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Corporate Profile

 

 

Stock Data

The common shares of the Company are listed on The Nasdaq Stock Market. The trading symbol is MSFG.

Message from the President

I am pleased to report that 2013 was a good year for MainSource; a year in which we continued to make progress in improving our company. Net earnings were $26.3 million, slightly below reported earnings for 2012. On a per share basis, earnings were $1.26 compared to $1.30 last year. After adjusting for non-operating items, net income was $27.7 million and earnings per share were $1.33, both slight increases over the prior year. The adjusted operating earnings were the highest in the company’s history and the earnings per share were the second highest.

The primary factors in our earnings performance were a reduction in provision expense for loans losses, by more than half, as loan quality continued to improve, and a large increase in our trust and investment fees, resulting primarily from our 2012 purchase of two brokerage agencies, offset by a continued decline in net interest income, declining mortgage banking income and increased expenses related to our strategic expansion activities.

Several changes in the economic environment began to have an impact in 2013. Longer term interest rates increased during the middle part of the year negatively impacting mortgage refinance activity. Also, healthier companies increased their level of investment leading to a stronger demand for lending. While the overall economy remained stagnant with GDP hovering at 2% and unemployment slowly declining, we did observe a higher level of overall business activity. Concerns about the rollout of the “Affordable Health Care Act”, and the potential impact it may have on businesses, continue to be a major stumbling block to higher economic growth.

The bull market in equities continued in 2013. All the factors that have fueled the increases in stock prices over the last couple of years (strong corporate earnings, historically low interest rates and a cautious Federal Reserve) were in place again in 2013. The S&P 500 increased 30% during 2013 and the NASDAQ Bank Index increased by 38%. Similarly, MainSource had an excellent year. Our stock closed on December 31, 2013 at $18.03, a 42% increase from the previous year-end. In addition to the momentum driving overall stock prices higher, our continued progress in reducing problem loans, improving operating earnings, growing loans at a moderate pace and increases to the common dividend all contributed to our excellent performance. Our stock price, at year-end, closed higher than any year-end since 2004.

2013 OPERATING PERFORMANCE
Our operating performance in 2013 was similar to that of 2012. Net interest income, our primary driver of earnings, declined by 3%. The decline continued a trend that began in 2011. The primary reason for the decrease was a reduction in asset yields while funding costs declined by a lesser amount as deposit rates and borrowing costs reached floors. Our net interest margin also reflected that environment, declining from 4.07% in 2012 to 3.91% in 2013. The trend appeared to turn in the fourth quarter as the growth in the loan portfolio began to provide a base of support. We are optimistic that net interest income will not decline as we go forward, assuming we continue to experience moderate loan expansion. In last year’s letter, I cited our need to grow the loan portfolio. After declining by close to double digit levels for a couple of years, our loan balances flattened out in 2012 and, in 2013, loans grew by approximately 8%. It is important that we continue to build upon the trend that we began in 2013. Growing loans continues to be our top priority in 2014.

Non-interest income for the year declined by 2%; excluding gains on the sale of securities, fee income was basically flat. A big challenge for the year was the 32% decline in mortgage revenue. The mortgage market has completely changed in one year; a nearly 100 basis point increase in long term interest rates led to significant decline in the level of mortgage refinance activity. This volume has been partially replaced by loans for home purchases. We are working to recruit additional high-producing mortgage loan officers to help us increase loan activity. Most other fee categories increased with trust and brokerage revenue increasing by 30% as the result of our purchase of two brokerages in late 2012.

Expenses increased in 2013 by just under 4%. Excluding prepayment penalties on FHLB advances in both years, expenses were up approximately 2.6%, year over year. Increases in employee-related costs and occupancy and equipment expenses were the primary causes of our increased expenses. We have made significant investments in new markets in the last few years. We are very excited about these investments as they are already becoming part of our growth story. We will expand on this discussion later in this annual report.

2013 ASSET QUALITY
One of our best areas of performance in 2013 was our improvement in loan quality. Non-performing assets (NPAs) declined by 47% for the year. As a percentage of total assets, NPAs declined from 2.09% at the end of 2012 to 1.07% at the end of 2013. This level compares favorably to other banks in the Midwest. Net charge-offs declined from 1.13% of average loans to .57%, which is an improvement, but were still higher than we desired. We anticipate net charge-offs to continue declining over the next year as we have experienced very low levels of new non-performing loans. The significant improvement in loan quality led to much lower loan loss provision levels; $4.5 million for 2013 compared to $9.9 million in 2012. It was this improvement that offset our revenue and expense pressure in 2013. With provision expense at a more normalized level, and without room for much improvement in loan quality, it is important that we drive revenue levels higher and control expenses.

DIVIDEND AND CAPITAL
We paid common dividends of $.28 per share in 2013 compared to $.08 per share in 2012. In January of this year, our board elected to increase the quarterly dividend to $.10 per share beginning with the March dividend payout. The current payout level equates to a dividend yield of approximately 2.25% and a payout ratio of approximately 32%. The board evaluates the dividend on a regular basis and has set a target payout range for the dividend of 30% to 35%. Strengthened and stable earnings, strong tangible equity and total capital, the redemption of the remaining preferred shares from the former TARP program and a general positive outlook about the economy were factors in the decision to increase the dividend to its current level. Thank you for supporting the company over the last few years when the dividend was much lower.

Our continued improvement as a company is due to the hard work and dedication of our employees. We have worked to increase our talent levels and challenge our team more each year. I want to thank them as we continue the climb to higher levels of performance. I also want to thank them for the sacrificial time and money they personally commit to the communities we serve. You will read more about our commitment to our communities later in our report. I also want to acknowledge our board of directors. I deeply value the board’s wisdom, leadership and support. I am proud of its desire to strive for excellence in its oversight of our company. During 2013, Bill McGraw, who served on the board of directors of the company and predecessor boards of the company for 35 years, retired from the board. I would like to thank Bill for his years of dedicated service. Finally, I want to thank you for your support as we worked through challenges of the last six years. It has been a difficult period for our country, industry and company. We are a better company today than we were in 2008 and we will work hard to be even better in the next year.

Sincerely,

Archie M. Brown, Jr.

