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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, 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, 2008

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:Common shares, no par value(Title of Class)Securities 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 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 (Do not check if a smaller
reporting company)

Smaller reporting company o


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 $287,895,218 as of June 30, 2008.

As
of March 10, 2009, 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 29, 2009

Part III (Items 10 through 14)




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Table of Contents

FORM 10-K

TABLE OF CONTENTS



PART I

PageItem 1

Business

3Item 1A

Risk Factors

8Item 1B

Unresolved Staff Comments

13Item 2

Properties

13Item 3

Legal Proceedings

13Item 4

Submission of Matters to a Vote of Security Holders

13PART IIItem 5

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

14Item 6

Selected Financial Data

16Item 7

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

17Item 7A

Quantitative and Qualitative Disclosures About Market Risk

27Item 8

Financial Statements and Supplementary Data

28Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

55Item 9A

Controls and Procedures

55Item 9B

Other Information

55PART 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 Accountant Fees and Services

See belowPART IVItem 15

Exhibits, Financial Statement Schedules

56


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, 2008, the Company operated three banking subsidiaries: MainSource Bank, MainSource Bank of Illinois, and MainSource Bank  Ohio (together "the Banks").
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, 2008, the Company operated 85 branch banking offices in Indiana, Illinois, Ohio, and Kentucky as well as eight insurance offices in Indiana. As of
December 31, 2008, the Company had consolidated assets of $2,899,835, consolidated deposits of $2,009,324 and shareholders' equity of $299,949.

Through
its Banks, 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 general agency personal and business insurance services; providing personal and corporate trust services; and providing other corporate
services such as letters of credit and repurchase agreements.

The
lending activities of the Banks are separated into primarily the categories of commercial/agricultural, real estate and consumer. Loans are originated by the lending officers of the
Banks subject to limitations set forth in lending policies. The Boards of Directors of each Bank review loans up to the Bank's legal lending limits, monitor concentrations of credit, problem and past
due loans and charge-offs of uncollectible loans and formulate loan policy. The Banks maintain 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 within the market area of the Banks for a myriad
of business purposes.

Agricultural
loans are generated in the Banks' 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. All affiliate banks generate residential mortgages for their own portfolios. 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, 2008, the Company was servicing a
$560,399 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 67.9% of total revenues in 2008, 69.1% in 2007 and 67.6% in 2006.

The
Company's investment securities portfolio is primarily comprised of U. S. Treasuries, federal agencies, 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 15.0% of total revenues
in 2008, 14.2% in 2007 and 16.0% in 2006. As of December 31, 2008, the Company had not identified any securities as being "high risk" as defined by the FFIEC Supervisory Policy Statement on
Securities Activities.

The
primary sources of funds for the Banks are deposits generated in local market areas. To attract and retain stable depositors, the Banks market 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
Company's Banks are located in predominantly non-metropolitan areas and their 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, 2008, the Company and its subsidiaries had 915 full-time equivalent employees to whom it provides
a variety of benefits and with whom it enjoys 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"). Each of the Banks is a state chartered bank subject to supervision and regulation by the Federal
Deposit Insurance Corporation ("FDIC") and each of their respective state banking authorities. The following is a discussion of material statutes and regulations affecting the Company and the Banks.
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 including transactions with their 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 any of our banking subsidiaries 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 any of our banking subsidiaries 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. Our banking
subsidiaries currently meet these capital, management and CRA requirements.



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 Banks, 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 8%, 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

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"undercapitalized"
if its respective ratios are less than 8%, 4% and 4%. "Significantly undercapitalized" institutions have ratios of 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 Company's banking subsidiaries 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.



The Company is a legal entity separate and distinct from its subsidiary Banks. There are various legal limitations on the extent to
which the Banks can supply funds to the Company. The principal source of the Company's funds consists of dividends from its subsidiary Banks. State and Federal law restricts the amount of dividends
that may be paid by banks. In addition, the Banks are 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.



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.

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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. As part of TARP, Treasury has allocated $250 billion towards the Capital Purchase Program. Under the Capital Purchase Program, Treasury will
purchase debt or equity securities from participating institutions. Participants in the Capital Purchase Program are subject to executive compensation limits and are encouraged to expand their lending
and mortgage loan modifications.

EESA
also increased FDIC deposit insurance on most accounts from $100 to $250. This increase is in place until the end of 2009 and is not covered by deposit insurance premiums paid by
the banking industry.

Following
a systemic risk determination, on October 14, 2008, the FDIC established a Temporary Liquidity Guarantee Program ("TLGP"). The TLGP includes the Transaction Account
Guarantee Program ("TAGP"), which provides unlimited deposit insurance coverage through December 31, 2009 for noninterest-bearing transaction accounts (typically business checking accounts) and
certain funds swept into noninterest-bearing savings accounts. Institutions participating in the TAGP pay a 10 basis points fee (annualized) on the balance of each covered account in excess of $250,
while the extra deposit insurance is in place. The TLGP also includes the Debt Guarantee Program ("DGP"), under which the FDIC guarantees certain senior
unsecured debt of FDIC-insured institutions and their holding companies. The unsecured debt must be issued on or after October 14, 2008 and not later than June 30, 2009, and
the guarantee is effective through the earlier of the maturity date or June 30, 2012. The DGP coverage limit is generally 125% of the entity's eligible debt outstanding on September 30,
2008 and scheduled to mature on or before June 30, 2009 or, for certain insured institutions, 2% of their total liabilities as of September 30, 2008. Depending on the term of the debt
maturity, the nonrefundable DGP fee ranges from 50 to 100 basis points (annualized) for covered debt outstanding until the earlier of maturity or June 30, 2012. The TAGP and DGP are in effect
for all eligible entities, unless the entity opted out on or before December 5, 2008. The Company did not opt out of the TAGP or the DGP, although it does not have any eligible debt and
therefore does not currently anticipate paying any premium associated with the DGP.

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 Treasury's Capital Purchase Program, including MainSource, 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.



In addition to the statutes and regulations discussed above, the Company and the Banks are subject to additional regulation of their
activities, including a variety of consumer protection regulations affecting lending, deposit and collection activities and regulations affecting secondary mortgage market activities.

Capital Requirements

As discussed above, the Company and its subsidiary Banks 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, 2008, the Company's leverage ratio of capital to total assets was 7.3%. 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 9.9% and its Total Capital to Risk-Weighted Assets Ratio was 11.2% at December 31, 2008. The Company's Banks had capital to asset ratios and risk- adjusted capital
ratios at December 31, 2008, in excess of the applicable minimum regulatory requirements.

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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 may materially adversely affect our business and results of operations.

Our results of operations are materially affected by conditions in the capital markets and the economy generally. The capital and
credit markets have been experiencing extreme volatility and disruption for more than twelve months at unprecedented levels. In many cases, these markets have produced downward pressure on stock
prices of, and credit availability to, certain companies without regard to those companies' underlying financial strength.

Recently,
concerns over inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining U.S. real estate market have
contributed to increased volatility and diminished expectations for the economy and the capital and credit markets going forward. These factors, combined with volatile oil prices, declining business
and consumer confidence and increased unemployment, have precipitated an economic slowdown and national recession. In addition, the fixed-income markets are experiencing a period of extreme volatility
which has negatively impacted market liquidity conditions. Initially, the concerns on the part of market participants were focused on the subprime segment of the mortgage-backed securities market.
However, these concerns have since expanded to include a broad range of mortgage-and asset-backed and other fixed income securities, including those rated investment grade, the U.S. and
international credit and interbank money markets generally, and a wide range of financial institutions and markets, asset classes and sectors.

Factors
such as consumer spending, business investment, government spending, the volatility and strength of the capital markets, and inflation all affect the business and economic
environment and, ultimately, the amount and profitability of our business. In an economic downturn characterized by higher unemployment, lower family income, lower corporate earnings, lower business
investment and lower consumer spending, the demand for our financial products could be adversely affected. Adverse changes in the economy could affect earnings negatively and could have a material
adverse effect on our business, results of operations and financial condition. The current mortgage crisis and economic slowdown has also raised the possibility of future legislative and regulatory
actions in addition to the recent enactment of EESA and ARRA that could further impact our business. We cannot predict whether or when such actions may occur, or what impact, if any, such actions
could have on our business, results of operations and financial condition.

There can be no assurance that actions of the U.S. government, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial
markets will achieve the intended effect.

In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks
and other financial institutions, on October 3, 2008, President Bush signed EESA into law. Pursuant to EESA, the Treasury has the authority to utilize up to $700 billion to purchase
distressed assets from financial institutions or infuse capital into financial institutions for the purpose of stabilizing the financial markets. The Treasury announced the Capital Purchase Program
under EESA pursuant to which it has purchased and will continue to purchase senior preferred stock in participating financial institutions such as the Company. There can be no assurance, however, as
to the actual impact that EESA, including the Capital Purchase Program and the Treasury's Troubled Asset Repurchase Program,
will have on the financial markets or on us. The failure of these programs to help stabilize the financial markets and a continuation or worsening of current financial market conditions could
materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

The
federal government, Federal Reserve and other governmental and regulatory bodies have taken or are considering taking other actions to address the financial crisis. There can be no
assurance as to what impact such actions will have on the financial markets, including the extreme levels of volatility currently being experienced. Such continued volatility could materially and
adversely affect our business, financial condition and results of operations, or the trading price of our common stock.

Like most banking organizations, our business is highly susceptible to credit risk.

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, 2008, our total loan portfolio was approximately $1,995,601 or 69% of our total assets. Three major components of the loan portfolio are loans principally
secured by real estate, approximately $1,612,578 or 81% of total loans, other commercial loans, approximately $267,030 or 13% of total loans, and consumer loans, approximately $115,993 or 6% of total
loans.

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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.

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. Additional 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 collectibility 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 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.

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, 2008, we had a negative interest rate gap of 27% 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.

Recent insured institution failures, 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 a higher rate of insured institution failures in the next few years compared to recent
years; thus, the reserve ratio may continue to decline. In addition, EESA temporarily increased the limit on FDIC coverage of deposit accounts to $250 through December 31, 2009. These
developments will cause the premiums assessed to us by the FDIC to increase.

On
December 16, 2008, the FDIC Board of Directors determined deposit insurance assessment rates for the first quarter of 2009 at 12 to 14 basis points of deposits. Beginning
April 1, 2009, the rates will increase to 12 to 16 basis points of deposits. Additionally, on February 27, 2009, the FDIC announced an interim rule imposing a 20 basis point special
emergency assessment on June 30, 2009, payable September 30, 2009. The interim rule also allows the FDIC to impose a special emergency assessment after June 30, 2009, of up to 10
basis points if necessary to maintain public confidence in FDIC insurance. These higher FDIC assessment rates and special assessments could have an adverse impact on our results of operations.

9

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Table of Contents

Recent negative developments in the financial industry and the credit markets may subject us to additional regulation.

As a result of the recent global financial crisis, the potential exists for new federal or state laws and regulations regarding lending
and funding practices and liquidity standards to be promulgated, and bank regulatory agencies are expected to be active in responding to concerns and trends identified in examinations, including the
expected issuance of many formal enforcement orders. Negative developments in the financial industry and the domestic and international credit markets, and the impact of new legislation in response to
those developments, may negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and may adversely impact our financial performance.

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.

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 32 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 is 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 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.

10

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Table of Contents

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 acquisition strategy 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. 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.

Risks Relating to the Banking Industry

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 when 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

11

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Table of Contents

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.

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.

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.

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:

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.

12

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Table of Contents

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, 2008, 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, 2008 the Company had 85 banking locations of which MainSource Bank had 72, MainSource Bank of
Illinois had seven, and MainSource Bank  Ohio had six. In addition, the Company operates eight insurance offices in Indiana. At December 31, 2008, the Company had
approximately $49,155 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.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of 2008 to a vote of security holders, through the solicitation of proxies or
otherwise.

