assets and continue to represent the greatest potential 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 also 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 concentration policy. The Company believes it has no undue concentrations of loans.

22

---



Table of Contents

Total
loans (excluding those held for sale) decreased by $204,476 from year-end 2009. Approximately 25% of this decrease was in the Company's residential real estate
portfolio as on balance sheet fixed-rate residential real estate loans refinanced during the year, the Company elected to sell these loans to the secondary market (while retaining the
servicing for these loans). The remaining decrease in loan balances was primarily due to the following factors: a decrease in construction and development loans as the continued sluggish economy
resulted in the Company ceasing the origination of these loans, charge-offs taken during 2010, and the overall decrease in loan demand across all segments. Residential real estate loans
continue to represent the largest portion of the total loan portfolio and were 45% of total loans at December 31, 2010 compared to 43% of total loans at the end of 2009.

The
following table details the Company's loan portfolio by type of loan.

Loan Portfolio

December 312010

2009

2008

2007

2006Types of loansCommercial and industrial

$
163,651

$
195,509

$
226,696

$
214,393

$
173,557Agricultural production financing


36,596


41,889


40,334


29,812


25,588Farm real estate


37,634


45,332


45,918


42,185


46,051Commercial real estate mortgage


525,578


551,670


515,964


376,759


326,284Construction and development


84,152


142,472


173,551


123,611


82,261Residential real estate mortgage


759,409


813,602


877,145


780,102


790,962Consumer


73,951


94,973


115,993


126,816


129,681Total loans

$
1,680,971

$
1,885,447

$
1,995,601

$
1,693,678

$
1,574,384


The following table indicates the amounts of loans (excluding residential and commercial mortgages and consumer loans) outstanding as of
December 31, 2010 which, based on remaining scheduled repayments of principal, are due in the periods indicated.

Maturities and Sensitivity to Changes in Interest Rates of Commercial and Construction Loans

Due:

Within
1 Year

1-5 Years

Over 5 years

TotalLoan TypeCommercial and industrial



$
72,167

$
37,038

$
54,446

$
163,651Agricultural production financing




25,267


5,219


6,110


36,596Construction and development




69,221


10,095


4,836


84,152Totals



$
166,655

$
52,352

$
65,392

$
284,399Percent




59%


18%


23%


100%Rate SensitivityFixed Rate



$
19,771

$
37,753

$
16,104

$
73,628Variable Rate




167,850


41,389


1,532


210,771Totals



$
187,621

$
79,142

$
17,636

$
284,399


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 $91,519 as of December 31, 2010 compared to $80,353 as of December 31, 2009 and represented 5.44% of total loans at December 31, 2010 versus
4.26% one year ago.

23

---



Table of Contents

The
following table details the Company's non-performing loans as of December 31 for the years indicated.

Non-performing Loans

2010

2009

2008

2007

2006Nonaccruing loans

$
68,279

$
77,074

$
55,671

$
18,800

$
16,021Troubled debt restructurings


22,250


11,843








Accruing loans contractually past due 90 days or more


990


3,279


3,639


1,693


1,460Total

$
91,519

$
92,196

$
59,310

$
20,493

$
17,481% of total loans


5.44%


4.89%


2.97%


1.21%


1.11%


Over 35% of the non-accrual loan balance was attributable to 10 large credit relationships over $1,000. These loans are primarily land
development and 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 us 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 provision for loan losses was $35,250 in 2010, $46,310 in 2009, and $20,918 in 2008. The Company's provision for loan losses in 2010 was lower than 2009 due to
the stabilization of problem credits. New non-accrual loans declined in each of the last three quarters of 2010. Net charge-offs were $39,293 in 2010 compared to $34,245 in
2009 and $6,230 in 2008. As a percentage of average loans, net charge-offs equaled 2.21%, 1.73%, and 0.35% in 2010, 2009 and 2008, respectively. The increase in charge-offs in
2010 was primarily related to the normal progression of problem credits that were previously identified through a work out plan established.

Potential
problem loans are identified on the Company's watch list and consist of loans that require close monitoring by management and are not necessarily considered classified credits
by regulators. Credits may be considered as a potential problem loan for reasons that are temporary or correctable, such as for a deficiency in loan documentation or absence of current financial
statements of the borrower. Potential problem loans may also include credits where adverse circumstances are identified that may affect the borrower's ability to comply with the contractual terms of
the loan. Other factors which might indicate the existence of a potential problem loan include the delinquency of a scheduled loan payment, deterioration in a borrower's financial condition identified
in a review of periodic financial statements, a decrease in the value of the collateral securing the loan, or a change in the economic environment in which the borrower operates. Substandard
commercial loans that were not classified as non-accrual were $60,545 at December 31, 2010 and $68,528 at December 31, 2009, a decrease of $7,983. The Company believes its
substandard loans peaked in 2009. These loans are reviewed at least quarterly by senior management. This review includes monitoring how the borrower is performing vs their workout plan, obtaining and
reviewing the borrower's financial information, and monitoring collateral values. Management believes these loans were well secured and had adequate allowance allocations at December 31, 2010.

Summary of the Allowance for Loan Losses

2010

2009

2008

2007

2006Balance at January 1

$
46,648

$
34,583

$
14,331

$
12,792

$
10,441ChargeoffsCommercial


8,190


8,686


1,866


1,642


1,653Commercial real estate mortgage


29,177


21,140


948


136


Residential real estate mortgage


2,220


1,899


1,421


446


412Consumer


2,859


4,477


3,032


3,134


1,834Total Chargeoffs


42,446


36,202


7,267


5,358


3,899RecoveriesCommercial


518


350


214


258


65Commercial real estate mortgage


873


226


17





Residential real estate mortgage


524


37


16


26


66Consumer


1,238


1,344


790


868


405Total Recoveries


3,153


1,957


1,037


1,152


536Net Chargeoffs


39,293


34,245


6,230


4,206


3,363Addition resulting from acquisition








5,564





3,895Provision for loan losses


35,250


46,310


20,918


5,745


1,819Balance at December 31

$
42,605

$
46,648

$
34,583

$
14,331

$
12,792Net Chargeoffs to average loans


2.21%


1.73%


0.35%


0.26%


0.25%Provision for loan losses to average loans


1.98%


2.35%


1.17%


0.36%


0.13%Allowance to total loans at year end


2.53%


2.47%


1.73%


0.85%


0.81%


24

---



Table of Contents

Although the allowance for loan loss is available for any loan that, in management's judgment, should be charged off, the following table details
the allowance for loan losses by loan category and the percent of loans in each category compared to total loans at December 31.

Allocation of the Allowance for Loan Losses

2010

2009

2008

2007

2006December 31

Amount

Percent
of loans
to total
loans

Amount

Percent
of loans
to total
loans

Amount

Percent
of loans
to total
loans

Amount

Percent
of loans
to total
loans

Amount

Percent
of loans
to total
loansReal estateResidential

$
2,281


45
%
$
9,449


43
%
$
3,882


44
%
$
2,652


46
%
$
2,514


50
%Farm real estate


740


2


647


2


344


2


251


3


247


3Commercial


19,980


31


14,754


29


11,448


26


4,386


22


4,045


21Construction and development


11,879


5


10,205


8


6,500


9


1,085


7


359


5Total real estate


34,880


83


35,055


82


22,174


81


8,374


78


7,165


79CommercialAgribusiness


370


2


1,126


2


303


2


167


2


138


2Other commercial


6,070


10


7,880


11


7,632


11


2,593


13


2,189


11Total Commercial


6,440


12


9,006


13


7,935


13


2,760


15


2,327


13Consumer


1,285


5


2,587


5


4,072


6


3,114


7


2,053


8Unallocated














402





83





1,247Total

$
42,605


100
%
$
46,648


100
%
$
34,583


100
%
$
14,331


100
%
$
12,792


100
%


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 40% of all loans. External loan review personnel examine the top 100 commercial credit
relationships. This equates to approximately all relationships above $1,850.

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. During the latter part of 2008, the Company established a separate group to address its deteriorating credit quality. This group consists of six full-time equivalent
employees and reports directly to the Chief Credit Officer of the Company. At the present time, this group is charged with the task of efficiently resolving non-performing credits and
disposing of foreclosed properties.

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 Company's allowance for loan losses was $42,605, or 2.53% of total loans, at December 31, 2010 compared to
$46,648, or 2.47% of total loans, at the end of 2009. This $4,043 decrease in the allowance was due to a large part on 2010 write-offs that had an allowance allocated in 2009. Although the
economy continued to improve in 2010, the housing industry remained pressured due to foreclosures and low sales. Builders and developers continue to struggle with difficult financial conditions. Other
borrowers also face similar constraints to cash flow their businesses.

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Table of Contents

Securities, at Fair Value

December 31,2010

2009

2008Available for SaleU.S. Government-sponsored entities

$


$
14,387

$
33,046State and municipal


300,144


233,485


153,200Mortgage-backed


498,828


459,049


318,500Equity and other


7,099


7,686


8,564Total securities

$
806,071

$
714,607

$
513,310


Securities offer flexibility in the Company's management of interest rate risk, and are the primary means by which the Company provides liquidity
and responds to changing maturity characteristics of assets and liabilities. The Company's investment policy prohibits trading activities and does not allow investment in high-risk
derivative products or junk bonds.

As
of December 31, 2010, all of the securities are classified as "available for sale" ("AFS") and are carried at fair value with unrealized gains and losses, net of taxes,
excluded from earnings and reported as a separate component of shareholders' equity. A net unrealized gain of $14,550 was recorded to adjust the AFS portfolio to current market value at
December 31, 2010 compared to a net unrealized gain of $19,397 at December 31, 2009.

Securities(Carrying Values at December 31)

Within
1 Year

2-5 Yrs

6-10 Yrs

Beyond
10 Years

Total 2010Available for saleFederal agencies

$


$


$


$


$
State and municipal


1,164


31,215


95,539


172,226


300,144Mortgage-backed securities





710


117,469


380,649


498,828Other securities











2,694


2,694Total available for sale

$
1,164

$
31,925

$
213,008

$
555,569

$
801,666Weighted average yield*


6.32%


5.44%


4.45%


4.58%


4.58%


---

Amounts in the table above are based on scheduled maturity dates. Variable interest rates are subject to change not less than annually based upon
certain interest rate indexes. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment
penalties. Equity securities of $4,405 do not have contractual maturities and are excluded from the table above.

As
of December 31, 2010, there were no corporate bonds and other securities which represented more than 10% of shareholders' equity.

For
2010 the tax equivalent yield of the investment securities portfolio was 4.58%, compared to 5.11% and 5.42% for 2009 and 2008, respectively. The average life of the Company's
investment securities portfolio was 4.95 years at December 31, 2010. During 2010 the investment portfolio significantly increased in size as excess cash, a by-product of loan
run-off and deposit growth, was invested in portfolio holdings. Spreads on investment products tightened as confidence grew in an economic recovery leading to lower overall investment
rates. The combination of these two events  lower reinvestment rates and increased portfolio size  caused the portfolio yield to decline. The portfolio credit
risk remained low and allowed the portfolio to avoid any credit losses. Throughout 2010 investment opportunities were focused on balancing shorter cash flow horizons and maximizing earnings potential.
Entering 2011 the portfolio is well positioned to manage the eventual increase in rates and improved lending environment.

The
Company and its investment advisor monitor the securities portfolio on at least a quarterly basis for other-than-temporary impairment ("OTTI"). The amount of
the OTTI recognized in earnings depends on whether the Company 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

26

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Table of Contents

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. During 2010, the Company
recorded $97 of impairment charges related to
three of its equity securities. These securities were written down to their fair values, as based on the financial condition of the companies, recovery of the fair value above cost could not be
readily projected.

Sources of Funds

The Company relies primarily on customer deposits and securities sold under agreement to repurchase ("repurchase agreements") along
with shareholders' equity to fund earning assets. Federal Home Loan Bank ("FHLB") advances are used to provide additional funding. The Company also attempts to obtain deposits through branch and whole
bank acquisitions.

Deposits
generated within local markets provide the major source of funding for earning assets. Average total deposits were 86.6% and 82.9% of total average earning assets for 2010 and
2009, respectively. Total interest-bearing deposits averaged 88.5% and 89.1% of average total deposits during 2010 and 2009. Management is continuing its efforts to increase the percentage of
transaction-related deposits to total deposits due to the positive effect on earnings.

Repurchase
agreements are high denomination investments utilized by public entities and commercial customers as an element of their cash management responsibilities. During 2010,
repurchase agreements averaged $39,737, with an average cost of 0.64%.

Another
source of funding is the Federal Home Loan Bank (FHLB). The Company had FHLB advances of $152,065 outstanding at December 31, 2010. These advances have interest rates
ranging from 2.5% to 5.9% (see note 12 to the consolidated financial statements for the maturity schedule of these advances). The Company averaged $195,897 in FHLB advances during 2010 compared
to $266,533 during 2009. This decrease in the average balance of FHLB borrowings was primarily due to the increased deposits generated by the Company which reduced the need for other funding sources.
One final source of funding is federal funds purchased. The Company had no federal funds purchased as of December 31, 2010 and December 31, 2009.

Average Deposits

2010

2009

2008Amount

Rate

Amount

Rate

Amount

RateDemand

$
259,607




$
238,411




$
203,979Interest Bearing Demand


780,125


0.54
%

631,905


0.65
%

509,370


1.00
%Savings/Money Markets


421,020


0.48


397,130


0.75


355,472


1.35Certificates of Deposit


798,471


2.13


928,689


2.73


873,731


3.67Totals

$
2,259,223


1.03
%
$
2,196,135


1.47
%
$
1,942,552


2.16
%


As of December 31, 2010, certificates of deposit and other time deposits of $100 or more mature as follows:

3 months or less

4-6 months

6-12 months

over 12 months

TotalAmount

$
57,270

$
46,944

$
60,119

$
66,686

$
231,019Percent


25%


20%


26%


29%


Capital Resources

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 ("Tier 1") consists of common shareholders' equity adjusted for unrealized gains or losses on available
for sale (AFS) securities plus limited amounts of Trust Preferred Securities less goodwill and intangible assets. Total capital consists of core capital, certain debt instruments and a portion of the
allowance for loan losses. At December 31, 2010, Tier 1 capital to average assets was 9.7%. Total capital to risk-weighted assets was 16.8%. Both ratios exceed all required
ratios established for bank holding companies. Risk-adjusted capital levels of the Company's subsidiary bank also exceed regulatory definitions of well-capitalized
institutions.

