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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 2003
COMMISSION FILE NUMBER 0-12422
MAINSOURCE FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-1562245
------- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
201 NORTH BROADWAY GREENSBURG, INDIANA 47240
---------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(812) 663-0157
--------------
(Registrant's telephone number, including area code)
-------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12B-2 of the Act) Yes X No
--- ---
As of May 9, 2003 there were outstanding 6,767,715 shares, without par
value of the registrant.
MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
INDEX
- ------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION Page
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Income and Comprehensive Income 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
MAINSOURCE FINANCIAL GROUP
FORM 10-Q
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands except per share data)
(Unaudited)
March 31, December 31,
2003 2002
----------- -----------
Assets
Cash and due from banks $ 41,851 $ 54,548
Money market fund 4,168 22,869
Federal funds sold -- 500
----------- -----------
Cash and cash equivalents 46,019 77,917
Investment securities
Available for sale 392,982 346,468
Held to maturity (fair value of $4,018 and $4,939) 3,746 4,675
Loans held for sale 17,490 15,715
Loans, net of allowance for loan losses of $9,917 and $9,517 726,482 730,650
Restricted stock, at cost 5,680 5,690
Premises and equipment, net 19,152 19,258
Goodwill 21,526 20,708
Intangible assets 4,951 5,005
Other assets 25,324 25,674
----------- -----------
Total assets $ 1,263,352 $ 1,251,760
=========== ===========
Liabilities
Deposits
Noninterest bearing $ 108,756 $ 104,282
Interest bearing 940,840 930,025
----------- -----------
Total deposits 1,049,596 1,034,307
Short-term borrowings 25,373 19,529
Federal Home Loan Bank advances 50,197 50,235
Trust preferred securities 22,000 30,425
Notes payable 2,400 2,400
Other liabilities 13,968 15,093
----------- -----------
Total liabilities 1,163,534 1,151,989
Shareholders' equity
Preferred stock no par value
Authorized - 400,000
Issued and outstanding - none -- --
Common stock $.50 stated value:
Authorized shares - 10,000,000 shares,
Issued shares - 6,824,405 and 6,500,084
Outstanding shares - 6,767,715 and 6,469,873 shares 3,414 3,251
Common stock to be distributed, 0 and 325,004 shares -- 163
Treasury stock, 56,690 and 30,211 shares (1,268) (694)
Additional paid-in capital 43,009 43,025
Retained earnings 51,811 49,529
Accumulated other comprehensive income 2,852 4,497
----------- -----------
Total shareholders' equity 99,818 99,771
----------- -----------
Total liabilities and shareholders' equity $ 1,263,352 $ 1,251,760
=========== ===========
See notes to consolidated condensed financial statements.
3
MAINSOURCE FINANCIAL GROUP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands except per share data)
Three months ended
March 31,
2003 2002
------- -------
Interest income:
Loans, including fees $13,044 $14,610
Investment securities 3,632 3,600
Other 56 155
------- -------
Total interest income 16,732 18,365
------- -------
Interest expense:
Deposits 4,833 6,295
Trust preferred securities 488 506
Other borrowings 697 501
------- -------
Total interest expense 6,018 7,302
------- -------
Net interest income 10,714 11,063
Provision for loan losses 390 550
------- -------
Net interest income after
provision for loan losses 10,324 10,513
Non-interest income:
Securities gains 793 128
Other income 4,055 3,371
------- -------
Total non-interest income 4,848 3,499
Non-interest expense 10,312 8,882
------- -------
Income before income tax 4,860 5,130
Income tax expense 1,355 1,794
------- -------
Net income $ 3,505 $ 3,336
======= =======
Comprehensive income $ 1,860 $ 2,300
======= =======
Net income per share (basic and diluted) $ 0.52 $ 0.49
Cash dividends declared 0.180 0.162
See notes to consolidated condensed financial statements.
