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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, 2004
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 7, 2004 there were outstanding 10,578,068 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 Balance Sheets 3
Consolidated Statements of Income and Comprehensive Income 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated 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 BALANCE SHEETS
(Dollar amounts in thousands except per share data)
(Unaudited)
March 31, December 31,
2004 2003
----------- -----------
Assets
Cash and due from banks $ 41,124 $ 50,564
Money market fund 6,184 6,290
----------- -----------
Cash and cash equivalents 47,308 56,854
Interest bearing time deposits 202 201
Investment securities
Available for sale 418,475 422,111
Held to maturity (fair value of $3,591 and $3,683) 3,306 3,431
----------- -----------
Total investment securities 421,781 425,542
Loans held for sale 5,925 1,965
Loans, net of allowance for loan losses of $11,333 and $11,509 827,973 843,962
Restricted stock, at cost 6,917 6,639
Premises and equipment, net 22,763 22,886
Goodwill 36,047 36,047
Intangible assets 5,113 5,347
Cash surrender value of life insurance 22,444 22,203
Other assets 19,707 21,083
----------- -----------
Total assets $ 1,416,180 $ 1,442,729
=========== ===========
Liabilities
Deposits
Noninterest bearing $ 123,167 $ 127,100
Interest bearing 1,024,791 1,064,210
----------- -----------
Total deposits 1,147,958 1,191,310
Short-term borrowings 46,276 27,508
Federal Home Loan Bank advances 56,786 62,751
Subordinated debentures 29,898 29,898
Notes payable 12,500 12,500
Other liabilities 14,199 13,338
----------- -----------
Total liabilities 1,307,617 1,337,305
----------- -----------
Shareholders' equity
Preferred stock, no par value
Authorized shares - 400,000
Issued and outstanding - none -- --
Common stock $.50 stated value:
Authorized shares - 25,000,000
Issued shares - 10,747,133 and 6,824,405
Outstanding shares - 10,578,068 and 6,729,256 5,289 3,413
Common stock to be distributed, 0 and 341,220 shares -- 170
Treasury stock - 169,065 and 95,149 shares, at cost (2,630) (2,190)
Additional paid-in capital 51,799 53,478
Retained earnings 51,704 49,338
Accumulated other comprehensive income 2,401 1,215
----------- -----------
Total shareholders' equity 108,563 105,424
----------- -----------
Total liabilities and shareholders' equity $ 1,416,180 $ 1,442,729
=========== ===========
See notes to consolidated financial statements.
3
MAINSOURCE FINANCIAL GROUP
FORM 10-Q
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three months ended
March 31,
(Dollar amounts in thousands except per share data) 2004 2003
------- -------
Interest income:
Loans $13,290 $13,044
Investment securities 3,454 3,632
Other interest income 20 56
------- -------
Total interest income 16,764 16,732
------- -------
Interest expense:
Deposits 4,006 4,833
Other borrowings 873 697
Subordinated debentures 413 488
------- -------
Total interest expense 5,292 6,018
------- -------
Net interest income 11,472 10,714
Provision for loan losses -- 390
------- -------
Net interest income after
provision for loan losses 11,472 10,324
Non-interest income:
Insurance commissions 698 582
Mortgage banking 799 1,353
Trust and investment product fees 217 150
Service charges on deposit accounts 1,538 953
Net realized gains on securities 336 793
Other income 1,176 1,017
------- -------
Total non-interest income 4,764 4,848
------- -------
Non-interest expense:
Salaries and employee benefits 6,441 5,514
Net occupancy expenses 758 655
Equipment expenses 932 812
Intangibles amortization 234 221
Telecommunications 340 310
Stationery printing and supplies 219 229
Other expenses 2,157 2,571
------- -------
Total non-interest expense 11,081 10,312
------- -------
Income before income tax 5,155 4,860
Income tax expense 1,520 1,355
------- -------
Net income $ 3,635 $ 3,505
======= =======
Comprehensive income $ 4,821 $ 1,860
======= =======
Net income per share (basic and diluted) $ 0.34 $ 0.33
Cash dividends declared .120 .114
See notes to consolidated financial statements.