The
Trust Preferred Securities (which are classified as subordinated debentures) 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 these securities cannot constitute more than 25%
of the total Tier 1 capital of the Company. Consequently, the amount of Trust Preferred Securities in excess of the 25% limitation constitutes Tier 2 capital, or supplementary capital,
of the Company. As of December 31, 2010, all of the Company's Trust Preferred Securities qualify as Tier 1 capital.

Common
shareholders' equity is impacted by the Company's decision to categorize its securities portfolio as available for sale (AFS). Securities in this category are carried at fair
value, and common shareholders' equity is adjusted to reflect unrealized gains and losses, net of taxes.

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The
Company declared and paid common dividends of $.04 per share in 2010 compared to $.26 and $.58 in 2009 and 2008 respectively. Book value per common share increased to $12.24 at
December 31, 2010 compared to $11.84 at the end of 2009. The net adjustment for AFS securities increased book value per share by $.47 at December 31, 2010 and increased book value per
share by $.63 at December 31, 2009. Depending on market conditions, the adjustment for AFS securities can cause significant fluctuations in shareholders' equity.

On
January 16, 2009, the Company entered into an agreement with the United States Department of Treasury (the "Treasury Department") as part of the Treasury Department's Capital
Purchase Program. Under this agreement, the Company issued to the Treasury Department 57,000 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A ("preferred stock") and a
warrant to purchase up to 571,906 shares ("warrant shares") of the Company's common stock, at an initial per share exercise price of $14.95. Like stock options, the warrant issued through the Capital
Purchase Program is potentially dilutive.
The average stock price for the Company for 2010 and 2009 was $7.43 and $7.40 per share respectively, and the warrant issued in 2009 has an exercise price of $14.95 per share. This results in no
additional potentially dilutive shares during 2009 and 2010.

The
preferred stock pays cumulative dividends at a rate of 5% per year for the first five years and 9% per year thereafter. The Company may, at its option and at any time, redeem the
preferred stock for the liquidation amount of $1,000 per share, plus any accrued and unpaid dividends. While the preferred stock is outstanding, the Company may only pay dividends on common stock if
all accrued and unpaid dividends for the preferred stock have been paid. The Company cannot increase its quarterly cash dividend above the level paid in October 2008 without the prior consent of
Treasury until the earlier of three years following the date of the sale of the preferred stock to the Treasury or the date the preferred stock is no longer held by Treasury. See Note 27 to the
consolidated financial statements for additional details on the Company's participation in the Capital Purchase Program.

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 approximately $800,502 of 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, supports liquidity, extends the contractual maturity of liabilities, and limits reliance
on volatile short-term purchased funds. Short-term funding needs may 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, which provide a sizable source of relatively stable low-cost funds. The Company defines
core deposits as all deposits except certificates of deposits greater than $100. Average core deposits funded approximately 76.7% of total earning assets during 2010 and approximately 71.4% in 2009.

Management
believes the Company has sufficient liquidity to meet all reasonable borrower, depositor and creditor needs in the present economic environment. The Company has not received
any directives from regulatory authorities that would materially affect liquidity, capital resources or operations.

Contractual Obligations as of December 31, 2010

Total

Less than 1 Year

1-3 Years

3-5 Years

More than 5 YearsTime Deposits

$
713,910

$
503,686

$
172,048

$
27,105

$
11,071FHLB Advances


152,065


15,725


35,927


35,976


64,437Subordinated Debentures


50,117











50,117Operating Lease Commitments


3,805


880


1,465


1,058


402Total

$
919,897

$
520,291

$
209,440

$
64,139

$
126,027


Off-balance Sheet Arrangements

The Bank incurs off-balance sheet risks in the normal course of business in order to meet the financing needs of its
customers. These risks derive from commitments to extend credit and standby letters of credit. Off-balance sheet risk to credit loss exists up to the face amount of these instruments,
although material
losses are not anticipated. See Note 17 to the Consolidated Financial Statements for additional details on the Company's off-balance sheet arrangements.

Interest Rate Risk Management

Interest rate risk is the exposure of the Company's financial condition to adverse changes in market interest rates. In an effort to
estimate the impact of sustained interest rate movements to the Company's earnings, the Company monitors interest rate risk through

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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. The Company monitors compliance within established guidelines of the Funds Management Policy. See Item 7A. Quantitative and
Qualitative Disclosures About Market Risk section for further discussion regarding interest rate risk.

Critical Accounting Policies

The accounting and reporting policies of the Company comply with accounting principles generally accepted in the United States and
conform to general practices within the banking industry. These policies require estimates and assumptions. Changes in underlying factors, assumptions, or estimates in any of these areas could have a
material impact on the Company's future financial condition and results of operations. In management's opinion, some of these areas have a more significant impact than others on the Company's
financial reporting. These areas currently include accounting for the allowance for loan losses, goodwill, income taxes, and mortgage servicing rights.

Allowance
for Loan Losses  The level of the allowance for loan losses is based upon management's evaluation of the loan and lease portfolios, past loan loss
experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay (including the timing of future payments), the estimated value of any
underlying collateral, composition of the loan portfolio, economic conditions, and other pertinent factors. This evaluation is inherently subjective as it requires material estimates including the
amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The level of allowance maintained is believed by management to be
adequate to cover losses inherent in the portfolio. The allowance is increased by provisions charged to expense and decreased by charge-offs, net of recoveries of amounts previously
charged-off.

Goodwill 
Goodwill and intangible assets deemed to have indefinite lives are subject to annual impairment tests. The Company has selected June 30 as its date
for annual impairment testing, but will test more frequently if circumstances warrant. During 2009, the Company determined that goodwill might be impaired and tested it for impairment at
May 31, 2009 and November 30, 2009. See Note 9 in the financial statements for further discussion of the goodwill impairment charges taken in 2009. No goodwill impairment was
identified during testing performed in 2010.

Income
taxes  The Company is subject to the income tax laws of the U.S., its states and the municipalities in which it operates. These tax laws are complex and
subject to different interpretations by the taxpayer and the relevant government taxing authorities. The Company reviews income tax expense and the carrying value of deferred tax assets; and as new
information becomes available, the balances are adjusted as appropriate. In establishing a provision for income tax expense, the Company makes judgments and interpretations about the application of
these inherently complex tax laws and also makes estimates about when in the future certain items will affect taxable income in the various tax jurisdictions.

Mortgage
servicing rights  The Company originally records mortgage servicing rights at fair value and amortizes them over the period of the estimated future net
servicing income of the underlying loans. The servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. Impairment is determined by
stratifying rights into groupings based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an
individual grouping, to the extent that fair value is less than the carrying amount.

New Accounting Matters

See Note 1 to the Consolidated Financial Statements regarding the adoption of new accounting standards in 2010.

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Table of Contents

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's exposure to market risk is reviewed on a regular basis by the Asset/Liability Committee and Boards of Directors of the
Company and the Bank. Primary market risks, which impact the Company's operations, are liquidity risk and interest rate risk, as discussed above.

As
discussed previously, the Company monitors interest rate risk by the use of computer simulation modeling to estimate the potential impact on its net interest income under various
interest rate scenarios. Another method by which the Company's interest rate risk position can be estimated is by computing estimated changes in its net portfolio value ("NPV"). This method estimates
interest rate risk exposure from movements in interest rates by using interest rate sensitivity analysis to determine the change in the NPV of discounted cash flows from assets and liabilities.
Computations are based on a number of assumptions, including the relative levels of market interest rates and prepayments in mortgage loans and certain types of investments. These computations do not
contemplate any actions management may undertake in response to changes in interest rates, and should not be relied upon as indicative of actual results. In addition, certain shortcomings are inherent
in
the method of computing NPV. Should interest rates remain or decrease below current levels, the proportion of adjustable rate loans could decrease in future periods due to refinancing activity. In the
event of an interest rate change, prepayment levels would likely be different from those assumed in the table. Lastly, the ability of many borrowers to repay their adjustable rate debt may decline
during a rising interest rate environment.

The
following tables provide an assessment of the risk to NPV in the event of sudden and sustained 1% and 2% increases and decreases in prevailing interest rates. The table indicates
that as of December 31, 2010 the Company's estimated NPV might be expected to decrease in the event of a decrease in prevailing interest rates, and might be expected to generally decrease in
the event of a increase in prevailing interest rates (dollars in thousands). As of December 31, 2009 the Company's estimated NPV would generally decrease in the event of a increase in
prevailing rates and increase in the event of an decrease in rates.

December 31, 2010

Change in Rates

$ Amount

$ Change

NPV Ratio

Change+2%


599,777


(12,600
)

22.01%


69+1%


612,598


221


21.87%


55Base


612,377





21.32%


-1%


580,467


(31,910
)

19.95%


(137
)-2%


538,946


(73,431
)

18.34%


(298
)


December 31, 2009

Change in Rates

$ Amount

$ Change

NPV Ratio

Change+2%


382,429

$
(51,107
)

13.09%


(133)bp+1%


439,093


5,557


14.68%


26bpBase


433,536





14.42%


-1%


492,568


59,032


16.00%


158bp-2%


513,360


79,824


16.50%


208bp


The above discussion, and the portions of MANAGEMENT'S DISCUSSION AND ANALYSIS in Item 7 of this Report that are referenced in the above
discussion contains statements relating to future results of the Company that are considered "forward-looking-statements" within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to, among other things, simulation of the impact on net interest income from changes in interest rates. Actual results may differ materially from those expressed or implied
therein as a result of certain risks and uncertainties, including those risks and uncertainties expressed above, those that are described in MANAGEMENT'S DISCUSSION AND ANALYSIS in Item 7 of
this Report, those that are described in Item 1 of this Report, "Business," under the caption "Forward-Looking-Statements and Associated Risks," and those that are described in Item 1A
of this Report, "Risk Factors", all of which discussions are incorporated herein by reference.

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Table of Contents

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LOGOCrowe Horwath LLPIndependent Member Crowe Horwath International


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board
of Directors and Shareholders
MainSource Financial Group, Inc.
Greensburg, Indiana

We
have audited the accompanying consolidated balance sheets of MainSource Financial Group, Inc. as of December 31, 2010 and 2009 and the related consolidated statements of
operations, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2010. We also have audited MainSource Financial Group, Inc.'s internal
control over financial reporting as of December 31, 2010, based on criteria established inInternal Control  Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). MainSource Financial Group, Inc.'s management is responsible for these
financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the company's internal
control over financial reporting 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 and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our
opinions.

A
company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MainSource Financial Group, Inc. as of
December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion MainSource Financial Group, Inc. maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2010, based on criteria established inInternal Control  Integrated Frameworkissued by the
COSO.

/s/ Crowe Horwath LLPLouisville, Kentucky
March 10, 2011


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Table of Contents

MAINSOURCE FINANCIAL GROUP, INC.  CONSOLIDATED BALANCE SHEETS  (Dollar amounts in thousands except per share data)

December 31,
2010

December 31,
2009AssetsCash and due from banks

$
40,423

$
57,578Money market funds and federal funds sold


19,700


14,111Cash and cash equivalents


60,123


71,689Securities available for sale


806,071


714,607Loans held for sale


5,845


5,128Loans, net of allowance for loan losses of $42,605 and $46,648


1,638,366


1,838,799Restricted stock, at cost


19,502


27,359Premises and equipment, net


48,861


49,499Goodwill


61,919


62,909Purchased intangible assets


9,102


11,168Cash surrender value of life insurance


47,756


46,567Interest receivable and other assets


71,767


78,805Total assets

$
2,769,312

$
2,906,530LiabilitiesDepositsNoninterest bearing

$
268,390

$
250,438Interest bearing


1,943,174


2,020,212Total deposits


2,211,564


2,270,650Securities sold under agreement to repurchase


33,181


47,631Federal Home Loan Bank (FHLB) advances


152,065


222,265Subordinated debentures


50,117


49,966Other liabilities


19,815


21,556Total liabilities


2,466,742


2,612,068Commitments and contingent liabilities (Note 17)Shareholders' equityPreferred stock, no par valueAuthorized shares  400,000Issued and outstanding shares  57,000;Aggregate liquidation preference $57,000


56,183


55,979Common stock $.50 stated value:Authorized shares  100,000,000Issued shares  20,710,764Outstanding shares  20,136,362


10,394


10,394Treasury stock  574,402, at cost


(9,367
)

(9,367
)Additional paid-in capital


223,134


223,020Retained earnings


12,768


1,825Accumulated other comprehensive income


9,458


12,611Total shareholders' equity


302,570


294,462Total liabilities and shareholders' equity

$
2,769,312

$
2,906,530


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

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MAINSOURCE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
(Dollar amounts in thousands except per share data)