4
MAINSOURCE FINANCIAL GROUP
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(Unaudited)
(Dollars in thousands)
Three months ended
March 31,
2003 2002
--------- ---------
Operating Activities
Net income $ 3,505 $ 3,336
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 390 550
Depreciation and amortization 634 501
Securities amortization, net 908 93
Amortization of intangibles 221 433
Investment securities gains (793) (128)
Change in loans held for sale (1,775) 15,280
Change in other assets and liabilities 123 48
--------- ---------
Net cash provided by operating activities 3,213 20,113
Investing Activities
Net change in short term investments -- 599
Proceeds from maturities and payments
on securities held to maturity 939 1,077
Purchases of securities available for sale (130,107) (62,047)
Proceeds from maturities and payments
on securities available for sale 58,084 27,932
Proceeds from sales of securities available for sale 22,787 10,757
Loan originations and payments, net 10,205 11,460
Purchases of restricted stock -- (565)
Purchases of premises and equipment (427) (940)
Cash received from branch acquisitions 12,203 15,654
--------- ---------
Net cash provided (used) by investing activities (26,316) 3,927
Financing Activities
Net change in deposits (4,364) (43,180)
Short-term borrowings 5,844 2,479
Repayment of notes payable -- (12)
Repayment of FHLB advances (38) (59)
Proceeds from FHLB borrowings -- 20,000
Redemption of trust preferred securities (8,425) --
Purchase of shares for treasury (574) (93)
Cash dividends and fractional shares (1,238) (1,116)
--------- ---------
Net cash used by financing activities (8,795) (21,981)
--------- ---------
Net change in cash and cash equivalents (31,898) 2,059
Cash and cash equivalents, beginning of period 77,917 59,419
--------- ---------
Cash and cash equivalents, end of period $ 46,019 $ 61,478
========= =========
See notes to consolidated condensed financial statements.
5
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by MainSource Financial Group,
Inc., formerly known as Indiana United Bancorp, ("Company") for interim
financial reporting are consistent with the accounting policies followed for
annual financial reporting. All adjustments which are, in the opinion of
management, necessary for a fair presentation of the results for the periods
reported have been included in the accompanying unaudited consolidated financial
statements and all such adjustments are of a normal recurring nature.
During the first quarter of 2003, the Company's Board of Directors approved a
stock option plan and set aside 350,000 shares that may be issued under option
grants. The plan was approved contingent upon shareholder approval, which was
received at the Company's annual meeting held on April 23, 2003. Options granted
under the plan in the second quarter totaled 34,500 shares. A total of 8,000
shares were issued to the Company's Board of Directors and are immediately
vested. The remaining grants were issued to various members of the Company's
executive management team and vest over a four-year period.
NOTE 2 ACQUISITIONS
In February 2003, the Company acquired one branch in Illinois. The acquired
branch consisted of $12,203 of cash, $6,427 of loans, and $19,653 of deposits. A
core deposit intangible of $166 and goodwill of $818 were also recorded. The
results of operations for this acquisition have been included since the
transaction date. The branch acquisition was made to further solidify the
Company's market share in existing markets and to expand its customer base into
new markets, thereby enhancing deposit fee income and providing an opportunity
to market additional products and services to new customers. The acquisition
also helped to prevent another financial institution from entering these
markets, and it allowed the Company to establish additional branch locations to
improve customer convenience.
6
NOTE 3 - SECURITIES
The fair value of securities available for sale and related gains/losses
recognized in accumulated other comprehensive income (loss) were as follows:
Gross Gross
Fair Unrealized Unrealized
As of March 31, 2003 Value Gains Losses
- -------------------------------------------------------------------------------
Available for Sale
Federal agencies $65,339 $1,825 $0
State and municipal 48,577 1,819 (4)
Mortgage-backed securities 252,475 2,028 (756)
Equity and other securities 26,591 234 (673)
- -------------------------------------------------------------------------------
Total available for sale $392,982 $5,906 ($1,433)
- -------------------------------------------------------------------------------
As of December 31, 2002
- ------------------------------------
Available for Sale
Federal agencies $80,483 $2,928 $0
State and municipal 49,027 1,682 (5)
Mortgage-backed securities 194,490 2,901 (54)
Equity and other securities 22,468 227 (614)
- -------------------------------------------------------------------------------
Total available for sale $346,468 $7,738 ($673)
- -------------------------------------------------------------------------------
The carrying amount, unrecognized gains and losses, and fair value of securities
held to maturity were as follows:
Gross Gross
Carrying Unrecognized Unrecognized Fair
As of March 31, 2003 Amount Gains Losses Value
- --------------------------------------------------------------------------------
Held to Maturity
State and municipal 3,036 129 - 3,165