4
MAINSOURCE FINANCIAL GROUP
FORM 10-Q
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
(Dollars in thousands)
Three months ended
March 31,
2004 2003
--------- ---------
Operating Activities
Net income $ 3,635 $ 3,505
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses -- 390
Depreciation and amortization 695 634
Securities amortization, net 884 918
Amortization of intangibles 234 221
Increase in cash surrender value of life insurance policies (241) --
Investment securities gains (336) (793)
Change in loans held for sale (3,960) (1,775)
Change in other assets and liabilities 1,313 113
--------- ---------
Net cash provided by operating activities 2,224 3,213
Investing Activities
Proceeds from maturities and payments
on securities held to maturity 137 939
Purchases of securities available for sale (62,040) (130,107)
Proceeds from maturities and payments
on securities available for sale 24,673 58,084
Proceeds from sales of securities available for sale 42,552 22,787
Purchases of restricted stock (278) --
Loan originations and payments, net 15,989 10,205
Purchases of premises and equipment (572) (427)
Cash received from acquisitions, net -- 12,203
--------- ---------
Net cash provided /(used) by investing activities 20,461 (26,316)
Financing Activities
Net change in deposits (43,352) (4,364)
Net change in short-term borrowings 18,768 5,844
Repayment of FHLB advances (5,965) (38)
Redemption of trust preferred securities -- (8,425)
Purchase of treasury shares (440) (574)
Proceeds from exercise of stock options 27 --
Cash dividends and fractional stock dividends (1,269) (1,238)
--------- ---------
Net cash used by financing activities (32,231) (8,795)
--------- ---------
Net change in cash and cash equivalents (9,546) (31,898)
Cash and cash equivalents, beginning of period 56,854 77,917
--------- ---------
Cash and cash equivalents, end of period $ 47,308 $ 46,019
========= =========
See notes to consolidated financial statements.
5
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by MainSource Financial Group,
Inc. ("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.
6
NOTE 2 - STOCK COMPENSATION
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market price of the underlying common stock at date of grant. The following
table illustrates the effect on net income and earnings per share if expense was
measured using the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation.
For the three months ended
-------------------------------
March 31, 2004 March 31, 2003
-------------- --------------
Net income as reported $3,635 $3,505
Deduct: Stock-based compensation expense
determined under fair value based method 37 --
------ ------
Pro forma net income $3,598 $3,505
Basic earnings per share as reported $ 0.34 $ 0.33
Pro forma basic earnings per share $ 0.34 $ 0.33
Diluted earnings per share as reported $ 0.34 $ 0.33
Pro forma diluted earnings per share $ 0.34 $ 0.33
The pro forma effects are computed using option pricing models, with the
following weighted-average assumptions for 2004 as of grant date: risk-free
interest rate 3.48%, expected option life 6.69 years, expected stock price
volatility 20.33% and dividend yield 2.75%.
NOTE 3 - ACQUISITIONS
In June 2003, the Company acquired First Community Bancshares, Inc. which had 10
branches located in the south central area of Indiana. The results of operations
for this acquisition have been included since the transaction date which was
June 12, 2003. The Company funded the cash purchase price of $24,243 by issuing
$7,000 of floating rate trust preferred securities and securing a long-term note
of $13,000. The additional amount was obtained from internal sources.
In February 2003, the Company acquired one branch in Illinois. The results of
operations for this acquisition have been included since the transaction date.
In December 2003, the Company executed a definitive agreement to acquire Peoples
Financial Corp., Inc. ("Peoples"). Peoples has seven bank offices in southwest
Indiana with total assets of approximately $120 million. The transaction, which
is subject to approval by regulatory agencies and Peoples' shareholders, is
expected to close in the second quarter of 2004.
