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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, 2005
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)
N/A
-------------------------------------------------------
(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 6, 2005 there were outstanding 11,471,128 shares of common stock,
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 2. Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 6. Exhibits 20
Signatures 21
2
MAINSOURCE FINANCIAL GROUP
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands except per share data)
(Unaudited)
March 31, December 31,
2005 2004
----------- -----------
Assets
Cash and due from banks $ 40,849 $ 71,607
Money market and federal funds sold 804 4,662
----------- -----------
Cash and cash equivalents 41,653 76,269
Interest bearing time deposits 100 304
Investment securities
Available for sale 425,853 425,443
Held to maturity (fair value of $3,104 and $3,414) 2,978 3,243
----------- -----------
Total investment securities 428,831 428,686
Loans held for sale 3,049 824
Loans, net of allowance for loan losses of $11,505 and $11,698 889,807 917,307
Restricted stock, at cost 7,994 7,902
Premises and equipment, net 25,516 25,766
Goodwill 39,311 40,642
Purchased intangible assets 6,134 6,429
Cash surrender value of life insurance 25,017 24,776
Interest receivable and other assets 21,392 20,474
----------- -----------
Total assets $ 1,488,804 $ 1,549,379
=========== ===========
Liabilities
Deposits
Noninterest bearing $ 147,181 $ 145,999
Interest bearing 1,044,832 1,080,368
----------- -----------
Total deposits 1,192,013 1,226,367
Short-term borrowings 21,614 57,175
Federal Home Loan Bank (FHLB) advances 103,834 90,981
Subordinated debentures 29,898 29,898
Notes payable 9,100 9,100
Other liabilities 11,050 12,538
----------- -----------
Total liabilities 1,367,509 1,426,059
----------- -----------
Shareholders' equity
Preferred stock, no par value
Authorized shares - 400,000
Issued and outstanding shares - none -- --
Common stock $.50 stated value:
Authorized shares - 25,000,000
Issued shares - 11,755,409 and 11,196,357
Outstanding shares - 11,471,128 and 10,985,121 5,880 5,600
Common stock to be distributed, 0 and 559,818 shares -- 280
Treasury stock - 284,281 and 211,236, at cost (4,861) (3,479)
Additional paid-in capital 73,433 73,451
Retained earnings 49,653 47,371
Accumulated other comprehensive income (2,810) 97
----------- -----------
Total shareholders' equity 121,295 123,320
----------- -----------
Total liabilities and shareholders' equity $ 1,488,804 $ 1,549,379
=========== ===========
See notes to consolidated financial statements.
3
MAINSOURCE FINANCIAL GROUP
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three months ended
March 31,
(Dollar amounts in thousands except per share data) 2005 2004
------- -------
Interest income
Loans, including fees $14,591 $13,290
Investment securities 4,026 3,454
Other interest income 76 20
------- -------
Total interest income 18,693 16,764
------- -------
Interest expense
Deposits 4,309 4,006
Subordinated debentures 458 413
Other borrowings 1,221 873
------- -------
Total interest expense 5,988 5,292
------- -------
Net interest income 12,705 11,472
Provision for loan losses 120 --
------- -------
Net interest income after
provision for loan losses 12,585 11,472
Non-interest income
Insurance commissions 587 698
Mortgage banking 546 799
Trust and investment product fees 280 217
Service charges on deposit accounts 1,666 1,538
Net realized gains on securities 11 336
Gain on cash surrender value of life insurance 235 248
Interchange income 490 408
Other income 764 520
------- -------
Total non-interest income 4,579 4,764
------- -------
Non-interest expense
Salaries and employee benefits 6,876 6,441
Net occupancy expenses 899 758
Equipment expenses 1,030 932
Intangibles amortization 295 234
Telecommunications 390 340
Stationery printing and supplies 178 219
Other expenses 2,426 2,157
------- -------
Total non-interest expense 12,094 11,081
------- -------
Income before income tax 5,070 5,155
Income tax expense 1,280 1,520
------- -------
Net income $ 3,790 $ 3,635
======= =======
Comprehensive income $ 883 $ 4,821
======= =======
Net income per share (basic and diluted) $ 0.33 $ 0.33
Cash dividend declared per share .130 .114
See notes to consolidated financial statements.
