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MainSource Financial Group DEF 14A 2006

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.              )

Filed by the Registrant  x

Filed by a Party other than the Registrant  o

Check the appropriate box:

o

Preliminary Proxy Statement

o

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

x

Definitive Proxy Statement

o

Definitive Additional Materials

o

Soliciting Material Pursuant to §240.14a-12

 

MAINSOURCE FINANCIAL GROUP, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

x

No fee required.

o

Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

(1)

Title of each class of securities to which transaction applies:

 

 

 

 

(2)

Aggregate number of securities to which transaction applies:

 

 

 

 

(3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

 

 

(4)

Proposed maximum aggregate value of transaction:

 

 

 

 

(5)

Total fee paid:

 

 

 

o

Fee paid previously with preliminary materials.

o

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

(1)

Amount Previously Paid:

 

 

 

 

(2)

Form, Schedule or Registration Statement No.:

 

 

 

 

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(4)

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Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number.

 

 




GRAPHIC

MainSource Financial Group, Inc.
201 N. Broadway
Greensburg, Indiana 47240

March 31, 2006

Dear Fellow Shareholders:

We would like to invite you to attend the 2006 Annual Meeting of Shareholders of MainSource Financial Group, Inc. to be held on Wednesday, April 26, 2006 at 10:00 a.m., local time, at our Operations Center located at 1927 Greensburg Crossing, Greensburg, Indiana. We have enclosed a copy of our 2005 Annual Report to Shareholders for your review.

We hope you can attend the meeting. If you are unable to join us, however, we urge you to exercise your right as a shareholder and vote. The vote of every shareholder is important. Please mark, sign, date, and return the enclosed proxy card in the envelope provided. Your cooperation is appreciated.

This Proxy Statement is first being mailed to shareholders on or about March 31, 2006.

Sincerely,

GRAPHIC

GRAPHIC

Robert E. Hoptry

James L. Saner, Sr.

Chairman of the Board

President and Chief Executive Officer

 




MainSource Financial Group, Inc.
201 N. Broadway
Greensburg, Indiana 47240

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To be held April 26, 2006

To our Shareholders:

The 2006 Annual Meeting of Shareholders of MainSource Financial Group, Inc. will be held at its Operations Center located at 1927 Greensburg Crossing, Greensburg, Indiana, on Wednesday, April 26, 2006, beginning at 10:00 a.m. local time. At the meeting, shareholders will act on the following matters:

1.                Election of eight directors, each for a term of one year; and

2.                Any other matters that properly come before the meeting.

Shareholders of record at the close of business on March 15, 2006 are entitled to vote at the meeting or any postponements or adjournments of the meeting.

By Order of the Board of Directors,

 

GRAPHIC

 

James M. Anderson
Secretary

March 31, 2006
Greensburg, Indiana

 

 




TABLE OF CONTENTS

Page

Questions and Answers About The Meeting

1

Proposal 1: Election of Directors

3

Corporate Governance

5

·

General

5

·

Director Independence

5

·

Corporate Governance Policy Regarding Majority Voting

5

·

Code of Ethics

5

·

Communications with Independent Directors

6

·

Board Committees

6

·

Board Committee Membership

8

·

Compensation of Directors

8

·

Meeting Attendance

9

·

Directors’ Attendance at Annual Meetings

9

·

Certain Relationships and Related Transactions

9

Report of the Audit Committee

10

Matters Relating to Independent Registered Public Accountants

11

Security Ownership of Beneficial Owners and Management

12

Executive Officers

14

·

Report of the Compensation Committee

14

·

Compensation Committee Interlocks and Insider Participation

17

·

Change in Control and Severance Agreements

17

·

Performance Graph

18

·

Compensation Tables

19

Section 16 Beneficial Ownership Reporting Compliance

20

Shareholder Proposals

21

Additional Information

21

Other Matters

22

Annex A—Corporate Governance Policy Regarding Majority Voting

A-1

Annex B—Audit Committee Charter

B-1

 




MAINSOURCE FINANCIAL GROUP, INC.
201 N. Broadway
Greensburg, Indiana 47240


PROXY STATEMENT


This proxy statement contains information related to the Annual Meeting of Shareholders of MainSource Financial Group, Inc. (the “Company” or “we”) to be held on Wednesday, April 26, 2006, beginning at 10:00 a.m., local time, at the Company’s Operations Center, 1927 Greensburg Crossing, Greensburg, Indiana, and at any postponements or adjournments of the meeting.

QUESTIONS AND ANSWERS ABOUT THE MEETING

Q:  What is the purpose of the annual meeting?

At the annual meeting, shareholders will act upon the matters outlined in the notice of meeting accompanying this proxy statement, including the election of directors. In addition, the Company’s management will report on the performance of the Company during the fiscal year ended December 31, 2005, and respond to questions from shareholders.

Q:  Who is entitled to vote at the meeting?

Only shareholders of record at the close of business on the record date, March 15, 2006, are entitled to receive notice of the annual meeting and to vote the common shares that they held on that date at the meeting, or any postponements or adjournments of the meeting. Each shareholder is entitled to one vote for each share of common stock held on the record date.

Q:  Who can attend the meeting?

All shareholders as of the record date, or their duly appointed proxies, may attend the meeting. Admission to the meeting will be on a first-come, first-admitted basis. Registration will begin at 9:30 a.m.

Q:  What constitutes a quorum?

The presence at the meeting, in person or by proxy, of the holders of a majority of the common shares outstanding on the record date will constitute a quorum, permitting the meeting to conduct its business. As of the record date, 13,472,616 common shares of the Company were outstanding. Proxies received but marked as abstentions and broker non-votes will be included in the calculation of the number of shares considered to be present at the meeting.

Q:  How do I vote?

If you complete and properly sign the accompanying proxy card and return it to us, it will be voted as you direct. If you are a registered shareholder and attend the meeting, you may deliver your completed proxy card in person. “Street name” shareholders who wish to vote at the meeting will need to obtain a proxy form from the institution that holds their shares.

Q:  Can I vote by telephone or electronically?

If you are a registered shareholder (that is, if you hold your shares in certificate form), you may only vote in person or by written proxy.

1




If your shares are held in “street name,” please check your proxy card or contact your broker or nominee to determine whether you will be able to vote by telephone or electronically through the Internet.

Q:  Can I change my vote after I return my proxy card?

Yes. Even after you have submitted your proxy, you may change your vote at any time before the proxy is exercised by filing with the Secretary of the Company either a notice of revocation or a duly executed proxy bearing a later date. The powers of the proxy holders will be suspended if you attend the meeting in person and so request, although attendance at the meeting will not by itself revoke a previously granted proxy.

Q:  How do I vote my retirement plan and 401(k) shares?

If you participate in the Company’s 401(k) and Employee Stock Ownership Plan, you may vote shares credited to your account as of the record date. You may vote by instructing Community Bank, N.A., the trustee of the Plan, pursuant to the instruction card being provided with this proxy statement to plan participants. The trustee will vote your shares in accordance with your duly executed instructions received by April 24, 2006. If you do not send instructions, the share equivalents credited to your account in the Plan will be voted by the trustee in the same proportion that it votes share equivalents in that Plan for which it did receive timely instructions. You may also revoke previously given voting instructions by April 24, 2006 by filing with the trustee either a written notice of revocation or a properly completed and signed voting instruction card bearing a later date.

Q:  What are the Board’s recommendations?

Unless you give other instructions on your proxy card, the persons named as proxy holders on the proxy card will vote in accordance with the recommendations of the Board of Directors. The Board’s recommendations are set forth together with the description of each proposal in this proxy statement. In summary, the Board recommends a vote:

·  for election of the nominated slate of directors (see pages 3-4).