President and Chief Executive Officer

 

 

 

MainSource Financial Group, Inc. Code of Ethical Conduct

All officers and directors of MainSource Financial Group (the “Company”) are obligated at all times to comply with the laws, rules and regulations of the United States and of each jurisdiction (local and foreign) in which the Company does business. This Code of Ethical Conduct (the “Code”) has been adopted by the Company as evidence of the Company's commitment to the principles of HONESTY, INTEGRITY AND RESPONSIBILITY as a code of behavior for all officers and directors, affiliates and associates of the Company. The implementation of this Code is intended to engender the TRUST, RESPECT AND CONFIDENCE of customers, clients, suppliers, regulators, creditors, stockholders and the general public. By accepting a position or affiliation with the Company, each officer or director is charged with the responsibility of upholding the Company’s commitment to ethical corporate behavior and agrees to comply with this Code.

This Code covers a wide range of business practices and procedures. It does not purport to summarize all laws, rules and regulations that may be applicable to the Company and its officers and directors or cover every issue that may arise, but it sets out basic principles to guide all officers and directors. This Code is intended to convey the overriding commitment of the Company that its business and affairs be conducted at the highest level of honest and appropriate corporate behavior.

The Company's executive officers, including the chief executive officer, the chief financial officer, all senior vice presidents and others performing similar functions, and the Company's Board of Directors hold an important and elevated role in corporate governance. The Company’s executive officers and the Board of Directors are charged with both the responsibility and authority to protect, promote and preserve the interests of all of the stakeholders, including stockholders, creditors, customers, employees, and suppliers. All executive officers and directors, as models for all employees of the Company, must behave in such manner as to deter wrongdoing and to promote honest and ethical conduct in all aspects of the Company's business and operations.

For purposes of this Code, "Covered Person" means the Company’s executive officers as well as each corporate department manager, all loan review officers and each director of the Company; each person in an executive or senior management position for each subsidiary or division of the Company, and all other persons occupying similar policy-making positions: and "director" means each member of the Board of Directors of the Company or any of its affiliates or subsidiaries.

Honesty

Each Covered Person shall exhibit and promote the highest standards of honest and ethical conduct in his/her professional and personal behavior. The Board of Directors and the executive officers are mandated to publicize and support this Code within the Company.

The standards for honest and ethical behavior for all Covered Persons include, but are not limited to, the avoidance of conflicts of interest, the prohibition on the misuse of corporate opportunities, the prohibition on the misuse of corporate assets, the preservation of the Company's confidential information, the requirement to deal fairly with Company customers, suppliers and competitors, and the prohibition of trading while in possession of inside information.

Avoidance of Conflicts of Interest

  • A "conflict of interest" exists or may exist whenever a Covered Person's private interests interfere with or influence the objective judgment and actions of the Covered Person (or appear to do any of the foregoing) with respect to the business interests of the Company. A conflict situation can arise when a Covered Person takes actions or has interests that are materially adverse to or conflict with or otherwise may make it difficult to perform his or her Company duties objectively and effectively. Conflicts of interest may also arise when a Covered Person or an affiliate (including a family member) of such Covered Person receives improper personal benefits from any Company action or omission to act, which are substantially attributable to such Covered Person's position with the Company. Examples of potential conflicts of interest include employment with or significant equity holdings in a competitor of the Company.
  • Conflicts of interest are prohibited as a matter of Company policy and should be avoided. To the extent that any Covered Person is or becomes aware of a potential or actual conflict of interest between such Covered Person's interests and the actions or potential actions of the Company, the Covered Person shall promptly report such potential or actual conflict of interest to his/her supervisor with the intended purpose of completing a report to the Company's director of human resources. Any Covered Person who becomes aware of a potential or actual conflict of interest with respect to the interests of another Covered Person is also directed to make a report. Any report of a potential or actual conflict of interest may, at the option of the Covered Person making the report, be made directly to the Company’s CEO or the director of human resources.
  • Kickbacks, bribes, rebates or other forms of illegal consideration are never acceptable, and must never be either offered or accepted by anyone acting on behalf of the Company or in connection with the performance of his or her duties. At the same time, business entertainment and gifts in a commercial setting intended to create good will and sound working relationships, and not to gain unfair advantage with customers or other parties, are acceptable if reasonable in amount and form. The giving or receipt of business-related gifts or entertainment, such as customary holiday gifts, is acceptable as long as the gift is not a cash gift, is consistent with customary business practices and is nominal in value, and does not violate any applicable laws or regulations. For the purposes of this Code, “nominal” should be considered as meaning less than $100. Covered Persons dealing with government agencies should be particularly alert to any agency rules limiting or prohibiting gifts or other favors. Covered Persons should discuss with their supervisor any gifts or proposed gifts that they are not certain are appropriate.
  • Covered Persons may not accept a fiduciary or co-fiduciary appointment unless he/she is acting on behalf of a family member or has first received approval from the CEO. A “fiduciary appointment” is an appointment as an administrator, executor, guardian, custodian for a minor, trustee or managing agent. A Covered Person also may not act as a deputy or co-tenant of a safe deposit box, or act as an agent or attorney-in-fact (including signor or co-owner) on a customer’s account unless for a family member, not-for-profit corporation, or an entity with ownership by a covered person, or if approval is first received from the CEO.

Prohibition on Misuse of Corporate Opportunities

  • Each Covered Person is prohibited from (i) appropriating for himself/herself or any of his/her affiliates or family members business opportunities that properly belong to the Company or are discovered by the Covered Person through the performance of duties on behalf of the Company unless the opportunity has first been presented to the Company and rejected, and (ii)using his/her position for personal gain.

Prohibition on Misuse of Corporate Assets

  • All Company assets should be used for the legitimate business purposes of the Company only, although incidental personal use of Company equipment may be permissible. However, use of Company assets, time or property for personal political activities is never permissible.
  • Company policy expressly prohibits the creation and maintenance of secret or unrecorded assets or liabilities. The use of Company funds (whether inside or outside the United States) for illegal purposes or for illegal political contributions to candidates, political action committees or political parties is expressly prohibited.