13

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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 4,500
shareholders at March 10, 2009. 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 Prices2008

Q1

Q2

Q3

Q4High

$
16.51

$
17.59

$
21.27

$
21.02Low

$
12.15

$
13.45

$
13.98

$
12.742007

Q1

Q2

Q3

Q4High

$
17.53

$
17.50

$
19.01

$
18.09Low

$
15.42

$
16.15

$
15.03

$
14.36Cash Dividends2008

Q1

Q2

Q3

Q4$
0.140

$
0.145

$
0.145

$
0.1452007

Q1

Q2

Q3

Q4$
0.135

$
0.140

$
0.140

$
0.140


It is expected that the Company will continue to pay dividends on a similar schedule, to the extent permitted by its results of operations and
other factors beyond management's control. As a participant in the U.S. Treasury's Capital Purchase Program, the Company is prohibited from increasing cash dividends on common stock 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, 2008:

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


262,441

$
18.02


621,000Equity compensation plans not approved by security holders








Total


262,441

$
18.02


621,000


14

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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, 2008. 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 21, 2003.

LOGO

12/31/03

12/31/04

12/31/05

12/31/06

12/31/07

12/31/08MainSource Financial Group

$
100.00

$
122.35

$
92.27

$
92.13

$
82.06

$
81.74NASDAQ MARKET INDEX (U.S.)


100.00


108.59


110.08


120.56


132.39


78.72NASDAQ Bank Stocks Index


100.00


110.99


106.18


117.87


91.85


69.88


Purchases of Equity Securities

The activity in the Company's Stock Repurchase Program for the fourth quarter of 2008 was as follows:

Period

Total Number
of Shares (or Units)
Purchased

Average Price
Paid Per Share
(or Unit)

Total Number of Shares
(or Units) Purchased as Part
of Publicly Announced Plans
or Programs

Maximum Number
(or Approximate Dollar Value)
of Shares (or Units)
That May Yet Be Purchased
Under the Plans or Programs(1)October 2008











498,605November 2008











498,605December 2008











498,605


---

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Table of Contents

ITEM 6.    SELECTED FINANCIAL DATA

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

2008

2007

2006

2005

2004Results of OperationsNet interest income

$
87,525

$
74,397

$
68,268

$
53,648

$
50,002Provision for loan losses


20,918


5,745


1,819


1,040


600Noninterest income


29,697


28,126


23,039


17,332


19,544Noninterest expense


72,773


68,020


59,642


48,576


45,880Income before income tax


23,531


28,758


29,846


21,364


23,066Income tax


4,379


6,888


7,605


5,172


6,273Net income


19,152


21,870


22,241


16,192


16,793Dividends paid on common stock


11,133


10,392


8,944


6,514


5,421Per Common Share*Earnings per share (basic)

$
1.00

$
1.17

$
1.30

$
1.23

$
1.41Earnings per share (diluted)


1.00


1.17


1.29


1.23


1.41Dividends paid


0.575


0.555


0.529


0.495


0.453Book value  end of period


14.90


14.22


13.50


11.39


10.17Market price  end of period


15.50


15.56


16.94


17.00


22.74At Year EndTotal assets

$
2,899,835

$
2,536,437

$
2,429,773

$
1,645,605

$
1,549,379Investment securities


513,310


489,739


485,259


450,814


428,686Loans, excluding held for sale


1,995,601


1,693,678


1,574,384


957,995


929,005Allowance for loan losses


34,583


14,331


12,792


10,441


11,698Total deposits


2,009,324


1,901,829


1,859,689


1,352,697


1,226,367Notes payable














9,100Federal Home Loan Bank advances


433,167


257,099


208,443


41,547


90,981Subordinated debentures


49,816


41,239


41,239


29,898


29,898Shareholders' equity


299,949


264,102


253,247


161,069


123,320Financial RatiosReturn on average assets


0.73
%

0.90
%

1.06
%

1.04
%

1.13
%Return on average common shareholders' equity


6.90


8.49


10.39


11.27


14.70Allowance for loan losses to total loans (year end, excluding held for sale)


1.73


0.85


0.81


1.09


1.26Allowance for loan losses to total non-performing loans (year end)


58.31


69.93


73.18


102.19


83.31Shareholders' equity to total assets (year end)


10.34


10.41


10.42


9.79


7.96Average equity to average total assets


10.57


10.57


10.13


9.18


7.95Dividend payout ratio


58.13


47.52


40.21


40.23


32.28


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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 three wholly owned subsidiary banks ("Banks"): MainSource Bank headquartered in Greensburg, Indiana, MainSource Bank of Illinois headquartered in Kankakee, Illinois,
and MainSource Bank  Ohio headquartered in Troy, Ohio. The banks operate under state charters and are subject to regulation by their respective state regulatory agencies and the
Federal Deposit Insurance Corporation. Non-banking subsidiaries include MainSource Insurance, LLC and MainSource Title, LLC. Both of these subsidiaries are subject to
regulation by the Indiana Department of Insurance. The Company also owns all of the outstanding stock of MainSource Bank  Hobart, although substantially all of the assets of that
bank were transferred to MainSource Bank in May, 2007.

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 was $19,152 in 2008, $21,870 in 2007, and $22,241 in 2006. Earnings per common share on a fully diluted basis were $1.00 in
2008, $1.17 in 2007, and $1.29 in 2006. The primary driver that led to the decrease in net income in 2008 was the $15,173 increase in the Company's loan loss provision expense. The increase in
provision expense was partially offset by an increase of $13,128 in net interest income as the Company's net interest margin increased by 30 basis points year over year. The decrease from 2006 to 2007
in overall net income and earnings per share was primarily attributable to three factors: the decrease in the Company's net interest margin, the increase in the Company's loan loss provision expense,
and the expenses incurred for the data processing system conversions of the Hobart and Crawfordsville affiliates. Key measures of the operating performance of the Company are return on average assets,
return on average shareholders' equity, and efficiency ratio. The Company's return on average assets was 0.73% for 2008 compared to 0.90% for 2007 and 1.06% in 2006. The Company's return on average
shareholders' equity was 6.9% in 2008 compared to 8.5% in 2007 and 10.4% in 2006. 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 60.7% in 2008 compared to 64.4% in 2007 and 63.6% in 2006.

17

---



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 $91,358 in 2008 increased from $77,603 in 2007. Net interest margin, on a fully-taxable equivalent basis, was 3.90% for 2008 compared to 3.60% for
the same period a year ago. Due to rate reductions by the Federal Reserve during the year, the Company's cost of funds decreased steadily throughout the year and outpaced the decrease in the yield on
earning assets. In addition, there was a favorable shift in the Company's volume and mix of earning assets as lower-yielding residential real estate loans were replaced by higher-yielding commercial
loans.

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)*

2008

2007

2006Assets

Average
Balance

Interest

Average
Rate

Average
Balance

Interest

Average
Rate

Average
Balance

Interest

Average
RateShort-term investments

$
1,993

$
36


1.81
%
$
2,601

$
131


5.04
%
$
4,210

$
141


3.35
%Federal funds sold and money market accounts


8,303


158


1.90


10,458


575


5.50


8,249


394


4.78SecuritiesTaxable


398,851


20,395


5.11


401,006


19,661


4.90


382,912


18,176


4.75Non-taxable*


139,498


8,763


6.28


121.737


7,621


6.26


121,257


7,540


6.22Total securities


538,349


29,158


5.42


522,743


27,282


5.22


504,169


25,716


5.10Loans**Commercial


975,499


63,272


6.49


770,269


55,243


7.17


594,294


43,128


7.26Residential real estate


508,019


33,802


6.65


556,136


41,625


7.48


488,477


33,362


6.83Consumer


308,211


22,066


7.16


290,930


23,177


7.97


270,885


21,067


7.78Total loans


1,791,729


119,140


6.65


1,617,335


120,045


7.42


1,353,656


97,557


7.21Total earning assets


2,340,374


148,492


6.34


2,153,137


148,033


6.88


1,870,284


123,808


6.62Cash and due from banks


52,698








56,498








58,562Unrealized gains (losses) on securities


1,896








(4,634
)







(7,643
)Allowance for loan losses


(19,747
)







(13,296
)







(12,667
)Premises and equipment,net


43,885








39,829








35,926Intangible assets


138,079








136,189








103,008Accrued interest receivable and other assets


71,367








70,789








55,580Total assets

$
2,628,552







$
2,438,512







$
2,103,050LiabilitiesInterest-bearing deposits DDA, savings, and money market accounts

$
864,842

$
10,017


1.16

$
776,693

$
14,853


1.91

$
711,111

$
11,130


1.57Certificates of deposit


873,731


32,052


3.67


864,074


38,820


4.49


731,603


28,152


3.85Total interest-bearing deposits


1,738,573


42,069


2.42


1,640,767


53,673


3.27


1,442,714


39,282


2.72Short-term borrowings


44,913


1,293


2.88


48,943


1,856


3.79


33,586


1,332


3.97Subordinated debentures


43,000


2,782


6.47


41,239


3,333


8.08


31,750


2,475


7.80Notes payable and FHLB borrowings


297,333


10,990


3.70


236,706


11,568


4.89


189,171


9,374


4.96Total interest-bearing liabilities


2,123,819


57,134


2.69


1,967,655


70,430


3.58


1,697,221


52,463


3.09Demand deposits


203,979








190,162








174,218Other liabilities


23,059








23,062








17,622Total liabilities


2,350,857








2,180,879








1,889,061Shareholders' equity


277,695








257,633








213,989Total liabilities and shareholders' equity

$
2,628,552


57,134


2.44
***
$
2,438,512


70,430


3.27
***
$
2,103,050


52,463


2.81
***Net interest income




$
91,358


3.90
****



$
77,603


3.60
****



$
71,345


3.81
****Conversion of tax exempt income to a fully taxable equivalent basis using a marginal rate of 35%




$
3,833







$
3,206







$
3,077


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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)

2008 OVER 2007

2007 OVER 2006Volume

Rate

Total

Volume

Rate

TotalInterest incomeLoans

$
11,548

$
(12,453
)
$
(905
)
$
19,645

$
2,843

$
22,488Securities


831


1,045


1,876


961


605


1,566Federal funds sold and money market funds


(41
)

(376
)

(417
)

117


64


181Short-term investments


(11
)

(84
)

(95
)

(81
)

71


(10
)Total interest income


12,327


(11,868
)

459


20,643


3,582


24,225Interest expenseInterest-bearing DDA, savings, and money market accounts

$
1,021

$
(5,857
)
$
(4,836
)
$
1,305

$
2,418

$
3,723Certificates of deposit


354


(7,122
)

(6,768
)

5,986


4,682


10,668Borrowings


2,125


(3,266
)

(1,141
)

2,911


(193
)

2,718Subordinated debentures


114


(665
)

(551
)

769


89


858Total interest expense


3,614


(16,910
)

(13,296
)

10,971


6,996


17,967Change in net interest income

$
8,713

$
5,042


13,755

$
9,672

$
(3,414
)

6,258Change in tax equivalent adjustment








627








129Change in net interest income before tax equivalent adjustment







$
13,128







$
6,129


Provision for Loan Losses

The Company expensed $20,918 in provision for loan losses in 2008. 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 Change2008

2007

2006

08/07

07/06Non-interest incomeInsurance commissions

$
2,073

$
1,864

$
1,821


11.2%


2.4%Mortgage banking


2,565


2,921


2,279


-12.2%


28.2%Trust and investment product fees


1,575


1,569


1,187


0.4%


32.2%Service charges on deposit accounts


14,555


13,312


9,491


9.3%


40.3%Net realized gains/(losses) on securities sales


1,118


114


145


880.7%


-21.4%Increase in cash surrender value of life insurance


967


1,535


1,255


-37.0%


22.3%Interchange income


3,600


3,159


2,617


14.0%


20.7%Other


3,244


3,652


4,244


-11.2%


-13.9%Total non-interest income

$
29,697

$
28,126

$
23,039


5.6%


22.1%Non-interest expenseSalaries and employee benefits

$
41,033

$
38,063

$
33,073


7.8%


15.1%Net occupancy


6,061


5,347


4,755


13.4%


12.5%Equipment


6,496


5,788


5,361


12.2%


8.0%Intangibles amortization


2,607


2,666


2,236


-2.2%


19.2%Telecommunications


1,863


1,924


1,916


-3.2%


0.4%Stationery, printing, and supplies


1,374


1,475


1,408


-6.8%


4.8%Other


13,339


12,757


10,893


4.6%


17.1%Total non-interest expense

$
72,773

$
68,020

$
59,642


7.0%


14.0%


19

---



Table of Contents

Non-interest Income

Non-interest income was $29,697 for 2008 compared to $28,126 for the same period in 2007. Increases in service charges on
deposit accounts, interchange income and gains on the sale of investment securities were offset by the decrease in mortgage banking income and a reduction in income related to bank-owned
life insurance policies as the Company recorded a $400 charge on its separate account investments. Despite an increase in the level of mortgage loans originated for sale, mortgage banking income
decreased as the Company incurred an impairment charge of $1,226 related to its mortgage servicing rights. Non-interest income as a percent of non-interest expense was 40.8%
for 2008 compared to 41.3% for 2007.