With respect to any other matter that properly comes before the meeting, the proxy holders will vote as recommended by the Board of Directors or, if no recommendation is given, in their own discretion.

Q:  What vote is required to approve each item?

Directors will be elected by a plurality of the votes cast at the meeting. A properly executed proxy marked “WITHHOLD AUTHORITY” with respect to the election of one or more directors will not be voted with respect to the director or directors indicated, although it will be counted for purposes of determining whether there is a quorum.

If you hold your shares in “street name” through a broker or other nominee, your broker or nominee may not be permitted to exercise voting discretion with respect to some of the matters to be acted upon. Thus, if you do not give your broker or nominee specific instructions, your shares may not be voted on those matters and will not be counted in determining the number of shares necessary for approval. However, shares represented by such “broker non-votes” will be counted in determining whether there is a quorum.

2




PROPOSAL 1—ELECTION OF DIRECTORS

A Board of Directors consisting of eight members is to be elected at the Annual Meeting. The Board of Directors proposes that the nominees described below, all of whom are currently serving as directors, be elected for a term of one year and until their successors are duly elected and qualified. Each of the nominees has consented to serve a one-year term. If any of them become unavailable to serve as a director, the Nominating/Corporate Governance Committee may recommend a substitute nominee for election. In that case, the persons named as proxies will vote for the substitute nominee designated by the Nominating Committee.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THE ELECTION OF THE FOLLOWING NOMINEES:

William G. Barron

Director since 1989

 

Mr. Barron is a commercial-industrial real estate specialist. He has been Chairman and President of Wm. G. Barron Enterprises, Inc., a commercial real estate broker, manager and developer, since June 1994.

Brian J. Crall

Director since 2005

 

Mr. Crall is Deputy Secretary of the Executive Cabinet, Office of the Governor of the Commonwealth of Kentucky. Mr. Crall has held this position since April 2004. Mr. Crall also served as CEO of the Owensboro Family YMCA from November 1986 until June 2000, CEO of Progress Printing Company from July 2000 until April 2004, and was the 13th District State Representative in the state of Kentucky from January 1995 until April 2004.

Philip A. Frantz

Director since 1987

 

Mr. Frantz is a partner in Coldren & Frantz, a law firm located in Portland, Indiana. He has been a partner since the inception of the firm in 1971. Mr. Frantz is also President of Jay-Portland Abstract Company, Inc. and has held that position since 1978.

Rick S. Hartman

Director since 2000

 

Mr. Hartman is President and Chief Executive Officer of The HRH Group, Ltd., a motel ownership and real estate management company. He is also managing partner of Hartman Properties and Hartman & Hartman, Ltd, and owner of Hartman and Associates, CPA’s.

D.J. Hines

Director since 2005

 

Mr. Hines is Chief Executive Officer of Schuler Bauer Real Estate Services Inc., a real estate brokerage company, and has held this position since 1987. He is also President of Bugaboo Developers, Inc. and a member of Whispering Pines Developers, LLC, a residential land development company.

Robert E. Hoptry

Director since 1983

 

Mr. Hoptry serves as Chairman of the Board. He has served in this capacity since the Company’s inception in 1983. Prior to 1999, Mr. Hoptry also served as the Company’s President and Chief Executive Officer.

3




 

Douglas I. Kunkel

Director since 2004

 

Mr. Kunkel is the Vice President of Operations for Batesville Casket Company, a subsidiary of Hillenbrand Industries, Inc. He has held this position since August 2005. From January 2002 until August 2005, Mr. Kunkel was the Vice President and Chief Financial Officer of Batesville Casket Company. Prior to Batesville Casket Company, Mr. Kunkel was Vice President and Controller of Hill-Rom Company, Inc. from 1999 until 2002 and was also the Director of International and Financial Planning of Hill-Rom Company, Inc. from 1993 until 1999.

James L. Saner, Sr.

Director since 1998

 

Mr. Saner serves as President and Chief Executive Officer of the Company. He has held this position since 1999. Mr. Saner also served as President and Chief Operating Officer of the Company in 1998. Prior to 1998, Mr. Saner was President and Chief Executive Officer of P.T.C. Bancorp.

4




CORPORATE GOVERNANCE

General

The Company aspires to the highest ethical standards for its employees, officers and directors, and remains committed to the interests of its shareholders. The Company believes it can achieve these objectives only with a plan for corporate governance that clearly defines responsibilities, sets high standards of conduct and promotes compliance with the law. The Board of Directors has adopted policies and procedures designed to foster the appropriate level of corporate governance. Some of these procedures are discussed below. For further information, including electronic versions of our Code of Ethical Conduct and Code of Conduct, our Audit Committee Charter, our Compensation Committee Charter, our Nominating/Corporate Governance Committee Charter and our Corporate Governance Policy Regarding Majority Voting please contact us at (812) 663-0157 or visit our website at (www.mainsourcefinancial.com).

Director Independence

The Board of Directors has determined that a majority of the Board, including nominees William G. Barron, Brian J. Crall, Philip A. Frantz, Rick S. Hartman, D.J. Hines, and Douglas I. Kunkel, are independent, as independence is defined under revised listing standards of the Nasdaq National Market applicable to the Company. Mr. Saner is not deemed independent under the listing standards because he is President and Chief Executive Officer of the Company. Mr. Hoptry is not deemed independent under the listing standards because his son is an executive officer of a bank subsidiary of the Company.

Corporate Governance Policy Regarding Majority Voting

As part of the Company’s continuing efforts to enhance corporate governance procedures, the Board of Directors has implemented a new policy regarding director elections. Under the policy, in an uncontested election, any nominee for director who receives a greater number of votes “withheld” from his or her election than votes “for” such election shall promptly tender his or her resignation following certification of the shareholder vote. The Nominating/Corporate Governance Committee will consider the resignation offer and recommend to the Board whether to accept it. The Board will act on the Nominating/Corporate Governance Committee’s recommendation within 90 days following the date of the shareholders’ meeting at which the election occurred. Thereafter, the Company will promptly disclose the Board’s decision whether to accept the director’s resignation offer (and the reasons for rejecting the resignation offer, if applicable) in a current report on Form 8-K filed with the Securities and Exchange Commission. Any director who tenders his or her resignation pursuant to this provision shall not participate in the Nominating/Corporate Governance Committee recommendation or Board action regarding whether to accept the resignation offer. A copy of the Policy Regarding Majority Voting is attached to this Proxy Statement as Annex A.

Code of Ethics

The Company has adopted a “Code of Ethical Conduct” to document the principles of conduct and ethics which are followed by 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, all other persons occupying similar policy-making positions, and directors of any of the Company’s affiliates or subsidiaries.

The Company has also adopted a “Code of Conduct” to document the principles of conduct and ethics which are followed by the employees of the Company.

5




Communications with Independent Directors

Shareholders or other interested parties may contact the Company’s Nominating/Corporate Governance Committee through correspondence addressed to MainSource Financial Group, Inc., Attn: Nominating/Corporate Governance Committee, P.O. Box 611, Greensburg, Indiana 47240. Only the Company’s internal auditors have access to this post office box and will promptly forward communications received to the members of the Nominating/Corporate Governance Committee.

An employee, officer, shareholder or other interested party who has an interest in communicating with the Independent Directors regarding financial matters may do so by directing communication to the Chairman of the Audit Committee, Rick S. Hartman. Messages for the Chairman of the Audit Committee or any other director, or the Board of Directors as a whole, may be mailed, faxed or e-mailed to the Company at Secretary, MainSource Financial Group, Inc., 201 North Broadway, P.O. Box 87, Greensburg, Indiana 47240, (812) 663-4812 (facsimile) or shareholder.relations@mainsourcefinancial.com (e-mail). All communications addressed to the Independent Directors will be forwarded to Mr. Hartman as representative of the Independent Directors.

