Mainsource Financial (MSFG) 8-K Financial Statements and Exhibits

Exhibit 99.2

ITEM 1.  FINANCIAL STATEMENTS

HFS Bank, F.S.B.

Condensed Consolidated Balance Sheets

	(Unaudited)
	30-Sept-05			31-Mar-05
ASSETS:
Cash and due from banks	$	4,781,154		$	3,730,001
Interest-earning deposits	10,521,550			10,424,759
Cash and cash equivalents	15,302,704			14,154,760
Investment securities available for sale	26,402,486			29,776,382
Loans (net of allowance for loan losses of $1,246,260 and $1,172,318)	180,443,614			177,608,601
Premises and equipment	4,605,180			4,733,183
Federal Home Loan Bank of Indianapolis (FHLBI) stock, at cost	4,595,100			4,547,600
Interest receivable	1,007,640			1,014,151
Bank-owned life insurance	2,347,442			2,303,114
Other assets	1,117,435			1,564,896
Total assets	$	235,821,601		$	235,702,687
LIABILITIES AND STOCKHOLDERS’ EQUITY:
Liabilities:
Deposit accounts	$	142,003,705		$	141,603,749
Advances from FHLBI	70,432,656			70,533,260
Escrows	1,164,987			1,915,913
Accrued expenses and other liabilities	1,432,788			1,379,588
Total liabilities	215,034,136			215,432,510
Stockholders’ Equity:
Capital stock:
Preferred stock, $1 par value. 1,000,000 shares authorized and unissued Common stock, $1 par value. Authorized 4,000,000 Shares; issued and outstanding 1,866,200	1,866,200			1,866,200
Additional paid-in capital	858,563			858,563
Accumulated other comprehensive income (loss)	(309,197		)	(405,928		)
Retained earnings	18,371,899			17,951,342
Total stockholders’ equity	20,787,465			20,270,177
Total liabilities and stockholders’ equity	$	235,821,601		$	235,702,687

See Notes to Condensed Consolidated Financial Statements

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HFS Bank, F.S.B.

Condensed Consolidated Statements of Income

(Unaudited)

	Three Months		Three Months
	Ended		Ended
	30-Sept-05		30-Sept-04
Interest income:
Loans receivable	$	2,903,065	$	2,764,831
Investment securities	157,415		197,632
Mortgage-backed securities	39,806		56,212
FHLBI stock dividends	52,038		50,111
Other interest-earning assets	94,044		9,760
Total interest income	3,246,368		3,078,546
Interest expense:
Deposit accounts	703,955		614,018
Advances from FHLBI	996,150		1,018,323
Total interest expense	1,700,105		1,632,341
Net interest income	1,546,263		1,446,205
Provision for loan losses	40,000		30,650
Net interest income after provision for loan losses	1,506,263		1,415,555
Noninterest income:
Fees and service charges	299,653		269,867
Net gains on the sales of loans	28,701		0
Net gains (loss) on the sales of foreclosed assets	4,496		(20,919		)
Other income	67,375		75,323
Total noninterest income	400,225		324,271
Noninterest expense:
Salaries and employee benefits	642,983		598,415
Premises and equipment expense	172,742		146,211
Data processing expense	168,225		149,054
Other expense	277,797		218,965
Total noninterest expense	1,261,747		1,112,645
Income before taxes	644,741		627,181
Income tax expense	232,812		225,153
Net income	$	411,929	$	402,028
Basic earnings per share	$	0.22	$	0.21
Diluted earnings per share	$	0.22	$	0.21
Dividends per share	$	0.110	$	0.105

See Notes to Condensed Consolidated Financial Statements

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HFS Bank, F.S.B.

Condensed Consolidated Statements of Income

(Unaudited)

	Six Months		Six Months
	Ended		Ended
	30-Sept-05		30-Sept-04
Interest income:
Loans receivable	$	5,749,440	$	5,510,720
Investment securities	329,747		389,089
Mortgage-backed securities	83,668		80,480
FHLBI stock dividends	100,549		93,776
Other interest-earning assets	190,914		32,098
Total interest income	6,454,318		6,106,163
Interest expense:
Deposit accounts	1,374,312		1,235,741
Advances from FHLBI	1,981,904		2,022,325
Total interest expense	3,356,216		3,258,066
Net interest income	3,098,102		2,848,097
Provision for loan losses	70,000		60,650
Net interest income after provision for loan losses	3,028,102		2,787,447
Noninterest income:
Fees and service charges	570,597		544,410
Net gains on the sales of loans	32,015		0
Net gains (loss) on the sales of foreclosed assets	1,996		(15,426		)
Other income	141,821		165,479
Total noninterest income	746,429		694,463
Noninterest expense:
Salaries and employee benefits	1,293,468		1,195,454
Premises and equipment expense	356,866		274,931
Data processing expense	336,144		306,334
Other expense	502,157		439,419
Total noninterest expense	2,488,635		2,216,138
Income before taxes	1,285,896		1,265,772
Income tax expense	464,106		454,160
Net income	$	821,790	$	811,612
Basic earnings per share	$	0.44	$	0.43
Diluted earnings per share	$	0.44	$	0.43
Dividends per share	$	0.215	$	0.205