Total
non-interest income was $28,126 for 2007 compared to $23,039 for 2006, an increase of $5,087 and 22.1% The acquisitions closed in 2006 were the primary driver of the
increase as the Company realized the full-year effect in 2007.

Non-interest Expense

Total non-interest expense was $72,773 in 2008 compared to $68,020 in 2007, an increase of $4,753 and 7.0%. The increase
was primarily attributable to the acquisition of 1st Independence Bancorp, Inc. in August 2008, severance costs related to the resignation of the Company's former Chief Executive
Officer, and normal employee merit increases.

Total
non-interest expense was $68,020 in 2007 compared to $59,642 in 2006, an increase of $8,378 and 14.0%. The full-year effect of the 2006 acquisitions was the
primary driver of this increase and added approximately $6,000 of expenses to 2007. In addition, the Company incurred approximately $900 of expenses related to the data processing system conversions
of its Hobart and Crawfordsville, Indiana affiliates.

Income Taxes

The effective tax rate was 18.6% in 2008, 24.0% in 2007, and 25.5% in 2006. The decrease in the Company's effective tax rate from 2007
to 2008 was primarily due to lower pretax earnings with earnings from tax exempt assets remaining relatively flat. The decrease in the Company's effective tax rate from 2006 to 2007 was primarily
attributable to the purchase of a new markets tax credit investment in 2007. The Company and its subsidiaries file consolidated income tax returns.

Balance Sheet

At December 31, 2008, total assets were $2,899,835 compared to $2,536,437 at December 31, 2007, an increase of
$363 million. The increase was primarily attributable to the acquisition of 1st Independence which added $319,014 in assets.

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 Company's subsidiaries are viewed by management as a means of controlling problem loans and the resulting charge-offs.

The
Company's conservative loan underwriting standards have historically resulted in higher loan quality and generally lower levels of net charge-offs than peer group
averages. 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.

Total
loans (excluding those held for sale) increased by $301,923 from year-end 2007. The acquisition of 1st Independence in August 2008 accounted for $236,992 of the
increase in loans. The $64,931 of organic loan growth was primarily concentrated in the commercial real estate area. Residential real estate loans continue to represent the largest portion of the
total loan portfolio and were 44% of total loans at December 31, 2008 compared to 46% of total loans at the end of 2007.

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

20

---



Table of Contents

Loan Portfolio

December 312008

2007

2006

2005

2004Types of loansCommercial and industrial

$
226,696

$
214,393

$
173,557

$
149,074

$
154,717Agricultural production financing


40,334


29,812


25,588


23,871


22,647Farm real estate


45,918


42,185


46,051


38,833


38,281Commercial real estate mortgage


515,964


376,759


326,284


202,047


213,359Residential real estate mortgage


877,145


780,102


790,962


368,953


353,515Construction and development


173,551


123,611


82,261


51,736


38,056Consumer


115,993


126,816


129,681


123,481


108,430Total loans

$
1,995,601

$
1,693,678

$
1,574,384

$
957,995

$
929,005


The following table indicates the amounts of loans (excluding residential and commercial mortgages and consumer loans) outstanding as of
December 31, 2008 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

$
102,805

$
55,121

$
68,770

$
226,696Agricultural production financing


29,121


7,983


3,230


40,334Construction and development


125,159


35,034


13,358


173,551Totals

$
257,085

$
98,138

$
85,358

$
440,581Percent


58%


22%


20%


100%Rate SensitivityFixed Rate

$
38,225

$
47,211

$
32,052

$
117,488Variable Rate


285,665


34,555


2,873


323,093Totals

$
323,890

$
81,766

$
34,925

$
440,581


The Company regards its ability to identify and correct loan quality problems as one of its greatest strengths. 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 $59,310 as of December 31, 2008 compared to
$20,493 as of December 31, 2007 and represented 2.97% of total loans at December 31, 2008 versus 1.21% one year ago.

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

Non-performing Loans

2008

2007

2006

2005

2004Nonaccruing loans

$
55,671

$
18,800

$
16,021

$
9,984

$
13,611Accruing loans contractually past due 90 days or more


3,639


1,693


1,460


233


431Total

$
59,310

$
20,493

$
17,481

$
10,217

$
14,042% of total loans


2.97%


1.21%


1.11%


1.07%


1.51%


Approximately 80% of the increase in non-accruing loans was attributable to 11 large credit relationships over $1,000. The provision for loan
losses was $20,918 in 2008, $5,745 in 2007, and $1,819 in 2006. The increase in the Company's provision in 2008 was primarily due to the increase in non-performing loans, the increase in
net charge-offs during 2008, and the deterioration of the economy and real estate market. Net charge-offs were $6,230 in 2008 compared to $4,206 in 2007 and $3,363 in 2006. As
a percentage of average loans, net charge-offs equaled .35%, .26%, and .25% in 2008, 2007 and 2006, respectively.

Substandard
loans that were not classified as non-accrual were $39,339 at December 31, 2008 and $17,979 at December 31, 2007. The large increase in these
substandard loans related to substandard commercial loans as they increased $19,099 from $15,694 at December 31, 2007 to $34,793 at December 31, 2008. Substandard mortgage loans totaled
$3,806 and substandard installment loans were $740 at December 31, 2008. These loans are reviewed at least quarterly by senior management. Management believes these loans were well secured and
had adequate allowance allocated at December 31, 2008.

21

---





Table of Contents

Summary of the Allowance for Loan Losses

2008

2007

2006

2005

2004Balance at January 1

$
14,331

$
12,792

$
10,441

$
11,698

$
11,509ChargeoffsCommercial


1,866


1,642


1,653


1,164


1,069Commercial real estate mortgage


948


136





594


43Residential real estate mortgage


1,421


446


412


869


534Consumer


3,032


3,134


1,834


956


886Total Chargeoffs


7,267


5,358


3,899


3,583


2,532RecoveriesCommercial


214


258


65


46


123Commercial real estate mortgage


17











2Residential real estate mortgage


16


26


66


35


43Consumer


790


868


405


203


178Total Recoveries


1,037


1,152


536


284


346Net Chargeoffs


6,230


4,206


3,363


3,299


2,186Addition resulting from acquisition


5,564





3,895


1,002


1,775Provision for loan losses


20,918


5,745


1,819


1,040


600Balance at December 31

$
34,583

$
14,331

$
12,792

$
10,441

$
11,698Net Chargeoffs to average loans


0.35%


0.26%


0.25%


0.35%


0.24%Provision for loan losses to average loans


1.17%


0.36%


0.13%


0.11%


0.07%Allowance to total loans at year end


1.73%


0.85%


0.81%


1.09%


1.26%


Allocation of the Allowance for Loan Losses

2008

2007

2006

2005

2004December 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

$
3,882


44
%
$
2,652


46
%
$
2,514


50
%
$
1,018


39
%
$
1,123


38
%Farm real estate


344


2


251


3


247


3


625


4


681


4Commercial


11,448


26


4,386


22


4,045


21


3,233


21


3,997


23Construction and development


6,500


9


1,085


7


359


5


763


5


648


4Total real estate


22,174


81


8,374


78


7,165


79


5,639


69


6,449


69CommercialAgribusiness


303


2


167


2


138


2


412


3


464


3Other commercial


7,632


11


2,593


13


2,189


11


2,440


16


2,831


17Total Commercial


7,935


13


2,760


15


2,327


13


2,852


19


3,295


20Consumer


4,072


6


3,114


7


2,053


8


1,435


12


1,581


11Unallocated


402





83





1,247





515





373Total

$
34,583


100
%
$
14,331


100
%
$
12,792


100
%
$
10,441


100
%
$
11,698


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 of each banking subsidiary.
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 all commercial credit
relationships over $1,000.

22

---



Table of Contents

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 2008, the Company established a separate group solely responsible for the collection of problem loans.

The
adequacy of the allowance for loan losses in each subsidiary 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 $34,583, or 1.73% of total loans, at
December 31, 2008 compared to $14,331, or 0.85% of total loans, at the end of 2007. The largest increases in the allowance occurred in the commercial and the construction and development loans.
As the recession has worsened, home buying has virtually ceased, placing buildings and developers in stressed financial condition.

During
2008 and 2006 the Company purchased certain loans that were subject to the accounting treatment under SOP 03-3 (see Note 5 to the Consolidated Financial
Statements). At the time of acquisition, these loans had evidence of credit deterioration. In applying this accounting standard, an allowance for loan losses amount was not carried over or established
for these loans. Instead these loans are carried at their fair value at date of acquisition including consideration of expected cash flows to be received. The valuation allowance for these purchased
loans as of December 31, 2008 was $6,390. Before the adoption of SOP 03-3, this valuation allowance would have been included in the allowance for loan losses balance. Had
this amount been included in the allowance for loan losses amount at December 31, 2008, the allowance would have been $40,973, or 2.05% of total loans.

Investment Securities, at Amortized Cost

December 31,2008

2007

2006Available for SaleU.S. Government-sponsored entities

$
32,898

$
31,779

$
90,662State and municipal


155,389


126,215


121,027Mortgage-backed


310,277


322,933


266,416Equity and other


9,903


6,854


9,445Total securities

$
508,467

$
487,781

$
487,550


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, 2008, 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 $4,843 was recorded to adjust the AFS portfolio to current market value at
December 31, 2008 compared to a net unrealized gain of $1,958 at December 31, 2007.

Investment Securities(Carrying Values at December 31)

Within
1 Year

2-5 Yrs

6-10 Yrs

Beyond
10 Years

Total
2008Available for saleFederal agencies

$
102

$


$
32,944

$


$
33,046State and municipal


3,375


17,698


56,400


75,727


153,200Mortgage-backed securities


1


1,427


42,076


274,996


318,500Other securities


751


949





5,883


7,583Total available for sale

$
4,229

$
20,074

$
131,420

$
356,606

$
512,329Weighted average yield*


5.13%


5.95%


5.25%


5.70%


5.59%


---

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 $981 do not have contractual maturities and are excluded from the table above.

23

---



Table of Contents

As
of December 31, 2008, there were no corporate bonds and other securities which represented more than 10% of shareholders' equity.