Board Committees

The standing committees of the Board of Directors of the Company at the commencement of 2005 were the Audit, Compensation, Nominating/Corporate Governance, Corporate Loan and Executive Committees. The Board of Directors amended the charter for its Audit Committee effective March 20, 2006 and its charter for the Nominating/Corporate Governance Committee was amended effective January 18, 2005. The Board also adopted a charter for the Compensation Committee during 2005. Copies of the Audit and Nominating/Corporate Governance Committee charters are available on the Company’s website, www.mainsourcefinancial.com.

Audit Committee.   The Audit Committee has sole authority for selecting and replacing the Company’s independent auditor and approving its compensation. The Audit Committee is charged with assisting the Board in its oversight of: the arrangements for and scope of the audit by the independent accountants; reviewing the independence of the independent accountants; considering the adequacy of the system of internal accounting controls and reviewing any proposed corrective actions; reviewing and monitoring the Company’s policies relating to ethics and conflicts of interest; discussing with management and the independent accountants the Company’s draft of the annual financial statements and key accounting disclosures and/or reporting matters; and reviewing the activities and recommendations of the Company’s internal audit department. The Audit Committee also is charged with establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, including procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters.

In 2005, the Audit Committee met nine times, each time on a day when the Board also met. The members of the Audit Committee are independent for purposes of the Audit Committee, as independence is defined in the Nasdaq National Market listing standards applicable to the Company. The Board has determined that director Douglas I. Kunkel is an “audit committee financial expert” as that term is defined in rules adopted under the Securities Exchange Act of 1934.

Nominating/Corporate Governance Committee.   The Nominating/Corporate Governance Committee has responsibility for (i) developing criteria for selecting directors; (ii) identifying individuals qualified to become members of the Board of Directors and recommending director nominees for the next annual meeting of shareholders; (iii) overseeing the evaluation of the corporate and subsidiary Boards of Directors; and (iv) developing and recommending to the Board corporate governance guidelines applicable to the Company. The Nominating/Corporate Governance Committee also considers other matters, such as the size and composition of the Board. The Nominating/Corporate Governance

6




Committee will consider written recommendations from shareholders of the Company regarding potential nominees for election as directors which are submitted to the Company’s secretary on or before the date for shareholder nominations specified in the “Shareholder Proposals” section of this proxy statement.

The Nominating/Corporate Governance Committee currently does not maintain any formal criteria for selecting directors and may take into consideration such factors and criteria as it deems appropriate. However, in reviewing qualifications for prospective nominees to the Board, the Nominating/Corporate Governance Committee may take into consideration, among other matters, the prospective nominee’s judgment, skill, educational background or equivalent lifetime experience, integrity, reputation, possession of the ability to oversee the Company’s business and affairs, the time available to serve, community involvement, civic-mindedness, and business and other experience. Nominees for the Board generally are expected to be identified by non-management members of the Board. The Nominating/Corporate Governance Committee presently has a policy of not nominating any individual who serves on the board of directors of any bank or bank holding company (other than the Company and its subsidiaries). The Nominating/ Corporate Governance Committee does not evaluate nominees proposed by shareholders any differently than other nominees to the Board.

In 2005, the Nominating/Corporate Governance Committee held three meetings, each time on a day when the Board also met. The members of the Nominating/Corporate Governance Committee are independent, as independence is defined in Nasdaq National Market listing standards applicable to the Company.

Compensation Committee.   The Compensation Committee is charged with reviewing the Company’s general compensation strategy; establishing salaries and reviewing benefit programs for the Chief Executive Officer and those persons who report directly to him; reviewing, approving, recommending and administering the Company’s incentive compensation plans and certain other compensation plans; and approving certain employment contracts.

In 2005, the Compensation Committee held five meetings, each time on a day when the Board also met. The members of the Compensation Committee are independent, as independence is defined in Nasdaq National Market listing standards applicable to the Company.

Executive Committee.   The Executive Committee exists for the purpose of reviewing and implementing business policies and making business decisions that need to be made but do not require or merit discussion and review by the full Board. Additionally, the Executive Committee has and may exercise the powers and authority of the full Board between meetings of the Board. The Executive Committee did not meet in 2005.

Corporate Loan Committee.   The Corporate Loan Committee exists for the purpose of providing loan approval and credit oversight of any loan of $5 million or greater and any loans to any borrower or affiliated borrower group whose total indebtedness to the Company is $5 million or greater. In 2005, the Corporate Loan Committee met 21 times, nine times on a day when the Board also met and 12 times on a day when the Board did not meet.

7




Board Committee Membership

Name

 

 

 

Executive
Committee

 

Compensation
Committee

 

Audit
Committee

 

Corporate
Loan
Committee

 

Nominating/
Corporate
Governance
Committee

 

William G. Barron

 

 

M

 

 

 

C

 

 

 

 

 

 

 

M

 

 

 

M

 

 

Brian J. Crall

 

 

 

 

 

 

 

 

 

 

M

 

 

 

 

 

 

 

M

 

 

Philip A. Frantz

 

 

 

 

 

 

M

 

 

 

 

 

 

 

A

 

 

 

C

 

 

Rick S. Hartman

 

 

M

 

 

 

 

 

 

 

C

 

 

 

M

 

 

 

M

 

 

D.J. Hines

 

 

 

 

 

 

M

 

 

 

M

 

 

 

A

 

 

 

 

 

 

Robert E. Hoptry

 

 

C

 

 

 

 

 

 

 

 

 

 

 

C

 

 

 

 

 

 

Douglas I. Kunkel

 

 

 

 

 

 

M

 

 

 

M

 

 

 

 

 

 

 

 

 

 

James L. Saner, Sr.

 

 

M

 

 

 

 

 

 

 

 

 

 

 

M

 

 

 

 

 

 


M:          Member

C:             Chairman

A:            Alternate

Compensation of Directors

Board members are compensated based upon their attendance at meetings of the Board and Board committees, and further based upon whether the committee meetings occur on the same day as the Board meetings or different days. Additionally, each non-employee director receives an annual retainer for Board participation in the amount of $12,000, except the Chairman of the Board, who receives an annual retainer of $24,000. Beginning April 2006, each non-employee director will receive an annual retainer of $12,500, and the Chairman of the Board will receive an annual retainer of $25,000. Non-employee directors are also eligible to participate in the Company’s 2003 Stock Option Plan.

The following is a list of the fees paid to directors for Board and committee attendance, with any applicable increases in such fees effective in April 2006, noted in parentheses:

 

Board Meetings

 

Committee Meetings

Chairman of the Board

 

$1,125 ($1,200) per meeting

 

 

Non-employee directors

 

$750 ($800) per meeting

 

$300 per meeting if held on a day when the Board also meets; $600 per meeting if held on a day when the Board does not meet; $600 per meeting for attendance at Audit Committee meetings

Chairman of the Audit Committee

 

 

 

$1,200 per meeting

Financial Expert of Audit Committee (if not Chairman)

 

 

 

($900 per meeting)

Chairman of the Corporate Loan Committee

 

 

 

$450 per meeting if held on a day when the Board also meets; $750 ($900) per meeting if held on a day when the Board does not meet

Chairman of other Board Committees

 

 

 

$450 per meeting if held on a day when the Board also meets; $900 per meeting if held on a day when the Board does not meet

 

8




Meeting Attendance

The Board of Directors met 14 times during the fiscal year ended December 31, 2005. Each director attended more than 75% of the aggregate of (i) all meetings of the Board held while he was a director and (ii) all committees on which he served during the period that he served on the committee.

Directors’ Attendance at Annual Meetings

Although the Company does not have a policy with regard to Board members’ attendance at the Annual Meeting of Shareholders, all of the directors are encouraged to attend such meetings. All eight of our directors attended our 2005 Annual Meeting.