Preservation of the Company's Confidential Information

  • The Company's "Confidential Information" shall mean all proprietary information belonging to the Company, whether in written or electronic form, and used by the Company in the conduct of its business, including, without limitation, data, technology, source code, know-how, inventions, discoveries, designs, processes, formulations, models, equipment, algorithms, software programs, documents, specifications, information concerning research and development work, trade and business secrets, customer information, supplier lists, financial records, and information which relates to current, planned or proposed products, marketing and business plans, forecasts, projections and analyses, and financial information. Confidential Information does not include information in the public domain or generally known in the industry in which the Company operates, unless such availability has been caused by a violation of this non-disclosure policy.
  • Each Covered Person shall hold all Confidential Information in strict confidence and shall take such steps to safeguard the Confidential Information from unauthorized disclosure.
  • The Company and its subsidiaries are periodically reviewed by regulatory examiners. Certain reports made by these agencies are the property of the agencies and are strictly confidential. Giving information from those reports to anyone not associated with the Company is a criminal offense.
  • If a Covered Person believes that disclosure of Confidential Information is required by applicable law or judicial process, such Covered Person shall first notify and consult with the Company's CEO prior to any such disclosure.

Prohibition of Trading on Inside Information

  • Pursuant to Federal law and Company policy, no Covered Person shall purchase or sell any security of the Company while in possession of material information about the Company, whether positive or negative, which has not yet been publicly disseminated. The prohibition on the use of such "inside information" applies to any Covered Person at any level within the Company and extends to persons not employed by the Company if they have access to such information including if such persons are “tipped” by a Covered Person. This same prohibition applies to trading in the stock of other publicly held companies on the basis of material, non-public information gained through position with the Company.
  • Material, non-public information is any information that could reasonably be expected to affect the price of a stock. Anyone considering buying or selling stock because of inside information they possess should assume that such information is material. It is also important to keep in mind that any trade that becomes the subject of an investigation by the government will be viewed after-the-fact with the benefit of hindsight. Covered persons who are unsure whether a potential trade could run afoul of these rules should contact the Corporate CFO or CEO.
  • The laws and regulations governing transactions in Company securities are extensive and complex. At times, the Board of Directors of the Company will issue alerts notifying each Covered Person that no transactions in Company securities may occur during a certain period. At other times, each Covered Person should consult with the Company's chief financial officer prior to entering into any transaction involving Company securities.

Competition and Fair Dealing

  • We seek to outperform our competition fairly and honestly, and in compliance with all applicable laws, including antitrust laws. Stealing proprietary information, possessing trade secret information that was obtained without the owner’s consent, inducing past or present employees of other companies to disclose such proprietary, trade secret or other confidential information, and similar practices, are prohibited. Covered Persons should endeavor to respect the rights of and deal fairly with the Company’s customers, suppliers, competitors and employees. No Covered Person should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any other intentional unfair-dealing practice.
  • Covered Persons are expected to fully comply with all applicable antitrust laws. To that end, Covered Persons should never discuss business strategy or similar issues with competitors of the Company. In addition, to avoid even the appearance of an improper agreement or understanding, communications with competitors should be kept to a minimum. There should be a legitimate business reason for any such communication.

Integrity of Company Financial Records and Reports

As a public company, the Company is required to make periodic filings with the Securities and Exchange Commission (“SEC”) reporting on the Company's results of operations and general financial condition. It is the Company’s policy that these reports are filed with complete and accurate information and on a timely basis. The Company has established and maintains sufficient reporting systems and procedures to ensure such full, fair, accurate, timely and understandable disclosure in filings with the SEC and in other communications with the Company's stockholders and the general public.

  • It is Company policy that all Company books, records, accounts and financial statements be maintained in reasonable detail, and that business transactions be timely, completely and accurately recorded on the Company's books and records in accordance with applicable legal and other requirements and the Company’s disclosure controls and procedures and system of internal controls. Financial records should, in addition, be maintained in accordance with generally accepted accounting principles and established company financial policy.
  • It is against Company policy to evade the Company's system of internal controls and to perpetuate unrecorded transactions, assets or liabilities.
  • Depending upon their position within the Company, each Covered Person may be required to provide necessary financial and other information concerning such Covered Person's areas of responsibility, and each Covered Person agrees to provide accurate and complete information in response to such request on a timely basis. Covered Persons should notify their supervisor or the person to whom the information was supplied upon learning of any inaccuracy or deficiency in such previously supplied information.
  • Further, each Covered Person is expected to comply, within the scope of his or her duties, with the Company’s disclosure controls and procedures implemented by the Company to ensure that material information relating to the Company is timely recorded, processed, summarized and reported in accordance with all applicable SEC and other applicable rules and regulations. In addition, employees should report to his/her supervisor any information regarding the Company that he or she believes might be material, but may not be known at higher levels within the Company. Directors should report such matters to the Corporate CEO.
  • Employees who become aware of any omission, inaccuracy or falsification regarding Company financial or other business records, or the information supporting such records, should report the situation to his/her supervisor, while directors should report such matters to the Corporate CEO.
  • Furthermore, Covered Persons shall also report any concerns or complaints regarding questionable accounting or auditing matters of the Company. Such reports may be made on a confidential, anonymous basis directly to the Corporation’s Audit Committee by following the process and procedure as put forth in the employee handbook.
  • The retention or proper disposal of Company records shall be in accordance with established enterprise financial policies and applicable legal and regulatory requirements.

Compliance with Applicable Laws, Rules, and Regulations

Obeying the law, both in letter and in spirit, is the foundation on which the Company's ethical standards are built. All Covered Persons must respect and obey the laws, rules and regulations applicable to the Company's business and operations, including those regarding equal opportunity, harassment in the workplace, political activities, insider trading in securities and all applicable banking regulations. Violating any of them could subject a Covered Person or the Company to criminal and/or civil penalties. Although not all Covered Persons are expected to know the details of all of these laws, rules and regulations, it is important to know enough to determine when to seek advice from supervisors, managers or other appropriate personnel.

As appropriate, the Company will hold information and training sessions to promote compliance with applicable laws, rules and regulations.

While this Code cannot address all laws, rules and regulations applicable to the Company, some of the most material ones, to the extent not addressed above, are discussed below.