2010

2009

2008Interest incomeLoans, including fees

$
105,179

$
115,873

$
118,379SecuritiesTaxable


18,830


19,490


20,387Tax exempt


10,360


7,663


5,696Federal funds sold and money market funds


114


128


155Deposits with financial institutions


88


87


42Total interest income


134,571


143,241


144,659Interest expenseDeposits


23,162


32,497


42,069Federal Home Loan Bank advances


8,144


10,235


10,990Subordinated debentures


1,755


2,059


2,782Other borrowings


258


442


1,293Total interest expense


33,319


45,233


57,134Net interest income


101,252


98,008


87,525Provision for loan losses


35,250


46,310


20,918Net interest income after provision for loan losses


66,002


51,698


66,607Non-interest incomeInsurance commissions


1,711


2,071


2,073Mortgage banking


7,642


9,028


2,565Trust and investment product fees


2,363


1,743


1,575Service charges on deposit accounts


17,462


16,537


14,555Net realized gains on securities


2,979


1,263


1,118Increase in cash surrender value of life insurance


1,246


890


967Interchange income


5,487


5,178


3,600Other income


2,401


3,340


3,244Total non-interest income


41,291


40,050


29,697Non-interest expenseSalaries and employee benefits


50,138


46,342


41,033Net occupancy


6,654


6,660


6,061Equipment


7,855


7,468


6,496Intangibles amortization


2,066


2,199


2,607Telecommunications


1,882


2,015


1,863Stationery printing and supplies


1,478


1,608


1,374FDIC assessment


4,940


4,976


741Marketing


3,412


3,040


1,645Collection expenses


3,579


3,255


1,225Goodwill impairment





80,310


Other expenses


10,248


9,659


9,728Total non-interest expense


92,252


167,532


72,773Income/(loss) before income tax


15,041


(75,784
)

23,531Income tax expense/(benefit)


239


(11,645
)

4,379Net income/(loss)

$
14,802

$
(64,139
)
$
19,152Preferred dividends and discount accretion


(3,054
)

(2,919
)

Net income/(loss) attributable to common shareholders

$
11,748

$
(67,058
)
$
19,152Net income/(loss) per common share  basic

$
0.58

$
(3.33
)
$
1.00Net income/(loss) per common share  diluted

$
0.58

$
(3.33
)
$
1.00


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

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MAINSOURCE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
(Dollar amounts in thousands except per share data)

Common StockAccumulated
Other
Comprehensive
Income/(Loss)Preferred
Stock

Shares
Outstanding

Amount

Treasury
Stock

Additional Paid-in Capital

Retained
Earnings

Total

Comprehensive IncomeBalance, January 1, 2008

$



18,570,139

$
9,610

$
(9,487
)
$
196,712

$
65,999

$
1,268

$
264,102Net income

















19,152





19,152


19,152Change in unrealized gains/losses on securities




















1,847


1,847


1,847Total comprehensive income

























$
20,999Cash dividends ($.575 per share)

















(11,133
)




(11,133
)Issuance of common stock in acquisitions





1,559,005


780





25,006








25,786Stock option expense














101








101Purchase of treasury stock





(1,463
)




(22
)










(22
)Exercise of stock options





8,681


4


142


(30
)







116Balance, December 31, 2008





20,136,362


10,394


(9,367
)

221,789


74,018


3,115


299,949Net loss

















(64,139
)




(64,139
)

(64,139
)Change in unrealized gains/losses on securities




















9,496


9,496


9,496Total comprehensive income

























$
(54,643
)Stock option expense














115








115Cash dividends ($.255 per share)

















(5,135
)




(5,135
)Issuance of preferred stock, net of issuance costs


55,783




















55,783Issuance of warrants to purchase common stock














1,116








1,116Dividends  preferred stock

















(2,723
)




(2,723
)Accretion of preferred stock discount


196














(196
)




Balance, December 31, 2009


55,979


20,136,362


10,394


(9,367
)

223,020


1,825


12,611


294,462Net income

















14,802





14,802


14,802Change in unrealized gains/losses on securities




















(3,153
)

(3,153
)

(3,153
)Total comprehensive income

























$
11,649Stock option expense














114








114Cash dividends ($.04 per share)  common stock

















(805
)




(805
)Dividends  preferred stock

















(2,850
)




(2,850
)Accretion of preferred stock discount


204














(204
)




Balance, December 31, 2010

$
56,183


20,136,362

$
10,394

$
(9,367
)
$
223,134

$
12,768

$
9,458

$
302,570


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

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MAINSOURCE FINANCIAL GROUP, INC.  CONSOLIDATED STATEMENTS OF CASH FLOW  YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008  (Dollars in thousands)

2010

2009

2008Operating ActivitiesNet income (loss)

$
14,802

$
(64,139
)
$
19,152Adjustments to reconcile net income/(loss) to net cash provided by operating activities:Provision for loan losses


35,250


46,310


20,918Depreciation expense


5,276


5,351


4,523Amortization of mortgage servicing rights


1,424


2,317


706Valuation allowance on mortgage servicing rights


(132
)

(600
)

1,226Securities amortization, net


1,794


(72
)

(731
)Amortization of purchased intangible assets


2,066


2,199


2,607Increase in cash surrender value of life insurance policies


(1,246
)

(890
)

(967
)Gain on life insurance benefit


(67
)

(128
)

Gain on sale of insurance related business line


(988
)




Securities gains


(2,979
)

(1,263
)

(1,118
)Gain on loans sold


(5,152
)

(5,548
)

(1,904
)Loans originated for sale


(274,111
)

(419,192
)

(111,968
)Proceeds from loan sales


278,546


424,559


112,956Stock based compensation expense


114


115


101Goodwill impairment





80,310


Change in other assets and liabilities


16,965


(25,679
)

(1,709
)Net cash provided by operating activities


71,562


43,650


43,792Investing ActivitiesNet change in time deposits





116


Purchases of securities available for sale


(363,844
)

(451,603
)

(168,697
)Proceeds from calls, maturities, and payments on securities available for sale


157,154


172,390


67,531Proceeds from sales of securities available for sale


111,564


93,855


98,647Loan originations and payments, net


154,068


124,944


(75,325
)Purchases of premises and equipment


(4,660
)

(2,490
)

(6,252
)Purchases of restricted stock








(4,232
)Sale of insurance related business line


2,000





Proceeds from redemption of restricted stock


7,857


2,362


Proceeds from life insurance benefit


124


442


Cash received from bank acquisitions, net





17,566


20,345Net cash provided (used) by investing activities


64,263


(42,418
)

(67,983
)Financing ActivitiesNet change in deposits


(59,086
)

173,291


(153,297
)Net change in other borrowings


(14,450
)

(36,817
)

34,292Proceeds from FHLB advances





50,000


690,850Repayment of FHLB advances


(70,200
)

(260,902
)

(525,782
)Cash dividends on preferred stock


(2,850
)

(2,367
)

Purchase of treasury shares








(22
)Cash dividends


(805
)

(5,135
)

(11,133
)Issuance of preferred shares, net of issuance costs





55,783


Issuance of warrants to purchase common stock





1,116


Proceeds from exercise of stock options








116Net cash provided (used) by financing activities


(147,391
)

(25,031
)

35,024Net change in cash and cash equivalents


(11,566
)

(23,799
)

10,833Cash and cash equivalents, beginning of year


71,689


95,488


84,655Cash and cash equivalents, end of year

$
60,123

$
71,689

$
95,488Supplemental cash flow informationInterest paid

$
34,714

$
47,011

$
59,550Income taxes paid/(refunded)


(1,675
)

1,820


5,862Supplemental non cash disclosureLoan balances transferred to foreclosed real estate


11,115


11,915


6,824


See Note 2 regarding non-cash transactions included in acquisitions.

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

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands except per share data)

NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation:The consolidated financial statements include MainSource Financial
Group, Inc. and its wholly owned subsidiaries, together referred to as "the Company". Intercompany transactions and balances are eliminated in consolidation.

The
Company's wholly owned subsidiaries include MainSource Bank ("the Bank"), MainSource Title, LLC, MainSource Insurance, LLC, and Insurance Services Marketing, LLC. On
October 1, 2010, the Company sold its property and casualty and health insurance book of businesses related to its insurance subsidiary, MainSource Insurance (MSI), to Encore Insurance Group,
LLC. In November 2009, the Company merged MainSource Bank of Illinois into MainSource Bank. On December 2009, the Company merged MainSource Bank  Ohio into MainSource Bank.

The
Company provides financial services through its offices in Indiana, Illinois, Ohio, and Kentucky. Its primary deposit products are checking, savings, and term certificate accounts,
and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer
assets and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by both residential and commercial real estate. Other
financial instruments which potentially represent concentrations of credit risk include deposit accounts in other financial institutions and federal funds sold.

Use of Estimates:To prepare financial statements in conformity with accounting principles generally accepted in the United States of America,
management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided and
actual results could differ. The allowance for loan losses, carrying value of goodwill, loan servicing rights, and fair values of financial instruments are particularly subject to change.

Cash Flows:Cash and cash equivalents include cash and due from banks, interest bearing deposits with other financial institutions with
maturities
under 90 days, money market funds and federal funds sold. Net cash flows are reported for loan and deposit transactions, federal funds purchased and repurchase agreements.

Interest-bearing Deposits in Other Financial Institutions:Interest-bearing deposits in other financial institutions mature within one year and are
carried at cost.

Securities:Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at
fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

Interest
income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method, which considers prepayments only on
mortgage-backed securities. Gains and losses on sales are recorded on the trade date and are based on the amortized cost of the security sold. The Company 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. For securities in an
unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of
the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its
amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through
earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be
recognized in the income statement and 2) other-than-temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income. The credit
loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is
recognized through earnings.

Loans Held for Sale:Loans originated and intended for sale in the secondary market are carried at the lower of cost or market in the aggregate, as
determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings.

Mortgage
loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is reduced by the amount allocated to the servicing right. Gains
and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loan sold.

Loans:Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of purchase premiums or discounts, unearned interest, deferred loan fees and costs, and an allowance for loan losses. Interest income is accrued on the unpaid principal
balance. Loan origination fees, net of certain

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direct
origination costs, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

Interest
income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days. Past due status is based on the
contractual terms of the loan. Loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All
interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Payments received on such loans subsequent to being placed on
non-accrual are applied to the principal balance of the loans. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and
future payments are reasonably assured. Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for
impairment and individually classified impaired loans. All loan segments follow this process in recording interest income.

Allowance for Loan Losses:The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged
against the allowance when management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information
about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.

The
allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers
non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual
loss history experienced by the Company over the most recent 3 years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio
segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends
in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of
lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations

For
allowance purposes, the following portfolio segments have been identified: Commercial, Commercial Real Estate (CRE), Residential and Consumer. The classes within the Commercial
portfolio are commercial and industrial and agricultural. The classes within the Commercial Real Estate portfolio are farm, hotel, construction and development, and other. The classes within the
Residential portfolio are 1-4 family and home equity. Finally, the classes within the Consumer portfolio are direct and indirect.

The
risk characteristics of each loan portfolio segment are as follows:

Commercial

Commercial
loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The
cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other
business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans
secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial
real estate

These
loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher
loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the
loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company's commercial real estate
portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria.

Residential
and Consumer

With
respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally establishes a
maximum loan-to-value ratio and requires PMI if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences,
and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment

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of
these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be
impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

All
loans are charged off when the Company has determined that future collectability of the entire loan balance is doubtful. For commercial and commercial real estate loans, collateral
dependent loans are written down to the fair value of the collateral.

A
loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the
borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Loans, for
which the terms have been modified, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Impairment is measured on
a loan by loan basis for commercial and commercial real estate loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable
market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the
Company does not separately identify individual consumer and residential real estate loans for impairment disclosures. A specific reserve is established as a component of the allowance when a loan has
been determined to be impaired for all commercial and commercial real estate loans greater than $250,000.

When
a loan within any class is impaired, interest income is recognized unless the receipt of principal and interest is in doubt when contractually due. If receipt of principal and
interest is in doubt when contractually due, interest income is not recognized. Cash receipts received on nonaccruing impaired loans within any class are generally applied entirely against principal
until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income. Cash receipts received on accruing impaired loans within any class are
applied in the same manner as accruing loans that are not considered impaired.

Regarding
all segments within the portfolio, when in the Company's judgment, the borrower's ability to make required principal and interest payments resumes and collectability is no
longer in doubt, and the loan has been brought current with respect to principal and interest, the loan is returned to accrual status.

Federal Home Loan Bank (FHLB) Stock:The Bank is a member of the Federal Home Loan Bank ("FHLB") system. Members are required to own a certain amount
of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for
impairment. Because this stock is viewed as a long-term investment, impairment is based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Premises and Equipment:Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related
components are depreciated using the straight-line method with useful lives ranging from 30 to 39 years for buildings and 5 to 15 years for related components. Furniture,
fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years.

Foreclosed Assets:Assets acquired through or instead of loan foreclosure are initially recorded at fair value net of estimated selling costs when
acquired, establishing a new cost basis. If fair value declines after acquisition, a valuation allowance is recorded through expense. Costs after acquisition are expensed.

Company Owned Life Insurance:The Company has purchased life insurance policies on certain employees. Company owned life insurance is recorded at its
cash surrender value, or the amount that can be realized. Company owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is
the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Servicing Assets:Servicing rights are recognized separately when they are acquired through sales of loans. When mortgage loans are sold, servicing
rights are initially recorded at fair value with the income statement effect recorded in mortgage banking. Fair value is based on market prices for comparable mortgage servicing contracts, when
available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using
the amortization method which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the
underlying loans.

Servicing
assets are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is determined by stratifying rights into groupings based
on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair
value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded
as an increase to income. Changes in valuation allowances are

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reported
with mortgage banking on the income statement. The fair values of servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and
default rates and losses.

Servicing
fee income which is reported on the income statement as mortgage banking is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the
outstanding principal, or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income. Servicing fees
totaled $1,890, $1,521 and $1,242 for the years ended December 31, 2010, 2009 and 2008. Late fees and ancillary fees related to loan servicing are not material.

Transfers of Financial Assets:Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control
over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of
that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement or option to repurchase them before their
maturity.

Goodwill and Other Intangible Assets:Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the
purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill resulting from business combinations after January 1, 2009, is
generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets
acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not
amortized, but tested for impairment at least annually. The Company has selected June 30 of each year as the date to perform its impairment review. Intangible assets with definite useful lives
are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on the Company's balance sheet.

Other
intangible assets consist largely of core deposit and acquired customer relationship intangibles arising from whole bank and branch acquisitions. They are initially measured at
fair value and then are amortized on an accelerated method over their estimated useful lives, generally ten years.