Certain Relationships and Related Transactions

Our bank subsidiaries make loans in the ordinary course of business to our directors and executive officers, and to family members and other entities with which a director, an executive officer or a family member may be affiliated. These loans are subject to various federal and state banking laws and are made on substantially the same terms, including interest rates and collateral, as those provided for comparable transactions with other persons. We believe these loans do not involve more than a normal risk of collectability or present other unfavorable features. Our bank subsidiaries also provide directors and executive officers and their family members and other affiliated entities with other banking, trust, insurance and other financial services in the ordinary course of business.

9




REPORT OF THE AUDIT COMMITTEE

The Audit Committee of MainSource Financial Group, Inc. is composed of four directors who the Board of Directors has determined are “independent” as defined by NASDAQ National Market listing standards. The Audit Committee’s responsibilities are set forth in a written charter approved by the Board of Directors. The charter is also reviewed annually by the Audit Committee. A copy of the Audit Committee charter is attached as Annex B to this Proxy Statement. The Audit Committee has determined that its members meet the financial literacy requirements of the NASDAQ National Market listing standards.

Management of the Company has primary responsibility for the Company’s internal controls and the financial reporting process. The independent registered public accounting firm is responsible for performing an independent audit of our consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board. This audit serves as a basis for the auditor’s opinion in the annual report to shareholders addressing whether the financial statements fairly present the Company’s financial position, results of operations and cash flows and for the auditor’s report regarding management’s assessment of the effectiveness of the Company’s internal control over financial reporting. The Audit Committee’s responsibility is to monitor and oversee these processes. For the fiscal year ended December 31, 2005, the Audit Committee engaged Crowe Chizek & Company LLC to serve as the Company’s independent auditor.

In discharging its oversight responsibility, the Audit Committee met and held discussions with management and the independent auditor. Management represented to the Audit Committee that the Company’s consolidated financial statements as of and for the year ended December 31, 2005 were prepared in accordance with accounting principles generally accepted in the United States, and the Audit Committee has reviewed and discussed these consolidated financial statements with management. The Audit Committee discussed with the independent registered public accountants matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees).

The independent auditor also provided to the Audit Committee the written disclosures required by Independence Standards Board No. I (Independence Discussions with Audit Committees), and the Audit Committee discussed with the independent auditor that firm’s independence. In addition, the Audit Committee approved in advance all non-audit engagements by the Company’s independent auditor which exceeded $10,000 per service or $25,000 in the aggregate. The Audit Committee determined that the independent auditor’s provision of non-audit services to the Company is compatible with maintaining that firm’s independence.

Based upon the discussions and reviews referred to above, the Audit Committee recommended to the Board of Directors that the financial statements referred to above be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005, for filing with the Securities and Exchange Commission.

Respectfully submitted by the members of the Audit Committee:

/s/ Rick S. Hartman (Chairman)

 

/s/ Douglas I. Kunkel

 

/s/ Brian J. Crall

 

/s/ D.J. Hines

 

10




MATTERS RELATING TO INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

Fees Paid to Independent Registered Public Accountants

The following table presents fees for professional services rendered by Crowe Chizek and Company LLC for the audit of the Company’s annual financial statements for 2004 and 2005 included on Form 10-K, the integrated audit over internal controls as required under Section 404 of the Sarbanes-Oxley Act, the review of the interim consolidated financial statements included in Forms 10-Q filed during the years 2004 and 2005, and the review of various other SEC filings during 2004 and 2005. Fees billed for audit-related services, tax services and all other services rendered by Crowe Chizek for 2004 and 2005 are also presented below. Representatives from Crowe Chizek and Company LLC are not expected to be present at the meeting.

 

 

2004

 

2005

 

Audit Fees

 

$

323,405

 

$

376,475

 

Audit-Related Fees(1)

 

25,135

 

45,640

 

Tax Fees(2)

 

100,900

 

102,800

 

All Other Fees(3)

 

35,350

 

4,125

 

Total

 

$

484,790

 

$

529,040

 


(1)          Includes fees, including reimbursement of expenses, paid for the audit of the Company’s benefit plans and mortgage company, required collateral verification procedures, required FDICIA reporting procedures and consulting on various accounting and auditing matters.

(2)          Includes fees, including reimbursement of expenses, paid for income tax return preparation, informational return preparation for the Company’s benefit plans, assistance with quarterly tax estimates and consulting on various tax matters.

(3)          Includes fees paid for all other services including consulting services provided relating to compliance with Sarbanes-Oxley Section 404.

Pre-Approval by Audit Committee of Independent Accountant Services

The Audit Committee is responsible for pre-approving all auditing services and permitted non-audit services to be performed by its independent auditor, except as described below.

Under its current charter, it is the policy of the Audit Committee to establish general guidelines for the permissible scope and nature of any permitted non-audit services in connection with its annual review of the audit plan and to review such guidelines with the Board of Directors. Pre-approval may be granted by action of the full Audit Committee or, in the absence of such Audit Committee action, by the Audit Committee Chair whose action shall be considered to be that of the entire Committee. Pre-approval shall not be required for the provision of non-audit services if (1) the aggregate amount of all such non-audit services constitute no more than 5% of the total amount of revenues paid by the Company to the independent auditor during the fiscal year in which the non-audit services are provided, (2) such services were not recognized by the Company at the time of engagement to be non-audit services, and (3) such services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit. No services were provided by Crowe Chizek and Company LLC pursuant to these exceptions in the 2005 fiscal year.

11




SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table shows, as of March 5, 2006, the number and percentage of shares of common stock held by each person known to the Company who owned beneficially more than five percent of the issued and outstanding common stock of the Company:

Name and address of
beneficial owner

 

 

 

Amount and nature of
beneficial ownership

 

Percent of class

 

Robert S. Dunevant

 

 

853,543

(1)

 

 

6.3

%

 

25993 Far Hills Lane
West Harrison, IN 47060

 

 

 

 

 

 

 

 

 


(1)          Includes 287,160 shares held in a family partnership over which Mr. Dunevant shares voting and investment power, 9,576 shares held in an investment company over which Mr. Dunevant shares voting and investment power, and 249,421 shares held by his wife. Mr. Dunevant disclaims beneficial ownership over the shares held by his wife.

The following table shows the number of our common shares beneficially owned (unless otherwise indicated) by the Company’s nominees for election as directors, the executive officers named in the Summary Compensation Table, and the directors and executive officers of the Company as a group.

Name (Age)

 

 

 

Aggregate Number of
Shares Beneficially
Owned

 

Percent of
Shares
Outstanding(1)

 

James M. Anderson(34)

 

 

8,432

(2)

 

 

*

 

 

William G. Barron(56)

 

 

511,954

(3)

 

 

3.8

%

 

Brian J. Crall(46)

 

 

1,100

(4)

 

 

*

 

 

Philip A. Frantz(61)

 

 

44,759

(5)

 

 

*

 

 

Rick S. Hartman(50)

 

 

101,864

(6)

 

 

*

 

 

D.J. Hines(54)

 

 

7,497

(7)

 

 

*

 

 

Robert E. Hoptry(67)

 

 

178,392

(8)

 

 

1.3

%

 

Douglas I. Kunkel(41)

 

 

4,798

(9)

 

 

*

 

 

John C. Parker(53)

 

 

29,856

(10)

 

 

*

 

 

James L. Saner, Sr.(54)

 

 

133,185

(11)

 

 

*

 

 

Daryl R. Tressler(54)

 

 

76,456

(12)

 

 

*

 

 

All directors and executive officers as a group (11 persons)

 

 

1,098,293

 

 

 

8.2

%

 


*                    Represents less than 1% of the Company’s outstanding common shares.