Criminal Laws

Covered Persons are subject to a number of criminal laws. For example, a Covered Person may not:

  • Corruptly accept or solicit anything of value intending to be influenced or rewarded in connection with the Company's business or in return for confidential information
  • Intentionally fail to make currency transaction reports or other filings required by the Bank Secrecy Act, or other applicable laws or regulations
  • Knowingly engage in financial transactions involving the proceeds of an illegal activity. This is referred to as money laundering
  • Using Company funds or assets to finance campaigns for political office
  • Making a loan or giving a gift to someone who has the authority to examine the Company or its affiliates
  • Using a computer to gain unauthorized access to customer records
  • Making false statements to government officials

Equal Opportunity, Discrimination, and Harassment

It is the Company's policy, in compliance with applicable federal, state and local laws, to provide equal opportunity in all aspects of employment, and we will not tolerate any illegal discrimination or harassment of any kind. Decisions regarding employment, training, compensation and advancement will be made on the basis of qualification, merit and business needs, regardless of race, religion, sex, national origin, age, or other protected characteristic. Examples of impermissible harassment include derogatory comments based on sex, racial or ethnic characteristics, religion, national origin and similar characteristics, and unwelcome sexual advances.

Waivers of the Code

Any waivers of this Code for employees must be made in writing to the Corporate CEO. Any waivers of the Code for Executive Officers and Directors may be made only by the board of directors, and must be promptly disclosed to stockholders in accordance with applicable SEC and NASDAQ rules and regulations.

Reporting Any Violations of Company Policy or Illegal or Unethical Behavior

Covered Persons are required to report violations or suspected violations of this Code, other Company policies or any applicable law, regulatory requirement or other rule or regulation applicable to the Company promptly after becoming aware of such violation or potential violation. Employees may make reports to either their supervisor or if they feel more comfortable, to the Company's internal compliance officer. Directors should report violations or suspected violations to the Corporate CEO. To the extent possible, the identity of persons making such reports will be kept secret and their anonymity will be protected if the circumstances so warrant.

While reporting a known or suspected violation will not absolve a Covered Person from the consequences of his or her misconduct, it may be considered in determining an appropriate disciplinary response. In addition, failure to report violations of which one is aware is itself a violation of this Code and could result in disciplinary action as discussed further below, including possible termination of employment.

Employees are encouraged to talk to supervisors or other appropriate personnel if they have questions about this Code or its applicability or about the appropriateness of observed behavior and when in doubt about the best course of action in a particular situation. Directors should consult with the Corporation’s CEO on such matters. Covered Persons are expected to cooperate in internal investigations of misconduct.

The Company will not permit any form of retaliation against any person who, in good faith, reports known or suspected violations of this Code or any other illegal or unethical behavior, even if such report turns out to be in error. Any such retaliation is itself a violation of this Code and will subject the person(s) involved to disciplinary action, as discussed below.

Disciplinary Measures

  • Violations of the Code or other policies, or of applicable laws, rules and regulations, may result in disciplinary measures against the violator. Such measures, depending on the nature and severity of the violation, whether the violation was a single or repeated occurrence, and whether the violation appears to have been intentional or inadvertent, may include written notices to the individual involved, censure by the Board, demotion or re-assignment, suspension with or without pay or benefits and termination of employment. Directors may be asked to resign from the Board.
  • Disciplinary action will also apply to supervisors who, with respect to those employees reporting to them, know that prohibited conduct is contemplated by such employees and do nothing to prevent it, or know that prohibited conduct has been engaged in by such employees and fail to take appropriate corrective action. Supervisors may also be subject to disciplinary action for their failure to effectively monitor the actions of their subordinates.
  • In addition, Covered Persons should keep in mind that violations of legal and regulatory requirements may carry their own civil and criminal penalties, including fines and imprisonment.
MainSource Financial Group, Inc. Nominating/Corporate Governance Committee Charter

Composition and Term of Office

  • The Committee will consist of no less than two members each of whom shall be a director who satisfies the independence requirements of The Nasdaq Stock Market, Inc. (“Nasdaq”) for listed companies, as interpreted by the Board in its business judgment.
  • One member shall serve as Chairman of the Committee and this member’s vote shall be recorded. The members of the Committee shall serve one-year terms, and shall be appointed annually by the Board on the day of the Annual Meeting of Shareholders or on such other date as the Board shall determine. Members of the Committee may be removed or replaced by the Board.

Committee Meetings-Operating Principles

  • The Committee shall meet at least one time each year (from annual meeting to annual meeting) and at such other times as it deems necessary to fulfill its responsibilities.
  • Regularly scheduled Committee meetings will occur in conjunction with meetings of the full Board when practical.
  • Special meetings of the Committee may be called as needed by the Committee Chairman, the Chairman of the Board or the Chief Executive Officer.
  • The Committee Chairman will preside, when present, at all meetings of the Committee. The Committee may meet by teleconference or videoconference and may take action by written consent.
  • The Committee shall have the sole right to retain and terminate search firms and assist in the identification and evaluation of director candidates, including the sole authority to approve search firm fees and negotiate retention terms in connection therewith.
  • The Committee shall have the authority to obtain advice and assistance from any officer or employee of the Company or from any outside legal expert or other advisor.
  • The Committee may request that members of management or outside consultants and advisors of the Committee be present at meetings to assist the Committee in performing its duties.
  • Minutes of each meeting will be kept and distributed to the entire Committee.
  • The Committee may form, and where legally permissible may delegate authority to, subcommittees when the Committee deems it appropriate or desirable.

Nominating/Corporate Governance Responsibilities

The Committee shall perform the following functions:

  • Develop and recommend to the full Board from time to time as it deems appropriate corporate governance policies, review such policies as necessary and recommend modifications thereto.
  • Consider corporate governance issues that may arise from time to time and make recommendations to the Board with respect thereto.
  • Identify and review the qualifications of prospective nominees for Corporate Director and recommend to the Board the slate of nominees for inclusion in the Company’s proxy statement and presentation to the Shareholders at the Annual Meeting. In evaluating candidates for nomination to the Board, the Committee may take into consideration such factors and criteria as it deems appropriate, including judgment; skill; educational background or equivalent life experience; integrity; reputation; possession of the ability to oversee, as a Director, the business and affairs of the Company for the benefit of the Shareholders while keeping in perspective the interests of the Company’s customers, employees and communities; the time available to devote to the Company’s business; community involvement; civic-mindedness; and business and other experience. The Committee shall take into account the applicable requirements for directors under the Securities Exchange Act of 1934 and the listing standards of the Nasdaq. In addition, the Committee shall recommend to the Board a slate of nominees for all subsidiary Boards of Directors.
  • Consider any communication from shareholders, which is submitted through the process as detailed on the Company’s website: www.mainsourcefinancial.com, and review, consider and recommend any changes to such process as it deems necessary.
  • Give consideration to any candidate nominated by a shareholder for director, provided the nominating process is followed as specified in the Company’s by-laws as outlined on the Company’s website: www.mainsourcefinancial.com, and review, consider and recommend any changes to such process as it deems necessary.
  • Review the performance of the Corporate Board members annually as well as the performance of subsidiary Board members before nominating them for re-election.
  • Periodically review the composition of the full Board to determine whether additional members with different qualifications or areas of expertise are needed to further enhance the composition of the Board and work with management in attracting candidates with those qualifications.
  • Periodically review all standing or any ad hoc committees and recommend to the full Board, as appropriate, changes in number, function or composition of committees. In evaluating candidates for nomination to committees of the Board, the Committee may take into consideration factors or criteria that the Committee deems appropriate, including his or her judgment, skill, integrity, and business and other experience. In addition, the Committee shall take into account the applicable requirements for directors under the Securities Exchange Act of 1934 and the listing standards of the Nasdaq.
  • Conduct an annual performance evaluation of this Committee.
  • Review and make recommendations to the full Board with respect to Executive succession.
  • Periodically review the Company’s director and officer liability insurance coverage.
  • Confer, as appropriate, with outside legal counsel on matters of corporate governance.