Loan Commitments and Related Financial Instruments:Financial instruments include off-balance sheet credit instruments, such as
commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer
collateral or ability to repay. Such financial instruments are recorded when they are funded.

Long-term Assets:Premises and equipment and other long-term assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Mortgage Banking Derivatives:Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments
for the future delivery of these mortgage loans are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on changes in mortgage interest rates from
the date the interest on the loan is locked. The Company enters into forward commitments for the future delivery of mortgage loans when interest rate locks are entered into, in order to hedge the
change in interest rates resulting from its commitments to fund the loans.

Repurchase Agreements:Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to
cover these liabilities, which are not covered by federal deposit insurance. Repurchase agreements are included in other borrowings on the consolidated balance sheets.

Income Taxes:Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax
rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

A
tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to
occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no
tax benefit is recorded.

The
Company recognizes interest and/or penalties related to income tax matters in income tax expense.

Loan Commitments and Related Financial Instruments:Financial instruments include off-balance sheet credit instruments, such as
commitments to make loans and commercial letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer
collateral or ability to repay. Such financial instruments are recorded when they are funded.

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Stock-Based Compensation:Compensation cost is recognized for stock options and restricted stock awards issued to employees, based on the fair value
of these awards at the date of grant. A Black-Scholes model is utilized to estimate the fair value of stock options. Compensation cost is recognized over the required service period, generally defined
as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Retirement Plans:Employee 401(k) and profit sharing plan expense is the amount of matching contributions and discretionary contributions,
respectively.

Earnings (Loss) Per Common Share:Basic earnings (loss) per common share is net income available to common shareholders divided by the weighted
average number of common shares outstanding during the period. Diluted earnings (loss) per common share include the dilutive effect of additional potential common shares issuable under stock options.
Earnings and dividends per share are restated for all stock splits and dividends through the date of issuance of the financial statements.

Comprehensive Income (Loss):Comprehensive income (loss) consists of net income (loss) and other comprehensive income. Other comprehensive income
includes unrealized gains and losses on securities available for sale which are also recognized as a separate component of equity.

Loss Contingencies:Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are now any such matters that will have a material effect on the
financial statements.

Restrictions on Cash:Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements.

Equity:Stock dividends in excess of 20% are reported by transferring the par value of the stock issued from retained earnings
to common stock. Stock dividends for 20% or less are reported by transferring the fair value, as of the ex-dividend date, of the stock issued from retained earnings to common stock and
additional paid-in capital. Fractional share amounts are paid in cash with a reduction in retained earnings.

Dividend Restriction:Banking regulations require maintaining certain capital levels and may limit the dividends paid by the banks to the holding
company or by the holding company to shareholders.

Fair Value of Financial Instruments:Fair values of financial instruments are estimated using relevant market information and other assumptions, as
more fully disclosed in a Note 6. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Operating Segments:While the Company's chief decision makers monitor the revenue streams of the various Company products and services, the
identifiable segments are not material and operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all of the Company's financial service
operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications:Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had
no affect on prior year net income or shareholders' equity.



In April 2009, the FASB amended existing guidance for determining whether impairment is other-than-temporary
for debt securities. The guidance requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position
before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For
securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment (OTTI)
related to other factors, which is recognized in other comprehensive income and 2) OTTI related to credit loss, which must be recognized in the income statement. The credit loss is defined as
the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Additionally, disclosures about other-than-temporary
impairments for debt and equity securities were expanded. This guidance was effective for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. The adoption of this guidance on April 1, 2009 did not have a material impact on the Company's results of operations or financial position.

In
June 2009, the FASB issued guidance on accounting for transfers of financial assets. This guidance amends previous guidance relating to the transfers of financial assets and
eliminates the concept of a qualifying special purpose entity. This guidance must be applied as of the beginning of each reporting entity's first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This guidance must be applied to transfers occurring on
or after the effective date. Additionally, on and after the effective date, the concept of a qualifying

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special-purpose
entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after
the effective date in accordance with the applicable consolidation guidance. Additionally, the disclosure provisions of this guidance were also amended and apply to transfers that occurred both before
and after the effective date of this Statement. The adoption of this guidance did not have a material impact on the Company's results of operations or financial position.

NOTE 2  ACQUISITION

On May 2, 2009, the Company completed an acquisition of three branches from American Founders Bank ("AFB"). Two branches were
located in Frankfort, Kentucky and the third in Lawrenceburg, Kentucky. Concurrent with this purchase, the Company sold one of its branches in Louisville, Kentucky, to AFB. Pursuant to the terms of
the purchase agreement, AFB paid the Company approximately $18,400 in cash. The Company expensed approximately $78 of direct acquisition costs and recorded goodwill of $6,002 and $222 of core deposit
intangible assets. The core deposit intangible is being amortized on an accelerated basis over 10 years. On the date of acquisition, the Company assumed net deposit liabilities valued at
approximately $88,000, acquired a net portfolio of loans valued at approximately $61,000, and premises and equipment valued at $3,000. All loans acquired were performing loans and none were within the
scope of ASC 310.

As
a result of this acquisition, the Company has expanded its geographical presence in the state of Kentucky. The Company believes that the acquisition will allow it to increase its
customer base to enhance deposit fee income and market additional products and services to new customers.

NOTE 3  RESTRICTION ON CASH AND DUE FROM BANKS

The Bank is required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. The reserves required at
December 31, 2010 and 2009 were $7,244 and $7,574. The Company had no compensating balance requirements at December 31, 2010 and 2009.

NOTE 4  SECURITIES

The fair value of securities available for sale and related gross unrealized gains and losses recognized in accumulated other
comprehensive income (loss) was as follows:

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair ValueAs of December 31, 2010Available for SaleState and municipal


294,706


7,193


(1,755
)

300,144Mortgage-backed securities-residential (Government Sponsored Entity)


304,347


9,513


(1,029
)

312,831Collateralized mortgage obligations


184,549


3,129


(1,681
)

185,997Equity securities


4,405








4,405Other securities


3,514





(820
)

2,694Total available for sale

$
791,521

$
19,835

$
(5,285
)
$
806,071As of December 31, 2009Available for SaleU.S. government agency

$
14,386

$
1

$


$
14,387State and municipal


225,845


8,588


(948
)

233,485Mortgage-backed securities-residential (Government Sponsored Entity)


234,851


9,043


(186
)

243,708Collateralized mortgage obligations


211,123


4,595


(377
)

215,341Equity securities


4,463





(96
)

4,367Other securities


4,542





(1,223
)

3,319Total available for sale

$
695,210

$
22,227

$
(2,830
)
$
714,607


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Contractual maturities of securities at December 31, 2010 were as follows. Securities not due at a single maturity or with no maturity at year end are
shown separately.

Available
for SaleAmortized Cost

Fair ValueWithin one year

$
1,145

$
1,164One through five years


30,054


31,215Six through ten years


93,162


95,539After ten years


173,859


174,920Mortgage-backed securities-residential (GSE's)


304,347


312,831Collateralized mortgage obligations


184,549


185,997Equity securities


4,405


4,405Total available for sale securities

$
791,521

$
806,071


Gross
proceeds from sales of securities available for sale during 2010, 2009 and 2008 were $111,564, $93,855, and $98,647. Gross gains of $3,018, $1,518, and $1,255 and gross losses of
$39, $105, and $137 were realized on those sales in 2010, 2009 and 2008, respectively. The tax provision related to these net realized gains was $1,049, $495, and $401 respectively.

Securities
with a carrying value of $307,597 and $272,675 were pledged at December 31, 2010 and 2009 to secure certain deposits and repurchase agreements, secure future funding
needs, and for other purposes as permitted or required by law.

At
year end 2010 and 2009, there were no holdings of securities of any one issuer, other than the U.S. Government and its sponsored entities, in an amount greater than 10% of
shareholders' equity.

Below
is a summary of securities with unrealized losses as of year-end 2010 and 2009 presented by length of time the securities have been in a continuous unrealized loss
position.

2010

Less than 12 months

12 months or longer

TotalDescription of securities

Fair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

Fair Value

Unrealized
LossesState and municipal

$
69,009

$
(1,664
)
$
406

$
(91
)
$
69,415

$
(1,755
)Mortgage-backed securities-residential (GSE's)


42,926


(1,029
)







42,926


(1,029
)Collateralized mortgage obligations


70,656


(1,681
)







70,656


(1,681
)Other securities


1,010


(2
)

1,684


(818
)

2,694


(820
)Total temporarily impaired

$
183,601

$
(4,376
)
$
2,090

$
(909
)
$
185,691

$
(5,285
)2009

Less than 12 months

12 months or longer

TotalDescription of securities

Fair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

Fair Value

Unrealized
LossesState and municipal

$
12,937

$
(675
)
$
7,542

$
(273
)
$
20,479

$
(948
)Mortgage-backed securities-residential (GSE's)


43,904


(186
)







43,904


(186
)Collateralized mortgage obligations


50,124


(376
)

3


(1
)

50,127


(377
)Equity securities








888


(96
)

888


(96
)Other securities








3,319


(1,223
)

3,319


(1,223
)Total temporarily impaired

$
106,965

$
(1,237
)
$
11,752

$
(1,593
)
$
118,717

$
(2,830
)


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 (formerly EITF Issue No. 99-20,Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial
Interests that Continue to be Held by a Transfer in Securitized Financial Assets). The Company holds no securities that fall within the scope of ASC 325-10.

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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 the Company 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 December 31, 2010, the Company's security portfolio consisted of 945 securities, 196 of which were in an unrealized loss position. Unrealized losses on state and municipal
securities 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 temporary illiquidity and the financial crisis affecting these
markets and not the expected cash flows of the individual securities. The fair value of these debt securities is expected to recover as the securities approach their maturity date.

At
December 31, 2010, approximately 100% 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 $1.0 million 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 December 31, 2010.

The
Company's collateralized mortgage obligation securities portfolio includes agency collateralized mortgage obligations with a market value of $186 million which had unrealized
losses of approximately $1.7 million at December 31, 2010. The Company monitors to insure it has adequate credit support and as of December 31, 2010, 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.

The
unrealized losses on other securities are related to three single issue trust preferred securities and 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. All
but one of these investments are currently rated investment grade. The other investment is not rated. The Company performs a quarterly review of these securities and based on this review, no evidence
of adverse changes in expected cash flows is anticipated. The decline in value is primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not the expected
cash flows of the individual securities. Currently, the issuers have made all contractual payments and given no indication that they will not be able to make them into the future. The fair value of
these debt securities is expected to recover as the securities approach their maturity date. As of December 31, 2010, the Company owned $2,694 of these securities with an unrealized loss of
$820.

During
2010, the Company determined that three of its equity holdings were other than temporarily impaired and wrote down the securities by $97 to their fair value of $136. During 2009,
the Company identified one of its equity holdings to be other than temporarily impaired and wrote down the security by $150 to its fair value ($0). These amounts were included in other income in 2010
and net realized gains/(losses) on securities in 2009.

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NOTE 5  LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans were as follows:

December 31,
2010

December 31,
2009CommercialCommercial and industrial

$
157,718

$
212,553Agricultural


20,960


34,193Commercial Real EstateFarm


42,250


51,388Hotel


152,032


142,244Construction and development


72,397


125,221Other


569,330


597,043Residential1-4 family


381,076


414,713Home equity


214,672


216,978ConsumerDirect


58,001


68,197Indirect


12,535


22,917Total loans


1,680,971


1,885,447Allowance for loan losses


(42,605
)

(46,648
)Net loans

$
1,638,366

$
1,838,799


Activity
in the allowance for loan losses was as follows:

2010

2009

2008Allowance for loan lossesBalances, January 1

$
46,648

$
34,583

$
14,331Addition resulting from acquisitions








5,564Provision for losses


35,250


46,310


20,918Recoveries on loans


3,153


1,957


1,037Loans charged off


(42,446
)

(36,202
)

(7,267
)Balances, December 31

$
42,605

$
46,648

$
34,583




Commercial

Commercial
Real Estate

Residential

Consumer

TotalAllowance for loan lossEnding Balance individually evaluated for impairment

$
1,807

$
8,517

$


$


$
10,324Ending Balance collectively evaluated for impairment


4,633


24,082


2,281


1,285


32,281Total ending allowance balance

$
6,440


32,599

$
2,281

$
1,285

$
42,605LoansEnding Balance individually evaluated for impairment

$
8,807


63,463

$
17,991

$
315

$
90,576Ending Balance collectively evaluated for impairment


170,569


775,851


580,228


70,526


1,597,174Total ending loan balance includes $ 6,779 of accrued interest

$
179,376


839,314

$
598,219

$
70,841

$
1,687,750


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Impaired loans were as follows::

December 31

2010

2009

2008Impaired loans with an allowance allocated

$
56,041

$
67,336

$
28,769Impaired loans with no allocated allowances


34,535


24,121


26,902Total impaired loans

$
90,576

$
91,457

$
55,671Allowance allocated for impaired loans

$
10,324

$
15,203

$
7,677Average balance of impaired loans during the year

$
94,905

$
84,387

$
37,591Interest income recognized on impaired loans


108


101


432Cash basis interest included above


108


101


432


Nonperforming
loans were as follows:

December 31

2010

2009Loans past due 90 days or more still on accrual

$
990

$
3,279Troubled debt restructurings


22,250


11,843Nonaccrual loans


68,279


77,074Total

$
91,519

$
92,196


Nonperforming
loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

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Table of Contents

The
following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010:

Unpaid
Principal
Balance

Recorded
Investment

Allowance
for Loan
Losses AllocatedWith an allowance recordedCommercialCommercial and industrial

$
5,169

$
5,125

$
1,807AgriculturalCommercial Real EstateFarm


461


465


71Hotel


13,178


12,602


1,151Construction and development


42,319


17,936


3,211Other


21,951


19,913


4,084Residential1-4 FamilyHome EquityConsumerDirectIndirectTotal

$
83,078

$
56,041

$
10,324With no related allowance recordedCommercialCommercial and industrial

$
4,171

$
3,396

$
Agricultural


589


286Commercial Real EstateFarm


600


579Hotel


60


60Construction and development


1,677


1,390Other


13,914


10,518Residential1-4 Family


15,170


14,889Home Equity


3,182


3,102ConsumerDirect


249


241Indirect


78


74Total

$
39,690

$
34,535

$



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Table of Contents

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 December 31, 2010:

Nonaccrual

Past due over
90 days and
still accruingCommercialCommercial and industrial

$
4,953

$
Agricultural


286Commercial Real EstateFarm


579Hotel


6,533Construction and development


19,326Other


23,842


42Residential1-4 Family


10,681


869Home Equity


1,716


86ConsumerDirect


233


9Indirect


74Total

$
68,223

$
1,006


The
following table presents the aging of the recorded investment in past due loans as of December 31, 2010 by class of loans:

Total
Loans

30-59 Days
Past Due

60-89 Days
Past Due

Greater than
90 Days
Past Due

Total
Past Due

Loans Not
Past DueCommercialCommercial and industrial

$
158,293

$
1,368

$
234

$
3,517

$
5,119

$
153,174Agricultural


21,083








130


130


20,953Commercial Real EstateFarm


42,597








528


528


42,069Hotel


152,579








512


512


152,067Construction and development


72,541


130


728


18,598


19,456


53,085Other


571,597


3,835


2,732


16,958


23,525


548,072Residential1-4 Family


382,565


7,176


2,673


8,032


17,881


364,684Home Equity


215,654


709


266


1,376


2,351


213,303ConsumerDirect


58,251


458


156


138


752


57,499Indirect


12,590


115


6


36


157


12,433Total  includes $6,779 of accrued interest

$
1,687,750

$
13,791

$
6,795

$
49,825

$
70,411

$
1,617,339


The
Company has allocated $2,599 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2010. The Company has
committed to lend additional amounts totaling $517 to customers with outstanding loans that are classified as troubled debt restructurings.