4
MAINSOURCE FINANCIAL GROUP
CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)
Three months ended
March 31,
2005 2004
-------- --------
Operating Activities
Net income $ 3,790 $ 3,635
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 120 --
Depreciation and amortization 768 695
Securities amortization, net 424 884
Amortization of core deposit intangibles 295 234
Increase in cash surrender value of life insurance policies (235) (241)
Investment securities gains (11) (336)
Change in loans held for sale (2,225) (3,960)
Change in other assets and liabilities (606) 1,313
-------- --------
Net cash provided by operating activities 2,320 2,224
Investing Activities
Net change in short-term investments 204 --
Proceeds from maturities and payments
on securities held to maturity -- 137
Purchases of securities available for sale (32,151) (62,040)
Proceeds from maturities and payments
on securities available for sale 26,731 24,673
Proceeds from sales of securities available for sale -- 42,552
Purchases of restricted stock -- (278)
Loan originations and payments, net 27,380 15,989
Purchases of premises and equipment (518) (572)
-------- --------
Net cash provided (used) by investing activities 21,646 20,461
Financing Activities
Net change in deposits (34,354) (43,352)
Net change in short-term borrowings (35,561) 18,768
Proceeds from FHLB advances 15,000 --
Repayment of FHLB advances (2,147) (5,965)
Purchase of treasury shares (27) (440)
Cash dividends and fractional stock dividends (1,518) (1,269)
Proceeds from exercise of stock options 25 27
-------- --------
Net cash provided (used) by financing activities (58,582) (32,231)
-------- --------
Net change in cash and cash equivalents (34,616) (9,546)
Cash and cash equivalents, beginning of year 76,269 56,854
-------- --------
Cash and cash equivalents, end of year $ 41,653 $ 47,308
======== ========
See Note 2 regarding non-cash transaction included in acquisitions.
See notes to consolidated financial statements.
5
NOTE 1 - BASIS OF PRESENTATION
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. The consolidated interim
financial statements have been prepared according to accounting principles
generally accepted in the United States of America and in accordance with the
instructions for Form 10-Q. The interim statements do not include all
information and footnotes normally included in the annual financial statements.
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. Some items in prior period
financial statements were reclassified to conform to current presentation.
6
NOTE 2 - STOCK COMPENSATION
Employee compensation expense for 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, 2005 March 31, 2004
-------------- --------------
Net income as reported $3,790 $3,635
Deduct: Stock-based compensation expense
determined under fair value based method 41 37
------ ------
Pro forma net income $3,749 $3,598
Basic earnings per share as reported $ 0.33 $ 0.33
Pro forma basic earnings per share $ 0.33 $ 0.32
Diluted earnings per share as reported $ 0.33 $ 0.33
Pro forma diluted earnings per share $ 0.32 $ 0.32
The pro forma effects are computed using option pricing models, with the
following weighted-average assumptions for 2005 as of grant date: risk-free
interest rate 4.07%, expected option life 6.82 years, expected stock price
volatility 21.66% and dividend yield 2.50%. For 2004, the following
weighted-average assumptions were used 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 2004, the Company consummated its acquisition of Peoples Financial Corp
("PFC"). At the date of acquisition, PFC had seven branches located in the
southwestern part of Indiana. The acquired company had $4,320 of cash and cash
equivalents, $81,371 of net loans, and $99,717 of deposits. A core deposit
intangible of $2,141 and goodwill of $4,595 were also recorded. The results of
operations for this acquisition have been included since the transaction date
which was June 8, 2004. The Company funded the purchase price of $13,588 by
issuing 471,685 shares of its common stock valued at $18.92 per share per the
NASDAQ closing bid on June 7, 2004 and using $4,454 of cash on hand.