For
2008 the tax equivalent yield of the investment securities portfolio was 5.42%, compared to 5.22% and 5.10% for 2007 and 2006, respectively. The average life of the Company's
investment securities portfolio was 3.55 years at December 31, 2008. During 2008 the investment universe saw significant disruptions as the fall out from the deterioration in the real
estate market intensified. Increased risk premiums drove investment yields higher even as the Federal Reserve continued its march toward lower rates. This allowed the Company's portfolio to increase
its yield while maintaining its standard conservative investment strategy and limiting its credit risk profile. Entering 2009 the portfolio remains focused on providing liquidity and avoiding
additional credit risk during the ongoing economic turmoil.

The
Company and its investment advisor monitor the securities portfolio on a monthly basis. As securities in a significant loss position are identified, a review of the underlying credit
is performed. Securities are written down to fair value when a decline in fair value is not considered temporary. In estimating other-than-temporary losses, management considers the length of time and
extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, and the Company's ability and intent to hold the security for a period sufficient to
allow for any anticipated recovery in fair value.

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 82.9% and 85.0% of total average earning assets in 2008 and
2007, respectively. Total interest-bearing deposits averaged 89.5% and 89.6% of average total deposits during 2008 and 2007. 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 2008,
repurchase agreements averaged $31,754, with an average cost of 1.64%.

Another
source of funding is the Federal Home Loan Bank (FHLB). The Company had FHLB advances of $433,167 outstanding at December 31, 2008. These advances have interest rates
ranging from 0.5% to 6.4% (see note 11 to the consolidated financial statements for the maturity schedule of these advances). The Company averaged $285,271 in FHLB advances during 2008 compared
to $224,624 during 2007. This increase in the average balance of FHLB borrowings was primarily due to the increased funding needs for loan growth. One final source of funding is federal funds
purchased. The Company had $41,715 of these funds at December 31, 2008 compared to $7,150 at December 31, 2007. The interest rate on these funds was 1% or less as of December 31,
2008.

Average Deposits

2008

2007

2006Amount

Rate

Amount

Rate

Amount

RateDemand

$
203,979




$
190,162




$
174,218Interest Bearing Demand


509,370


1.00%


446,152


1.93%


367,791


1.35%Savings/Money Markets


355,472


1.35


330,541


1.89


343,321


1.80Certificates of Deposit


873,731


3.67


864,074


4.49


731,603


3,85Totals

$
1,942,552


2.16%

$
1,830,929


2.93%

$
1,616,933


2.72%


As of December 31, 2008, 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

$
80,118

$
60,835

$
54,070

$
84,563

$
279,586Percent


29%


22%


19%


30%


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

24

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Table of Contents

December 31,
2008, Tier 1 capital to average assets was 7.3%. Total capital to risk-weighted assets was 11.2%. Both ratios exceed all required ratios established for bank
holding companies. Risk-adjusted capital levels of each of the Company's subsidiary banks 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, 2008, 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.

The
Company declared and paid common dividends of $.575 per share in 2008 compared to $.555 and $.529 in 2007 and 2006 respectively. Book value per common share increased to $14.90 at
December 31, 2008 compared to $14.22 at the end of 2007. The net adjustment for AFS securities increased book value per share by $.15 at December 31, 2008 and increased book value per
share by $.07 at December 31, 2007. 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 2008 was $16.01 per share and the warrant issued in 2009 has an exercise price of $14.95 per share. This results
in additional potentially dilutive shares of approximately 38,000, and does not significantly impact earnings per share.

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 historical levels 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 $425,000 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 71.2% of total earning assets during 2008 and approximately 71.6% in 2007.

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.

25

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Table of Contents

Contractual Obligations as of December 31, 2008

Total

Less than
1 Year

1-3 Years

3-5 Years

More than
5 YearsTime Deposits

$
849,580

$
612,230

$
216,914

$
13,051

$
7,385FHLB Advances


433,167


210,249


86,693


35,928


100,297Subordinated Debentures


49,816











49,816Total

$
1,332,563

$
822,479

$
303,607

$
48,979

$
157,498


Off-balance Sheet Arrangements

The Banks incur off-balance sheet risks in the normal course of business in order to meet the financing needs of their
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 16 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 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, and income taxes.

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 
Statement of Financial Accounting Standards No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets" were issued in
June of 2001 and were effective for fiscal years beginning after December 15, 2001. Under these rules, goodwill and intangible assets deemed to have indefinite lives, if any, will no longer be
amortized, but will be subject to annual impairment tests in accordance with the Statements. The Company has selected June 30 as its date for annual impairment testing, but will test more
frequently if circumstances warrant.

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.

New Accounting Matters

See Note 1 to the Consolidated Financial Statements regarding the adoption of new accounting standards in 2008.

26

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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 Committees and Boards of Directors of the
Company and its subsidiary banks. 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, 2008 the Company's estimated NPV might be expected to increase in the event of an increase in prevailing interest rates, and might be expected to decrease in the event
of a decrease in prevailing interest rates (dollars in thousands). As of December 31, 2007 the Company's estimated NPV would increase in the event of a decrease in prevailing rates and decrease
in the event of an increase in rates.

December 31, 2008

Change in Rates

$ Amount

$ Change

NPV Ratio

Change+2%


319,587

$
(23,157
)

11.48%


(84)bp+1%


345,087


2,343


12.40%


8bpBase


342,744





12.32%


-1%


338,252


(4,492
)

12.16%


(16)bp-2%


307,904


(34,840
)

11.06%


(126)bp


December 31, 2007

Change in Rates

$ Amount

$ Change

NPV Ratio

Change+2%


172,239

$
(45,749
)

7.28%


(194)bp+1%


201,515


(16,473
)

8.52%


(70)bpBase


217,988





9.22%


-1%


221,195


3,207


9.36%


14bp-2%


195,596


(22,392
)

8.27%


(95)bp


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.

27

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Table of Contents

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

LOGO

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, 2008 and 2007 and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2008. We also have audited MainSource Financial Group, Inc.'s
internal control over financial reporting as of December 31, 2008, 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.

As
permitted, the Company excluded the operations of 1st Independence Financial Group Inc., a financial institution acquired during 2008, from the scope of management's
report on internal control over financial reporting. As such, this entity has also been excluded from the scope of our audit of internal control over financial reporting.

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, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, 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, 2008, based on criteria established inInternal Control  Integrated Frameworkissued
by the COSO.

/s/ Crowe Horwath LLPLouisville, Kentucky
March 11, 2009


28

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Table of Contents

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

December 31,
2008

December 31,
2007AssetsCash and due from banks

$
72,141

$
81,660Money market funds and federal funds sold


23,347


2,995Cash and cash equivalents


95,488


84,655Interest bearing time deposits


116


116Securities available for sale


513,310


489,739Loans held for sale


4,947


2,439Loans, net of allowance for loan losses of $34,583 and $14,331


1,961,018


1,679,347Restricted stock, at cost


29,833


22,947Premises and equipment, net


49,155


40,483Goodwill


137,217


122,046Purchased intangible assets


13,146


13,278Cash surrender value of life insurance


46,180


41,420Interest receivable and other assets


49,425


39,967Total assets

$
2,899,835

$
2,536,437LiabilitiesDepositsNoninterest bearing

$
232,024

$
200,753Interest bearing


1,777,300


1,701,076Total deposits


2,009,324


1,901,829Other borrowings


84,448


50,156Federal Home Loan Bank (FHLB) advances


433,167


257,099Subordinated debentures


49,816


41,239Other liabilities


23,131


22,012Total liabilities


2,599,886


2,272,335Commitments and contingent liabilities (Note 14)Shareholders' equityPreferred stock, no par valueAuthorized shares  400,000Issued and outstanding shares  none





Common stock $.50 stated value:Authorized shares  25,000,000Issued shares  20,710,764 and 19,151,759Outstanding shares  20,136,362 and 18,570,139


10,394


9,610Treasury stock  574,402 and 581,620, at cost


(9,367
)

(9,487
)Additional paid-in capital


221,789


196,712Retained earnings


74,018


65,999Accumulated other comprehensive income


3,115


1,268Total shareholders' equity


299,949


264,102Total liabilities and shareholders' equity

$
2,899,835

$
2,536,437


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

29

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Table of Contents

MAINSOURCE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
(Dollar amounts in thousands except per share data)

2008

2007

2006Interest incomeLoans, including fees

$
118,379

$
119,546

$
97,121SecuritiesTaxable


20,387


19,621


18,176Tax exempt


5,696


4,954


4,899Federal funds sold and money market funds


155


575


394Deposits with financial institutions


42


131


141Total interest income


144,659


144,827


120,731Interest expenseDeposits


42,069


53,673


39,282Federal Home Loan Bank advances


10,990


10,894


8,704Subordinated debentures


2,782


3,333


2,475Other borrowings


1,293


2,530


2,002Total interest expense


57,134


70,430


52,463Net interest income


87,525


74,397


68,268Provision for loan losses


20,918


5,745


1,819Net interest income after provision for loan losses


66,607


68,652


66,449Non-interest incomeInsurance commissions


2,073


1,864


1,821Mortgage banking


2,565


2,921


2,279Trust and investment product fees


1,575


1,569


1,187Service charges on deposit accounts


14,555


13,312


9,491Net realized gains on securities


1,118


114


145Increase in cash surrender value of life insurance


967


1,535


1,255Interchange income


3,600


3,159


2,617Other income


3,244


3,652


4,244Total non-interest income


29,697


28,126


23,039Non-interest expenseSalaries and employee benefits


41,033


38,063


33,073Net occupancy expenses


6,061


5,347


4,755Equipment expenses


6,496


5,788


5,361Intangibles amortization


2,607


2,666


2,236Telecommunications


1,863


1,924


1,916Stationery printing and supplies


1,374


1,475


1,408Other expenses


13,339


12,757


10,893Total non-interest expense


72,773


68,020


59,642Income before income tax


23,531


28,758


29,846Income tax expense


4,379


6,888


7,605Net income

$
19,152

$
21,870

$
22,241Net income per share  basic

$
1.00

$
1.17

$
1.30Net income per share  diluted

$
1.00

$
1.17

$
1.29


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

30

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Table of Contents

MAINSOURCE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
(Dollar amounts in thousands except per share data)

Common StockAdditional
Paid-in
Capital



Accumulated
Other
Comprehensive
IncomeShares
Outstanding

Amount

Treasury
Stock

Retained
Earnings

Total

Comprehensive
IncomeBalance, January 1, 2006


13,472,616

$
6,881

$
(4,835
)
$
105,089

$
57,067

$
(3,133
)
$
161,069Net income













$
22,241




$
22,241

$
22,241Change in fair value of cash flow hedge, net

















(256
)

(256
)

(256
)Change in fair value of securities, net

















1,925


1,925


1,925Total comprehensive income






















$
23,910Cash dividends ($.529 per share)














(8,944
)




(8,944
)Issuance of common stock in acquisitions


4,484,008


2,242





76,945








79,187Stock option expense











69








69Other


1,355Purchase of treasury stock


(130,032
)




(2,290
)










(2,290
)5% Stock Dividend


912,038


456





14,994


(15,450
)




Exercise of stock options


31,656


16


539


(309
)







246Balance, December 31, 2006


18,771,641


9,595


(6,586
)

196,788


54,914


(1,464
)

253,247Net income













$
21,870




$
21,870


21,870Change in fair value of securities, net

















2,732


2,732


2,732Total comprehensive income






















$
24,602Stock option expense











115








115Adjustment to initially apply FASB Interpretation 48














(411
)




(411
)Cash dividends ($.555 per share)














(10,374
)




(10,374
)Purchase of treasury stock


(212,256
)




(3,407
)










(3,407
)5% Stock Dividend  Treasury shares


(19,058
)
















Fractional Shares  5% stock dividend


(1,051
)

(1
)




(17
)







(18
)Exercise of stock options


30,863


16


506


(174
)







348Balance, December 31, 2007


18,570,139


9,610


(9,487
)