7
NOTE 4 - SECURITIES
The fair value of securities available for sale and related gross unrealized
gains/losses recognized in accumulated other comprehensive income (loss) were as
follows:
Gross Gross
Fair Unrealized Unrealized
As of March 31, 2004 Value Gains Losses
- ----------------------------------------------------------------------
Available for Sale
Federal agencies $ 70,369 $ 1,297 ($9)
State and municipal 77,382 2,294 (87)
Mortgage-backed securities 257,549 1,645 (629)
Equity and other securities 13,175 244 (462)
- ----------------------------------------------------------------------
Total available for sale $418,475 $ 5,480 ($1,187)
- ----------------------------------------------------------------------
As of December 31, 2003
- ----------------------------------------------------------------------
Available for Sale
Federal agencies $ 92,867 $ 1,409 ($36)
State and municipal 61,324 1,899 (152)
Mortgage-backed securities 255,541 1,297 (1,710)
Equity and other securities 12,379 103 (625)
- ----------------------------------------------------------------------
Total available for sale $422,111 $ 4,708 ($2,523)
- ----------------------------------------------------------------------
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, 2004 Amount Gains Losses Value
- ------------------------------------------------------------------------------
Held to Maturity
State and municipal $2,544 $ 142 $ -- $2,686
Other securities 762 143 -- 905
- ------------------------------------------------------------------------------
Total held to maturity $3,306 $ 285 $ -- $3,591
- ------------------------------------------------------------------------------
As of December 31, 2003
- ------------------------------------------------------------------------------
Held to Maturity
State and municipal $2,682 $ 122 $ -- $2,804
Other securities 749 130 -- 879
- ------------------------------------------------------------------------------
Total held to maturity $3,431 $ 252 $ -- $3,683
- ------------------------------------------------------------------------------
NOTE 5 - LOANS AND ALLOWANCE
- -----------------------------------------------------------------------
March 31 December 31
2004 2003
- -----------------------------------------------------------------------
Commercial and industrial loans $ 141,193 $ 158,271
Agricultural production financing 22,518 25,897
Farm real estate 37,745 37,107
Commercial real estate 108,096 101,022
Hotel 85,344 83,997
Residential real estate 309,092 315,848
Construction and development 35,884 33,605
Consumer 99,434 99,724
------------------------------
Total loans 839,306 855,471
------------------------------
Allowance for loan lossess (11,333) (11,509)
- -----------------------------------------------------------------------
Net loans $ 827,973 $ 843,962
- -----------------------------------------------------------------------
8
NOTE 6 - DEPOSITS March 31, December 31,
2004 2003
---- ----
Non-interest-bearing demand $ 123,167 $ 127,100
Interest-bearing demand 273,025 311,333
Savings 230,336 224,318
Certificates of deposit of $100 or more 139,581 141,327
Other certificates and time deposits 381,849 387,232
---------- ----------
Total deposits $1,147,958 $1,191,310
========== ==========
NOTE 7 - EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
For the three months ended March 31, 2004 March 31, 2003
------------------------------ ------------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Basic earnings per share:
Income available to
common shareholders $3,635 10,587,237 $0.34 $3,505 10,677,679 $0.33
------ ----- ------ -----
Effect of dilutive shares 17,442 1,241
---------- ----------
Diluted earnings per share $3,635 10,604,679 $0.34 $3,505 10,678,920 $0.33
====== ========== ===== ====== ========== =====
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. ("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, 2004, the Company controlled four bank
subsidiaries, MainSource Bank, Regional Bank ("Regional"), First Community Bank
and Trust ("First Community") and Capstone Bank ("Capstone"). In addition to the
banking subsidiaries, the Company owned, either directly or indirectly, the
following subsidiaries: MainSource Insurance, Inc., MainSource Statutory Trust
I, MainSource Statutory Trust II, MainSource Statutory Trust III, IUB
Reinsurance Company, Ltd., MSB Investments of Nevada, Inc., and RB Investments,
Inc.