Other Responsibilities

  • Following each Committee meeting, the chairman shall report by minutes or otherwise at the next meeting of the full Board all significant items discussed at the Committee meeting.
  • Recommend changes to this Charter to the full Board as appropriate.
  • Take such further actions or provide such further advice as the full Board may from time to time delegate to the Committee.

The Committee shall review this charter annually and shall recommend changes to the full Board as appropriate. The Committee shall take such further actions or provide such further advice as the full Board may from time to time delegate to the Committee.

Audit Committee Charter

Purpose of Audit Committee

While the Committee has the functions, duties and authorities set forth in this Charter, its role is one of oversight.  It is not the duty of the Committee to plan or conduct audits or to determine that the financial statements of MainSource Financial Group, (the “Company”) are complete and accurate or are in accordance with generally accepted accounting principles.  This is the responsibility of management.  The independent auditors are responsible for planning and carrying out a proper audit and review, including reviews of the Company’s quarterly financial statements prior to the filing of each quarterly report on Form 10-Q.  In fulfilling their responsibilities, it is recognized that members of the Committee are not employees of the Company and are not, and do not represent themselves to be, serving as accountants or auditors.  As such, it is not the responsibility of the Committee or its members to conduct ”field work” or other types of auditing or accounting procedures and each member of the Committee shall be entitled to rely, in good faith, on the integrity of those persons or organizations within and outside of the Company that it receives information, opinions, reports, or statements from and the accuracy of the financial and other information, opinions, reports, or statements provided to the Committee by such persons or organizations.

Additionally, the Committee is responsible, in coordination with the Company’s Credit and Risk Committee, for the oversight of the Company’s risks that have, or could have, a material financial statement impact or require financial statement or regulatory disclosures.

Composition and Term of Office

  • The Audit Committee shall be comprised of not less than three independent members of the Company’s Board as may be appointed to the Committee from time to time by a majority of the Board all of which shall be independent of management of the Company and shall satisfy the independence requirements of the Nasdaq Stock Market, Inc. (“Nasdaq”) for listed companies, as interpreted by the Board in its business judgment, including the independence standards applicable to audit committee members. 
  • The members of the Committee shall serve one-year terms and shall be appointed annually by the Board. 
  • The Chair of the Audit Committee shall be designated by the Board out of those members appointed to the Committee, and this member’s vote shall be recorded. 
  • The Chair shall preside at meetings of the Audit Committee and may request other Officers of the Company to serve as ex officio members of the Audit Committee.  The Audit Committee members shall determine whether to exclude ex officio members from any portion of the meetings of the Audit Committee. 
  • In accordance with regulations, all members of the Audit Committee shall be “financially literate” and at least one member shall have accounting or related financial management expertise and be designated as a “financial expert”.  In the event that no member qualifies as a “financial expert”, the Committee shall recommend to the Board that a director meeting that qualifying skill set be added to the Board and appointed to the Audit Committee.

 

Committee Meetings – Operating Principles - Role and Scope of Authority

The role of the Audit Committee is to ensure to the Board and the Company’s shareholders, potential shareholders and investment community that the corporate accounting and financial reporting practices of the Company are in accordance with all applicable requirements.  The Audit Committee shall assist the Board, through review and recommendation, in its oversight responsibility related to the quality and integrity of the Company’s consolidated financial information and reporting, the adequacy and effectiveness of the Company’s system of internal accounting and financial controls, and the independent audit process.  The duties of the Audit Committee shall include the following:

 