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 demonstrated inability to
generate profits or to maintain net worth, chronic delinquency and /or a demonstrated lack of willingness or capacity to meet obligations.

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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 December 31, 2010, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

Pass

Special
Mention

Substandard

Non-accrualCommercialCommercial and industrial

$
131,006

$
15,563

$
6,771

$
4,953Agricultural


17,654


2,981


163


286Commercial Real EstateFarm


34,262


6,171


1,584


579Hotel


86,992


55,878


3,176


6,533Construction and development


24,321


13,174


15,720


19,326Other


468,404


41,967


37,384


23,842Total

$
762,639

$
135,734

$
64,798

$
55,519


Loans
not meeting the criteria above that are analyzed individually as part of the above described process are considered to be performing or non performing. These loans are primarily
residential mortgage and consumer loans. Performing loans are loans risk graded 1-4 and nonperforming loans are loans risk graded 5, 6, or 9. As of December 31, 2010, the
performing/non performing loans by category of loans is as follows:

Performing

Non-performingResidential1-4 Family

$
352,523

$
30,042Home Equity


209,302


6,352ConsumerDirect


56,878


1,373Indirect


12,302


288Total

$
631,005

$
38,055


NOTE 6  REAL ESTATE OWNED

Activity in the real estate owned assets was as follows:

2010

2009

2008Beginning Balance

$
10,363

$
5,814

$
2,676Transfer to ORE


11,115


11,915


6,824Sale  out of ORE


(9,246
)

(6,766
)

(3,460
)Acquisition








234Write down


(779
)

(600
)

(460
)Ending Balance

$
11,453

$
10,363

$
5,814


Expenses
related to foreclosed assets include:

2010

2009

2008Net loss (gain) on Sales

$
1,097

$
(200
)
$
156Operating expenses


674


681


252


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Table of Contents

NOTE 7  FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair
values:

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
Company used the following methods and significant assumptions to estimate the fair values:

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, single issuer trust preferred securities and equity
securities. 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.

The
fair value of servicing rights is based on a valuation model that incorporates assumptions that market participants would use in estimating future net servicing income, such as the
cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. The Company compares the valuation model inputs
and results to published industry data in order to validate the model results and assumptions. (Level 2 inputs).

The
fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. 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 appraisers to adjust for
differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

The
fair value of goodwill is based on a two step test. The first step, used to identify potential impairment, involves determining and comparing the fair value of a company, including a
control premium, with its carrying value, or shareholders equity. If the fair value of a company exceeds its carrying value, goodwill is not impaired. If the carrying value exceeds fair value, there
is an indication of impairment and the second step is performed to determine the amount of impairment, if any. The second step compares the fair value of the Company to the aggregate fair values of
its individual assets, liabilities and identified intangibles (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. 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 (Level 3 inputs).

49

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Table of Contents

Assets
and Liabilities Measured on a Recurring Basis

Assets
and liabilities measured at fair value 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 December 31, 2010 Using:(Dollars in thousands)

Carrying
Value

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Financial AssetsInvestment securities available-for sale States and municipal

$
300,144




$
300,144Mortgage-backed securities  residential


312,831





312,831Collateralized mortgage obligations


185,997





185,997Equity securities


4,405


3,655





750Other securities


2,694





824


1,870Total investment securities available-for-sale

$
806,071

$
3,655

$
799,796

$
2,620




Fair Value Measurements at December 31, 2009 UsingCarrying
Value

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Financial AssetsInvestment securities available-for sale U.S. government agencies

$
14,387




$
14,387States and municipal


233,485





232,556


929Mortgage-backed securities  residential


243,708





243,708Collateralized mortgage obligations


215,341





215,340


1Equity securities


4,367


3,617





750Other securities


3,319





1,779


1,540Total investment securities available-for-sale

$
714,607

$
3,617

$
707,770

$
3,220


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 years ended December 31, 2010 and 2009:

Available for sale
securitiesBeginning balance, January 1, 2010

$
3,220Total gains or losses (realized / unrealized)Included in earningsOther changes in fair value


Gains (losses) on sales of securities


Included in other comprehensive income


330Purchases, issuances, and settlements


Transfers in and / or out of Level 3


(930
)Ending balance, December 31, 2010

$
2,620


50

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Table of Contents



Available for sale
securitiesBeginning balance, January 1, 2009

$
3,050Total gains or losses (realized / unrealized)Included in earningsOther changes in fair value


Gains (losses) on securities


(204
)Included in other comprehensive income


704Purchases, issuances, and settlements


183Transfers in and / or out of Level 3


(513
)Ending balance, December 31, 2009

$
3,220


Transfers
out of Level 3 are primarily due to the availability of Level 2 data.

The
table below summarizes changes in unrealized gains and losses recorded in earnings for the year ended December 31 for Level 3 asset and liabilities that are still held
at December 31.

Changes in Unrealized
Gains/Losses
Relating to Assets
Still Held at
Reporting Date for
the Year Ended
December 312010

2009Interest Income on Securities

$
161

$
218Other Changes in Fair Value


330


270Total

$
491

$
488


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 December 31, 2010 Using:December 31,
2010

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Assets:Impaired loansCommercial and industrial

$
3,318







$
3,318Farm


394








394Hotel


11,451








11,451Construction and development


14,725








14,725Other


15,829








15,829Total impaired loans

$
45,717







$
45,717Servicing rights

$
5,498




$
5,498Other real estate owned/assets held for sale

$
3,085







$
3,085


51

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Table of Contents



Fair Value Measurements at December 31, 2009 UsingDecember 31,
2009

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Assets:Impaired loans

$
52,133







$
52,133Servicing rights


5,042




$
5,042Goodwill


62,909








62,909Other real estate owned/assets held for sale


1,369








1,369


The
following represent impairment charges recognized during the period:

Impaired
loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a gross carrying amount of $56,041, with a valuation
allowance of $10,324, resulting in an additional provision for loan losses of $18,182 in 2010. At December 31, 2009, impaired loans had a gross carrying amount of $67,336, with a valuation
allowance of $15,203, resulting in an additional provision for loan losses of $24,499 for the year ending December 31, 2009.

Servicing
rights, which are carried at lower of cost or fair value, were carried at a fair value of $5,498, which is made up of the gross outstanding balance of $5,992, net of a
valuation allowance of $494. A credit of $132 was included in 2010 earnings. In 2009, servicing rights were written down to a fair value of $5,042, resulting in a valuation allowance of $626. A credit
of $600 was included in 2009 earnings.

Goodwill,
which is evaluated for impairment on an annual basis, or more frequently if the situation warrants, was written down to a fair value of $62,909 in 2009 resulting in an
impairment charge of $80,310.

Other
real estate owned/assets held for sale is evaluated at the time a property is acquired through foreclosure or shortly thereafter. Fair value is based on appraisals by qualified
licensed appraisers. During 2010, these properties were written down by $1,479 which was included in 2010 earnings. During 2009, these properties were written down by $615 which was included in 2009
earnings.

Carrying
amount and estimated fair values of financial instruments, not previously presented, at year end were as follows:

2010

2009December 31

Carrying
Amount

Fair Value

Carrying
Amount

Fair ValueAssetsCash and cash equivalents

$
60,123

$
60,123

$
71,689

$
71,689Loans including loans held for sale, net


1,598,494


1,584,631


1,843,927


1,750,265Restricted stock


19,502


N/A


27,359


N/AInterest receivable


11,552


11,552


7,965


7,965LiabilitiesDeposits


(2,211,564
)

(2,214,778
)

(2,270,650
)

(2,283,151
)Other borrowings


(33,181
)

(33,181
)

(47,631
)

(47,631
)FHLB advances


(152,065
)

(163,498
)

(222,265
)

(195,946
)Interest payable


(3,391
)

(3,391
)

(4,786
)

(4,786
)Subordinated debentures


(50,117
)

(26,565
)

(49,966
)

(26,485
)


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

Carrying
amount is the estimated fair value of cash and cash equivalents, interest-bearing time deposits, accrued interest receivable and payable, demand and all other transactional
deposits, short-term borrowings, variable rate notes payable, and variable rate loans or deposits that reprice frequently and fully. For fixed rate loans or deposits and for variable rate
loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair value of
loans held for sale is based on market quotes. Fair value of FHLB advances and subordinated debentures is based on current rates for similar financing. It is not practicable to determine the fair
value of FHLB stock due to restrictions placed on its transferability. The fair value of off-balance-sheet items is based on the current fees or cost that would be charged to enter into or
terminate such arrangements, and are not considered significant.

52

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Table of Contents

NOTE 8  PREMISES AND EQUIPMENT

December 31

2010

2009Land

$
12,250

$
11,298Buildings


44,578


44,074Furniture and equipment


32,661


35,175Total cost


89,489


90,547Accumulated depreciation


(40,628
)

(41,048
)Net

$
48,861

$
49,499


Depreciation
expense was $5,276, $5,351, and $4,523 in 2010, 2009 and 2008.

Operating
Leases: The Company leases certain branch properties under operating leases. Rent expense was $940, $931, and $787 for 2010, 2009, and 2008. Rent commitments, before
considering renewal options that generally are present, were as follows:

2011

$
8802012


7412013


7242014


6152015


443Thereafter


402Total

$
3,805


NOTE 9  GOODWILL AND INTANGIBLE ASSETS

Goodwill

The change in carrying amount of goodwill is as follows. Accumulated impairment losses total $80,310.

2010

2009Balance, January 1

$
62,909

$
137,217Disposed of goodwill


(990
)

Acquired goodwill





6,002Impairment losses





(80,310
)Balance, December 31

$
61,919

$
62,909


The
Company typically tests goodwill for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. Impairment exists when a reporting
unit's carrying value of goodwill exceeds its fair value, which is determined through a two-step impairment test. Step 1 includes the determination of the carrying value of our reporting
units  banking and insurance, including the existing goodwill and intangible assets, and estimating the fair value of the reporting units. The Company determined the fair value of
its reporting units and compared it to its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, the Company is required to perform a second step to the impairment test.
Step 2 of the goodwill impairment test is performed to measure the impairment loss.

Testing
performed during 2010 provided no indication of potential goodwill impairment. The Company engaged an independent, outside firm during the second and fourth quarters of 2009 to
help perform an impairment analysis due to the significant, sustained declines in the Company's market capitalization. The impact of deteriorating economic conditions had significantly impacted the
banking industry during 2008 and 2009 and had impacted the financial results of the Company. As a result, the Company concluded that goodwill resulting from the Company's banking acquisitions over the
past several years was impaired. There was no indication of impairment related to the insurance reporting unit during either the 2009 second or fourth quarter tests. During 2010, the insurance
business was sold, including the associated goodwill of $990.

The
Company utilized both the income and market approaches to determine fair value of the banking reporting unit under step 1 of the impairment analysis. The income approach was based on
discounted cash flows derived from assumptions of balance sheet and income statement activity. Bank management developed a financial forecast considering several long-term key business
drivers such as anticipated loan and deposit growth. For the market approach, revenue, earnings and market capitalization multiples of comparable public companies were selected and applied to the
banking unit's applicable metrics such as book and tangible book values. Based on the results of the step 1 analyses, the Company concluded that the potential for goodwill impairment existed and
therefore a step 2 test was required to determine if there was goodwill impairment and the amount of goodwill that might be impaired.

53

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Table of Contents

Step
2 compared the implied fair value of the reporting unit goodwill with the carrying amount of the goodwill for the reporting unit. The implied fair value of goodwill is determined in
the same manner as goodwill that is recognized in a business combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting
unit. Significant valuation estimates were the assessment of core deposit intangibles, the mark-to-fair-value of outstanding debt and deposits, and
mark-to-fair-value on the loan portfolio. The following highlights some of the key assumptions used in the step 2 valuation as of the fourth quarter 2009. Core
deposits were valued using a 15.84% discount rate. The marks on our outstanding debt and deposits were based on modeled prices using current yield curves and market spreads. The valuation of the loan
portfolio indicated discounts in the ranges of 0%-25%, depending upon the loan type. Based on the results of goodwill impairment analyses performed by the Company in 2009, a $45,076
goodwill impairment charge was recorded in the second quarter and $35,234 was recorded in the fourth quarter of 2009.