In March 2005, the Company executed a definitive agreement to acquire The
Madison Bank & Trust Company ("Madison"). Madison, which has approximately
$180,000 in assets, operates a total of five offices with four in Jefferson
County, Indiana and one in Ohio County, Indiana. The transaction, which is
subject to regulatory approval, is expected to close in the third quarter of
2005.
In March 2005, the Company disposed of the Kentucky division of MainSource
Insurance to its previous owners. The consideration received totaled $1,380 of
the Company's stock.
7
NOTE 4 - 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, 2005 Value Gains Losses
- --------------------------------------------------------------------------------------------
Available for Sale
Federal agencies $63,011 $29 ($1,361)
State and municipal 89,198 $1,112 (1,118)
Mortgage-backed securities 255,742 $541 (4,339)
Equity and other securities 17,902 $511 (60)
- --------------------------------------------------------------------------------------------
Total available for sale $425,853 $2,193 ($6,878)
- --------------------------------------------------------------------------------------------
As of December 31, 2004
- --------------------------------------------------------------------------------------------
Available for Sale
Federal agencies $56,557 $152 ($388)
State and municipal 88,338 1,546 (583)
Mortgage-backed securities 262,690 1,005 (1,924)
Equity and other securities 17,858 427 (60)
- --------------------------------------------------------------------------------------------
Total available for sale $425,443 $3,130 ($2,955)
- --------------------------------------------------------------------------------------------
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, 2005 Amount Gains Losses Value
- -----------------------------------------------------------------------------------------------
Held to Maturity
State and municipal $2,161 $55 $ - $2,216
Other securities 817 71 - 888
- -----------------------------------------------------------------------------------------------
Total held to maturity $2,978 $126 $ - $3,104
- -----------------------------------------------------------------------------------------------
As of December 31, 2004
- -----------------------------------------------------------------------------------------------
Held to Maturity
State and municipal $2,439 $74 $ - $2,513
Other securities 804 97 - 901
- -----------------------------------------------------------------------------------------------
Total held to maturity $3,243 $171 $ - $3,414
- -----------------------------------------------------------------------------------------------
8
NOTE 5 - LOANS
March 31, December 31,
2005 2004
- ----------------------------------------------------------------------
Commercial and industrial loans $ 162,901 $ 154,717
Agricultural production financing 20,830 22,647
Farm real estate 37,434 38,281
Commercial real estate 133,584 133,360
Hotel 57,714 80,234
Residential real estate 344,392 353,515
Construction and development 35,982 37,821
Consumer 108,475 108,430
-----------------------------
Total loans 901,312 929,005
-----------------------------
Allowance for loan lossess (11,505) (11,698)
- ----------------------------------------------------------------------
Net loans $ 889,807 $ 917,307
======================================================================
NOTE 6 - DEPOSITS March 31, December 31,
2005 2004
------------- --------------
Non-interest-bearing demand $ 147,181 $ 145,999
Interest-bearing demand 277,829 310,306
Savings 300,641 304,230
Certificates of deposit of $100 or more 125,059 117,361
Other certificates and time deposits 341,303 348,471
------------- --------------
Total deposits $ 1,192,013 $ 1,226,367
============= ==============
NOTE 7 - EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
For the three months ended March 31, 2005 March 31, 2004
------------------------------------- -------------------------------------
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 $3,790 11,527,515 $0.33 $3,635 11,116,599 $0.33
------ ----- ------ -----
Effect of dilutive shares 18,734 18,314
------ ------
Diluted earnings per share $3,790 11,546,249 $0.33 $3,635 11,134,913 $0.33
====== ========== ===== ====== ========== =====
Stock options for 61,425 shares of common stock were not considered in computing
diluted earnings per common share for the first quarter 2005 because they were
antidilutive.