  • Meet at least four times each year and at such other times as it deems necessary to fulfill its responsibilities; 
  • Have sole authority to select, retain, compensate, evaluate, and replace the independent auditors;
  • Oversee the work of the independent auditors, including resolving any disagreements between management and the auditors regarding financial reporting;
  • Review with the independent auditors, the Company’s internal auditor (if appointed), and financial and accounting personnel, the adequacy and effectiveness of the accounting and financial controls of the Company including internal controls over financial reporting and elicit any recommendations for the improvement of such internal control procedures or particular areas where new or more detailed controls or procedures are desirable.  Particular emphasis should be given to the adequacy of such internal controls to expose any payments, transactions, or procedures that might be deemed illegal or otherwise improper.  Based upon its review, the Committee shall report to the Board that, to the best of its knowledge, the internal controls are reliable and provide adequate safeguards of the Company’s assets and proper recording of its transactions;
  • Ensure receipt from the independent auditors of a formal written statement delineating all relationships between the auditor and the Company, consistent with Independence Standards Board Standard 1, and actively engage in a dialogue with the auditor with respect to any disclosed relationships or services that may impact the objectivity and independence of the auditor, and take, or recommend the full Board take, appropriate action to oversee the independence of the independent auditor;
  • Pre-approve all non-audit services, including tax work, or other allowable services to be performed by external accountants or auditors;
  • Periodically review the Company's policy statements to determine adherence to the Corporate Code of Ethical Conduct;
  • Review the appointment and replacement of the Internal Audit Director who shall have a direct reporting relationship to the Audit Committee but shall report administratively to the Company’s Director of Risk Management;
  • Review the internal audit function of the Company including the independence and authority of its reporting obligations; the proposed audit plans for the coming year, and the coordination of such plans with the independent auditors;
  • Receive prior to each meeting, a summary of findings from completed internal audits and a progress report on the proposed internal audit plan, with explanations for any deviations from the original plan;
  • Review the financial statements contained in the annual report to shareholders with management and the independent auditors to determine that the independent auditors are satisfied with the disclosure and content of the financial statements to be presented to the shareholders, and review any changes in accounting principles.  Additionally, the Audit Committee or its designee will discuss the results of the review of the quarterly financial statements on Form 10Q with the independent auditors,  Based upon its review, the Committee shall report to the Board that, to the best of its knowledge, the independent audit of the Company meets the standards of the accounting profession and the Company’s financial reports fairly present its financial position and operating results;
  • Provide sufficient opportunity for the internal auditors, independent auditors and others to meet with the members of the Audit Committee without members of management present (Among the items to be discussed in these meetings are the independent auditors’ evaluation of the Company's financial, accounting and auditing personnel, and the cooperation that the independent auditors received during the course of the audit.);
  • Review accounting and financial human resources and succession planning within the Company;
  • Establish procedures for the receipt, retention, and treatment of complaints received by the Company regarding accounting, internal accounting controls, and auditing matters and the confidential, anonymous submission by employees of the Company or any of its subsidiaries or affiliates of concerns regarding questionable accounting or auditing matters, and periodically receive reports regarding the status and treatment of complaints submitted through such procedures;
  • Conduct and review with the Board of Directors annually an evaluation of the Committee’s performance with respect to the requirements of this Charter;
  • Review, in coordination with the Credit and Risk Committee and with the Company’s risk officers, the risks facing the Company and the policies and procedures adopted by the risk officers to monitor and control the Company’s exposure to risks that could have a significant financial statement impact or require significant financial statement or regulatory disclosures;
  • Discuss, at a joint session of the Audit and Risk Committee, any items that have a significant financial statement impact or require significant financial statement or regulatory disclosures; and

In carrying out its duties and responsibilities, the Audit Committee shall have the authority to retain independent counsel and other advisors when deemed necessary, in its sole discretion and at the Company’s expense, and shall maintain free and open means of communication between the directors, the independent auditors, the internal auditors, and the financial management of the Company.

Manner of Acting

A majority of the members of the Committee present (in person or by telephone) at any meeting of the Committee shall constitute a quorum and approval by a majority of the quorum is necessary for Committee action.  Minutes shall be recorded of each meeting held.  When appropriate, action may be taken by written consent in lieu of a meeting of the Committee.

Reports

The Chair of the Audit Committee (or in his/her absence such other Committee member as the Committee may select) shall report on behalf of the Committee to the full Board at each regularly scheduled meeting with respect to any action taken by the Committee if any meetings of the Committee have been held (or action otherwise taken) since the date of the previous Board meeting. In lieu of any such report, the minutes of meetings held or other record of action taken may be submitted to the Board of Directors for review.

Other Responsibilities

The Committee shall review this charter annually and shall recommend changes to the full Board as appropriate.  The Committee shall take such further actions or provide such further advice as the full Board may from time to time delegate to the Committee.

Approved: October 16, 2012

 

Credit and Risk Committee Charter 

Purpose of Credit and Risk Committee

The Credit and Risk Committee is established to provide oversight of the Company’s risks, including credit, interest rate, liquidity, regulatory, operating (transaction), human capital, reputation, and other risks identified by the Committee or the Company’s risk officers from time to time.  While the Committee has the functions, duties and authorities set forth in this Charter, its role is one of oversight.  It is not the duty of the Committee to assure compliance with laws or regulations or to conduct investigations, both of which are the responsibility of management. 

Composition and Term of Office

  • The Credit and Risk Committee shall be comprised of the Chief Executive Officer of the Company and not less than three independent members of the Company’s Board as may be appointed to the Committee from time to time.  Each of the independent members shall satisfy the independence requirements of the Nasdaq Stock Market, Inc. (“Nasdaq”) for listed companies, as well as any additional applicable independence requirements under federal or state securities or banking laws.
  • The members of the Committee shall serve one-year terms and shall be appointed annually by the Board. 
  • The Board shall designate one of the Committee’s members as the Chairman of the Credit and Risk Committee. 
  • The Chairman shall preside at meetings of the Credit and Risk Committee and he may request other Officers of the Company to serve as ex officio members of the Credit and Risk Committee.  The Credit and Risk Committee members shall determine whether to exclude ex officio members from any portion of the meetings of the Credit and Risk Committee. 

Committee Meetings – Operating Principles - Role and Scope of Authority:

The role of the Credit and Risk Committee is to ensure to the Board and the Company’s shareholders, potential shareholders and investment community that the Company is adequately identifying and managing all aspects of risk, including but not limited to credit, interest rate, liquidity, regulatory, operating (transaction), human capital and reputation risk. The Committee’s role is one of oversight and proactive identification of risk issues of significance to the Company.

The Credit and Risk Committee shall assist the Board, through review and recommendation, in its oversight responsibility related to the management of all aspects of corporate risk. The duties of the Credit and Risk Committee shall include the following:

  • Meet monthly and at such other times as it deems necessary to fulfill its responsibilities;  
  • Review and recommend to the Board for approval all Company policies with regard to credit risk management as well as amendments to such policies;
  • Review and evaluate the appropriateness of the Company’s risk appetite parameters on an annual basis, and provide recommendations when appropriate for amendments to these parameters;
  • Monitor results to ensure alignment with the Company’s risk appetite;
  • Proactively assess all corporate risks that significantly impact, or may in the future significantly impact, the Company, and develop strategies and recommendations for the Board to consider in determining appropriate risk management policies and practices;
  • Review and evaluate the Company’s policies, procedures and practices with respect to risk assessment and risk management and annually present to the Board a report summarizing the Committee’s review of the Company’s risk assessment and risk management;
  • Review and evaluate findings of the Audit Committee with respect to existing Company risk management activities, and Management’s response to Audit Committee findings;
  • Facilitate an open avenue of communication regarding identified risks among Management and the Board;
  • Review information and reports provided by the Company’s Chief Risk Officers, as such officers may be designated by the Company from time to time, Chief Credit Officer and other officers identified by the Committee regarding significant risks;
  • Review information regarding the Company’s largest loans and borrowers, including the largest loans approved during the month prior to the Committee meeting;
  • Review and recommend to the Board for approval a written Credit Policy for the Bank at least annually, to be prepared and periodically updated by the Chief Credit Officer;
  • Review and recommend to the Board for approval a written Asset/Liability Policy for the Company, to be prepared and updated at least annually by the Chief Financial Officer.  The Asset/Liability Policy is to govern interest rate risk and liquidity policy for the Company to manage market risk and ensure profitability;
  • Review the Company’s Allowance for Loan and Lease Losses on a quarterly basis;
  • Review Management’s proposed action plan in the event external or internal circumstances require a public response to actual or perceived reputational risk;
  • Review, in coordination with the Audit Committee, the risks facing the Company and the policies and procedures adopted by the risk officers to monitor and control the Company’s exposure to risk;
  • Refer to the Audit Committee for discussion at a joint session of the Audit and Credit and Risk Committees any items that have a significant financial statement impact or require significant financial statement/regulatory disclosures; and,
  • Conduct and review with the Board of Directors annually an evaluation of the Committee’s performance with respect to the requirements of this Charter.