(1)          Based on the number of shares outstanding at March 5, 2006.

(2)          Includes 216 shares owned of record by Mr. Anderson as custodian for his daughter, 316 shares owned of record by Mr. Anderson as custodian for his son, 1,039 shares held on his behalf under the Company’s 401(k) Plan, and 5,855 shares to which there is a right to acquire beneficial ownership as specified in Rule 13d-3(d)(1) of the Exchange Act of 1934 (the “Exchange Act”).

(3)          Includes 28,646 shares held in IRAs on Mr. Barron’s behalf, 32,136 shares held in IRAs on behalf of Mr. Barron’s wife, 48,461 shares held in 7 irrevocable trusts of which Mr. Barron is the co-trustee, 205,750 shares held in a trust of which Mr. Barron’s wife is the trustee, 125,521 shares owned by a limited partnership of which Mr. Barron is the controlling partner, 6,173 shares owned of record by Mr. Barron’s 4 children, 26,978 shares owned of record by Mr. Barron as custodian for his 4 children, and 4,728 shares as to which there is a right to acquire beneficial ownership as specified in Rule 13d-3(d)(1) of the Exchange Act.

12




(4)          Includes 500 shares to which there is a right to acquire beneficial ownership as specified in Rule 13d-3(d)(1) of the Exchange Act.

(5)          Includes 1,642 shares owned of record by Mr. Frantz’s wife, 16,381 shares owned of record by Mr. Frantz jointly with his wife, and 4,728 shares as to which there is a right to acquire beneficial ownership as specified in Rule 13d-3(d)(1) of the Exchange Act.

(6)          Includes 19,818 shares held in IRAs on Mr. Hartman’s behalf, 9,024 shares owned of record by Mr. Hartman’s wife, 5,597 shares held in IRAs on behalf of Mr. Hartman’s wife, 10,140 shares owned of record by Mr. Hartman’s wife as custodian for Mr. Hartman’s 2 children, and 4,728 shares as to which there is a right to acquire beneficial ownership as specified in Rule 13d-3(d)(1) of the Exchange Act. Mr. Hartman disclaims any beneficial interest in the shares owned directly or indirectly by his wife.

(7)          Includes 494 shares owned of record by Mr. Hines jointly with his wife, 339 shares owned of record by Mr. Hines’ wife jointly with their daughter, 64 shares owned of record by Mr. Hines’ wife jointly with their son, 274 shares owned of record by Mr. Hines’ wife as custodian for their son, and 500 shares as to which there is a right to acquire beneficial ownership as specified in Rule 13d-3(d)(1) of the Exchange Act.

(8)          Includes 50,011 shares held in an IRA on behalf of Mr. Hoptry, 2,468 shares held in an IRA on behalf of Mr. Hoptry’s wife, and 4,728 shares as to which there is a right to acquire beneficial ownership as specified in Rule 13d-3(d)(1) of the Exchange Act. Mr. Hoptry disclaims any beneficial interest in the shares owned by the IRA on behalf of his wife.

(9)          Includes 3,298 shares owned of record by Mr. Kunkel jointly with his wife, and 1,500 shares as to which there is a right to acquire beneficial ownership as specified in Rule 13d-3(d)(1) of the Exchange Act.

(10)   Includes 2,535 shares held in an IRA on Mr. Parker’s behalf, 3,150 shares owned of record by Mr. Parker jointly with his wife, 14,668 shares held on his behalf under the Company’s 401(k) Plan, and 8,635 shares as to which there is a right to acquire beneficial ownership as specified in Rule 13d-3(d)(1) of the Exchange Act.

(11)   Includes 13,892 shares held in an IRA on Mr. Saner’s behalf, 2,751shares held in an IRA on behalf of Mr. Saner’s wife, 8,465 shares owned of record by Mr. Saner jointly with his wife, 1,097 shares owned of record by Mr. Saner jointly with his 3 children, 6,005 shares held on his behalf under the Company’s 401(k) Plan, and 40,673 shares as to which there is a right to acquire beneficial ownership as specified in Rule 13d-3(d)(1) of the Exchange Act. Mr. Saner disclaims any beneficial interest in the shares owned by his wife or by him jointly with his 3 children.

(12)   Includes 1,292 shares owned of record by Mr. Tressler jointly with his wife, 44,792 shares held on his behalf under the Company’s 401(k) Plan, 4,980 shares owned of record by Mr. Tressler’s wife, 739 shares owned by Mr. Tressler’s wife jointly with his daughter, and 11,411 shares as to which there is a right to acquire beneficial ownership as specified in Rule 13d-3(d)(1) of the Exchange Act.

13




EXECUTIVE OFFICERS

The following table sets forth the names and ages of all executive officers of the Company and their positions. Except as set forth below, each executive officer has held the specified position for the last five years.

Name

 

 

 

 

Age

 

 

Position

 

 

James L. Saner, Sr.

 

54

 

President and Chief Executive Officer (1)

James M. Anderson

 

34

 

Senior Vice President, Chief Financial Officer (2)

John C. Parker

 

53

 

Senior Vice President, Director of Operations (3)


(1)          Mr. Saner has served as President and Chief Executive Officer of the Company since May 18, 1999.

(2)          Mr. Anderson has served as Senior Vice President, Chief Financial Officer and Corporate Secretary of the Company since January 4, 2006. Prior to his appointment to these positions, Mr. Anderson Served as Administrative Vice President and Principal Accounting Officer from March 1, 2005 to January 4, 2006, as Controller and Principal Accounting Officer from March 1, 2002 to March 1, 2005, and as Controller from September 1, 2000 to March 1, 2002.

(3)          Mr. Parker has served as Senior Vice President, Director of Operations of the Company since December 4, 2000, and prior to that he served as Senior Vice President, Director of Operations at People’s Trust Company.

Report of the Compensation Committee

Compensation Philosophy

The Compensation Committee of the Company’s Board of Directors is composed entirely of non-management directors, each of whom has been determined in the Board’s business judgment to be independent, based on the categorical standards for independence mandated by the Nasdaq National Market listing standards and adopted by the Company’s Board of Directors. This Committee is responsible for evaluating compensation levels and compensation programs for the Company’s executives and for making recommendations to the Company’s Board of Directors regarding appropriate compensation awards for executive management. In general, the compensation policies adopted by the Committee are designed to attract, retain and motivate the Company’s executives to meet the Company’s business objectives and enhance long-term shareholder value.

The Company’s compensation program for executives consists of three key elements:

·        a base salary;

·        a performance-based annual (cash) bonus; and

·        a long-term incentive in the form of stock options.

The Committee believes that this three-part approach serves the interests of the Company and its shareholders. Under this approach, a portion of each executive’s annual compensation is “at risk”—namely, the annual bonus and award of stock options. The variable annual bonus permits individual performance to be recognized on an annual basis and is based, in significant part, on the earnings per share growth attained by the Company each year.

Base Salary.   Base salaries for the Company’s executive officers other than its chief executive officer, as well as changes in such salaries, are based upon recommendations by the chief executive officer, James L. Saner, Sr., taking into account such factors as competitive industry salaries, a subjective assessment of the nature and responsibilities of the position, the contribution and experience of the officer, and the length of the officer’s service with the Company and its subsidiaries and predecessors. The

14




Committee considers and then approves or disapproves such recommendations. The Committee also reviews peer data when setting the salary range of particular positions.

Annual Bonus.   Cash bonuses are granted to executive officers under the Company’s annual bonus performance plan as indicated in the Summary Compensation Table set forth in this Proxy Statement. Pursuant to the plan, the Committee, with input from Mr. Saner, establishes specific annual “performance targets” for each covered executive officer for a performance period of one year. The performance targets relate to such factors as Overall Profitability (return on average equity, return on average assets, efficiency ratio), Growth rates (core earnings per share growth, loan growth, core deposit growth), and Asset Quality (loan loss reserves (LLR) compared to non-performing assets (NPA), NPA/Total Assets, net charge-offs (NCO) compared to average loans). No executive bonuses were paid in 2005.