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, financial 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, 2005, the Company controlled three bank
subsidiaries, MainSource Bank, MainSource Bank of Illinois, and Peoples Trust
Company ("Peoples"). In addition to the banking subsidiaries, the Company owned
the following subsidiaries: MainSource Insurance, LLC, MainSource Statutory
Trust I, MainSource Statutory Trust II, MainSource Statutory Trust III, IUB
Reinsurance Company, Ltd., MSB Investments of Nevada, Inc., MainSource Title,
LLC, and MainSource Mortgage, LLC. As required by current accounting guidance,
the trusts are no longer consolidated with the Company. Accordingly, the Company
does not report the securities issued by the trusts as liabilities, and instead
reports as liabilities the subordinated debentures issued by the Company. During
the first quarter of 2005, the Company sold the Kentucky division of MainSource
Insurance at its approximate book value.
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 2005 was $3,790 or 4.3% greater than the
first quarter of 2004. Earnings per share for the first quarter totaled $.33 in
2005, which was equal to the first quarter of 2004. During the first quarter of
2005, the Company incurred $140 of pre-tax expenses, or $.01 per share, related
to the continued collapsing of its Indiana bank charters into MainSource Bank
which was previously announced in September 2004. Excluding these costs, the
Company's earnings per share would have been $0.34. The Company's return on
average total assets for the first quarter was 1.02% in 2005 and 1.03% in 2004.
Return on average shareholders' equity for the first quarter was 12.38% in 2005
and 13.60% in 2004.
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
$12,705 in 2005 was an increase of 10.7% versus the first quarter of 2004. 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 2005
and 3.68% for the same timeframe in 2004. The increase in the Company's net
interest margin was primarily attributable to an increase in the Company's yield
on earning assets. The Company's cost of funds also increased, 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 2005 was $4,579 compared to $4,764 for the
first quarter of 2004. This decrease was primarily attributable to a decrease in
mortgage banking income and a lower level of securities gains. Mortgage banking
income, which consists of gains and losses on loan sales and service fee income,
was $546 for the first quarter of 2005 versus $799 for the first quarter of
2004. This decrease was primarily due to lower refinancing activity driven by
the increase in mortgage rates versus the prior year. Insurance commissions
decreased due to the aforementioned sale of the Kentucky division of MainSource
Insurance during the quarter. Offsetting these decreases was an increase in
service charges on deposit accounts and increases resulting from the acquisition
of Peoples in June 2004.
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 $12,094 for the first quarter of 2005, which
represented an increase of $1,013, or 9.1%, from the first quarter of 2004. The
increase was primarily due to the acquisition of Peoples, which added $930 of
non-interest expense in 2005. Excluding this acquisition, non-interest expense
would have been $11,164, relatively flat when compared to the same period a year
ago.
Income Taxes
The effective tax rate for the first three months was 25.2% for 2005 compared to
29.5% for the same period a year ago. The decrease in the Company's effective
tax rate was primarily attributable to increased income from tax-free municipal
securities. 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, 2005 were $1,488,804 compared to $1,549,379 as of
December 31, 2004. Average earning assets represented 90.2% of average total
assets for the first three months of 2005 and 90.5% for the same period in 2004.
Average loans represented 76.6% of average deposits in the first three months of
2005 and 73.9% for the comparable period in 2004. Management continues to
emphasize quality loan growth to increase these averages. Average loans as a
percent of average assets were 60.9% and 60.1% for the three-month period ended
March 31, 2005 and 2004 respectively.
The decrease in deposits of $34,354 from December 31, 2004 to March 31, 2005 was
due primarily to the seasonal fluctuation of public fund deposits.
Shareholders' equity was $121,295 on March 31, 2005 compared to $123,320 on
December 31, 2004. Book value (shareholders' equity) per common share was $10.57
at March 31, 2005 versus $10.68 at year-end 2004. Accumulated other
comprehensive income decreased book value per share by $.25 at March 31, 2005
and increased book value per share $.01 at December 31, 2004. 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 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 38.2% of total loans at March 31,
2005 and 38.1% at December 31, 2004.