In carrying out its duties and responsibilities, the Credit and Risk Committee shall have the authority to retain independent counsel and other advisors when deemed necessary, in its sole discretion and at the Company’s expense.  Information and reports reviewed by the Committee and the Audit Committee may each be of interest to the other, and should be provided to the other.

Manner of Acting:

A majority of the members of the Committee (present in person or by telephone) at any meeting of the Committee shall constitute a quorum.  Actions shall be approved by the affirmative vote of a majority of the persons present.  Minutes shall be recorded of each meeting held.  When appropriate, action may be taken by unanimous written consent in lieu of a meeting of the Committee.

Reports:

The Chairman of the Credit and Risk Committee (or in his absence such other Committee member as the Committee may select) shall report on behalf of the Committee to the full Board at each regularly scheduled meeting with respect to any action taken by the Committee if any meetings of the Committee have been held (or action otherwise taken) since the date of the previous Board meeting. In lieu of any such report, the minutes of meetings held or other record of action taken may be submitted to the Board of Directors for review.

Other Responsibilities:

The Committee shall review this charter annually and shall recommend changes to the full Board as appropriate.  The Committee shall take such further actions or provide such further advice as the full Board may from time to time delegate to the Committee.

Approved by the Board of Directors on July 18, 2011.

 

Corporate Governance Policy Regarding Majority Voting

It is the policy of the Board of Directors of MainSource Financial Group, Inc. that:

In an uncontested election of Directors (i.e., an election where the only nominees are those recommended by the Board of Directors), any nominee for Director who receives a greater number of votes "withheld" from his or her election than votes "for" his or her election will promptly tender his or her resignation to the Chairman of the Board following certification of the shareholder vote.

The Nominating/Corporate Governance Committee will promptly consider the resignation submitted by a Director in this circumstance, and the Committee will recommend to the Board whether to accept the tendered resignation or reject it. In considering whether to accept or reject the tendered resignation, the Committee will consider all factors deemed relevant by the members of the Committee including, without limitation, the stated reasons why shareholders "withheld" votes for election from such Director, the length of service and qualifications of the Director whose resignation has been tendered and the Director's contributions to the Company.

The Board will act on the Committee's recommendation no later than 90 days following the date of the shareholders' meeting where the election occurred. In considering the Committee's recommendation, the Board will consider the factors considered by the Committee and such additional information and factors the Board believes to be relevant. Following the Board's decision on the Committee's recommendation, the Company will promptly publicly disclose the Board's decision whether to accept the resignation as tendered (providing a full explanation of the process by which the decision was reached and, if applicable, the reasons for rejecting the tendered resignation) in a Form 8-K filed with the Securities and Exchange Commission.

To the extent that one or more Directors' resignations are accepted by the Board, the Committee will recommend to the Board whether to fill such vacancy or vacancies or to reduce the size of the Board.

Any Director who tenders his or her resignation pursuant to this provision will not participate in the Committee recommendation or Board consideration regarding whether or not to accept the tendered resignation. If a majority of the members of the Committee received a greater number of votes "withheld" from their election than votes "for" their election at the same election, then the independent Directors who are on the Board who did not receive a greater number of votes "withheld" from their election than votes "for" their election will appoint a Board committee amongst themselves solely for the purpose of considering the tendered resignations and will recommend to the Board whether to accept or reject them.

This corporate governance guideline will be summarized or included in each proxy statement relating to an election of directors of the Company.

Compensation Committee Charter

Purpose

The Compensation Committee is appointed by the Board of Directors to discharge the Board’s responsibilities relating to compensation of the Company’s executives and directors.

For this purpose, compensation shall include:

  • annual base salary;
  • annual incentive opportunity;
  • stock option or other equity participation plans;
  • long-term incentive opportunity;
  • the terms of employment agreements, severance arrangements, and change in control agreements, in each case as, when and if appropriate;
  • any special or supplemental benefits; and
  • any other payments that are deemed compensation under applicable SEC rules; and
  • annual director retainer and meeting fees.

Composition and Term of Office

The Committee will be composed of at least three directors, all of whom satisfy the definition of “independent” under the listing standards of The Nasdaq Stock Market (Nasdaq).  All Committee members shall also be “non-employee directors” as defined by Rule 16b-3 under the Securities Exchange Act of 1934 and “outside directors” as defined by Section 162(m) of the Internal Revenue Code.  The members of the Committee shall serve one-year terms and shall be appointed annually by the Board.  The Committee members may be removed by the Board in its discretion.

Meetings

The Committee shall meet as often as its members deem necessary to perform the Committee’s responsibilities, but not less than twice per year.

Committee Authority and Responsibilities

The Committee will have the authority, to the extent it deems necessary or appropriate, to retain a compensation consultant to assist in the evaluation of director, Chief Executive Officer (CEO) or senior executive compensation.  The Committee shall have sole authority to retain and terminate any such consulting firm, including sole authority to approve the firm’s fees and other retention terms. The Committee shall also have authority, to the extent it deems necessary or appropriate, to retain other advisors. The Company will provide for appropriate funding, as determined by the Committee, for payment of compensation to any consulting firm or other advisors employed by the Committee.