Other securities 710 143 - 853
- --------------------------------------------------------------------------------
Total held to maturity $3,746 $272 $0 $4,018
- --------------------------------------------------------------------------------
As of December 31, 2002
- ----------------------------------------
Held to Maturity
State and municipal $3,977 $119 $0 $4,096
Other securities 698 145 - 843
- --------------------------------------------------------------------------------
Total held to maturity $4,675 $264 $0 $4,939
- --------------------------------------------------------------------------------
7
NOTE 4 - LOANS
March 31 December 31
2003 2002
- ------------------------------------------------------------------------------
Commercial and industrial loans $ 105,464 $ 105,093
Agricultural real estate and production 65,098 68,867
Commercial real estate 79,261 84,024
Hotel 82,537 73,262
Residential real estate 305,774 301,232
Construction and development 24,411 34,987
Consumer 73,854 72,702
-----------------------------
Total loans 736,399 740,167
Allowance for loan lossess (9,917) (9,517)
- ------------------------------------------------------------------------------
Net loans $ 726,482 $ 730,650
==============================================================================
NOTE 5 - DEPOSITS March 31, December 31,
2003 2002
---- ----
Non-interest-bearing demand $ 108,756 $ 104,282
Interest-bearing demand 235,462 260,120
Savings 202,203 196,056
Certificates of deposit of $100 or more 103,462 93,192
Other certificates and time deposits 399,713 380,657
-------------- ---------------
Total deposits $ 1,049,596 $ 1,034,307
============== ===============
8
NOTE 6 - SHORT-TERM BORROWINGS
March 31 December 31,
2003 2002
---- ----
Short-term borrowings:
Federal funds purchased $ 8,750 $ -
Securities sold under agreement to repurchase 16,623 19,529
---------- ---------
Total short-term borrowings $25,373 $19,529
========== =========
NOTE 7 - EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
For the three months ended March 31, 2003 March 31, 2002
-------------------------- --------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
------ -------- ------ ------ -------- ------
Basic and dilutive earnings
per share:
Income available to
common shareholders $3,505 6,779,479 $0.52 $3,336 6,821,879 $0.49
As discussed in Note 1, the shareholders approved a stock option plan in the
second quarter of 2003. Options granted under this plan in the future may be
dilutive to earnings per share.
9
MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Overview
MainSource Financial Group, Inc. until May 1, 2002 known as Indiana United
Bancorp, ("Company") is a multi-bank, bank holding company that provides an
array of financial services and is headquartered in Greensburg, Indiana. The
Company's shares trade on the NASDAQ national market under the symbol MSFG. On
March 31, 2003, the Company controlled three bank subsidiaries, MainSource Bank,
Regional Bank ("Regional"), and Capstone Bank, N.A. ("Capstone"). In addition to
the banking subsidiaries, the Company owned, either directly or indirectly, the
following subsidiaries: MainSource Insurance, Inc., IUB Capital Trust,
MainSource Statutory Trust I, IUB Reinsurance Company, Ltd., People's Investment
Company, Ltd., PTC Investments, Inc., RB Investments, Inc. and Union Investment
Company, Ltd.
The Company continues to explore various acquisition targets including branches,
whole banks, and other financial service providers. In order to fund these
acquisitions, the Company may assume additional debt or issue additional shares.
Forward-Looking Statements
Except for historical information contained herein, the discussion in this Form
10-Q quarterly report includes certain forward-looking statements based upon
management expectations. Factors which could cause future results to differ from
these expectations include the following: general economic conditions;
legislative and regulatory initiatives; monetary and fiscal policies of the
federal government; deposit flows; the costs of funds; general market rates of
interest; interest rates on competing investments; demand for loan products;
demand for financial services; changes in accounting policies or guidelines; and
changes in the quality or composition of the Company's loan and investment
portfolios.
The forward-looking statements included in the Management's Discussion and
Analysis ("MD&A") relating to certain matters involve risks and uncertainties,
including anticipated financial performance, business prospects, and other
similar matters, which reflect management's best judgment based on factors
currently known. Actual results and experience could differ materially from the
anticipated results or other expectations expressed in the Company's forward-
looking statements as a result of a number of factors, including but not limited
to those discussed in the MD&A.
Results of Operations
Net income for the first quarter of 2003 was $3,505 or 5.1% greater than the
first quarter of 2002 due primarily to an increase in the Company's non-interest
income. Earnings per share for the first quarter equaled $.52 in 2003, compared
to $.49 in 2001, an increase of 6.1%. The Company's return on average total
assets for the first quarter was 1.15% in 2003 and 2002. Return on average
shareholders' equity for the first quarter was 14.19% in 2003 and 15.09% in
2002.