196,712


65,999


1,268


264,102Net income














19,152





19,152


19,152Change in fair value of securities, net

















1,847


1,847


1,847Total comprehensive income






















$
20,999Stock option expense











101








101Cash dividends ($.575 per share)














(11,133
)




(11,133
)Purchase of treasury stock


(1,463
)




(22
)










(22
)Issuance of common stock in acquisitions


1,559,005


780





25,006








25,786Exercise 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

$
299,949


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

31

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Table of Contents

MAINSOURCE FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
(Dollars in thousands)

2008

2007

2006Operating ActivitiesNet income

$
19,152

$
21,870

$
22,241Adjustments to reconcile net income to net cash provided by operating activities:Provision for loan losses


20,918


5,745


1,819Depreciation expense


4,523


4,174


3,869Amortization of mortgage servicing rights


706


567


519Valuation allowance on mortgage servicing right


1,226





Securities amortization, net


(731
)

(725
)

(521
)Amortization of core deposit intangibles


2,607


2,666


2,236Increase in cash surrender value of life insurance policies


(967
)

(1,535
)

(1,255
)Securities (gains) losses


(1,118
)

(114
)

(145
)Gain on loans sold


(1,904
)

(1,166
)

(599
)Loans originated for sale


(111,968
)

(79,034
)

(62,804
)Proceeds from loan sales


112,956


79,923


63,807Stock based compensation expense


101


115


69Change in other assets and liabilities


(1,709
)

(10,660
)

(5,002
)Net cash provided by operating activities


43,792


21,826


24,234Investing ActivitiesNet change in short-term investments








210Purchases of securities available for sale


(168,697
)

(140,466
)

(92,757
)Proceeds from maturities and payments on securities available for sale


67,531


50,017


64,855Proceeds from sales of securities available for sale


98,647


91,057


26,075Loan originations and payments, net


(75,325
)

(121,411
)

(17,792
)Purchases of premises and equipment


(6,252
)

(5,718
)

(3,381
)Purchases of restricted stock


(4,232
)




Proceeds from redemption of restricted stock








2,628Cash received (paid) for bank acquisitions, net


20,345





(2,210
)Net cash provided (used) by investing activities


(67,983
)

(126,521
)

(22,372
)Financing ActivitiesNet change in deposits


(153,297
)

42,140


16,992Net change in other borrowings


34,292


7,850


15,790Proceeds from FHLB advances


690,850


345,000


197,000Repayment of FHLB advances


(525,782
)

(296,344
)

(213,706
)Proceeds from issuance of subordinated debentures








11,000Purchase of treasury shares


(22
)

(3,407
)

(2,290
)Cash dividends and fractional share payments


(11,133
)

(10,392
)

(8,944
)Proceeds from exercise of stock options


116


348


246Net cash provided by financing activities


35,024


85,195


16,088Net change in cash and cash equivalents


10,833


(19,500
)

17,950Cash and cash equivalents, beginning of year


84,655


104,155


86,205Cash and cash equivalents, end of year

$
95,488

$
84,655

$
104,155Supplemental cash flow informationInterest paid

$
59,550

$
69,482

$
47,804Income taxes paid


5,862


6,315


3,760Supplemental non cash disclosureLoan balances transferred to foreclosed real estate


8,136


2,544


4,071


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

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

32

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Table of Contents

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, MainSource Bank of Illinois, and MainSource Bank  Ohio (collectively referred to herein as the
"Banks"), and MainSource Insurance, LLC, and MainSource Title, LLC. In February 2007, the Company transferred substantially all of the assets of MainSource Mortgage, LLC into
MainSource Bank. In May 2007, the Company transferred substantially all of the assets of MainSource Bank  Hobart into MainSource Bank. In September 2007, the Company merged
MainSource Bank  Crawfordsville into MainSource Bank. In November 2008, the Company merged 1st Independence Bank 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, 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 on
mortgage-backed securities. Gains and losses on sales are based on the amortized cost of the security sold. Declines in the fair value of securities below their cost that are other than temporary are
reflected as realized losses. In estimating other-than-temporary losses,
management considers the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, and the Company's ability and intent to hold
the security for a period sufficient to allow for any anticipated recovery in fair value.

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. 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 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 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. 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.

33

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Table of Contents

Certain Purchased Loans:The Company purchases individual loans and groups of loans. Purchased loans that show evidence of credit deterioration since
origination are recorded at the amount paid (or allocated fair value in a purchase business combination), such that there is no carryover of the seller's allowance for loan losses. After acquisition,
incurred losses are recognized by an increase in the allowance for loan losses.

Such
purchased loans are accounted for individually based on common risk characteristics (e.g., credit score, loan type, and date of origination). The Company estimates the amount
and timing of expected cash flows for each purchased loan, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan (accretable
yield). The excess of the loan's contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Over
the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present
value of expected cash flows is greater than the carrying amount, it is recognized as part of future 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 or loans otherwise classified as
substandard or doubtful. The general component covers pools of other loans and is based on historical loss experience adjusted for current factors.

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. Factors considered by management in determining impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. 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. Impairment is
measured on a loan by loan basis for commercial and construction 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.

Restricted Stock:The Bank is a member of the "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 when acquired net of estimated selling
costs, 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. In accordance with EITF 06-5, 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. The valuation model 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

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valuation
model inputs and results to published industry data in order to validate the model results and assumptions. 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 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 $1,242, $1,303 and $1,383 for the years ended December 31, 2008, 2007 and 2006. Late fees and ancillary fees related to loan servicing are not material.

Mortgage
banking income consists of gains on loan sales, changes in the servicing asset valuation allowance, and loan servicing fee income, net of amortization of mortgage servicing
rights.

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 results from business acquisitions and represents the excess of the purchase price over the fair value
of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period
identified.

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.

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.

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.

The
Company adopted FASB Interpretation 48,Accounting for Uncertainty in Income Taxes("FIN 48"), as of January 1, 2007. 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 adoption resulted in an increase in the Company's tax liability of $411 at January 1, 2007.

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.

Derivatives:All derivative instruments are recorded at their fair values. If derivative instruments are designated as hedges of fair values, both
the change in fair value of the hedge and the hedged item are included in current earnings. Fair value adjustments related to cash flow hedges are recorded in other comprehensive income and
reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of hedges are reflected in earnings as they occur.

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The
Company settled its interest rate swap in 2006 and is not currently a party to any such transactions.

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, while the market price of the Corporation's common stock at the date of grant is
used for restricted stock awards. 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.

Earnings Per Common Share:Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during
the period. Diluted earnings per common share includes 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 issue of the financial statements.

Comprehensive Income:Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized
gains and losses on securities available for sale and unrealized gains and losses on cash flow hedges, 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.

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.

Recently Issued Accounting Standards:During 2008, the Company adopted the following accounting standards and guidance:

In
September 2006, the FASB issued Statement No. 157,Fair Value Measurements(FAS 157). This Statement defines fair value,
establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair
value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard was effective for fiscal years beginning after November 15, 2007. In
February 2008, the FASB issued Staff Position (FSP) 157-2,Effective Date of FASB Statement No. 157.This FSP delays the effective
date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years
beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material to the Company. In October 2008, the FASB issued Staff Position (FSP)
157-3,Determining the Fair Value of a Financial Asset when the Market for That Asset Is Not Active.This FSP clarifies the application of
FAS 157 in a market that is not active. The impact of adoption was not material.

In
February 2007, the FASB issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilities. The
standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard was effective for the Company on January 1, 2008. The Company did
not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

In
September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4,Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be

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recorded
during the service period when a split-dollar life insurance agreement continues after participants' employment or retirement. The required accrued liability will be based on either the
post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue was effective
for fiscal years beginning after December 15, 2007. The impact of adoption was not material.

On
November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109,Written Loan Commitments Recorded at Fair Value through
Earnings("SAB 109"). Previously, SAB 105,Application of Accounting Principles to Loan Commitments, stated that
in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109
supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan
commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a
derivative loan commitment, and SAB 109 retains that view. SAB 109 was effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15,
2007. The impact of adoption was not material.

In
December 2007, the SEC issued SAB No. 110, which expresses the views of the SEC regarding the use of a "simplified" method, as discussed in SAB No. 107, in developing an
estimate of expected term of "plain vanilla" share options in accordance with SFAS No. 123(R), Share-Based Payment. The SEC concluded that a company could, under certain circumstances, continue
to use the simplified method for share option grants after December 31, 2007. The Company does not
use the simplified method for share options and therefore SAB No. 110 has no impact on the Company's consolidated financial statements.

Effect of Newly Issued But Not Yet Effective Accounting Standards:

In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations ("FAS 141(R)"), which establishes
principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a business combination. FAS No. 141(R) is effective for fiscal years beginning on or after December 15, 2008.
Earlier adoption is prohibited. The Company believes the adoption of this standard will have to be addressed on an individual acquisition basis to determine whether it will have a material effect on
the Corporation's results of operations or financial position.

In
December 2007, the FASB issued SFAS No. 160,"Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB
No. 51"("SFAS No. 160"), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and
classified as a component of equity within the consolidated balance sheets. FAS No. 160 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008.
Earlier adoption is prohibited and the Company does not expect the adoption of FAS No. 160 to have a significant impact on its results of operations or financial position.

NOTE 2  ACQUISITIONS

In August 2008, the Company consummated its acquisition of 1st Independence Financial Group, Inc., a Delaware corporation
("1st Independence") and 1st Independence Bank, Inc., a Kentucky chartered commercial bank and wholly owned subsidiary of 1st Independence. As of the date of acquisition,
1st Independence had four branches in Jefferson, Anderson, and Mercer counties in Kentucky, and four branches in Floyd, Crawford, and Clark counties in Indiana.

As
of the date of acquisition, 1st Independence had $240.0 million of loans, and $260.8 million of deposits. Goodwill of $13.8 million, a core deposit
intangible of $1.8 million, and a customer relationship intangible of $0.7 million were also recorded. The core deposit intangible asset is being amortized over 10 years using an
accelerated method and the customer relationship intangible is being amortized on a straight-line basis over 15 years. Goodwill and intangible assets will not be deducted for tax purposes. The
Company funded the $35.4 million purchase price by issuing 1,559,005 shares of its common stock valued at $16.54 per share per the NASDAQ closing bid on July 24, 2008 and using
$9.6 million of cash on hand. The results of operations for this acquisition have been included since the transaction date which was August 29, 2008.

In
evaluating this acquisition, the Company considered a number of factors. These factors included the following: the Company's view that the acquisition of 1st Independence
provided an attractive opportunity to enhance its presence in southern Indiana and expand into Kentucky, both of which are markets that MainSource considers desirable; 1st Independence's
community banking orientation and its compatibility with MainSource and its subsidiaries; the ability to achieve synergies and cost savings by reducing data processing costs, reducing staff, achieving
economies of scale in advertising and marketing expenses, and other areas. The Company based these assumptions on its assessment of where savings could be realized based upon the independent
operations of the two companies. Actual savings in some or all of these areas could be higher or lower
than expected. The Company also believes that the acquisition will be beneficial to the customers of 1st Independence as a result of the additional products and services offered by MainSource
and its subsidiary banks and because of the increased lending capability.

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The
following table summarizes the estimated fair value of assets acquired and liabilities assumed at the date of acquisition.

Cash/Fed Funds Sold

$
29,999Securities


16,318Loans, net


236,992Core Deposit Intangible


1,777Goodwill


13,759Customer Relationship Intangible


698Fixed Assets


6,943Cash surrender value of life insurance


3,793Other Assets


8,735Total assets acquired


319,014Deposits


(260,792
)Other Debt


(19,527
)Other Liabilities


(3,254
)Total liabilities assumed


(283,573
)Net assets purchased

$
35,441


The following table presents proforma information for the periods ended December 31 as if the acquisitions had occurred at the beginning of
2008 and 2007. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed dates and is not
intended to be a projection of future results.