Acquired Intangible Assets

2010

2009Core deposit intangibles

$
27,000

$
27,000Other customer relationship intangibles


698


698Accumulated amortization


(18,596
)

(16,530
)Purchased intangibles, net

$
9,102

$
11,168


Aggregate
amortization expense was $2,066, $2,199, and $2,607 for 2010, 2009, and 2008.

Estimated
amortization expense for each of the next five years follows:

2011

$
1,9392012


1,7892013


1,6172014


1,4252015


1,203


NOTE 10  DEPOSITS

December 31,
2010

December 31,
2009Non-interest-bearing demand

$
268,390

$
250,438Interest-bearing demand


798,897


727,728Savings


430,367


418,269Certificates of deposit of $100 or more


231,019


290,843Other certificates and time deposits


482,891


583,372Total deposits

$
2,211,564

$
2,270,650


Certificates
and other time deposits mature as follows:

2011

$
503,6862012


118,7042013


53,3442014


24,6342015


2,471Thereafter


11,071Total

$
713,910


NOTE 11  SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE

December 31

2010

2009Securities sold under agreement to repurchase

$
33,181

$
47,631


Securities
sold under repurchase agreements ("agreements") consist of obligations secured by securities issued by government-sponsored entities, and a safekeeping agent holds such
collateral. The maximum amount of outstanding agreements at any month-end during 2010, 2009, and 2008 totaled $50,313, $54,975, and $40,809. The daily average of such agreements during
2010, 2009, and 2008 totaled $39,737, $47,312, and $31,754. The weighted average rate was 0.55%, 0.68%, and 1.02% at December 31, 2010, 2009, and 2008 while the weighted average rate during
2010, 2009, and 2008 was approximately 0.64%, 0.85%, and 1.64% respectively. The majority of the agreements at December 31, 2010 mature within 30 days.

54

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Table of Contents

NOTE 12  FEDERAL HOME LOAN BANK ADVANCES

Federal Home Loan Bank ("FHLB") advances at year end were as follows:

2010

2009Maturities from January 2011 through May 2022, primarily fixed rates from 2.5% to 5.9%, averaging 4.0%

$
152,065

$
Maturities from February 2010 through May 2022, primarily fixed rates from 2.5% to 5.9%, averaging 4.2%





222,265$
152,065

$
222,265


The majority of the FHLB advances are secured by first mortgage loans totaling approximately 155% of the advance under a blanket security
agreement. The advances are subject to restrictions or penalties in the event of prepayment. Of the $152,065 in advances at December 31, 2010, $124,000 or 82% of the advances contained options
whereby the FHLB may convert the fixed rate advance to an adjustable rate advance, at which time the Company may prepay the advance without a penalty. Of the $222,265 in advances at
December 31, 2009, $189,453 or 85% of the advances contained such options.

Required
payments over the next five years are:

2011

$
15,7252012


20,5622013


15,3652014


25,2682015


10,708Thereafter


64,437


NOTE 13  SUBORDINATED DEBENTURES

The Company formed four separate trusts in 2002, 2003, and 2006 that issued floating rate trust preferred securities as part of pooled
offerings. The Company issued subordinated debentures to the trusts in exchange for the proceeds of the offerings, which debentures represent the sole asset of the trusts. The Company acquired two
trusts from a prior acquisition  Harrodsburg Statutory Trust I and Independence Bancorp Statutory Trust I. In accordance with accounting guidelines, the trusts are not consolidated
with the Company's financial statements, but rather the subordinated debentures are shown as a liability. Interest payments are payable quarterly in arrears and the Company has the option to defer
interest payments from time to time for a period not to exceed 20 consecutive quarters. The subordinated debentures mature in 30 years from issuance and can be called anytime after five years
at par. The subordinated debentures may be included in Tier 1 capital (with certain limitations) under current regulatory guidelines and interpretations. The following table summarizes the
other terms of each issuance.

Trust Name

Issuance

Amount

Variable Rate

Rate as of
12/31/10

MaturityTrust 1


2002

$
8,248


LIBOR +3.25%


3.55
%

2032Trust 2


2003


14,433


LIBOR +3.25%


3.55
%

2033Trust 3


2003


7,217


LIBOR +3.15%


3.45
%

2033Trust 4


2006


11,341


LIBOR +1.63%


1.93
%

2036Harrodsburg


2003


4,932


LIBOR +3.15%


3.45
%

2033Independence


2003


3,946


LIBOR +3.15%


3.45
%

2033


55

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Table of Contents

NOTE 14  LOAN SERVICING

Loans serviced for others are not included in the accompanying consolidated balance sheets. Loan servicing fee income was $1,890,
$1,521, and $1,242 for 2010, 2009, and 2008. The unpaid principal balances of loans serviced for others totaled $781,673 and $726,404 at December 31, 2010 and 2009. Custodial escrow balances
maintained in connection with serviced loans were $7,403 and $8,983 at year end 2010 and 2009. The weighted average amortization period is 4.9 years. Mortgage servicing rights are included in
other assets on the consolidated balance sheets. The fair value of capitalized mortgage servicing assets is based on comparable market values and expected cash flows, with impairment assessed based on
portfolio characteristics including product type and interest rates. The fair market value of capitalized mortgage servicing rights was estimated at $5,498 and $5,042 at year end 2010 and 2009. Fair
value at year-end 2010 was determined using a discount rate of 9%, and prepayment speeds ranging from 160% to 373%, depending on the stratification of the specific right. Fair value at
year-end 2009 was determined using a discount rate of 9%, and prepayment speeds ranging from 185% to 379%, depending on the stratification of the specific right.

2010

2009

2008Mortgage servicing assetsBalances, January 1

$
5,042

$
3,359

$
3,949Servicing assets capitalized


1,748


3,400


1,342Amortization of servicing assets


(1,424
)

(2,317
)

(706
)Change in valuation allowance


132


600


(1,226
)Balance, December 31

$
5,498

$
5,042

$
3,359Valuation allowance:Balances, January 1

$
626

$
1,226

$
Additions expensed








1,226Reductions credited to operations


(132
)

(600
)

Balance, December 31

$
494

$
626

$
1,226


NOTE 15  INCOME TAX

Income tax expense (benefit) was as follows:

Year Ended December 31

2010

2009

2008Income tax expenseCurrently payable


3,885


(391
)
$
5,518Deferred


(4,708
)

(12,360
)

(1,375
)Change in valuation allowance


1,062


1,106


236Total income tax expense

$
239

$
(11,645
)
$
4,379


Effective tax rates differ from the federal statutory rate of 35% applied to income before income taxes due to the following:

Federal statutory income tax rate


35%


35%


35%Federal statutory income tax

$
5,264

$
(26,524
)
$
8,236Tax exempt interest


(3,999
)

(3,263
)

(2,411
)Effect of state income taxes


29


(228
)

43Resolution of uncertain tax position





(600
)

(595
)Non-deductible expenses


135


108


93Non-deductible goodwill impairment





19,795


Tax exempt income on life insurance


(460
)

(356
)

(338
)Tax credits


(717
)

(474
)

(459
)Other


(13
)

(103
)

(190
)Income tax expense

$
239

$
(11,645
)
$
4,379


56

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Table of Contents

The components of the net deferred tax asset (liability) are as follows:

December 31

2010

2009AssetsAllowance for loan losses

$
16,759

$
18,777Net operating loss carryforward


5,075


3,758Deferred compensation


354


414Fair value adjustments on assets acquired


66


1,281Intangibles


356


403Accrued expenses


489


113Credit carryforwards


5,385


2,857Other


968


647Total assets


29,452


28,250LiabilitiesAccretion on securities


(119
)

(83
)Depreciation


(2,388
)

(2,486
)Mortgage servicing rights


(2,151
)

(1,995
)Deferred loan fees/costs


(753
)

(673
)FHLB stock dividends


(831
)

(1,875
)Unrealized gain on securities AFS


(5,093
)

(6,784
)Other


(1,040
)

(1,593
)Total liabilities


(12,375
)

(15,489
)Less: Valuation allowance


(4,882
)

(3,820
)Net deferred tax asset (liability)

$
12,195

$
8,941


The Company has $2,244 of alternative minimum tax credit carryforwards, which under current tax law have no expiration period. The Company has a
federal net operating loss carryforward acquired in the 1st Independence business combination of $1,101. This carryforward expires in 2028. The Company has general business credit carryforwards
of $3,141 that begin to expire in 2027.

The
Company has an Indiana state operating loss carryforward of $82,897, which begins to expire in 2019. The Company maintains a valuation allowance as it does not anticipate generating
taxable income in Indiana to utilize this carryforward prior to expiration.

A
valuation allowance for deferred tax assets is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of the deferred tax assets depends on the ability of the Company to generate sufficient taxable income of the appropriate character in the future and in the appropriate taxing
jurisdictions. At December 31, 2010, the largest component of deferred tax assets is associated with the allowance for loan losses. The Company considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in making this assessment. With the exception of the deferred tax asset associated with the Company's Indiana state operating
loss carryforward, no valuation allowance for deferred tax assets are considered necessary at December 31, 2010 or 2009.

Retained
earnings of certain subsidiary banks include approximately $13,112 for which no deferred income tax liability has been recognized. This amount represents an allocation of income
to bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses including redemption of bank stock or excess
dividends, or loss of "bank" status would create income for tax purposes only, which would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax
liability on the above amount for the Company was approximately $4,589 at December 31, 2010 and 2009 respectively.

57

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Table of Contents

Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

2010

2009

2008Balance at January 1,

$


$
484

$
1,023Additions related to tax positions in current year








Reductions of tax positions from prior years





(484
)

(539
)Balance at December 31,

$


$


$
484


The Company does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

The
total amount of interest and penalties recorded in the income statement for the year ended December 31, 2010, 2009, and 2008 were $0, a reduction of $116, and a reduction of
$12 respectively, and the amount accrued for interest and penalties at December 31, 2010, 2009, and 2008 were $0, $0, and $116.

The
Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the states of Indiana and Illinois. The Company is no longer subject to examination by
taxing authorities for years before 2006.

NOTE 16  OTHER COMPREHENSIVE INCOME/(LOSS)

Year Ended December 31, 2010

Before-Tax
Amount

Tax (Expense)/
Benefit

Net-of-Tax
AmountUnrealized holding gains/(losses) on available for sale securities

$
(1,868
)
$
651

$
(1,217
)Less: reclassification adjustment for gains realized in net income


2,979


(1,043
)

1,936Other comprehensive income/(loss)

$
(4,847
)
$
1,694

$
(3,153
)




Year Ended December 31, 2009

Before-Tax
Amount

Tax (Expense)/
Benefit

Net-of-Tax
AmountUnrealized holding gains on available for sale securities

$
15,817

$
(5,506
)
$
10,311Less: reclassification adjustment for gains realized in net income


1,263


(448
)

815Other comprehensive income

$
14,554

$
(5,058
)
$
9,496




Year Ended December 31, 2008

Before-Tax Amount

Tax (Expense)/ Benefit

Net-of-Tax AmountUnrealized holding gains on available for sale securities

$
4,003

$
(1,439
)
$
2,564Less: reclassification adjustment for gains realized in net income


1,118


(401
)

717Other comprehensive income

$
2,885

$
(1,038
)
$
1,847


NOTE 17  COMMITMENTS

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet
customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates.
Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same
credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

Financial
instruments whose contract amount represents credit risk as of December 31 were as follows:

2010

2009Fixed
Rate

Variable
Rate

Fixed
Rate

Variable
RateCommitments to extend credit and unused lines of credit

$
4,018

$
301,331

$


$
319,507Commercial letters of credit





22,016





24,394


58

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Table of Contents

Commitments to make loans are generally made for periods of 60 days or less. Interest rates on fixed rate commitments range from 3.25% to
19.8% with maturities ranging from 1 year to 18 years.

NOTE 18  DIVIDENDS

The Company's principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount
of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year's net
profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described in Note 20. As a result of the goodwill impairment charges, the Bank
and the Company are not able to pay dividends without prior approval. The Company is also limited by the requirements of the U. S. Department of Treasury Capital Purchase Program (See Note 27)
and Regulatory Action (See Note 28).

NOTE 19  DIVIDEND REINVESTMENT PLAN

The Company maintains an Automatic Dividend Reinvestment Plan. The plan enables shareholders to elect to have their cash dividends on
all or a portion of shares held automatically reinvested in additional shares of the Company's common stock. The stock is purchased by the Company's transfer agent on the open market and credited to
participant accounts at fair market value. Dividends are reinvested on a quarterly basis.

NOTE 20  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 three 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. Failure to meet capital requirements can initiate regulatory action. Risk
adjusted capital levels of the Company's subsidiary bank exceed regulatory definitions of well-capitalized institutions. During the second quarter of 2010, the Bank entered into an
agreement with its regulators to maintain a Tier 1 leverage ratio of at least 8% and a total risk based capital ratio of at least 11%. (See Note 28).

Management
believes as of December 31, 2010, the Company and Bank meet all capital adequacy requirements to which they are subject. The holding company is a source of additional
financial strength with its $14.3 million in cash and its ability to downstream additional capital to the Bank.

There
are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification in any of the undercapitalized categories can
result in actions by regulators that could have a material effect on operations. At December 31, 2010 and 2009, the most recent regulatory notifications categorized the Banks as well
capitalized under the regulatory framework for prompt corrective actions. There are no conditions or events since that notification that management believes have changed the Bank's category.

Actual
and required capital amounts and ratios are presented below.