See Notes to Condensed Consolidated Financial Statements

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HFS Bank, F.S.B.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Six Months			Six Months
	Ended			Ended
	30-Sept-05			30-Sept-04
Cash flows from operating activities:
Net income	$	821,790		$	811,612
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	156,392			95,833
Provision for loan losses	70,000			60,650
FHLBI stock dividends	(47,500		)	(97,600		)
Increase (decrease) in deferred loan fees	(52,436		)	17,508
Amortization of mortgage servicing rights	9,957			8,860
(Increase) decrease in accrued interest receivable	6,511			(18,042		)
Increase in life insurance value	(44,328		)	(47,143		)
Decrease in other assets	222,980			129,365
Increase in other liabilities	53,200			276,674
(Gain) loss on sale of repossessed assets	(1,996		)	15,426
Gain on sale of loans	(32,015		)	0
Proceeds from sale of loans	2,124,229			0
Loans originated for sale	(2,092,214		)	0
Net cash provided by operating activities	1,194,570			1,253,143
Cash flows from investing activities:
Loans originated	(43,436,977		)	(48,904,699		)
Loans purchased	(998,240		)	(2,317,323		)
Principal repayments on loans	41,693,639			48,531,521
Purchase of available for sale securities	(115,000		)	(4,450,000		)
Purchase of available for sale mortgage-backed securities	0			(5,027,439		)
Proceeds from maturities of available for sale securities	2,811,506			2,895,621
Principal repayments available for sale mortgage-backed securities	837,541			622,760
Proceeds from sale of foreclosed assets	42,101			147,288
Purchase of premises and equipment	(28,389		)	(1,215,252		)
Net cash provided by (used in) investing activities	806,181			(9,717,523		)

See Notes to Condensed Consolidated Financial Statements

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HFS Bank, F.S.B.

	Six Months			Six Months
	Ended			Ended
	30-Sept-05			30-Sept-04
Cash flows from financing activities:
Net decrease in checking deposits	$	(81,977	)	$	(1,347,753	)
Net decrease in passbook deposits	(1,002,557		)	(429,811		)
Net increase (decrease) in certificate of deposits	1,484,490			(432,391		)
Advances from the FHLBI	0			4,171,839
Repayments of FHLBI advances	(100,604		)	(4,107,804		)
Increase (decrease) in escrows	(750,926		)	2,424
Dividends paid	(401,233		)	(382,571		)
Net cash (used in) provided by financing activities	(852,807		)	2,526,067
Net increase (decrease) in cash and cash equivalents	1,147,944			(10,990,447		)
Cash and cash equivalents at the beginning of the year	14,154,760			15,287,819
Cash and cash equivalents at the end of period	$	15,302,704		$	4,297,372
Supplemental disclosures of cash flow information -
Cash paid during period for:
Interest	$	3,365,232		$	3,263,509
Income taxes	240,000			185,000
Noncash investing activity – transfer of loans to foreclosed assets	63,001			187,744
Noncash investing activity – transfer of foreclosed assets to loans	(174,000		)	0

See Notes to Condensed Consolidated Financial Statements

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HFS Bank, F.S.B.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

	Common Stock
	Shares Outstanding	Amount		Paid-in Capital		Comprehensive Income		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balances, April 1, 2005	1,866,200	$	1,866,200	$	858,563			$	17,951,342		$	(405,928	)	$	20,270,177
Net income for the six months ended Sept. 30, 2005						$	821,790	821,790						821,790
Other comprehensive income, unrealized gain on securities, net of tax						$	96,731				96,731			96,731
Comprehensive income						$	918,521
Cash dividends ($0.215 per share)								(401,233		)				(401,233		)
Balances, Sept. 30, 2005	1,866,200	$	1,866,200	$	858,563			$	18,371,899		$	(309,197	)	$	20,787,465

See Notes to Condensed Consolidated Financial Statements

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 - Basis of Presentation

Certain information and note disclosures normally included in HFS Bank, F.S.B.’s (the “Bank”) annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes hereto included in the Bank’s Form 10-K annual report for the year ended March 31, 2005 filed with the Office of Thrift Supervision (“OTS”).  The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of the Bank’s management, necessary to fairly present the financial position, results of operations and cash flows of the Bank.  Those adjustments consist only of normal recurring adjustments. The results of operations for the six-month period ended September 30, 2005, is not necessarily indicative of the results to be expected for the full year or any other period.

The condensed consolidated balance sheet of the Bank as of March 31, 2005 has been derived from the audited consolidated balance sheet of the Bank as of that date.