2008

2007Net Interest Income

$
93,435

$
84,024Net Income


17,611


17,099Net Income per share  basic


0.87


0.84Net Income per share  diluted


0.87


0.84


NOTE 3  RESTRICTION ON CASH AND DUE FROM BANKS

The Banks are required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. The reserves required at
December 31, 2008 and 2007 were $11,789 and $12,972 respectively. The Company also had compensating balances of $2,861 and $4,970 at December 31, 2008 and 2007 respectively.

NOTE 4  SECURITIES

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

Fair Value

Gross
Unrealized
Gains

Gross
Unrealized
LossesAs of December 31, 2008Available for SaleU.S. Government-sponsored entities

$
33,046

$
148

$
State and municipal


153,200


1,127


(3,316
)Mortgage-backed


318,500


8,225


(2
)Equity and other


8,564


2


(1,341
)Total available for sale

$
513,310

$
9,502

$
(4,659
)As of December 31, 2007Available for SaleU.S. Government-sponsored entities

$
31,964

$
187

$
(2
)State and municipal


127,697


1,812


(330
)Mortgage-backed


323,206


1,969


(1,697
)Equity and other


6,872


57


(38
)Total available for sale

$
489,739

$
4,025

$
(2,067
)


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Contractual maturities of securities at December 31, 2008 were as follows. Securities not due at a single maturity or with no maturity at
year end are shown separately.

Available
for SaleFair ValueWithin one year

$
3,477One through five years


17,698Six through ten years


89,344After ten years


75,727Mortgage-backed


318,500Equity and other


8,564Total available for sale securities

$
513,310


Gross proceeds from sales of securities available for sale during 2008, 2007 and 2006 were $98,647, $91,057, and $26,075. Gross gains of $1,255,
$642, and $166 and gross losses of $137, $28, and $21 were realized on those sales in 2008, 2007 and 2006, respectively. The tax benefit (provision) related to these net realized gains and losses was
($401), ($221), and ($56) respectively.

Securities
with a carrying value of $303,810 and $180,691 were pledged at December 31, 2008 and 2007 to secure certain deposits, repurchase agreements and for other purposes as
permitted or required by law.

At
year end 2008 and 2007, 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 2008 and 2007 presented by length of time the securities have been in a continuous unrealized loss
position.

2008

Less than 12 months

12 months or longer

TotalDescription of securities

Fair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

Fair Value

Unrealized
LossesU.S. Government-sponsored entities

$


$


$


$


$


$
State and municipal


92,756


(3,205
)

1,568


(111
)

94,324


(3,316
)Mortgage-backed


1,402


(2
)







1,402


(2
)Equity and other


5,326


(1,265
)

981


(76
)

6,307


(1,341
)Total temporarily impaired

$
99,484

$
(4,472
)
$
2,549

$
(187
)
$
102,033

$
(4,659
)2007

Less than 12 months

12 months or longer

TotalDescription of securities

Fair Value

Unrealized
Losses

Fair Value

Unrealized
Losses

Fair Value

Unrealized
LossesU.S. Government-sponsored entities

$


$


$
998

$
(2
)
$
998

$
(2
)State and municipal


8,178


(110
)

20,617


(220
)

28,795


(330
)Mortgage-backed


11,664


(54
)

127,193


(1,643
)

138,857


(1,697
)Equity and other


2,062


(38
)







2,062


(38
)Total temporarily impaired

$
21,904

$
(202
)
$
148,808

$
(1,865
)
$
170,712

$
(2,067
)


As of December 31, 2008, the Company's security portfolio consisted of 637 securities, 264 of which were in an unrealized loss position.
The Company does not believe any individual unrealized loss represents other-than-temporary impairment. The unrealized losses are primarily attributable to changes in interest
rates and continued financial market stress. Factors considered in evaluating the securities included whether the securities were backed by U.S. government-sponsored entities and agencies and credit
quality concerns surrounding the recovery of the full principal balance.

Unrealized
losses on state and municipal securities have not been recognized into income because management has the intent and ability to hold for a period of time sufficient to allow
for any anticipated recovery in fair value. The decline in value is primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not necessarily 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, 2008, 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 market value is attributable to changes in interest rates and illiquidity, and not credit

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quality,
and because the Company has the intent and ability to hold these mortgage-backed securities until a recovery of fair value, which may be maturity, the Company does not consider these
securities to be other-than-temporarily impaired at December 31, 2008. All mortgage-backed securities and agencies were considered investment grade at
December 31, 2008.

During
2007, the Company identified one security that was considered to be other-than-temporarily impaired. The Company wrote down the value of that security by $500 to its fair value
($0). This amount was included in net realized gains/(losses) on securities. During 2008, the issuer of this security filed for bankruptcy.

NOTE 5  LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans were as follows:

December 31,
2008

December 31,
2007Commercial and industrial loans

$
226,696

$
214,393Agricultural production financing


40,334


29,812Farm real estate


45,918


42,185Commercial real estate


411,317


326,194Hotel


104,647


50,565Residential real estate


877,145


780,102Construction and development


173,551


123,611Consumer


115,993


126,816Total loans


1,995,601


1,693,678Allowance for loan losses


(34,583
)

(14,331
)Net loans

$
1,961,018

$
1,679,347


Activity
in the allowance for loan losses was as follows:

December 31

2008

2007

2006Allowance for loan lossesBalances, January 1

$
14,331

$
12,792

$
10,441Addition resulting from acquisitions


5,564





3,895Provision for losses


20,918


5,745


1,819Recoveries on loans


1,037


1,152


536Loans charged off


(7,267
)

(5,358
)

(3,899
)Balances, December 31

$
34,583

$
14,331

$
12,792


Impaired loans were as follows:

December 31

2008

2007

2006Impaired loans with an allowance allocated

$
32,548

$
12,964

$
6,608Impaired loans with no allocated allowances


23,123


8,327


15,359Total impaired loans

$
55,671

$
21,291

$
21,967Allowance allocated for impaired loans

$
7,677

$
2,346

$
1,613Average balance of impaired loans during the year

$
37,591

$
21,761

$
17,934Interest income recognized on impaired loans


432


644


591Cash basis interest included above


432


644


568


Nonperforming loans were as follows:

December 31

2008

2007Loans past due 90 days or more still on accrual

$
3,639

$
1,693Nonaccrual loans


55,671


18,800Total

$
59,310

$
20,493


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

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Purchased Loans subject to SOP 03-3

The Company has purchased loans in 2008 and 2006, for which there was, at acquisition, evidence of deterioration of credit quality
since origination and it was probable, at acquisition, that all contractually required payments would not be collected. The carrying amount of those loans is as follows as of December 31:

2008

2007

2006Commercial real estate

$
4,548

$
6,945

$
7,747Construction & development


10,153





1,452Mortgage


3,905


354


527Consumer





249


269Outstanding balance


18,606


7,548


9,995Carrying amount, net of allowance of $67, $565, and $0.

$
12,149

$
5,951

$
8,907


Accretable yield, or income expected to be collected is as follows:

Balance January 1, 2007

$
Accretion of income


84Reclassification from nonaccretable difference


(84
)Balance December 31, 2007

$
Accretion of income


207Reclassification from nonaccretable difference


(207
)Balance December 31, 2008

$



For those purchased loans disclosed above, the Company increased the allowance for loan losses by $0, $565 and $0 during 2008, 2007 and 2006. $498
of allowance for loan losses was reversed in 2008 only.

Purchased
loans for which it was probable at acquisition that all contractually required payments would not be collected are shown below. No such loans were acquired in 2007.

2008

2006Contractually required payments receivable of loans purchased during the year:Commercial real estate

$
5,005

$
8,903Construction & development


12,429


1,454Mortgage loans


4,384


1,626Consumer





296Total


21,818


12,279Cash flows expected to be collected at acquisition


12,604


11,554Basis in acquired loans at acquisition


12,604


11,554


NOTE 6  FAIR VALUE

FASB Statement 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1:
Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2:
Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:
Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or
liability.

The
fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or using market data
utilizing pricing models, primarily Interactive Data Corporation (IDC), that vary based upon asset class and include available trade, bid, and other market information. Matrix pricing is used for most
municipals, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the
securities' relationship to other benchmark quoted securities. The grouping of

41

---



Table of Contents

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 and Community Reinvestment Act (CRA) qualified credits. 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 calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that
market participants would use in estimating future net servicing income. The Company is able to compare the valuation model inputs and results to widely available published industry data for
reasonableness (Level 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.

Assets
and Liabilities Measured on a Recurring Basis

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

Fair Value Measurements at December 31, 2008 UsingDecember 31,
2008

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

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Assets:Available for sale securities

$
513,310

$
131

$
507,510

$
5,669


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 year ended December 31, 2008:

Available for sale
securitiesBeginning balance, Jan. 1, 2008

$
4,988Total gains or losses (realized / unrealized)Included in earningsOther changes in fair value


Gains (losses) on sales of securities


Included in other comprehensive income


(529
)Purchases, issuances, and settlements


3,058Transfers in and / or out of Level 3


(1,848
)Ending balance, December 31, 2008

$
5,669


Transfers out of level 3 are primarily due to timing of investment purchases close to quarter end and the availability of level 2
data. Subsequent to the quarter, pricing data is obtained.

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, 2008 UsingDecember 31,
2008

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

Significant
Other Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)Assets:Impaired loans

$
47,995







$
47,995Servicing rights


3,359




$
3,359


42

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Table of Contents

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 carrying amount of $47,995, with a valuation allowance of
$7,677, resulting in an additional provision for loan losses of $7,398 in 2008. Also included in impaired loans above are loans acquired in the 1st Independence acquisition which had a purchase
accounting adjustment of $6,001 that was netted against the gross loan amount. See Purchased Loans disclosure at Note 5.

Servicing
rights, which are carried at lower of cost or market, were written down to fair value of $3,359, resulting in a valuation allowance of $1,226. A charge of $1,226 was included
in 2008 earnings.

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

2008

2007December 31

Carrying
Amount

Fair Value

Carrying
Amount

Fair ValueAssetsCash and cash equivalents

$
95,488

$
95,488

$
84,655

$
84,655Interest-bearing time deposits


116


116


116


116Loans including loans held for sale, net


1,965,965


2,048,006


1,681,786


1,714,002Restricted stock


29,833


N/A


22,947


N/AInterest receivable


12,603


12,603


11,814


11,814LiabilitiesDeposits


(2,009,324
)

(2,009,750
)

(1,901,829
)

(1,866,713
)BorrowingsOther


(84,448
)

(84,448
)

(50,156
)

(50,156
)FHLB advances


(433,167
)

(443,486
)

(257,099
)

(256,465
)Interest payable


(6,564
)

(6,564
)

(8,980
)

(8,980
)Subordinated debentures


(49,816
)

(29,019
)

(41,239
)

(38,125
)


The methods and assumptions 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.

NOTE 7  PREMISES AND EQUIPMENT

December 31

2008

2007Land

$
10,389

$
7,726Buildings


43,292


37,536Furniture and equipment


35,008


30,560Total cost


88,689


75,822Accumulated depreciation


(39,534
)

(35,339
)Net

$
49,155

$
40,483


Depreciation expense was $4,523, $4,174, and $3,869 in 2008, 2007 and 2006.

43

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Table of Contents

NOTE 8  GOODWILL AND INTANGIBLE ASSETS

Goodwill

The change in carrying amount of goodwill is as follows:

2008

2007Beginning of year

$
122,046

$
120,609Reclassification for deferred taxes


1,412


Acquired goodwill


13,759


1,437End of year

$
137,217

$
122,046


The acquired goodwill reported in 2007 is due to finalization of fair value adjustments related to purchase accounting for 2006 acquisitions.