Actual

Required for Adequate Capital

To Comply with Regulatory AgreementDecember 31, 2010

Amount

Ratio

Amount

Ratio

Amount

RatioMainSource Financial GroupTotal capital (to risk-weighted assets)

$
293,069


16.8
%
$
139,611


8.0
%

N/A


N/ATier 1 capital (to risk-weighted assets)


270,998


15.5


69,806


4.0


N/A


N/ATier 1 capital (to average assets)


270,998


9.7


112,069


4.0


N/A


N/AMainSource BankTotal capital (to risk-weighted assets)

$
271,430


15.7
%
$
138,237


8.0
%
$
190,076


11.0
%Tier 1 capital (to risk-weighted assets)


249,571


14.4


69,118


4.0





Tier 1 capital (to average assets)


249,571


9.0


110,761


4.0


221,522


8.0


59

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Table of Contents



Required for
Adequate Capital

To Be Well CapitalizedActualDecember 31, 2009

Amount

Ratio

Amount

Ratio

Amount

RatioMainSource Financial GroupTotal capital (to risk-weighted assets)

$
280,691


14.8
%
$
151,651


8.0
%

N/A


N/ATier 1 capital (to risk-weighted assets)


256,774


13.5


75,825


4.0


N/A


N/ATier 1 capital (to average assets)


256,774


8.8


117,099


4.0


N/A


N/AMainSource BankTotal capital (to risk-weighted assets)

$
252,284


13.3
%
$
151,251


8.0
%
$
189,064


10.0
%Tier 1 capital (to risk-weighted assets)


228,367


12.1


75,625


4.0


113,438


6.0Tier 1 capital (to average assets)


228,367


7.8


116,859


4.0


146,073


5.0


NOTE 21  EMPLOYEE BENEFIT PLANS

The Company has a defined-contribution retirement plan in which substantially all employees may participate. The Company matches 80% of
the first 8% of eligible employees' contributions and makes additional contributions based on employee compensation and the overall profitability of the Company. Expense was $2,014 in 2010, $916 in
2009, and $1,829 in 2008. The Company made an additional contribution in 2010 and 2008 based on the overall profitability of the Company, but made no additional contributions in 2009 above the
standard matching provisions.

NOTE 22  RELATED PARTY TRANSACTIONS

The Company has entered into transactions with certain directors, executive officers, significant stockholders and their affiliates or
associates (related parties).

The
aggregate amount of loans, as defined, to such related parties was as follows:

Balances, January 1, 2010

$
11,062Changes in composition of related parties


(170
)New loans, including renewals and advances


2,632Payments, including renewals


(3,105
)Balances, December 31, 2010

$
10,419


Deposits from related parties held by the Company at December 31, 2010 and 2009 totaled $3,073 and $2,631.

NOTE 23  STOCK OPTION PLANS

On January 16, 2007, the Company's Board of Directors adopted and approved the MainSource Financial Group, Inc. 2007
Stock Incentive Plan (the "2007 Stock Incentive Plan") effective upon the approval of the Plan by the Company's shareholders, which occurred on April 26, 2007 at the Company's annual meeting of
shareholders. The 2007 Stock Incentive Plan provides for the grant of incentive stock options, nonstatutory stock options, stock bonuses and restricted stock awards. Incentive stock options may be
granted only to employees. An aggregate of 650,000 shares of common stock are reserved for issuance under the 2007 Stock Incentive Plan. Shares issuable under the 2007 Stock Incentive Plan will be
authorized and unissued shares of common stock or treasury shares. The 2007 Stock Incentive Plan is in addition to, and not in replacement of, the 2003 Plan. However, no further awards of options will
be made under the 2003 Plan. Unexercised options, which were previously issued under the 2003 Plan, will not be terminated, but will otherwise continue in accordance with the 2003 Plan and the
agreements pursuant to which the options were issued.

The
fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below.
Expected volatilities are based on historical volatilities of the Company's common stock. The Company uses historical data to estimate option exercise and post-vesting
termination behavior. Employee and management options are tracked separately. The expected term of options granted is based on historical data and represents the period of time that options granted
are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S.
Treasury yield curve in effect at the time of the grant.

60

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Table of Contents

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

2010

2009

2008Risk-free interest rate


3.04
%

2.27
%

3.53
%Expected term (years)


7.00


6.58


7.00Expected stock price volatility


57.06
%

40.94
%

23.83
%Dividend yield


0.63
%

9.81
%

3.28
%


A summary of the activity in the stock option plan for 2010 follows:

Options (restated for stock dividends and splits)

Shares

Weighted
Average
Exercise
Price

Weighted
Average
Remaining
Contractual
Term
(years)

Aggregate
Intrinsic
ValueOutstanding, beginning of year


429,608

$
13.30Granted


1,500


6.39Exercised





Forfeited or expired


(21,325
)

12.70Outstanding at end of year


409,783

$
13.30


6.1

$
721Exercisable at year end


301,466

$
15.25


5.3

$
320


Information related to the stock option plan during each year follows:

2010

2009

2008Intrinsic value of options exercised

$


$


$
19Cash received from option exercises








116Tax benefit realized from option exercises








Weighted average (per share) fair value of options granted


3.59


0.88


3.53


As of December 31, 2010, there was $122 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 1.1 years.

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Table of Contents

NOTE 24  EARNINGS/(LOSS) PER COMMON SHARE

Earnings/(loss) per common share were computed as follows:

Year Ended December 31, 2010

Net
Income/(Loss)

Weighted
Average
Shares

Per
Share
AmountBasic Earnings Per Common ShareNet income

$
14,802Preferred dividends and discount accretion


(3,054
)11,748


20,136,362

$
0.58Effect of dilutive stock options





18,022Diluted Earnings Per Common ShareNet income available to common shareholders and assumed conversions

$
11,748


20,154,384

$
0.58Year Ended December 31, 2009Basic Loss Per Common ShareNet (loss) attributable to common shareholders

$
(64,139
)Preferred dividends and discount accretion


(2,919
)(67,058
)

20,136,362

$
(3.33
)Effect of dilutive stock options





Diluted (Loss) Per Common ShareNet (loss) attributable to common shareholders and assumed conversions

$
(67,058
)

20,136,362

$
(3.33
)Year Ended December 31, 2008Basic Earnings Per Common ShareNet income available to common shareholders

$
19,152


19,102,274

$
1.00Effect of dilutive stock options





6,330Diluted Earnings Per Common ShareNet income available to common shareholders and assumed conversions

$
19,152


19,108,604

$
1.00


Stock options for 262,441, 429,608, and 217,633 shares of common stock were not considered in computing diluted earnings per common share for
2010, 2009 and 2008 because they were antidilutive. Stock warrants for 571,906 shares of commons stock were not considered in computing earnings per share in 2010 and 2009 because they were
antidilutive.

NOTE 25  QUARTERLY FINANCIAL DATA (UNAUDITED)

Earnings/(Loss) per Common ShareInterest
Income

Net Interest
Income

(Loss)

Basic

Fully
Diluted2010First quarter

$
34,271

$
25,231

$
3,249

$
0.12

$
0.12Second quarter


34,039


25,364


2,165


0.07


0.07Third quarter


34,017


25,794


4,600


0.19


0.19Fourth quarter


32,244


24,863


4,788


0.20


0.202009First quarter

$
35,223

$
23,374

$
1,178

$
0.03

$
0.03Second quarter


36,104


24,438


(38,069
)

(1.93
)

(1.93
)Third quarter


36,307


24,933


1,388


0.03


0.03Fourth quarter


35,607


25,263


(28,636
)

(1.46
)

(1.46
)


62

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Table of Contents

The Company reported net income of $4.8 million for the fourth quarter and earnings per share of $0.20 compared to the $(1.46) loss per
share reported in the fourth quarter of 2009. During the fourth and second quarters of 2009, the Company recorded a $35.2 million and $45.1 million goodwill impairment charge (See
Note 9).

NOTE 26  PARENT ONLY CONDENSED FINANCIAL STATEMENTS

Parent Only Condensed Balance Sheets

December 31

2010

2009AssetsCash and cash equivalents

$
14,284

$
20,924Securities available for sale


899


861Investment in subsidiaries


332,091


317,484Other assets


9,774


9,274Total assets

$
357,048

$
348,543LiabilitiesSubordinated debentures

$
50,117

$
49,966Other liabilities


4,361


4,115Total liabilities


54,478


54,081Shareholders' equity


302,570


294,462Total liabilities and shareholders' equity

$
357,048

$
348,543


Parent Only Condensed Statements of Operations

Year Ended December 31

2010

2009

2008IncomeDividends from subsidiaries

$
1,119

$
450

$
27,850Fees from subsidiaries


17,669


16,178


12,540Other Income


233


482


288Total income


19,021


17,110


40,678ExpensesInterest expense


1,755


2,072


3,230Salaries and benefits


11,062


9,249


8,577Professional fees


1,275


1,189


1,070Other expenses


12,223


11,497


9,051Total expenses


26,315


24,007


21,928Income (loss) before income taxes and equity in undistributed income of subsidiaries


(7,294
)

(6,897
)

18,750Income tax expense (benefit)


(2,989
)

(3,245
)

(3,305
)Income (loss) before equity in undistributed income of subsidiaries


(4,305
)

(3,652
)

22,055Equity in undistributed income (loss) of subsidiaries


19,107


(60,487
)

(2,903
)Net income (loss)

$
14,802

$
(64,139
)
$
19,152


63

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Table of Contents

Parent Only Condensed Statements of Cash Flows

Year Ended December 31

2010

2009

2008Operating ActivitiesNet income (loss)

$
14,802

$
(64,139
)
$
19,152Undistributed income of subsidiaries


(19,107
)

60,487


2,903Changes in other assets and liabilities


1,838


(1,242
)

2,510Net cash provided by operating activities


(2,467
)

(4,894
)

24,565Investing ActivitiesCapital contributed to subsidiary





(11,000
)

(100
)Cash paid for acquisitions








(9,638
)Cash received from subsidiaries


1,287





Purchase of security AFS


(39
)




Purchases of equipment


(1,766
)

(2,569
)

(1,347
)Net cash used by investing activities


(518
)

(13,569
)

(11,085
)Financing ActivitiesIssuance of preferred shares, net of issuance costs





55,783


Issuance of warrants to purchase common shares





1,116


Cash dividends on preferred stock


(2,850
)

(2,367
)

Net change in other borrowings





(10,500
)

(2,500
)Purchase of treasury shares








(22
)Proceeds from exercise of stock options








116Cash dividends on common stock


(805
)

(5,135
)

(11,133
)Net cash provided (used) by financing activities


(3,655
)

38,897


(13,539
)Net change in cash and cash equivalents


(6,640
)

20,434


(59
)Cash and cash equivalents, beginning of year


20,924


490


549Cash and cash equivalents, end of year

$
14,284

$
20,924

$
490


NOTE 27  PREFERRED STOCK

On January 16, 2009, the Company entered into an agreement with the United States Department of Treasury (the "Treasury
Department") as part of the Treasury Department's Capital Purchase Program. Under this agreement, the Company issued to the Treasury Department 57,000 shares of Fixed Rate Cumulative Perpetual
Preferred Stock, Series A ("preferred stock"), having a liquidation amount per share of $1,000, for a total price of $57 million and a warrant to purchase up to 571,906 shares ("warrant
shares") of the Company's common stock, at an initial per share exercise price of $14.95, for an aggregate purchase price of $8.55 million.

The
preferred stock pays cumulative dividends at a rate of 5% per year for the first five years and 9% per year thereafter. Dividends are payable quarterly in arrears on
February 15, May 15, August 15 and November 15 of each year. The Company may, at its option and at any time, redeem the preferred stock for the liquidation amount of $1,000
per share, plus any accrued and unpaid dividends. While the preferred stock is outstanding, the Company may only pay dividends on common stock if all accrued and unpaid dividends for the preferred
stock have been paid. The Company cannot increase its quarterly cash dividend above the level in October 2008 without the prior approval of the Treasury Department until the earlier of three years
following the date the preferred stock was sold to the Treasury Department and the date that the Treasury Department no longer holds the preferred stock.

In
addition to the preferred shares, the Treasury Department received a warrant to purchase 571,906 shares of the Company's common stock at an initial per share exercise price of $14.95.
The warrant provides for the adjustment of the exercise price and the number of shares of the Company's common stock issuable upon exercise pursuant to customary anti-dilution provisions,
such as upon stock splits or distributions of securities or other assets to holders of Company common stock, and upon certain issuances of the Company common stock at or below a specified price
relative to the initial exercise price. The warrant has a term of ten years and is currently exercisable. The Treasury Department has agreed not to exercise voting power with respect to any shares of
common stock issued upon exercise of the warrant. Like stock options, the warrant issued through the Capital Purchase Program is potentially dilutive. The average stock price for the Company for 2010
and 2009 was $7.43 and $7.40 per share and the warrant issued in 2009 has an exercise price of $14.95 per share. This resulted in no additional potentially dilutive shares during 2009 or 2010.

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Table of Contents

NOTE 28  REGULATORY ACTION

Effective April 22, 2010, MainSource Bank entered into an informal agreement with the FDIC and Indiana Department of Financial
Institutions pursuant to which the Bank has agreed to take various actions and comply with certain requirements. The informal agreement is not a "written agreement" for purposes of Section 8 of
the Federal Deposit Insurance Act. The agreement documents an understanding among the Bank, the FDIC and the DFI that requires the Bank to maintain its Tier 1 leverage ratio at a minimum of 8%
and its total risk based capital ratio at a minimum of 11%. Additionally, the agreement requires the Bank to continue to obtain the approval of the FDIC and DFI prior to paying a cash dividend from
the Bank to the Company, a practice in which the Bank was already engaged. At the time it entered into the
agreement and at all times since that date, the Bank exceeded the required minimum capital levels and believes it is in substantial compliance with all other terms of the agreement.