The Committee shall:

  • Review and approve on an annual basis corporate goals and objectives relevant to the CEO’s compensation, evaluate the CEO’s performance in light of those goals and objectives and set the CEO’s compensation level based on this evaluation.  In determining the long-term incentive component of CEO compensation, the Compensation Committee will also consider, among such other factors as it may deem relevant, the Company's performance, shareholder returns, the value of similar incentive awards to chief executive officers at comparable companies and the awards given to the CEO in past years.
  • Develop philosophies, policies and practices relating to compensation and benefits for executive management and directors of the Company.
  • Review periodically the Company’s compensation program to ensure that each plan or benefit does not encourage or promote the taking of unnecessary or excessive risks by the Company’s officers and employees.
  • Discuss with the CEO and approve the compensation of all executive officers.
  • Review and approve the Company’s incentive compensation plans and equity-based plans, and administer such plans, including the approval of grants and awards under such plans.
  • Prepare the report required by the Securities and Exchange Commission to be included in the Company's annual proxy statement.
  • Conduct and review with the Board of Directors annually an evaluation of the Committee’s performance with respect to the requirements of this Charter.
  • Report regularly to the Board.

Other Responsibilities

  • The Committee shall review this charter annually and shall recommend changes to the full Board of Directors as appropriate.
  • Perform any other activities consistent with this Charter, the Company’s by-laws and governing law, or other functions as the Board deems necessary or appropriate.

Dated: February 28, 2012

Excessive and Luxury Expenditures Policy

This Policy is intended to fulfill the requirements of the Emergency Economic Stabilization Act of 2008 (the “EESA”), as amended by the American Recovery and Reinvestment Act of 2009 (the “ARRA”) and regulations adopted thereunder (the “TARP Standards for Compensation and Corporate Governance”) requiring each TARP recipient to have a company-wide policy regarding excessive or luxury expenditures.  This Policy shall apply to all employees of MainSource Financial Group, Inc. (the “Company”), and its subsidiaries, and all employees shall be held accountable for compliance with this Policy.

 

Policy Statement

 

It is the policy of MainSource Financial Group, Inc. (the “Company”) that expenditures on entertainment or events, office and facility renovations, aviation or other transportation services, and other similar items, activities or events for which the Company or any of its subsidiaries may reasonably anticipate incurring expenses are prohibited to the extent that such expenditures are not reasonable expenditures for staff development, reasonable performance incentives, or other similar reasonable activities conducted in the normal course of the Company’s business operations

 

Expenditures Covered

 

Entertainment, Events and other Similar Items

 

Entertainment
Entertainment is defined as an activity in which an employee of the Company uses corporate funds for business development purposes relating to a current customer or prospective customer, or to further enhance the Company’s marketing efforts.  Our expectation is that all entertainment expenses incurred by the Company or any of its subsidiaries would be for company purposes, and used to drive business to the Company or one of its subsidiaries.

 

Occasional events such as taking customers or prospects on trips, playing golf, eating meals, or taking them to other events the customer/prospect would find pleasurable are a necessary part of the Company’s marketing efforts and are not deemed to be a “luxury” or a violation of this Policy.  All entertainment expenses in excess of $1,000 require the prior approval of an Executive Officer of MainSource Financial Group (“Executive Management”).  All entertainment expenses should be documented and detailed as to the identity of the customer/prospect and the benefit derived by the Company through the normal accounts payable process. 

 

Conferences
We encourage our employees to attend conferences that are appropriate educational opportunities.  These conferences should be related to the financial services industry and have a direct correlation to the attending employees’ job.  Conference attendance requires prior approval in accordance with the procedures contained in the Allowable Expenses policy.  When an employee’s spouse or accompanying guest travels to a conference with a Company attendee, travel and all related expenses shall be the financial responsibility of the attendee and not the Company.

 

Employee Recognition/Events
Employee recognition is part of the employee appreciation process and our culture.  As such, we may sponsor employee recognition events from time to time.  These events may include costs for such things as service awards and nominal door prizes. Any proposed event costing more than $5,000 must be approved by the CEO or CFO (if an employee or senior executive officer meeting or event) or the Chairman of the Board (if a director or CEO meeting or event).

 

Board/Management Retreats 

Retreats should only be used for educational or business planning purposes, and should be kept in consideration and looked at in the same view and discretion as all other expenses. Board education is a vital part of maintaining and keeping a dynamic director base, and this Policy should not limit a retreat that is focused on strategic planning or education. 

Office and Facility Renovations
Renovations of facilities and office spaces should be relative to the approved project, tracked within the capital expenditure policies of the Company and approved by the Board of Directors of the Company. An exception to this can be allowed if management must deal with an emergency situation, such as an act of nature, and the expenditure is necessary to make the facility operational for customer use. At no time should renovations be done that would have the appearance of being extraordinary or excessive from a shareholder perspective.  All renovations must be approved in advance by the CEO or CFO. 

Aviation or Other Transportation Services
Transportation for Company staff to outlying locations, including conferences, business development purposes and mergers and acquisitions, should be conducted in the most cost appropriate way for the Company.  Modes of transportation to be used may consist of vehicle, commercial air or rail service. The selection of transportation services should factor in the cost, efficiency and timeliness of travel. Private air services are not allowed without the prior approval of the Board of Directors. 

Other Activities
All other activities or events that are not reasonable expenditures for staff development, performance incentives in accordance with written plans and policies or other similar expenditures incurred in the normal course of business must be approved by the Company’s CEO or Chairman of the Board.

 Amendments

Any material amendments to this Policy shall be approved by the Board of Directors and filed with the Treasury and the Company’s primary regulatory agency, and posted on the Company’s website, in accordance with the TARP Standards for Compensation and Corporate Governance.

 

Violations

Any individual who violates this Policy, or knows of any such violation by any other individual, must report the violation immediately to Executive Management.  Any employee who violates this Policy shall be subject to discipline, up to and including termination of employment, in accordance with the disciplinary procedures set forth in the Company’s Employee Handbook.

 

Certification of Compliance

The principal executive officer and principal financial officer of the Company shall certify, in accordance with the TARP Standards for Compensation and Corporate Governance, and to the Board of Directors of the Company that the Company and its employees have complied with this Policy and that all expenses requiring approval pursuant to this Policy have been properly approved in accordance with the requirements of this Policy.  Documentation and records necessary to substantiate such certifications shall be preserved in accordance with the TARP Standards for Compensation and Corporate Governance.