10
MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Net Interest Income
The volume and yield of earning assets and interest-bearing liabilities
influence net interest income. Net interest income reflects the mix of interest-
bearing and non-interest-bearing liabilities that fund earning assets, as well
as interest spreads between the rates earned on these assets and the rates paid
on interest-bearing liabilities. First quarter net interest income of $10,714 in
2003 was a decrease of 3.2% versus the first quarter of 2002. Net interest
income on a tax equivalent basis, reflected as a percentage of average earning
assets (net interest margin), was 3.90% for the first quarter of 2003 and 4.23%
for the same time frame in 2002. As a result of the current interest rate
environment, the Company's yield on earning assets decreased from 6.95% for the
first quarter of 2002 to 6.04% in the first quarter of 2003. The Company's cost
of funds also decreased, but to a lesser extent.
Provision for Loan Losses
This topic is discussed under the heading "Loans, Credit Risk and the Allowance
and Provision for Probable Loan Losses".
Non-interest Income
First quarter non-interest income for 2003 was $4,848 compared to $3,499 for the
same period a year ago, representing an increase of 38.6%. The increase was
primarily due to an increase in mortgage banking activity and gains on the sales
of investment securities. Mortgage banking income, which consists of gains and
losses on loan sales and service fee income, was $1,353 for the first quarter of
2003 versus $1,065 for the first quarter of 2002. As mortgage rates continue to
stay near record lows, this area of the Company's business remains strong. In
addition to the increase in mortgage banking income, the Company also realized
gains on the sales of investment securities of $793 in the first quarter of 2003
compared to securities gains of $128 in the same period a year ago. As the
Company continues to actively manage its investment portfolio, gains and/or
losses on the sales of investment securities will be periodically realized in
order to take advantage of current market conditions or to reposition the
portfolio for future profitability.
Non-interest Income
Three months ended
March 31,
-----------------------------
2003 2002
------- -------
Insurance commissions $ 582 $ 559
Fiduciary activities 150 197
Mortgage banking income 1,353 1,065
Service charges on deposit accounts 953 905
Gain (loss) on sales of securities 793 128
Other income * 1,017 645
------- -------
Total $ 4,848 $ 3,499
======= =======
* Other Income consists of interchange fees related to debit and credit card
activity, customer service fees, rental fees on safe deposit boxes, gains on
sales of assets other than securities, and other miscellaneous fees.
11
MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Non-interest expense
Total non-interest expense was $10,312 for the first quarter of 2003, which
represented an increase of $1,430 from the first quarter of 2002. The largest
component of non-interest expense is personnel expense. Personnel expenses were
$5,514 for the first quarter of 2003 versus $5,002 for the same period a year
ago, representing a 10.2% increase. Normal staff salary increases and increased
benefit costs were incurred in 2003. Included in the 10.2% increase are the
personnel costs related to the addition of four branches in 2002 and one in
February 2003. In addition to the increase in personnel costs, the Company
incurred $840 of costs associated with the write-off of deferred debt
acquisition costs due to the redemption of its fixed rate trust preferred
securities issued in 1997. On an ongoing basis, the Company expects these costs
to be approximately $4 per quarter.
Non-interest Expense
Three months ended
March 31,
-----------------------------
2003 2002
-------- --------
Salaries and employee benefits $ 5,514 $ 5,002
Net occupancy 655 505
Equipment 812 599
Intangible amortization 221 433
Stationary, printing, and supplies 229 254
Telephone 310 240
Other 2,571 1,849
-------- -------
Total non-interest expense $ 10,312 $ 8,882
======== =======
* Other Expenses consists of professional fees, directors' fees, marketing,
postage, travel, communications, regulatory fees, and other miscellaneous items.
Income Taxes
The effective tax rate for the first three months was 27.9% for 2003 and 35.0%
for 2002. The decrease in the effective tax rate was primarily due to tax
credits related to the Company's investment in low-income housing projects and
an increase in invested balances at its investment subsidiaries domiciled in a
state without income tax. The Company and its subsidiaries file consolidated
income tax returns.
12
MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Financial Condition
Total assets at March 31, 2003 were $1,263,352 compared to $1,251,760 as of
December 31, 2002. Average earning assets represented 91.7% of average total
assets for the first three months of 2003 and 92.7% for the same period in 2002.