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 2004 was $3,635 or 3.7% greater than the
first quarter of 2003. Earnings per share for the first quarter equaled $.34 in
2004, compared to $.33 in 2003, an increase of 3.0%. The Company's return on
average total assets for the first quarter was 1.03% in 2004 and 1.15% in 2003.
Return on average shareholders' equity for the first quarter was 13.60% in 2004
and 14.19% in 2003.
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 $11,472 in
2004 was an increase of 7.1% versus the first quarter of 2003. Net interest
income on a tax equivalent basis, reflected as a percentage of average earning
assets (net interest margin), was 3.68% for the first quarter of 2004 and 3.90%
for the same timeframe in 2003. As a result of the current interest rate
environment, the Company's yield on earning assets on a tax equivalent basis
decreased from 6.04% in the first quarter of 2003 to 5.34% in the first quarter
of 2004. 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 2004 was $4,764, relatively unchanged
versus the first quarter of 2003. The impact of the acquisition of First
Community in the second quarter of 2003, an increase in insurance commissions
and the implementation of a formalized overdraft program were offset by
decreases in mortgage banking activity and investment securities gains. Mortgage
banking income, which consists of gains and losses on loan sales and service fee
income, was $799 for the first quarter of 2004 versus $1,353 for the first
quarter of 2003.
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 $11,081 for the first quarter of 2004, which
represented an increase of $769 from the first quarter of 2003. The increase was
primarily due to the acquisition of First Community, which added $1,495 of
non-interest expense in 2004. Offsetting this increase was a decrease in the
amortization of deferred debt acquisition costs. In the first quarter of 2003,
the Company redeemed a portion of its subordinated debentures and wrote-off
approximately $850 in related costs. The largest component of non-interest
expense is personnel expense. Personnel expenses were $6,441 for the first
quarter of 2004 versus $5,514 for the same period a year ago, representing a
16.8% increase. Excluding the acquisition of First Community, employee costs for
the first quarter of 2004 would have been $5,719, an increase of 5.1%, and would
be attributable to normal staff salary increases.
Income Taxes
The effective tax rate for the first three months was 29.5% for 2004 which was
relatively stable compared to 27.9% for 2003. 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, 2004 were $1,416,180 compared to $1,442,729 as of
December 31, 2003. Average earning assets represented 90.5% of average total
assets for the first three months of 2004 and 91.7% for the same period in 2003.
Average loans represented 73.9% of average deposits in the first three months of
2004 and 72.1% for the comparable period in 2003. Management continues to
emphasize quality loan growth to increase these averages. Average loans as a
percent of average assets were 60.1% and 59.8% for the three-month period ended
March 31, 2004 and 2003 respectively.
The decrease in deposits of $43,352 from December 31, 2003 to March 31, 2004 was
due primarily to the loss of public fund deposits which are generally temporary
and seasonal in nature.
Shareholders' equity was $108,563 on March 31, 2004 compared to $105,424 on
December 31, 2003. Book value (shareholders' equity) per common share was $10.26
at March 31, 2004 versus $9.94 at year-end 2003. Accumulated other comprehensive
income increased book value per share by $.23 at March 31, 2004 and by $.12 at
December 31, 2003. 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 36.8% of total loans at March 31,
2004 and 36.9% at December 31, 2003.
On March 31, 2004, the Company had $5,925 of residential real estate loans held
for sale, which was an increase from the year-end balance of $1,965. The Company
generally retains the servicing rights on mortgages sold.
Asset quality deteriorated from a year ago with non-performing assets totaling
$16.1 million, or 1.13% of total assets, as of March 31, 2004 compared to $11.8
million, or 0.94% of total assets, as of the same period a year ago. This amount
represents a decrease from year-end 2003 of $1.2 million, or 7% of total
non-performing assets. With the acquisition of First Community, the Company
added approximately $4.4 million of non-performing assets. Management believes
that adequate allowance allocations have been provided for these loans as of
March 31, 2004. The allowance for loan losses was $11.3 million as of March 31,
2004 and represented 1.35% of total outstanding loans.