Acquired Intangible Assets

2008

2007Core deposit intangibles

$
26,779

$
25,002Other customer relationship intangibles


698


Accumulated amortization


(14,331
)

(11,724
)Purchased intangibles, net

$
13,146

$
13,278


Aggregate amortization expense was $2,607, $2,666, and $2,236 for 2008, 2007, and 2006.

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

2009

$
2,1812010


2,0372011


1,9142012


1,7682013


1,594


NOTE 9  DEPOSITS

December 31,
2008

December 31,
2007Non-interest-bearing demand

$
232,024

$
200,753Interest-bearing demand


537,503


532,539Savings


390,217


345,869Certificates of deposit of $100 or more


279,586


238,211Other certificates and time deposits


569,994


584,457Total deposits

$
2,009,324

$
1,901,829


Certificates and other time deposits mature as follows:

2009

$
612,2302010


127,8212011


89,0932012


11,2172013


1,834Thereafter


7,385Total

$
849,580


44

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Table of Contents

NOTE 10  OTHER BORROWINGS

December 31

2008

2007Other borrowings consisted of the following at year-end:Securities sold under repurchase agreements

$
32,233

$
30,006Line of credit


10,500


13,000Federal funds purchased


41,715


7,150Total short-term borrowings

$
84,448

$
50,156


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 2008, 2007, and 2006 totaled $40,809, $52,986, and $36,212. The daily
average of such agreements during 2008, 2007, and 2006 totaled $31,754, $37,296, and $23,200. The weighted average rate was 1.02%, 3.05%, and 3.31% at December 31, 2008, 2007, and 2006 while
the weighted average rate during 2008, 2007, and 2006 was approximately 1.64%, 3.35%, and 3.22% respectively. The majority of the agreements at December 31, 2008 mature within 30 days.

The
Company has a revolving credit facility for $30,000 as a standby for funding needs which matures September 30, 2009. The interest rate is 120 basis points above the
3-month LIBOR rate which resulted in a rate of 3.03% at year-end 2008. The line is secured by the stock of MainSource Bank. The line of credit agreement contains various
financial and non-financial covenants. The Company was not in compliance with the covenant related to the Company's non-performing loan ratio at December 31, 2008 due to
the 1st Independence acquisition. However, on February 9, 2009 the Company paid off the remaining balance of the line of credit.

NOTE 11  FEDERAL HOME LOAN BANK ADVANCES

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

2008

2007Maturities from June 2009 through May 2022, primarily fixed rates from .5% to 6.4%, averaging 2.7%

$
433,167

$
Maturities from January 2008 through May 2022, primarily fixed rates from 3.4% to 6.4%, averaging 4.5%





257,099$
433,167

$
257,099


The majority of the FHLB advances are secured by first mortgage loans totaling approximately 145% of the advance under a blanket security
agreement. The advances are subject to restrictions or penalties in the event of prepayment.

Required
payments over the next five years are:

2009

$
210,2492010


71,0102011


15,6832012


20,5622013


15,366Thereafter


100,297


NOTE 12  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. Included in the acquisition
of 1st Independence were two trusts formed in 2003  Harrodsburg Statutory Trust I and Independence Bancorp Statutory Trust I. In accordance with FASB Interpretation
No. 46, 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

45

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Table of Contents

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.

Issuance

Amount

Variable Rate

Rate as of
12/31/08

MaturityTrust 1


2002

$
8,248


LIBOR +3.25%


4.72
%

2032Trust 2


2003


14,433


LIBOR +3.25%


4.71
%

2033Trust 3


2003


7,217


LIBOR +3.15%


4.62
%

2033Trust 4


2006


11,341


LIBOR +1.63%


3.63
%

2036Harrodsburg


2003


4,765


LIBOR +3.15%


4.62
%

2033Independence


2003


3,812


LIBOR +3.15%


4.62
%

2033


During 2003, the Company entered into an interest rate swap and cap to mitigate overall risk to changes in interest rates for subordinated debt in
Trust 2. Both the interest rate swap and the cap had a 60 month term and a notional principal amount of $14,000. The notional amount of the interest rate swaps does not represent amounts
exchanged by the parties. The amount exchanged is determined by reference to the notional amounts and other terms of the contract. The interest rate swap and cap were designated as cash flow hedges
against a portion of the subordinated debentures. As such, the aggregate fair value of the swaps were recorded as other assets or other liabilities with changes in the fair value recorded in other
comprehensive income and no amount of ineffectiveness was included in net income. Under the interest rate swap agreement, the Company made fixed rate payments at 6.65%, and received variable payments
based on LIBOR. Net settlement expense or benefit was included in interest expense. The interest rate cap required the counter-party to pay the Company the excess of 3 month LIBOR over 12%. The
interest rate swap and cap were settled during 2006 resulting in a payment to the Company of $483.

NOTE 13  LOAN SERVICING

Loans serviced for others are not included in the accompanying consolidated balance sheets. Loan servicing fee income was $1,242,
$1,303, and $1,383 for 2008, 2007, and 2006. The unpaid principal balances of loans serviced for others totaled $560,399 and $533,286 at December 31, 2008 and 2007. Custodial escrow balances
maintained in connection with serviced loans were $1,454 and $1,001 at year end 2008 and 2007. The weighted average amortization period is 3.0 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 $3,359 and $4,922 at year end 2008 and 2007. Fair
value at
year-end 2008 was determined using a discount rate of 9%, and prepayment speeds ranging from 187% to 509%, depending on the stratification of the specific right. Fair value at
year-end 2007 was determined using a discount rate of 10%, and prepayment speeds ranging from 190% to 353%, depending on the stratification of the specific right.

2008

2007

2006Mortgage servicing assetsBalances, January 1

$
3,949

$
3,491

$
3,158Servicing assets capitalized/acquired


1,342


1,025


852Amortization of servicing assets


(706
)

(567
)

(519
)Change in valuation allowance


(1,226
)




Balance, December 31

$
3,359

$
3,949

$
3,491Valuation allowance:Balances, January 1

$


$


$
Additions expensed


1,226





Reductions credited to operations








Balance, December 31

$
1,226

$


$



46

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Table of Contents

NOTE 14  INCOME TAX

Income tax expense (benefit) was as follows:

Year Ended December 31

2008

2007

2006Income tax expenseCurrently payable

$
5,518

$
5,605

$
4,706Deferred


(1,375
)

536


2,049Change in valuation allowance


236


747


850Total income tax expense

$
4,379

$
6,888

$
7,605


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

$
8,236

$
10,065

$
10,446Tax exempt interest


(2,411
)

(1,702
)

(1,922
)Effect of state income taxes


43


86


96Reserve for unrecognized tax benefit


(595
)




Non-deductible expenses


93


241


53Tax exempt income on life insurance


(338
)

(548
)

(439
)Tax credits


(459
)

(823
)

(377
)Other


(190
)

(431
)

(252
)Income tax expense

$
4,379

$
6,888

$
7,605


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

December 31

2008

2007AssetsAllowance for loan losses

$
16,166

$
5,250Net operating loss carryforward


4,054


2,478Deferred compensation


410


425Fair value adjustments on assets acquired


1,559


2,566Accrued expenses


78


24Other


617


634Total assets


22,884


11,377LiabilitiesAccretion on securities


(64
)

(105
)Depreciation


(1,916
)

(1,508
)Intangibles


(8,124
)

(4,227
)Mortgage servicing rights


(1,337
)

(1,382
)Deferred loan fees/costs


(295
)

(298
)FHLB stock dividends


(2,463
)

(1,622
)Unrealized gain on securities AFS


(1,726
)

(690
)Other


(1,844
)

(1,188
)Total liabilities


(17,769
)

(11,020
)Less: Valuation allowance


(2,714
)

(2,478
)Net deferred tax asset (liability)

$
2,401

$
(2,121
)


The Company has $76 of alternative minimum tax credit carryforward, which under current tax law has no expiration period. The Company has federal
net operating loss carryforward acquired in the 1st Independence business combination of $1,101. This carryforward expires in 2028, and the use of this federal carryforward is limited to $551
in 2008.

The
Company has an Indiana state operating loss carryforward of $41,543, 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.

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

47

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Table of Contents

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 and $3,842 at December 31, 2008 and 2007 respectivley.

Unrecognized Tax Benefits

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

2008

2007Balance at January 1,

$
1,023

$
836Additions related to tax positions in current year





228Additions related to tax positions of prior years





Reductions of tax positions from prior years


(539
)

(41
)Balance at December 31,

$
484

$
1,023


Of this total, $484 represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate
in future periods. 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, 2008 and 2007 were a reduction of $12 and an increase of $53,
respectively, and the amount accrued for interest and penalties at December 31, 2008 and 2007 were $116 and $128.

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 2004.

NOTE 15  OTHER COMPREHENSIVE INCOME

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
)
$
1,847Year Ended December 31, 2007

Before-Tax
Amount

Tax (Expense)/
Benefit

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

$
4,363

$
(1,558
)
$
2,805Less: reclassification adjustment for gains realized in net income


114


(41
)

73Other comprehensive income

$
4,249

$
(1,517
)
$
2,732Year Ended December 31, 2006

Before-Tax
Amount

Tax (Expense)/
Benefit

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

$
3,126

$
(1,112
)
$
2,014Change in fair value of interest rate swap and cap


57


(23
)

34Less: reclassification adjustment for gains realized in net income


628


(249
)

379Other comprehensive income

$
2,555

$
(886
)
$
1,669


48

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Table of Contents

NOTE 16  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:

2008

2007Fixed
Rate

Variable
Rate

Fixed
Rate

Variable
RateCommitments to extend credit and unused lines of credit

$
9,782

$
426,748

$
16,164

$
353,123Commercial letters of credit





26,634





23,588


Commitments to make loans are generally made for periods of 60 days or less. The fixed loan commitments have interest rates ranging from
3.90% to 8.25% and maturities up to a year in length.

NOTE 17  STOCK DIVIDENDS AND SPLITS

On December 21, 2006, the Company announced a 5% stock dividend to be paid on January 16, 2007 to shareholders of record
as of December 31, 2006. The stock dividend was recorded in 2006, and all share and per share amounts have been retroactively adjusted for all prior years to reflect this stock dividend.

NOTE 18  DIVIDENDS

The Company's principal source of funds for dividend payments is dividends received from the Banks. 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. During 2009, the Banks could, without prior
approval, declare dividends of approximately $8,360 plus any 2009 net profits retained to the date of dividend declaration.

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.
Management believes as of December 31, 2008, the Company and Banks meet all capital adequacy requirements to which they are subject.

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, 2008 and 2007, 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 Banks' category.

49

---



Table of Contents

Actual
and required capital amounts and ratios are presented below.