Average loans represented 72.1% of average deposits in the first three months of
2003 and 76.7% for the comparable period in 2002. Management continues to
emphasize quality loan growth to increase these averages. Average loans as a
percent of average assets were 59.8% and 65.2% for the three-month period ended
March 31, 2003 and 2002 respectively.
The increase in deposits of $15,289 from December 31, 2002 to March 31, 2003 was
due primarily to the acquisition of one branch in Illinois involving the
assumption of $19 million of deposits.
Shareholders' equity was $99,818 on March 31, 2003 compared to $99,771 on
December 31, 2002. Book value (shareholders' equity) per common share was $14.75
at March 31, 2003 versus $14.69 at year-end 2002. The unrealized gain on
securities available for sale, net of taxes, increased book value per share by
$.42 at March 31, 2003 and by $.66 at December 31, 2002. Depending on market
conditions, the unrealized gain or loss on securities available for sale can
cause fluctuations in shareholders equity.
Loans, Credit Risk and the Allowance and Provision for Probable Loan Losses
Loans remain the Company's largest concentration of assets and, by their nature,
carry a higher degree of risk. The loan underwriting standards observed by the
Company's subsidiaries are viewed by management as a means of controlling
problem loans and the resulting charge-offs.
The Company's loan underwriting standards have historically resulted in lower
levels of net charge-offs than peer bank averages. The Company believes credit
risks may be elevated if undue concentrations of loans in specific industry
segments and to out-of-area borrowers are incurred. Accordingly, the Company's
Board of Directors regularly monitors such concentrations to determine
compliance with its loan allocation policy. The Company believes it has no undue
concentrations of loans.
13
MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
Residential real estate loans continue to represent a significant portion of the
total loan portfolio. Such loans represented 41.5% of total loans at March 31,
2003 and 40.7% at December 31, 2002.
On March 31, 2003, the Company had $17,490 of residential real estate loans held
for sale, which was an increase from the year-end balance of $15,715. The
Company generally retains the servicing rights on mortgages sold.
Asset quality improved from a year ago with non-performing assets totaling
$11,816, or 0.93% of total assets, as of March 31, 2003 compared to $12,545, or
1.07% of total assets, as of the same period a year ago. However, this was a
slight deterioration from year-end when non-performing assets totaled $10,857
and represented 0.87% of total assets. During the first three months of 2003,
the Company experienced an increase of $9,275 in loans related to the hotel
industry. As of March 31, 2003, these loans represented 11.2% of the Company's
total loan portfolio compared to 9.9% at year-end. Given the current economic
conditions and the recent downturn in the travel/lodging industry, allocations
were made to watch list loans in this industry to reflect the higher risk level.
The provision for loan losses was $390 in the first quarter of 2003 compared to
$550 for the same period in 2002. The Company had net recoveries of $10 for the
first three months of 2003 compared to net charge-offs of $208 for the
comparable period in 2002. The provision for 2003 was lower than 2002 as the
effect of declining loan balances and net recoveries more than offset the
increased allocations on hotel loans and non-performing loans.
The adequacy of the allowance for loan losses in each subsidiary is reviewed at
least quarterly. The determination of the provision amount in any period is
based on management's continuing review and evaluation of loan loss experience,
changes in the composition of the loan portfolio, current economic conditions,
the amount of loans presently outstanding, and information about specific
borrower situations. The allowance for loan losses as of March 31, 2003 is
considered adequate by management.
Investment Securities
Investment securities offer flexibility in the Company's management of interest
rate risk, and are an important source of liquidity as a response to changing
characteristics of assets and
14
MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
liabilities. The Company's investment policy prohibits trading activities and
does not allow investment in high-risk derivative products, junk bonds or
foreign investments.
As of March 31, 2003, $392,982 of investment securities are classified as
"available for sale" ("AFS") and are carried at fair value with unrealized gains
and losses, net of taxes, reported as a separate component of shareholders'
equity. An unrealized pre-tax gain of $4,473 was recorded to adjust the AFS
portfolio to current market value at March 31, 2003, compared to an unrealized
pre-tax gain of $7,065 at December 31, 2002.
Effective January 1, 2002 the Company formed two investment subsidiaries, PTC
Investments, Inc. and RB Investments, Inc., which are incorporated in Nevada.
These subsidiaries, which are 100% owned by and fully consolidated in the
Company's financial statements, hold a large portion of the Company's investment
portfolios and were formed with the intent to enhance the management and
profitablity of the investment portfolios.