The provision for loan losses was $0 in the first quarter of 2004 compared to
$390 for the same period in 2003. The provision for 2004 was lower than 2003 as
non-performing loan balances declined from year-end and several credits were
upgraded to a more favorable risk rating. Additionally, net charge-offs totaled
$176 in the first quarter of 2004 compared to $432 in the last quarter of 2003.
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, 2004 was
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, 2004, $418,475 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 $4,293 was recorded to adjust the AFS
portfolio to current market value at March 31, 2004, compared to an unrealized
pre-tax gain of $2,185 at December 31, 2003.
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 89.8% and 90.5% of total average
earning assets for the periods ending March 31, 2004 and 2003. Total
interest-bearing deposits averaged 89.9% and 90.5% of average total deposits for
the periods ending March 31, 2004 and 2003, 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 $56,786 outstanding at March 31, 2004. These
advances have interest rates ranging from 4.4% to 6.7% with $10,000 maturing in
the second quarter of 2005. The remaining amount of FHLB advances mature in 2007
or later.
Capital Resources
Total shareholders' equity was $108,563 at March 31, 2004, which was an increase
from $105,424 at December 31, 2003. The increase in equity was attributable to
the increase in the unrealized gain on investment securities and the earnings
for the first quarter. Offsetting these items were cash dividends paid on common
stock and treasury stock purchases.
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 loan
losses. At March 31, 2004, Tier 1 capital to total average assets was 6.24%.
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 9.70%. Total capital to risk-adjusted assets
was 11.79%. 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 $.120 per share in the first
quarter of 2004 versus $.114 for the first quarter of 2003.
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 78.9% of total earning assets for the three months ended
March 31, 2004 and 82.0% for the same period in 2003.
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, 2004, the Company held approximately $480 million 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.
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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, 2004 from the
analysis and disclosures provided in the Corporation's Form 10-K for the year
ended December 31, 2003.
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Item 4. Controls and Procedures
As of the end of the quarterly period covered by this report, an evaluation was
carried out under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures (as defined in
Exchange Act Rules 13a-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 were, to
the best of their knowledge, effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms as of such date.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's first fiscal quarter of 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company has a Stock Repurchase Plan that allows for the repurchase
of up to 255,000 shares of common stock. During the first quarter of
2004, the Company had one purchase of 20,781 shares on February 13,
2004 at a price of $22.31.
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
Sections 302 and 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.
31.1 Certification pursuant to Section 302 of Sarbanes-Oxley
Act of 2002 by Chief Executive Officer
31.2 Certification pursuant to Section 302 of Sarbanes-Oxley
Act of 2002 by Chief Financial Officer
32.1 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Chief Executive Officer
32.2 Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Chief Financial Officer
b) Reports on Form 8-K
During the quarter ended March 31, 2004 the Company filed the
following reports on Form 8-K.
The Form 8-K dated January 22, 2004, the Company announced
earnings and operating results for the fourth quarter and year
ended December 31, 2003.
The Form 8-K dated January 27, 2004, the Company announced a
stock repurchase program effective February 1, 2004.
The Form 8-K dated February 13, 2004, the Company announced
that their Annual Meeting of Shareholders would take place on
April 21, 2004.
The Form 8-K dated March 2, 2004, the Company announced the
declaration of their first quarter cash dividend.
The Form 8-K dated March 16, 2004, the Company announced that
its Board of Directors approved a three-for-two stock split of
the Company's stock to be distributed on April 16, 2004 to
shareholders of record as of March 31, 2004.
No other information is required to be filed under Part II of this form.
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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 7, 2004
/s/ James L. Saner, Sr.
-------------------------------------------------
James L. Saner Sr.
President and Chief Executive Officer
May 7, 2004
/s/ Donald A. Benziger
-------------------------------------------------
Donald A. Benziger
Senior Vice President & Chief Financial Officer
May 7, 2004
/s/ James M. Anderson
-------------------------------------------------
James M. Anderson
Controller & Principal Accounting Officer
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