NOTE 2 - - Earnings Per Share

Basic earnings per share have been computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Bank.  Stock options are regarded as common stock equivalents and are considered in diluted earnings per share computations (see Exhibit 11 attached). There were no stock options granted or outstanding during the periods presented and therefore, no dilutive effect.

NOTE 3 – Bank Merger

On October 26, 2005, the Bank entered in an Agreement and Plan of Merger, referred to as the merger agreement, with MainSource Financial Group, Inc., referred to as MainSource.  Under the merger agreement, subject to the terms and conditions of the merger agreement, the Bank would merge into a newly-formed bank subsidiary of MainSource, which would survive the merger and do business as “MainSource Bank – Hobart.”

The merger agreement provides that upon the effective date of the merger, pursuant to election procedures described in the merger agreement, each share of common stock of the Bank will be converted into either into a number of shares of MainSource common stock determined as provided below, referred to as the exchange ratio, or cash in an amount equal to the total merger consideration (as defined below) divided by the number of shares of Bank common stock outstanding at the effective time of the merger, referred to as the per share cash consideration; provided, however, that 52% of Bank common stock must be converted into MainSource common stock, except as provided in the merger agreement.

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The total merger consideration is $36,110,970, subject to adjustment.  If as of the last day of the calendar month ending immediately prior to the Effective Date of the merger, referred to as the measurement date, the Bank’s stockholders’ equity is less than $19,250,000, the total merger consideration will be reduced on a dollar-for-dollar basis by an amount equal to the difference between $19,250,000 and the actual Bank stockholders’ equity as of the measurement date.  If at the measurement date, the Bank’s stockholders’ equity is greater than $19,750,000, the total merger consideration will be increased on a dollar-for-dollar basis by an amount equal to the difference between $19,750,000 and the actual Bank stockholders’ equity as of the measurement date.

The Bank’s stockholders’ equity will be determined based upon the balance sheet of the Bank as of the measurement date, prepared in accordance with generally accepted accounting principles consistently applied, after adjustment for the following amounts if not otherwise reflected in such balance sheet (which amounts shall also be calculated in accordance with generally accepted accounting principles consistently applied and on an after-tax basis):

•the accrual or payment of any fees payable to a broker or investment advisor by the Bank as a result of the consummation of the merger;

•the accrual or payment of any change-in-control payment owed or payable to James Greiner as a result of the consummation of the merger but not including any amounts payable to him pursuant to the employment agreement contemplated by Section 8.01(i) of the merger agreement;

•the accrual or payment of $1,200,000 to terminate the Bank’s data processing contract with The Bisys Group, Inc.;

•the accrual in full of any deferred compensation plan maintained by the Bank;

•the accrual or payment of the cost to extend the duration of the insurance tail coverage policy described in Section 12.08 of the merger agreement from three to six years, if so elected by the Bank; and

•the accrual of all compensable vacation and sick days for employees of the Bank.

For purposes of the calculation of the Bank’s stockholders’ equity, the mark-to-market adjustment to equity of the Bank’s investment portfolio will be $(327,571).

The exchange ratio representing the number of shares of MainSource common stock to be issued in exchange for one share of Bank common stock in the merger will be determined as follows:

•if the average of the high and low sales prices of shares of MainSource common stock for the ten consecutive trading days ending three trading days prior to the closing date of the merger as quoted on the Nasdaq Stock Market, referred to as the average MainSource stock price, is not less than $17.00 per share and not more than 21.00 per share, then the exchange ratio will be determined by dividing the per share cash consideration by the average MainSource stock price;

•if the average MainSource stock price is less than $17.00 per share, the exchange ratio will be determined by dividing the per share cash consideration by $17.00; and

•if the average MainSource stock price is greater than $21.00 per share, the exchange ratio will be determined by dividing the per share cash consideration by $21.00; in each case, if applicable, the result will be calculated (and rounded, if applicable) to the fourth decimal place.

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As of October 26, 2005,  and assuming no adjustment based on the Bank’s stockholders’ equity, the per share cash consideration would be $19.35 per share and the exchange ratio would be 1.0403 shares of MainSource common stock, based on MainSource’s October 26, 2005 closing price of $18.60 per share.  Cash will be paid in lieu of issuing fractional shares.

At the closing of the merger, James Greiner, the president and chief executive officer of the Bank, will terminate his existing employment agreement with the Bank in exchange for the change of control payments and other amounts payable under the terms of that agreement. At closing, Mr. Greiner will enter into an employment agreement with the surviving bank to serve as president for a term of up to three years after the merger.

The merger is expected to close in the second quarter of calendar year 2006. The merger agreement has been approved by the boards of directors of the Bank and MainSource, but is subject to certain other customary closing conditions, including the approval of the shareholders of the Bank and the approval of regulatory authorities.

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