Stock Options.   The Committee believes that periodic grants of stock options are a key component of our executive compensation program because the grants ensure that the executive’s financial interests are aligned with those of the Company’s shareholders. Stock options are awarded by the Board of Directors upon the recommendation of the Committee based on each executive’s responsibilities, historical contributions and anticipated future contributions and the Company’s achievement of performance targets. The Committee determined that no stock options should be granted to the Company’s executives during 2005 under the Company’s “2005 Executive Incentive Plan” because the Company’s earnings per share did not increase during 2005. However, the Committee did award stock options for performance in connection with the successful completion of the Company’s acquisition of The Madison Bank and Trust Company, the consolidation of its Indiana banking charters, and to reward other employees for efforts the Committee determined to be extraordinary throughout the year.

401K and Profit Sharing Plans.   In addition to stock options, the Committee considers and determines the award of matching funds under the Company’s 401K Plan and Profit Sharing Plan to the Company’s employees, including its executive officers. For 2005, the Committee determined to match funds contributed by employees at $.80 of every dollar contributed to the 401K Plan, up to the first 8% of each employee’s salary. The Committee also contributed 3% of each employee’s salary to the Company’s Profit Sharing Plan in 2005.

Chief Executive Officer’s Compensation

James L. Saner, Sr., serves as the Company’s President and Chief Executive Officer. Mr. Saner’s annual base salary was established by the Committee for 2005 at $315,750, effective March 1, 2005, without any recommendation from Mr. Saner. In considering Mr. Saner’s compensation, the Committee considered the annual financial results of the Company, competitive industry salaries, the contribution and experience of Mr. Saner and a subjective assessment of the nature and responsibilities of Mr. Saner’s position.

The Committee has established Mr. Saner’s annual cash incentive opportunity at a range of 0% to 50% of annual salary based upon weighted criteria including Overall Profitability (return on average equity, return on average assets, efficiency ratio), Growth rates (core earnings per share growth, loan growth, core deposit growth), and Asset Quality (LLR/NPA, NPA/Total Assets, NCO/Average Loans) (80%) and Mr. Saner’s individual performance objectives (20%) as established by the Board of Directors. In the first quarter of 2006, Mr. Saner was granted options to purchase 5,000 shares of common stock of the Company as part of his 2005 compensation.

Compensation Analysis and Reviews

The Committee periodically retains an outside compensation consultant to compare base salary and incentive compensation programs for the Company’s executive officers with those of other banks in the Company’s peer group to ensure they are appropriate to the Company’s objectives. The Committee

15




exercises its judgment and discretion in reviewing and considering this analysis. In addition, the Committee periodically obtains advice from outside consultants, including the consultant retained by the Company, on compensation objectives and policies and the setting of executive officer compensation.

Tax Considerations

Section 162(m) of the Internal Revenue Code generally limits the tax deductions a public corporation may take for compensation paid to its executive officers named in its summary compensation table to $1 million per executive per year. This limitation applies only to compensation that is not considered to be performance-based. Based on fiscal year 2005 compensation levels, no such limits on the deductibility of compensation applied to any officer of the Company.

 

Members of the Compensation Committee

 

/s/ William G. Barron (Chairman)

 

/s/ Philip A. Frantz

 

/s/ D.J. Hines

 

/s/ Douglas I. Kunkel

 

16




Compensation Committee Interlocks and Insider Participation

As noted above, the Compensation Committee members are William G. Barron, Philip A. Frantz, D.J. Hines and Douglas I. Kunkel, all of whom are independent directors under Nasdaq listing standards. No member of the Compensation Committee is or was formerly an officer or an employee of the Company or its subsidiaries. No executive officer of the Company or its subsidiaries serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of the Company’s Board of Directors, nor has such an interlocking relationship existed in the past.

Change in Control and Severance Agreements

The Company has change in control severance agreements (the “Agreements”) in place with our Chief Executive Officer, each of the other named executive officers and certain other officers of the Company or our subsidiaries. References to executives in this description of Change in Control Severance Agreements are only to Mr. Saner, Mr. Anderson and Mr. Parker. The purpose of the Agreements is to secure the continued service and dedication of the executives in the event of an actual or threatened Change in Control (as defined in the Agreements). Each Agreement becomes operative only upon both a Change in Control and the subsequent termination of employment of the executive under circumstances covered by the Agreement. Payments under the Agreements are in full settlement of all other severance payments that may otherwise be payable to the executive under any other severance plan or agreement of the Company. The following discussion summarizes the key provisions of the Agreements.

If the employment of any of the executive officers is terminated during the two-year period (or an 18-month period in the case of Mr. Parker and Mr. Anderson) following a Change in Control of the Company, either by the Company other than for Cause (as defined in the Agreements) or by the executive for Good Reason (as defined in the Agreements, including the termination of employment by the executive for any reason during the 30-day period commencing six months (or twelve months in the case of Mr. Parker and Mr. Anderson) after the date of such Change in Control), the executive will be entitled to receive: (a) a lump sum cash amount equal to such executive’s unpaid salary and bonus amounts that have become payable, plus a pro-rata portion of such executive’s annual bonus for the fiscal year of termination of employment; (b) severance pay in a lump sum cash amount equal to 2.99 times in the case of Mr. Saner, 1.5 times in the case of Mr. Parker and 1 times in the case of Mr. Anderson, the sum of (i) the executive’s highest annual rate of base salary during the 12-month period immediately prior to his termination of employment and (ii) the executive’s annual incentive bonus earned for the last completed fiscal year of the Company; and (c) continuation of medical, dental, accident, disability and life insurance benefits for the executive and his dependents for a period of two years (or 18 months in the case of Mr. Parker and one year in the case of Mr. Anderson) following the executive’s date of termination of employment. If the executive’s date of termination is within two years (or 18 months in the case of Mr. Parker and one year in the case of Mr. Anderson) of the earliest date on which such termination could be considered a Retirement (as defined in the Agreements), the benefits described in (b) and (c) in the preceding sentence will be reduced accordingly. In the event that payments related to a Change in Control of the Company to any executive under the Agreements or otherwise are subject to excise tax under Section 4999 of the Internal Revenue Code, the Company will generally provide the executive with an additional amount sufficient to enable the executive to retain the full amount of his Change in Control benefits as if the excise tax had not applied, unless a reduction in such Change in Control related payments by less than 5% would result in the excise tax not being imposed on such executive, in which case payments under the Agreement shall be reduced (but not below zero) to the amount that could be paid to such executive without giving rise to such excise tax.

17




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, 2005. The graph assumes an investment of $100 in each of the Company’s common shares, the NASDAQ Market Index (U.S.) and the NASDAQ Bank Stocks Index on December 31, 2000.

GRAPHIC

 

 

12/31/00

 

12/31/01

 

12/31/02

 

12/31/03

 

12/31/04

 

12/31/05

 

 

MainSource Financial Group

 

 

100.00

 

 

 

124.23

 

 

 

176.91

 

 

 

236.06

 

 

 

288.85

 

 

 

217.86

 

 

NASDAQ MARKET INDEX (U.S.)

 

 

100.00

 

 

 

78.95

 

 

 

54.06

 

 

 

81.09

 

 

 

88.06

 

 

 

89.27

 

 

NASDAQ Bank Stocks Index

 

 

100.00

 

 

 

110.08

 

 

 

115.05

 

 

 

149.48

 

 

 

165.92

 

 

 

158.73

 

 

 

18




Compensation Tables

The following table sets forth information concerning total compensation earned or paid to our Chief Executive Officer and our three most highly compensated executive officers who served in such capacities as of December 31, 2005, each of which had total annual salary and bonus exceeding $100,000 in 2005 or in either of the preceding two years (the “named executive officers”), for services rendered to the Company during each of the last three fiscal years or such shorter period during which the executive has been employed by the Company.