On March 31, 2005, the Company had $3,049 of residential real estate loans held
for sale, which was an increase from the year-end balance of $824. The Company
generally retains the servicing rights on mortgages sold.
Non-performing assets totaled $17,548, or 1.18% of total assets, as of March 31,
2005, and is compared to $16,061, or 1.13% of total assets, as of the same date
a year ago, and $15,732, or 1.02% of assets at year-end 2004. Included in the
$16,562 of non-performing assets as of March 31, 2005 is one credit relationship
in the approximate aggregate amount of $1.9 million. However, on April 8, 2005,
the customer brought all of its loans to a current status. Excluding this
relationship, non-performing assets would have been approximately $14,650, or
1.05% of total assets as of March 31, 2005. The allowance for loan losses was
$11,505 as of March 31, 2005 and represented 1.28% of total outstanding loans
compared to $11,698 as of December 31, 2004 or 1.26% of total loans.
The provision for loan losses was $120 in the first quarter of 2005 compared to
$0 for the same period in 2004. The increase in the provision in 2005 was
primarily attributable to the slight increase in the balance of non-performing
loans and the corresponding increase in specific allowance allocations for these
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, 2005
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, 2005, $425,853 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 loss of $4,685 was recorded to adjust the AFS
portfolio to current market value at March 31, 2005, compared to an unrealized
pre-tax gain of $175 at December 31, 2004. Unrealized losses on AFS securities
have not been recognized into income because management has the intent and
ability to hold these securities for the foreseeable future and the decline in
fair value is largely due to increases in market interest rates. The fair value
is expected to recover as the securities approach their maturity dates.
Sources of Funds
The Company relies primarily on customer deposits, securities sold under
agreement to repurchase 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 88.2% and 89.8% of total average
earning assets for the periods ending March 31, 2005 and 2004. Total
interest-bearing deposits averaged 88.7% and 89.9% of average total deposits for
the periods ending March 31, 2005 and 2004, 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 $103,834 outstanding at March 31, 2005. These
advances have interest rates ranging from 2.36% to 6.58%. Approximately $48,000
of these advances were obtained for short-term liquidity needs and had original
maturities of six months or less. The remaining advances were originally
long-term advances with $15,000 maturing in 2005, $15,000 maturing in 2007,
$5,000 maturing in 2010 and $20,000 maturing in 2012.
Capital Resources
Total shareholders' equity was $121,295 at March 31, 2005, which was a decrease
from $123,320 at December 31, 2004. The decrease in equity was primarily
attributable to the change in accumulated other comprehensive income and an
increase in treasury stock as the Company obtained stock in the sale of its
Kentucky insurance division.
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 capital 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, 2005, Tier 1 capital to total average assets was
7.29%. 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 11.12%. Total capital to risk-adjusted
assets was 12.31%. 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 $.13 per share in the first
quarter of 2005 versus $.114 for the first quarter of 2004.
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 79.0% of total earning assets for the three months ended
March 31, 2005 and 78.9% for the same period in 2004.
Management believes the Company has sufficient liquidity to meet all reasonable
borrower, depositor, and creditor needs in the present economic environment. In
addition, the Company's 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.
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, 2005, the Company held $637,210 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.
17
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk of the Company 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, 2005 from the
analysis and disclosures provided in the Company's Annual Report on Form 10-K
for the year ended December 31, 2004.