Sources of Funds
The Company relies primarily on customer deposits, securities sold under
agreement to repurchase ("agreements") and shareholders' equity to fund earning
assets. FHLB advances are also used to provide additional funding.
Deposits generated within local markets provide the major source of funding for
earning assets. Average total deposits funded 90.5% and 91.8% of total average
earning assets for the periods ending March 31, 2003 and 2002. Total
interest-bearing deposits averaged 90.5% and 90.8% of average total deposits for
the periods ending March 31, 2003 and 2002, respectively. Management constantly
strives to increase the percentage of transaction-related deposits to total
deposits due to the positive effect on earnings.
The Company had FHLB advances of $50,197 outstanding at March 31, 2003. These
advances have interest rates ranging from 3.3% to 6.7% with $10,000 maturing in
the first quarter of 2004. Approximately $40,000 of these advances mature in
2005 or later.
Capital Resources
Total shareholders' equity was $99,818 at March 31, 2003, which was a slight
increase from $99,771 at December 31, 2002. The Company's earnings were
basically offset by the decrease in the unrealized gain on investment
securities, cash dividends paid on common stock, and treasury stock purchases.
During the first quarter of 2003, the Company redeemed $8,425 of its 8.75% fixed
rate trust preferred securities and announced the refinancing of the remaining
$14,000 of the 1997 issuance. As part of the refinancing that took place on
April 1st, the Company issued $14,000 of trust preferred securities in a pooled
offering. The rate on these securities is fixed for the first five years at
6.65% and then becomes variable at a rate tied to the 3-month LIBOR rate and
adjusts quarterly. These securities mature in 30 years and can be called anytime
after 5 years. An interest rate swap was utilized to obtain the initial fixed
rate on the issue.
The Federal Reserve Board and other regulatory agencies have adopted risk-based
capital guidelines that assign risk weightings to assets and off-balance sheet
items. The Company's core capital consists of shareholders' equity, excluding
accumulated other comprehensive income, while Tier 1 consists of core capital
less goodwill and intangibles. Trust preferred securities qualify as Tier 1
capital or core capital with respect to the Company under the risk-based capital
guidelines established by the Federal Reserve. Under such guidelines, capital
received from the proceeds of the sale of trust preferred securities cannot
constitute more than 25% of the total core capital of the Company. Consequently,
the amount of trust preferred securities in excess of the 25% limitation
constitutes Tier 2 capital of the Company. Total regulatory capital consists of
Tier 1, certain debt instruments and a portion of the allowance for credit
losses. At March 31, 2003, Tier 1 capital to total average assets was 7.60%.
Tier 1
15
MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
capital to risk-adjusted assets was 11.88%. Total capital to risk-adjusted
assets was 13.13%. All three ratios exceed all required ratios established for
bank holding companies. Risk-adjusted capital levels of the Company's subsidiary
banks exceed regulatory definitions of well-capitalized institutions.
The Company declared and paid common dividends of $.18 per share in the first
quarter of 2003 versus $.162 for the first quarter of 2002.
Liquidity
Liquidity management involves maintaining sufficient cash levels to fund
operations and to meet the requirements of borrowers, depositors, and creditors.
Higher levels of liquidity bear higher corresponding costs, measured in terms of
lower yields on short-term, more liquid earning assets, and higher interest
expense involved in extending liability maturities. Liquid assets include cash
and cash equivalents, loans and securities maturing within one year, and money
market instruments. In addition, the Company holds AFS securities maturing after
one year, which can be sold to meet liquidity needs.
Maintaining a relatively stable funding base, which is achieved by diversifying
funding sources and extending the contractual maturity of liabilities, supports
liquidity and limits reliance on volatile short-term purchased funds. Short-term
funding needs arise from declines in deposits or other funding sources, funding
of loan commitments and requests for new loans. The Company's strategy is to
fund assets to the maximum extent possible with core deposits that provide a
sizable source of relatively stable and low-cost funds. Average core deposits
funded approximately 82.0% of total earning assets for the three months ended
March 31, 2003 and 83.6% for the same period in 2002.
Management believes the Company has sufficient liquidity to meet all reasonable
borrower, depositor, and creditor needs in the present economic environment. In
addition, the affiliates have access to the Federal Home Loan Bank for borrowing
purposes. The Company has not received any recommendations from regulatory
authorities that would materially affect liquidity, capital resources or
operations.