The
agreement will remain in effect until modified or terminated by the FDIC and the DFI. The Company has not and does not expect the actions called for by the agreement to change in any
material respect our ongoing efforts to improve the performance of the Bank by reducing non-performing assets and increasing earnings. The Board of Directors and management of the Bank
have taken various actions to comply with the agreement, and will continue to take all actions necessary for continued compliance. Compliance with the terms of the agreement has not and is not
expected to have a material effect on the financial condition or results of operations of the Company or the Bank.

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Table of Contents

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

In connection with its audits for the three most recent fiscal years ended December 31, 2010, there have been no disagreements
with the Company's independent registered public accounting firm on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.

ITEM 9A.    CONTROLS & PROCEDURES

Disclosure Controls and Procedures

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

Our
management has evaluated our internal control over financial reporting and there were no changes in our internal control over financial reporting that occurred during the most recent
fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Management's Report on Internal Control Over Financial Reporting

MainSource Financial Group, Inc. (the "Corporation") is responsible for the preparation, integrity, and fair presentation of the
consolidated financial statements included in this annual report. The consolidated financial statements and notes included in this annual report have been prepared in conformity with United States
generally accepted accounting principles and necessarily include some amounts that are based on management's best estimates and judgments.

We,
as management of the Corporation, are responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial
statements in conformity with United States generally accepted accounting principles. The system of internal control over financial reporting as it relates to the financial statements is evaluated for
effectiveness by management and tested for reliability through a program of internal audits and other management testing. Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management
assessed the Corporation's system of internal control over financial reporting as of December 31, 2010, in relation to criteria for effective internal control over
financial reporting as described in "Internal Control 
Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that as of December 31, 2010, its system of
internal controls over financial reporting is effective and meets the criteria of the "Internal Control  Integrated Framework". Crowe Horwath LLP, independent registered
public accounting firm, has issued an attestation report dated March 10, 2011 on the Corporation's internal control over financial reporting. This report is incorporated by reference in
Item 8 above, under the heading "Report of Independent Registered Public Accounting Firm".

Archie
M. Brown, Jr.
President and Chief Executive Officer

James
M. Anderson
Senior Vice President and Chief Financial Officer

ITEM 9B.    OTHER INFORMATION

None

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Table of Contents

PART IV

ITEM 15    EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1)
Financial Statements.

Financial
Statements filed as part of this Form 10-K are included under Part II, Item 8, above.

(a)(2)
Financial statement schedules

All
schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or related notes in
Part II, Item 8 above.

(a)(3)
Exhibits:

3.1       Amended
and Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Quarterly Report on Form 10-Q of the registrant
for the quarter ended June 30, 2009 filed August 10, 2009 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)).

4.1       Indenture
dated as of December 19, 2002 between the Registrant, as issuer, and State Street Bank and Trust Company of Connecticut, N.A., as trustee, re: floating
rate junior subordinated deferrable interest debentures due 2032 (incorporated by reference to Exhibit 4.6 to the Annual Report on Form 10-K of the registrant for the fiscal
year ended December 31, 2002 filed March 28, 2003 with the Commission (Commission File No. 0-12422)).

4.2       Amended
and Restated Declaration of Trust dated as of December 19, 2002 among State Street Bank and Trust Company of Connecticut, N.A., as institutional trustee,
the Registrant, as sponsor, and James L. Saner Sr., Donald A. Benziger and James M. Anderson, as administrators (incorporated by reference to Exhibit 4.7 to the Annual Report on
Form 10-K of the registrant for the fiscal year ended December 31, 2002 filed March 28, 2003 with the Commission (Commission File No. 0-12422)).

4.3       Guarantee
Agreement dated as of December 19, 2002 between the Registrant, and State Street Bank and Trust Company of Connecticut, N.A (incorporated by reference
to Exhibit 4.8 to the Annual Report on Form 10-K of the registrant for the fiscal year ended December 31, 2002 filed March 28, 2003 with the Commission
(Commission File No. 0-12422)).

4.4       Indenture
dated as of April 1, 2003 between the Registrant, as issuer, and U.S. Bank, N.A., as trustee, re: floating rate junior subordinated deferrable interest
debentures due 2033 (incorporated by reference to Exhibit 4.1 to the Quarterly Report on Form 10-Q of the registrant for the quarter ended June 30, 2003 filed
August 14, 2003 with the Commission (Commission File No. 0-12422)).

4.5       Amended
and Restated Declaration of Trust dated as of April 1, 2003 among U.S. Bank, N.A., as institutional trustee, the Registrant, as sponsor, and James L.
Saner Sr., Donald A. Benziger and James M. Anderson, as administrators (incorporated by reference to Exhibit 4.2 to the Quarterly Report on Form 10-Q of the registrant for
the quarter ended June 30, 2003 filed August 14, 2003 with the Commission (Commission File No. 0-12422)).

4.6       Guarantee
Agreement dated as of April 1, 2003 between the Registrant, and U.S. Bank, N.A (incorporated by reference to Exhibit 4.3 to the Quarterly Report
on Form 10-Q of the registrant for the quarter ended June 30, 2003 filed August 14, 2003 with the Commission (Commission File No. 0-12422)).

4.7       Indenture
dated as of June 12, 2003 between the Registrant, as issuer, and The Bank of New York, as trustee, re: rate junior subordinated deferrable interest
debentures due (incorporated by reference to Exhibit 4.4 to the Quarterly Report on Form 10-Q of the registrant for the quarter ended June 30, 2003 filed
August 14, 2003 with the Commission (Commission File No. 0-12422)).

4.8       Amended
and Restated Declaration of Trust dated as of June 12, 2003 among The Bank of New York, as institutional trustee, the Registrant, as sponsor, and James L.
Saner Sr., Donald A. Benziger and James M. Anderson, as administrators (incorporated by reference to Exhibit 4.5 to the Quarterly Report on Form 10-Q of the registrant for
the quarter ended June 30, 2003 filed August 14, 2003 with the Commission (Commission File No. 0-12422)).

4.9       Guarantee
Agreement dated as of June 12, 2003 between the Registrant, and The Bank of New York (incorporated by reference to Exhibit 4.6 to the Quarterly
Report on Form 10-Q of the registrant for the quarter ended June 30, 2003 filed August 14, 2003 with the Commission (Commission File No. 0-12422)).

4.10     Form
of Amended and Restated Declaration of Trust dated as of October 13, 2006, of MainSource Statutory Trust IV, among MainSource Financial Group, Inc.
as sponsor, Wells Fargo Delaware Trust Company as Delaware trustee and Wells Fargo

67

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Table of Contents

Bank,
National Association, as institutional trustee (incorporated by reference to Exhibit 10.1 to the periodic report on Form 8-K of the registrant filed October 17,
2006 with the Commission (Commission File No. 0-12422)).

4.11     Form
of Indenture dated as of October 13, 2006, between MainSource Financial Group, Inc. and Wells Fargo Bank, National Association, as trustee
(incorporated by reference to Exhibit 10.2 to the periodic report on Form 8-K of the registrant filed October 17, 2006 with the Commission (Commission File
No. 0-12422)).

4.12     Form
of Guarantee Agreement dated as of October 13, 2006, between MainSource Financial Group, Inc., as guarantor, and Wells Fargo Bank, National
Association, as guarantee trustee (incorporated by reference to Exhibit 10.3 to the periodic report on Form 8-K of the registrant filed October 17, 2006 with the
Commission (Commission File No. 0-12422)).

4.13     Form
of Certificate for the MainSource Financial Group, Inc. Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to
Exhibit 4.1 to the Report on Form 8-K of the registrant filed January 20, 2009 with the Commission (Commission File No. 0-12422)).

4.14     Warrant
for the Purchase of Shares of MainSource Financial Group, Inc. Common Stock (incorporated by reference to Exhibit 4.2 to the Report on
Form 8-K of the registrant filed January 20, 2009 with the Commission (Commission File No. 0-12422)).

10.1     Registrant's
2003 Stock Option Plan (incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-K of the registrant for the
fiscal year ended December 31, 2003 filed March 12, 2004 with the Commission (Commission File No. 0-12422)).*

10.2     Form
of Stock Option Agreement Under 2003 Stock Option Plan for Directors of Registrant dated May 19, 2003 (incorporated by reference to Exhibit 10.2 to
the Annual Report on Form 10-K of the registrant for the fiscal year ended December 31, 2003 filed March 12, 2004 with the Commission (Commission File
No. 0-12422)).*

10.3     Form
of Stock Option Agreement Under 2003 Stock Option Plan for Officers of Registrant (incorporated by reference to Exhibit 10.1 to the Report on
Form 8-K of the registrant filed February 24, 2005 with the Commission (Commission File No. 0-12422)).*

10.4     Letter
Agreement between MainSource Financial Group, Inc. and Archie M. Brown, Jr. (incorporated by reference to Exhibit 10.1 to the Report on
Form 8-K of the registrant filed July 24, 2008 with the Commission (Commission File No. 0-12422)).*

10.5     Form
of Executive Severance Agreement dated January 16, 2001 between Registrant and Daryl R. Tressler (incorporated by reference to Exhibit 10.6 to the
Annual Report on Form 10-K of the registrant for the fiscal year ended December 31, 2006 filed March 14, 2007 with the Commission (Commission File
No. 0-12422)).*

10.6     Form
of Change-In-Control Agreement dated February 20, 2007 to be effective January 1, 2006, between Registrant and James M.
Anderson (incorporated by reference to Exhibit 10.7 to the Annual Report on Form 10-K of the registrant for the fiscal year ended December 31, 2006 filed
March 14, 2007 with the Commission (Commission File No. 0-12422)).*

10.7     Form
of Change in Control Agreement between the Registrant and Archie M. Brown, Jr. (incorporated by reference to Exhibit 10.3 to the Report on
Form 8-K of the registrant filed July 24, 2008 with the Commission (Commission File No. 0-12422)).*

10.8     Form
of Indemnification Agreement for Directors and Certain Officers of Registrant (incorporated by reference to Exhibit 10.1 to the Report on
Form 8-K of the registrant filed February 24, 2005 with the Commission (Commission File No. 0-12422)).

10.9     Registrant's
2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.9 to the Report on Form 10-K of the registrant for the year
ending December 31, 2007, filed March 17, 2008 with the Commission (Commission File No. 0-12422)).*

10.10   Form
of Award Agreement for Archie M. Brown, Jr. under the MainSource Financial Group, Inc. 2007 Stock Incentive Plan (incorporated by reference to
Exhibit 10.2 to the Report on Form 8-K of the registrant filed July 24, 2008 with the Commission (Commission File No. 0-12422)).*

10.11   Form
of Stock Award Agreement under the MainSource Financial Group, Inc. 2007 Stock Incentive Plan (for Executives) (incorporated by reference to
Exhibit 10.1 to the Report on Form 8-k of the registrant filed February 27, 2009 with the Commission (Commission File No. 0-12422)).*

10.12   Letter
Agreement, dated January 16, 2009, between MainSource Financial Group, Inc. and the United States Department of Treasury, which includes the
Securities Purchase Agreement-Standard Terms attached thereto (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the registrant filed January 20,
2009 with the Commission (Commission File No. 0-12422)).

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Table of Contents

10.13   Form
of Senior Executive Officer Letter Agreement (incorporated by reference to Exhibit 10.2 to the Report on Form 8-K of the registrant
filed January 20, 2009 with the Commission (Commission File No. 0-12422)).*

10.14   Form
of Waiver (incorporated by reference to Exhibit 10.3 to the Report on Form 8-K of the registrant filed January 20, 2009 with the
Commission (Commission File No. 0-12422)).

14        Code
of Ethical Conduct (incorporated by reference to Exhibit 14 to the Annual Report on Form 10-K of the registrant for the fiscal year ended
December 31, 2003 filed March 12, 2004 with the Commission (Commission File No. 0-12422)).

21        List
of subsidiaries of the Registrant.

23.1     Consent
of Crowe Horwath LLP

31.1     Certification
pursuant to Section 302 of Sarbanes-Oxley Act of 2002 by Chief Executive Officer

31.2     Certification
pursuant to Section 302 of Sarbanes-Oxley Act of 2002 by Chief Financial Officer

The
following exhibits 32.1 and 32.2 accompany this periodic report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (the "2002 Act"). These exhibits shall be
deemed only to accompany this periodic report and are not part of this periodic report, shall not be deemed filed for purposes of the Securities Exchange Act of 1934, and may not be for any purpose
other than compliance with the 2002 Act.

32.1     Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Executive Officer

32.2     Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by Chief Financial Officer

99.1     Subsequent
fiscal year certification of the Principal Executive Officer pursuant to Section 111(b) of the Emergency Economic Stabilization Act of 2008 for the
fiscal year ended December 31, 2010.

99.2     Subsequent
fiscal year certification of the Principal Financial Officer pursuant to Section 111(b) of the Emergency Economic Stabilization Act of 2008 for the
fiscal year ended December 31, 2010.

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Reference
is made to Item 15(a)(3) above.

None
required

69

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Table of Contents

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 10th day of March, 2011.

MAINSOURCE FINANCIAL GROUP, INC./s/ Archie M. Brown, Jr. President and Chief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed by the following
persons on behalf of the registrant and in the capacities with the Company and on the dates indicated.

Signature

Capacity

Date/s/

William G. BarronWilliam G. Barron

Director

March 10, 2011/s/

Brian J. CrallBrian J. Crall

Director

March 10, 2011/s/

Philip A. FrantzPhilip A. Frantz

Director

March 10, 2011/s/

Rick S. HartmanRick S. Hartman

Director

March 10, 2011/s/

D.J. HinesD.J. Hines

Director

March 10, 2011/s/

Robert E. HoptryRobert E. Hoptry

Director and Chairman of the Board

March 10, 2011/s/

Thomas M. O'BrienThomas M. O'Brien

Director

March 10, 2011/s/

James M. AndersonJames M. Anderson

Senior Vice President and Chief Financial Officer
(Principal Financial and Principal Accounting Officer)

March 10, 2011/s/

Archie M. Brown, Jr.Archie M. Brown, Jr.

President, Chief Executive Officer and Director
(Principal Executive Officer)

March 10, 2011


70

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