18
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
Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934
("Exchange Act")). 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 2005 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
19
MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The activity in the Company's Stock Repurchase Program for the first quarter of
2005 was as follows:
Maximum Number
Total Number of Shares (or Approximate Dollar
Total Number Average Price (or Units) Purchased as Part Value) of Shares (or Units)
of Shares (or Paid Per Share of Publicly Announced Plans That May Yet Be Purchased
Period Units) Purchased (or Unit) or Programs Under the Plans or Programs (1)
- -----------------------------------------------------------------------------------------------------------------------
January 2005 -- -- -- 487,048
February 2005 1,209 (2) $ 22.55 1,209 0
March 2005 -- -- -- 0
(1) On January 27, 2004, the Company announced that its Board of Directors had
approved a stock repurchase program for up to 255,000 of its outstanding
common shares. This plan was expanded by the Board of Directors on August
17, 2004 to include an additional 295,000 shares. The plan expired January
31, 2005.
(2) This transaction was negotiated and agreed to in January 2005, but was
consummated during February 2005.
Item 6. Exhibits
2.1 Agreement and Plan of Merger dated as of March 10, 2005, among the
Registrant, MainSource Bank, National City Corporation and The Madison
Bank & Trust Company.
3.1 Restated Articles of Incorporation (incorporated by reference to
Exhibit 3.1 to the Annual Report on Form 10-K of the registrant for
the fiscal year ended December 31, 2003 filed March 12, 2004 with the
Commission (Commission File No. 0-12422)).
3.2 Amended and Restated Bylaws dated April 28, 1998 (incorporated by
reference to Exhibit 3.2 to the Annual Report on Form 10-K of the
registrant for the fiscal year ended December 31,1998 filed March 29,
1999 with the Commission (Commission File No. 0-12422)).
4.1 Indenture dated as of December 19, 2002 between the Registrant, as
issuer, and State Street Bank and Trust Company of Connecticut, N.A.,
as trustee, re: floating rate junior subordinated deferrable interest
debentures due 2032 (incorporated by reference to Exhibit 4.6 to the
Annual Report on Form 10-K of the registrant for the fiscal year ended
December 31, 2002 filed March 28, 2003 with the Commission (Commission
File No. 0-12422)).
4.2 Amended and Restated Declaration of Trust dated as of December 19,
2002 among State Street Bank and Trust Company of Connecticut, N.A.,
as institutional trustee, the Registrant, as sponsor, and James L.
Saner Sr., Donald A. Benziger and James M. Anderson, as administrators
(incorporated by reference to Exhibit 4.7 to the Annual Report on Form
10-K of the registrant for the fiscal year ended December 31, 2002
filed March 28, 2003 with the Commission (Commission File No.
0-12422)).
4.3 Guarantee Agreement dated as of December 19, 2002 between the
Registrant, and State Street Bank and Trust Company of Connecticut,
N.A (incorporated by reference to Exhibit 4.8 to the Annual Report on
Form 10-K of the registrant for the fiscal year ended December 31,
2002 filed March 28, 2003 with the Commission (Commission File No.
0-12422)).
4.4 Indenture dated as of April 1, 2003 between the Registrant, as issuer,
and U.S. Bank, N.A., as trustee, re: floating rate junior subordinated
deferrable interest debentures due 2033 (incorporated by reference to
Exhibit 4.1 to the Quarterly Report on Form 10-Q of the registrant for
the quarter ended June 30, 2003 filed August 14, 2003 with the
Commission (Commission File No. 0-12422)).
4.5 Amended and Restated Declaration of Trust dated as of April 1, 2003
among U.S. Bank, N.A., as institutional trustee, the Registrant, as
sponsor, and James L. Saner Sr., Donald A. Benziger and James M.
Anderson, as administrators (incorporated by reference to Exhibit 4.2
to the Quarterly Report on Form 10-Q of the registrant for the quarter
ended June 30, 2003 filed August 14, 2003 with the Commission
(Commission File No. 0-12422)).
4.6 Guarantee Agreement dated as of April 1, 2003 between the Registrant,
and U.S. Bank, N.A (incorporated by reference to Exhibit 4.3 to the
Quarterly Report on Form 10-Q of the registrant for the quarter ended
June 30, 2003 filed August 14, 2003 with the Commission (Commission
File No. 0-12422)).