Interest Rate Risk
Asset/liability management strategies are developed by the Company to manage
market risk. Market risk is the risk of loss in financial instruments including
investments, loans, deposits and borrowings arising from adverse changes in
prices/rates. Interest rate risk is the Company's primary market risk exposure,
and represents the sensitivity of earnings to changes in market interest rates.
Strategies are developed that impact asset/liability committee activities based
on interest rate risk sensitivity, board policy limits, desired sensitivity gaps
and interest rate trends.
Effective asset/liability management requires the maintenance of a proper ratio
between maturing or repriceable interest-earning assets and interest-bearing
liabilities. It is the policy of the Company that the cumulative GAP divided by
total assets shall be plus or minus 20% at the 3-month, 6-month, and 1-year time
horizons.
16
MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands except per share data)
At March 31, 2003, the Company held approximately $456,017 in assets comprised
of securities, loans, short-term investments, and federal funds sold, which were
interest sensitive in one year or less time horizons.
Other
The Securities and Exchange Commission ("Commission") maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, including
the Company. That address is http://www.sec.gov.
17
MAINSOURCE FINANCIAL GROUP, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
(Dollar amounts in thousands except per share data)
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk of the Corporation encompasses exposure to both liquidity and
interest rate risk and is reviewed monthly by the Asset/Liability Committee and
the Board of Directors. There have been no material changes in the quantitative
and qualitative disclosures about market risks as of March 31, 2003 from the
analysis and disclosures provided in the Corporation's Form 10-K for the year
ended December 31, 2002.
18
Item 4. Controls and Procedures
Within the 90-day period prior to the filing date of this report, an evaluation
was carried out under the supervision and with the participation of the
Company's management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934). Based on their evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are, to the best of their knowledge, effective to ensure
that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission
rules and forms. Subsequent to the date of their evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect its internal controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.
19
MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are furnished in accordance with
the provisions of Item 601 of Regulation S-K.
The following exhibits accompany this periodic report pursuant
to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (the "2002 Act"). These exhibits shall be
deemed only to accompany this periodic report are not part of this
periodic report, shall not be deemed filed for purposes of the
Securities Exchange Act of 1934, and may not be used for any purpose
other than compliance with the 2002 Act.
99.1 Certification Pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Chief Executive Officer
99.2 Certification Pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, by
Chief Financial Officer
b) Reports on Form 8-K
During the quarter ended March 31, 2003 the Company filed the
following reports on Form 8-K.
The Form 8-K dated February 4, 2003 reported under Item 5, "Other
Events" the Company's announcement of a stock repurchase program
effective February 1, 2003 whereby the Company may purchase up to
170,000 shares, or approximately 2.5%, of its common shares
outstanding over a twelve month period of time.
The Form 8-K dated March 28, 2003 reported under Item 5, "Other
Events" the Company's announcement of the execution of a
definitive agreement that will lead to the merger of First
Community Bancshares, Inc. into MainSource Financial Group, Inc.
No other information is required to be filed under Part II of this form.
20
MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MAINSOURCE FINANCIAL GROUP, INC.
May 14, 2003
/s/ James L. Saner, Sr.
-------------------------------------------------
James L. Saner Sr
President and Chief Executive Officer
May 14, 2003
/s/ Donald A. Benziger
-------------------------------------------------
Donald A. Benziger
Senior Vice President & Chief Financial Officer
May 14, 2003
/s/ James M. Anderson
-------------------------------------------------
James M. Anderson
Controller & Principal Accounting Officer
21
Certification of Principal Executive Officer
CERTIFICATIONS FOR QUARTERLY REPORT ON FORM 10-Q
I, James L. Saner, Sr. certify that:
1) I have reviewed this quarterly report on Form 10-Q of MainSource Financial
Group, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
------------
/s/ James L. Saner, Sr.
- -------------------------------------
[Signature]
President and Chief Executive Officer
- -------------------------------------
[Title]
Certification of Principal Financial Officer
CERTIFICATIONS FOR QUARTERLY REPORT ON FORM 10-Q
I, Donald A. Benziger, certify that:
1) I have reviewed this quarterly report on Form 10-Q of MainSource Financial
Group, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
------------
/s/ Donald A. Benziger
- -------------------------------------
[Signature]
Senior Vice President &
Chief Financial Officer
- -------------------------------------
[Title]