Actual

Required for
Adequate Capital

To Be Well CapitalizedDecember 31, 2008

Amount

Ratio

Amount

Ratio

Amount

RatioMainSource Financial GroupTotal capital (to risk-weighted assets)

$
220,044


11.2
%
$
157,265


8.0
%

N/A


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


195,471


9.9


78,633


4.0


N/A


N/ATier 1 capital (to average assets)


195,471


7.3


107,907


4.0


N/A


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

$
192,679


11.3
%
$
136,243


8.0
%
$
170,304


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


171,391


10.1


68,121


4.0


102,182


6.0Tier 1 capital (to average assets)


171,391


7.4


92,433


4.0


115,541


5.0MainSource Bank of IllinoisTotal capital (to risk-weighted assets)

$
14,760


11.1
%
$
10,675


8.0
%
$
13,344


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


13,084


9.8


5,337


4.0


8,006


6.0Tier 1 capital (to average assets)


13,084


6.5


7,994


4.0


9,992


5.0MainSource Bank  OhioTotal capital (to risk-weighted assets)

$
18,299


14.7
%
$
9,947


8.0
%
$
12,434


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


16,745


13.5


4,974


4.0


7,461


6.0Tier 1 capital (to average assets)


16,745


9.3


7,240


4.0


9,050


5.0




Actual

Required for
Adequate Capital

To Be Well CapitalizedDecember 31, 2007

Amount

Ratio

Amount

Ratio

Amount

RatioMainSource Financial GroupTotal capital (to risk-weighted assets)

$
181,837


10.8
%
$
134,219


8.0
%

N/A


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


167,507


10.0


67,110


4.0


N/A


N/ATier 1 capital (to average assets)


167,507


7.1


94,518


4.0


N/A


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

$
159,151


11.2
%
$
114,018


8.0
%
$
142,523


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


147,554


10.4


57,009


4.0


85,514


6.0Tier 1 capital (to average assets)


147,554


7.5


78,872


4.0


98,590


5.0MainSource Bank of IllinoisTotal capital (to risk-weighted assets)

$
13,663


11,2
%
$
9,717


8.0
%
$
12,146


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


12,416


10.2


4,858


4.0


7,288


6.0Tier 1 capital (to average assets)


12,416


6.4


7,750


4.0


9,688


5.0MainSource Bank  OhioTotal capital (to risk-weighted assets)

$
17,564


13.9
%
$
10,084


8.0
%
$
12,606


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


16,078


12.8


5,042


4.0


7,563


6.0Tier 1 capital (to average assets)


16,078


8.4


7,656


4.0


9,570


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 a
portion of employees' contributions and makes additional contributions based on employee compensation and the overall profitability of the Company. Expense was $1,829 in 2008, $1,586 in 2007, and
$1,293 in 2006.

The
Company acquired a defined benefit retirement plan upon purchase of an affiliate in 2006. Per the merger agreement, the plan was frozen prior to the merger and an application was
filed with the IRS to settle this plan. The Company settled this plan in the first half of 2007.

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).

50

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Table of Contents

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

Balances, January 1, 2008

$
16,924Changes in composition of related parties


(2,691
)New loans, including renewals and advances


12,402Payments, including renewals


(11,679
)Balances, December 31, 2008

$
14,956


Deposits from related parties held by the Company at December 31, 2008 and 2007 totaled $8,037 and $5,839.

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.

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

2008

2007

2006Risk-free interest rate


3.53
%

4.67
%

4.56
%Expected term (years)


7.00


6.80


6.82Expected stock price volatility


23.83
%

19.72
%

21.11
%Dividend yield


3.28
%

3.00
%

2.78
%


A summary of the activity in the stock option plan for 2008 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


275,837

$
18.07Granted


29,000


17.40Exercised


(8,681
)

13.36Forfeited or expired


(33,715
)

19.08Outstanding at end of year


262,441

$
18.02


6.7


93Exercisable at year end


195,516

$
18.31


6.1


88


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

2008

2007

2006Intrinsic value of options exercised

$
19

$
180

$
314Cash received from option exercises


116


348


246Tax benefit realized from option exercises








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


3.53


3.47


3.97


As of December 31, 2008, there was $238 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 1.2 years.

51

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Table of Contents

NOTE 24  EARNINGS PER SHARE

Earnings per share were computed as follows:

Year Ended December 31, 2008

Net
Income

Weighted
Average
Shares

Per Share
AmountBasic Earnings Per ShareNet income available to common shareholders

$
19,152


19,102,274

$
1.00Effect of dilutive stock options





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

$
19,152


19,108,604

$
1.00Year Ended December 31, 2007Basic Earnings Per ShareNet income available to common shareholders

$
21,870


18,691,094

$
1.17Effect of dilutive stock options





9,181Diluted Earnings Per ShareNet income available to common shareholders and assumed conversions

$
21,870


18,700,275

$
1.17Year Ended December 31, 2006Basic Earnings Per ShareNet income available to common shareholders

$
22,241


17,174,478

$
1.30Effect of dilutive stock options





13,763Diluted Earnings Per ShareNet income available to common shareholders and assumed conversions

$
22,241


17,188,241

$
1.29


Stock options for 217,633, 226,350, and 182,995 shares of common stock were not considered in computing diluted earnings per common share for
2008, 2007 and 2006 because they were antidilutive.

NOTE 25  QUARTERLY FINANCIAL DATA (UNAUDITED)

Earnings per ShareInterest
Income

Net Interest
Income

Net
Income

Basic

Fully Diluted2008First quarter

$
36,055

$
19,675

$
6,251

$
0.34

$
0.34Second quarter


34,839


21,244


6,174


0.33


0.33Third quarter


36,242


22,549


5,383


0.28


0.28Fourth quarter


37,523


24,057


1,344


0.07


0.072007First quarter

$
35,100

$
18,607

$
5,415

$
0.29

$
0.29Second quarter


36,061


18,750


6,003


0.32


0.32Third quarter


36,783


18,246


5,603


0.30


0.30Fourth quarter


36,883


18,794


4,849


0.26


0.26


The Company reported net income of $1.3 million for the fourth quarter and earnings per share of $0.07 compared to the $0.26 per share
reported in the fourth quarter of 2007. During the fourth quarter of 2008, the Company increased its loan loss provision expense by approximately $4.7 million when compared to the third quarter
of 2008 and $7.0 million over the fourth quarter of 2007. The additional provision expense was primarily attributable to the continued deterioration of the Company's real estate builder and
development loan portfolios as well as the overall weakness in economic conditions. In addition, the Company incurred a $1.2 million impairment charge on its mortgage servicing rights in the
fourth quarter of 2008 as the decrease in mortgage rates had a significant negative impact on the value of these assets.

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Table of Contents

NOTE 26  PARENT ONLY CONDENSED FINANCIAL STATEMENTS

Parent Only Condensed Balance Sheets

December 31

2008

2007AssetsCash and cash equivalents

$
490

$
549Securities available for sale


981


1,026Investment in subsidiaries


357,463


314,924Other assets


6,024


5,265Total assets

$
364,958

$
321,764LiabilitiesSubordinated debentures

$
49,816

$
41,239Other borrowings


10,500


13,000Other liabilities


4,693


3,423Total liabilities


65,009


57,662Shareholders' equity


299,949


264,102Total liabilities and shareholders' equity

$
364,958

$
321,764


Parent Only Condensed Statements of Income

Year Ended December 31

2008

2007

2006IncomeDividends from subsidiaries

$
27,850

$
18,120

$
37,785Fees from subsidiaries


12,540


11,490


10,811Other Income


288


112


959Total income


40,678


29,722


49,555ExpensesInterest expense


3,230


4,008


3,150Salaries and benefits


8,577


7,136


6,601Professional fees


1,070


1,050


934Other expenses


9,051


7,423


6,696Total expenses


21,928


19,617


17,381Income before income taxes and equity in undistributed income of subsidiaries


18,750


10,105


32,174Income tax expense (benefit)


(3,305
)

(3,166
)

(2,441
)Income before equity in undistributed income of subsidiaries


22,055


13,271


34,615Equity in undistributed income of subsidiaries


(2,903
)

8,599


(12,374
)Net income

$
19,152

$
21,870

$
22,241


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Table of Contents

Parent Only Condensed Statements of Cash Flows

Year Ended December 31

2008

2007

2006Operating ActivitiesNet income

$
19,152

$
21.870

$
22,241Undistributed income of subsidiaries


2,903


(8,599
)

12,374Changes in other assets and liabilities


2,510


2,431


1,961Net cash provided by operating activities


24,565


15,702


36,576Investing ActivitiesCapital contributed to subsidiary


(100
)

(2,935
)

(6,408
)Cash paid for acquisitions


(9,638
)




(51,873
)Purchases of equipment


(1,347
)

(433
)

(1,184
)Proceeds from sales of securities available for sale








2,112Purchase of securities available for sale








(26
)Net cash used by investing activities


(11,085
)

(3,368
)

(57,379
)Financing ActivitiesProceeds from issuance of subordinated debentures








11,000Net change in other borrowings


(2,500
)




13,000Purchase of treasury shares


(22
)

(3,407
)

(2,290
)Proceeds from exercise of stock options


116


348


246Cash dividends and fractional shares


(11,133
)

(10,392
)

(8,944
)Net cash provided (used) by financing activities


(13,539
)

(13,451
)

13,012Net change in cash and cash equivalents


(59
)

(1,117
)

(7,791
)Cash and cash equivalents, beginning of year


549


1,666


9.457Cash and cash equivalents, end of year

$
490

$
549

$
1.666


NOTE 27  SUBSEQUENT EVENT

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 upaid dividends for the preferred
stock have been paid. The Company cannot increase its quarterly cash dividend above historical levels 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 exercisable immediately. If the Company completes one or more Qualified Equity Offerings on or prior to December 31, 2009
that result in the Company receiving aggregate gross proceeds equal to at least $57 million, then the number of warrant shares will be reduced by 50% of the original number. 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 2008 was $16.01 per share and the warrant issued in 2009 has an exercise price of $14.95 per share. This results in
additional potentially dilutive shares of approximately 38,000, and does not significantly impact earnings per share.

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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, 2008, 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 Untied 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, 2008, 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. This assessment excluded internal control over financial reporting for 1st Independence Financial
Group, Inc. as allowed by the SEC for current year acquisitions. 1st Independence was acquired on August 29, 2008 and represented 10% of assets at December 31, 2008 and 4% of net income
for 2008. Based on this assessment, management concluded that as of December 31, 2008, 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 11, 2009 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:

2.1       Agreement
and Plan of Merger, dated February 26, 2008, among MainSource Financial Group, Inc., 1st Independence Financial Group, Inc., and
1st Independence Bank, Inc. (incorporated by reference to Exhibit 2.1 to the Report on Form 8-K of the registrant filed February 27, 2008 with the
Commission (Commission File No. 0-12422)).

3.1       Restated
Articles of Incorporation (incorporated by reference to Exhibit 3.1 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)).

3.2       Articles
of Amendment to the Restated Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Report on Form 8-K of the
registrant filed January 20, 2009 with the Commission (Commission File No. 0-12422)).

3.3       Bylaws
of MainSource Financial Group, Inc. dated July 17, 2007 (incorporated by reference to Exhibit 3.1 to the Report on
Form 8-K of the registrant filed July 25, 2007 with the Commission (Commission File No. 0-12422)).

3.4       Amendment
to Bylaws of MainSource Financial Group, Inc. dated May 19, 2008 (incorporated by reference to Exhibit 3.1 to the Report on
Form 8-K of the registrant filed May 23, 2008 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

56

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Table of Contents

(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 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 for Jeffrey C. Smith (incorporated by reference to Exhibit 10.1 to the Report on Form 8-K of the
registrant filed March 20, 2008 with the Commission (Commission File No. 0-12422)).*

10.8     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)).*

10.9     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)).

10.10   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)).*

57

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Table of Contents

10.11   Form
of Award Agreement 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)).*

10.12   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)).*

10.13   Confidential
Separation and Release Agreement between MainSource Financial Group, Inc. and James L. Saner, Sr., dated February 21, 2008 (incorporated by
reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q of the registrant for the quarter ending June 30, 2008 filed August 8, 2008 with the Commission
(Commission File No. 0-12422)).*

10.14   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)).

10.15   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)).*

10.16   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 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

---

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

None
required

58

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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 12th day of March, 2009.

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 12, 2009/s/

Brian J. CrallBrian J. Crall

Director

March 12, 2009/s/

Douglas I. KunkelDouglas I. Kunkel

Director

March 12, 2009/s/

Philip A. FrantzPhilip A. Frantz

Director

March 12, 2009/s/

Rick S. HartmanRick S. Hartman

Director

March 12, 2009/s/

D.J. HinesD.J. Hines

Director

March 12, 2009/s/

Robert E. HoptryRobert E. Hoptry

Director and
Chairman of the Board

March 12, 2009/s/

James M. AndersonJames M. Anderson

Senior Vice President and
Chief Financial Officer

March 12, 2009/s/

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

President, Chief Executive Officer and
Director

March 12, 2009


59

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