 

Annual Compensation(1)

 

Long Term
Compensation
Awards

 

 

 

Name and Principal Positions

 

 

 

Fiscal Year

 

Salary

 

Bonus

 

Securities
Underlying
Options/SARs
(#)

 

All
Other
Compensation
(2)

 

James L. Saner, Sr.

 

 

2005

 

 

$

312,358

 

 

 

15,000

 

 

 

$

26,126

 

 

President and Chief Executive Officer

 

 

2004

 

 

293,630

 

$

46,656

 

 

15,750

 

 

 

36,398

 

 

 

 

 

2003

 

 

247,885

 

48,400

 

 

16,537

 

 

 

39,635

 

 

James M. Anderson

 

 

2005

 

 

100,988

 

 

 

2,500

 

 

 

7,082

 

 

Senior Vice President and Chief

 

 

2004

 

 

91,995

 

7,256

 

 

2,362

 

 

 

12,762

 

 

Financial Officer

 

 

2003

 

 

85,819

 

10,118

 

 

1,653

 

 

 

12,702

 

 

John C. Parker

 

 

2005

 

 

121,769

 

 

 

3,500

 

 

 

13,242

 

 

Senior Vice President—Director

 

 

2004

 

 

109,950

 

12,487

 

 

3,150

 

 

 

16,435

 

 

of Operations

 

 

2003

 

 

101,957

 

15,919

 

 

3,307

 

 

 

15,738

 

 

Daryl R. Tressler

 

 

2005

 

 

204,212

 

 

 

4,000

 

 

 

27,257

 

 

Chairman and Chief Executive

 

 

2004

 

 

184,039

 

12,296

 

 

3,938

 

 

 

33,493

 

 

Officer—MainSource Bank of Indiana

 

 

2003

 

 

174,423

 

15,939

 

 

5,788

 

 

 

35,385

 

 


(1)          Amounts shown include compensation earned by the named executive officers during the fiscal year, including bonuses generally paid in the year following the year in which they are earned.

(2)          The amounts shown in this column include contributions to the Company’s 401(k) and Employee Stock Ownership Plan, which for 2005 were as follows: Mr. Saner—$9,995; Mr. Anderson—$2,291; Mr. Parker—$7,793; and Mr. Tressler—$11,200. The amounts shown in this column also  include contributions to the Company’s Retirement Plan, which for 2005 were as follows: Mr. Anderson—$3,030 and Mr. Parker—$3,653.

Stock Options

The following table sets forth information concerning 2005 grants of stock options to the named executives of the Corporation during the fiscal year ended December 31, 2005.

Option/SAR Grants in Last Fiscal Year

 

 

 

 

 

 

Option Term Individual Grants

 

 

 

 

 

 

 

 

 

 

 

% of Total

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Options/SARs

 

 

 

 

 

Potential Realizable Value at

 

 

 

 

 

Securities

 

Granted to

 

Exercise or

 

 

 

Assumed Annual Rates of

 

 

 

 

 

Underlying

 

Employees

 

Base

 

 

 

Stock  Price Appreciation

 

 

 

 

 

Options/SARs

 

in Fiscal

 

Price (3)

 

Expiration

 

for Option Term(1)

 

(a) Name

 

 

 

Granted (2)(#)

 

Year

 

($/Share)

 

Date

 

5%

 

10%

 

James L. Saner, Sr

 

 

15,000

 

 

 

23.6

%

 

 

$

21.60

 

 

2/21/2015

 

$

203,762

 

$

516,373

 

James M. Anderson

 

 

2,500

 

 

 

3.9

%

 

 

$

21.60

 

 

2/21/2015

 

$

33,960

 

$

86,062

 

John C. Parker

 

 

3,500

 

 

 

5.5

%

 

 

$

21.60

 

 

2/21/2015

 

$

47,544

 

$

120,487

 

Daryl R. Tressler

 

 

4,000

 

 

 

6.3

%

 

 

$

21.60

 

 

2/21/2015

 

$

54,336

 

$

137,699

 

 

19




 

(1)          The dollar amounts under these columns are the result of calculations at the 5% and 10% rates set by the Securities and Exchange Commission and are not intended to forecast possible future appreciation, if any, in the market value of the Common Stock.

(2)          Grant Options—Options were granted as 2005 compensation under the Company’s 2003 Stock Option Plan and vest over four years in the following increments: 10% on December 31 of the year of grant, an additional 20% on the following December 31, an additional 30% on the next December 31, and an additional 40% on the fourth December 31 after the date of grant. The option exercise price is adjustable for stock splits, stock dividends and similar occurrences affecting all outstanding shares.

(3)          All options are granted at 100% of fair market value on the date of grant.

Aggregated Options/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values

 

 

 

 

 

 

Number Of Securities

 

 

 

 

 

 

 

 

 

 

 

Underlying Unexercised

 

Value of Unexercised In-the-

 

 

 

Shares

 

 

 

Options/SARs At Fiscal

 

Money Options/SARs at Fiscal

 

 

 

Acquired on

 

Value

 

Year End

 

Year End

 

Name

 

 

 

Exercise

 

Realized

 

Exercisable

 

Unexercisable

 

Exercisable

 

Unexercisable

 

James L. Saner, Sr.

 

 

 

 

 

 

 

 

40,673

 

 

 

6,615

 

 

 

$

37,906

 

 

 

$

25,269

 

 

James M. Anderson

 

 

 

 

 

 

 

 

5,854

 

 

 

662

 

 

 

$

3,789

 

 

 

$

2,529

 

 

John C. Parker

 

 

 

 

 

 

 

 

8,635

 

 

 

1,323

 

 

 

$

7,583

 

 

 

$

5,054

 

 

Daryl R. Tressler

 

 

 

 

 

 

 

 

11,702

 

 

 

1,984

 

 

 

$

11,372

 

 

 

$

7,579

 

 

 

Equity Compensation Plan Information

The following table summarizes certain information regarding the Company’s equity compensation plan.

Plan Category

 

 

 

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

 

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

 

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

 

Equity compensation plans approved by security holders

 

 

173,906

 

 

 

$

19.71

 

 

 

390,333

 

 

Equity compensation plans not approved by security holders

 

 

 

 

 

 

 

 

 

 

Total

 

 

173,906

 

 

 

$

19.71

 

 

 

390,333

 

 

 

SECTION 16 BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based upon a review of filings with the Securities and Exchange Commission and written representations that no other reports were required, the Company believes that all of the Company’s directors and executive officers complied during fiscal 2005 with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934, except: (1) each executive officer and each of the Company’s directors failed to timely report on Form 4 the acquisition of options granted through the Company’s 2003 stock option plan; (2) Mr. Crall and Mr. Hines each did not timely file a Form 3 relating to their elections as directors; and (3) Mr. Tressler did not timely file a Form 3 following the Board of Director’s determination that he should be subject to the reporting requirements of Section 16(a). Each of these transactions or events were subsequently reported by such persons on Forms 3, 4 or 5.