4.7 Indenture dated as of June 12, 2003 between the Registrant, as issuer,
and The Bank of New York, as trustee, re: rate junior subordinated
deferrable interest debentures due (incorporated by reference to
Exhibit 4.4 to the Quarterly Report on Form 10-Q of the registrant for
the quarter ended June 30, 2003 filed August 14, 2003 with the
Commission (Commission File No. 0-12422)).
4.8 Amended and Restated Declaration of Trust dated as of June 12, 2003
among The Bank of New York, as institutional trustee, the Registrant,
as sponsor, and James L. Saner Sr., Donald A. Benziger and James M.
Anderson, as administrators (incorporated by reference to Exhibit 4.5
to the Quarterly Report on Form 10-Q of the registrant for the quarter
ended June 30, 2003 filed August 14, 2003 with the Commission
(Commission File No. 0-12422)).
4.9 Guarantee Agreement dated as of June 12, 2003 between the Registrant,
and The Bank of New York (incorporated by reference to Exhibit 4.6 to
the Quarterly Report on Form 10-Q of the registrant for the quarter
ended June 30, 2003 filed August 14, 2003 with the Commission
(Commission File No. 0-12422)).
10.1 Registrant's 2003 Stock Option Plan (incorporated by reference to
Exhibit 10.1 to the Annual Report on Form 10-K of the registrant for
the fiscal year ended December 31, 2003 filed March 12, 2004 with the
Commission (Commission File No. 0-12422)).*
10.2 Form of Stock Option Agreement Under 2003 Stock Option Plan for
Directors of Registrant dated May 19, 2003 (incorporated by reference
to Exhibit 10.2 to the Annual Report on Form 10-K of the registrant
for the fiscal year ended December 31, 2003 filed March 12, 2004 with
the Commission (Commission File No. 0-12422)).*
10.3 Form of Stock Option Agreement Under 2003 Stock Option Plan for
Officers of Registrant (incorporated by reference to Exhibit 10.1 to
the Report on Form 8-K of the registrant filed February 24, 2005 with
the Commission (Commission File No. 0-12422)).*
10.4 Form of Executive Severance Agreement dated January 16, 2001 between
the Registrant and James L. Saner, Sr. (incorporated by reference to
Exhibit 10.2 to the Annual Report on Form 10-K of the registrant for
the fiscal year ended December 31, 2000 filed March 30, 2001 with the
Commission (Commission File No. 0-12422)).*
10.5 Form of Executive Severance Agreement dated January 16, 2001 between
the Registrant and Donald A. Benziger (incorporated by reference to
Exhibit 10.2 to the Annual Report on Form 10-K of the registrant for
the fiscal year ended December 31, 2000 filed March 30, 2001 with the
Commission (Commission File No. 0-12422)).*
10.6 Form of Executive Severance Agreement dated January 16, 2001 between
the Registrant and John C. Parker (incorporated by reference to
Exhibit 10.4 to the Annual Report on Form 10-K of the registrant for
the fiscal year ended December 31, 2002 filed March 28, 2003 with the
Commission (Commission File No. 0-12422)).*
10.7 Form of Indemnification Agreement for Directors and Certain Officers
of Registrant (incorporated by reference to Exhibit 10.1 to the Report
on Form 8-K of the registrant filed February 24, 2005 with the
Commission (Commission File No. 0-12422)).
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
The following exhibits accompany this periodic report 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 and 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 for any purpose other than compliance with
the 2002 Act.
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
* A management contract or compensatory plan or agreement.
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 9, 2005
/s/ James L. Saner, Sr.
-------------------------------------------------
James L. Saner Sr.
President and Chief Executive Officer
May 9, 2005
/s/ Donald A. Benziger
-------------------------------------------------
Donald A. Benziger
Senior Vice President & Chief Financial Officer
May 9, 2005
/s/ James M. Anderson
-------------------------------------------------
James M. Anderson
Controller & Principal Accounting Officer
21