20




SHAREHOLDER PROPOSALS

To be considered for inclusion in next year’s proxy statement, shareholder proposals must be submitted in writing by December 2, 2006, to the Company’s Secretary, 201 North Broadway, Greensburg, Indiana 47240. In addition, the Company’s By-laws provide that any shareholder wishing to nominate a candidate for director or propose other business at the Annual Meeting must give the Company written notice not less than 60 days nor more than 90 days before the meeting, and the notice must provide certain other information as described in the By-laws. Copies of the By-laws are available to shareholders free of charge upon request to the Company’s Secretary. The persons named in the proxies retain the discretion to vote proxies on matters of which the Company is not properly notified at its principal executive offices on or before 60 days before the meeting, and also retain such authority under certain other circumstances. For additional information regarding the shareholder nomination process, please see “Communications with Independent Directors” on page 6.

ADDITIONAL INFORMATION

Householding of Proxy Materials

The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery requirements for proxy statements and annual reports with respect to two or more shareholders sharing the same address by delivering a single proxy statement addressed to those shareholders. This process, which is commonly referred to as “householding,” potentially means extra convenience for shareholders and cost savings for companies. This year, a number of brokers with account holders who are shareholders of the Company will be “householding” our proxy materials. A single proxy statement may be delivered to multiple shareholders sharing an address unless contrary instructions have been received from the affected shareholders. Once “householding” communications to your address begin, “householding” will continue until you are notified otherwise or until you notify your broker or the Company that you no longer wish to participate in “householding.” If, at any time, you no longer wish to participate in “householding” and would prefer to receive a separate proxy statement and annual report in the future you may (1) notify your broker, (2) direct your written request to: Secretary, MainSource Financial Group, Inc., 201 N. Broadway, Greensburg, Indiana 47240 or (3) contact the Secretary of the Company, James M. Anderson, at (812) 663-0157. Shareholders who currently receive multiple copies of the proxy statement at their address and would like to request “householding” of their communications should contact their broker or if you are a record holder of Company shares, contact the Secretary of the Company. In addition, the Company will promptly deliver, upon written or oral request to the address or telephone number above, a separate copy of the annual report and proxy statement to a stockholder at a shared address to which a single copy of the documents was delivered.

Advance Notice Procedures for Annual Meeting Business

Under our bylaws, no business may be brought before an annual meeting unless in one of the following ways: (i) it is specified in the notice of the meeting (which includes shareholder proposals that the Company is required to include in its proxy statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934); (ii) such business is otherwise brought before the meeting by or at the direction of the Board of Directors; or (iii) such business is brought before the meeting by a shareholder who has delivered notice to the Company (containing certain information specified in our bylaws) not less than 60 nor more than 90 days prior to the meeting. These requirements are separate from and in addition to the SEC’s requirements that a shareholder must meet in order to have a shareholder proposal included in the Company’s proxy statement.

21




Proxy Solicitation Costs

The proxies being solicited through this Proxy Statement are being solicited by the Company. The cost of soliciting proxies in the enclosed form will be borne by us. Officers and regular employees of the Company may, without additional compensation, solicit proxies by further mailing or personal conversations, or by telephone, telex, facsimile or electronic means. We will, upon request, reimburse brokerage firms and others for their reasonable expenses in forwarding solicitation material to the beneficial owners of shares.

OTHER MATTERS

As of the date of this Proxy Statement, the Company knows of no business that will be presented for consideration at the annual meeting other than the items referred to above. If any other matter is properly brought before the meeting for action by shareholders, proxies in the enclosed form returned to the Company will be voted in accordance with the recommendation of the Board of Directors or, in the absence of such a recommendation, in accordance with the judgment of the proxy holder.

 

By Order of the Board of Directors,

 

 

GRAPHIC

 

 

James M. Anderson

 

 

Secretary

 

March 31, 2006

22




Annex A

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.

A-1




Annex B

MAINSOURCE FINANCIAL GROUP, INC.
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 Company’s financial statements 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.

Composition and Term of Office:

·       The Audit Committee shall be comprised of not less than three members of the Corporate Board as may be appointed to the Committee from time to time by a majority of the Board all of whom 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.

·       The members of the Committee shall serve one-year terms and shall be appointed annually by the Board.

·       The Chairman 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 Chairman shall preside at meetings of the Audit Committee and he 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”.

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;

B-1




·       Have sole authority to select, retain, evaluate, and replace the independent auditors;

·       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 Sarbanes Oxley, 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;

·       Pre-approve all non-audit services, including tax work, or other allowable services to be performed by external accountants or auditors; provided, however, that such pre-approval is not required where the services are not specifically forbidden and the total amount of fees for such non-audit services do not exceed $25,000 per year with any specific service exceeding $10,000.

·       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 CEO;

·       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;

·       Review the external audit function of the Company to ensure the independence of the independent auditors and discuss the Committee’s findings with the Company’s Board;

·       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;

·       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;

·       Conduct and review with the Board of Directors annually an evaluation of the Committee’s performance with respect to the requirements of this Charter;

B-2




In carrying out its duties and responsibilities, the Audit Committee shall have direct access to independent counsel when deemed necessary 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 Chairman of the Audit 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.

B-3




 

MainSource Financial Group, Inc.

Greensburg Indiana

Proxy for 2006 Annual Meeting of Shareholders

(Please Complete, Sign, Date and Return Promptly)

 

The undersigned shareholder of MAINSOURCE FINANCIAL GROUP, INC. (“Company”), Greensburg, Indiana, does hereby nominate, constitute and appoint PHILIP A. FRANTZ, RICK S. HARTMAN and JAMES L. SANER, SR., or any of them (with full power to act alone), my true and lawful attorney(s) and proxy(ies) with full power of substitution, for me and in my name, place and stead, to vote all of the Common Shares of the Company standing in my name on its books at the close of business on March 15, 2006 at the Annual Meeting of Shareholders to be held at the Company’s Operations Center, 1927 Greensburg Crossing, Greensburg, Indiana on April 26, 2006 at 10:00 a.m. (Eastern Daylight Savings Time), and at any adjournment thereof, with all the powers the undersigned would possess if personally present, as follows:

 

1.                   Election of Directors

To elect as directors the following eight (8) nominees:  William G. Barron, Brian J. Crall, Philip A. Frantz, Rick S. Hartman, D. J. Hines, Robert E. Hoptry, Douglas I. Kunkel and James L. Saner, Sr.

 

 

o

FOR all nominees (except as otherwise indicated below)

o

WITHHOLD AUTHORITY to vote for all nominees

 

(INSTRUCTIONS:  To withhold authority to vote for any individual nominee, write the nominee’s name on the line below)

 

 

2.                   Other Business. To transact such other matters as may properly be brought before the Annual Meeting or any adjournment thereof. (The Board of Directors does not know of any such other matters.)

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” ALL OF THE NOMINEES LISTED IN ITEM 1.

 

Information regarding the matters to be acted upon at the meeting is contained in the Notice of Annual Meeting of Shareholders and Proxy Statement accompanying this proxy.

 

THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS AND WILL BE VOTED AS SPECIFIED AND IN ACCORDANCE WITH THE ACCOMPANYING PROXY STATEMENT. IF NO INSTRUCTION IS INDICATED, THEN THE ABOVE-NAMED PROXIES, OR ANY ONE OF THEM, WILL VOTE THE SHARES REPRESENTED “FOR” ALL OF THE NOMINEES LISTED IN ITEM 1, AND IN ACCORDANCE WITH THEIR DISCRETION ON ANY OTHER BUSINESS THAT MAY PROPERLY COME BEFORE THE MEETING.

 

IN WITNESS WHEREOF, I have hereunto set my hand this _______ day of _________________, 2006.

 

 

 

 

(Signature of Shareholder(s))

 

 

 

Please sign above exactly as your name(s) appears opposite the signature lines. When signing as attorney, executor, administrator, trustee or guardian, please give full title. If more than one trustee, all should sign. All joint owners must sign.

 

An addressed postage prepaid envelope is enclosed for your convenience in promptly returning your proxy.

The prompt return of your proxy will help the Company avoid additional costs in soliciting proxies.

 


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