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 JUNE 30, 2002
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)
INDIANA UNITED BANCORP
----------------------
(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
--- ---
As of August 9, 2002 there were outstanding 6,473,873 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. Submission of Matters to a Vote of Security Holders 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in thousands except per share data)
(Unaudited)
June 30, December 31,
2002 2001
----------- -----------
Assets
Cash and due from banks $ 43,472 $ 54,068
Money market fund 31,071 5,351
Federal funds sold 51,306 --
----------- -----------
Cash and cash equivalents 125,849 59,419
Interest-bearing time deposits -- 599
Securities
Available for sale 303,446 268,136
Held to maturity (fair value of $6,882 and $8,292) 6,673 8,168
Loans held for sale 5,396 23,256
Loans, net of allowance for loan losses of $9,544 and $8,894 738,743 751,891
Premises and equipment (net) 18,328 16,840
Restricted stock, at cost 5,949 5,109
Goodwill 2,673 2,673
Intangible assets 19,810 20,142
Other assets 22,970 22,159
----------- -----------
Total assets $ 1,249,837 $ 1,178,392
=========== ===========
Liabilities
Deposits
Noninterest-bearing $ 89,466 $ 103,391
Interest-bearing 959,635 911,296
----------- -----------
Total deposits 1,049,101 1,014,687
Short-term borrowings 27,537 15,478
Federal Home Loan Bank advances 40,270 20,346
Notes payable 3,200 4,062
Other liabilities 13,114 13,522
----------- -----------
Subtotal 1,133,222 1,068,095
Guaranteed preferred beneficial interests in
company's subordinated debentures 22,425 22,425
Shareholders' equity
Preferred stock no par value
Authorized shares - 400,000
Issued and outstanding shares - none -- --
Common stock $.50 stated value:
Authorized shares - 10,000,000
Issued shares - 6,500,084 and 6,191,232
Outstanding shares - 6,473,873 and 5,873,900 3,251 3,096
Common stock to be distributed - 0 and 309,562 shares -- 155
Treasury stock - 26,211 shares (598) --
Additional paid-in capital 35,385 35,385
Retained earnings 52,240 47,806
Accumulated other comprehensive income (loss) 3,912 1,430
----------- -----------
Total shareholders' equity 94,190 87,872
----------- -----------
Total liabilities and shareholders' equity $ 1,249,837 $ 1,178,392
=========== ===========
See notes to consolidated condensed financial statements.
3
MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands except per share data)
Three months ended Six months ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Interest income:
Loans, including fees $ 13,843 $ 16,828 $ 28,453 $ 34,150
Investment securities 4,021 3,822 7,621 7,957
Other 263 757 418 1,612
-------- -------- -------- --------
Total interest income 18,127 21,407 36,492 43,719
-------- -------- -------- --------
Interest expense:
Deposits 5,819 10,414 12,114 21,699
Trust preferred securities 505 505 1,011 1,011
Other borrowings 634 585 1,135 1,252
-------- -------- -------- --------
Total interest expense 6,958 11,504 14,260 23,962
-------- -------- -------- --------
Net interest income 11,169 9,903 22,232 19,757
Provision for loan losses 565 369 1,115 738
-------- -------- -------- --------
Net interest income after
provision for loan losses 10,604 9,534 21,117 19,019
Non-interest income:
Securities gains/(losses) 186 (137) 314 (124)
Other income 3,123 3,033 6,494 5,576
-------- -------- -------- --------
Total non-interest income 3,309 2,896 6,808 5,452
Non-interest expense 9,011 8,267 17,893 16,501
-------- -------- -------- --------
Income before income tax 4,902 4,163 10,032 7,970
Income tax expense 1,584 1,377 3,378 2,610
-------- -------- -------- --------
Net income $ 3,318 $ 2,786 $ 6,654 $ 5,360
======== ======== ======== ========
Comprehensive income $ 6,836 $ 3,287 $ 9,136 $ 8,034
======== ======== ======== ========
Net income per share (basic and diluted) $ 0.51 $ 0.43 $ 1.02 $ 0.83
Cash dividends declared 0.170 0.157 0.340 0.314
See notes to consolidated condensed financial statements.
4
MAINSOURCE FINANCIAL GROUP, INC.
FORM 10-Q
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW
(Unaudited)
(Dollars in thousands)
Six months ended
June 30,
2002 2001
--------- ---------
Operating Activities
Net income $ 6,654 $ 5,360
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,115 738
Depreciation and amortization 1,418 1,179
Amortization of intangibles 870 976
Investment securities gains/(losses) (314) 124
Change in loans held for sale 17,860 (9,640)
Change in other assets and liabilities (2,783) 3,089
--------- ---------
Net cash provided by operating activities 24,820 1,826
Investing Activities
Net change in short term investments 599 (401)
Proceeds from maturities and payments
on securities held to maturity 1,512 3,421
Purchases of securities available for sale (104,573) (102,632)
Proceeds from maturities and payments
on securities available for sale 47,808 138,421
Proceeds from sales of securities available for sale 25,323 --
Loan originations and payments, net 15,232 7,288
Cash paid for acquisitions 0 (655)
Purchases of restricted stock (840) (345)
Purchases of premises and equipment (1,690) (796)
--------- ---------
Net cash provided (used) by investing activities (16,629) 44,301
Financing Activities
Net change in deposits 14,282 (24,809)
Short-term borrowings 12,059 2,656
Repayment of notes payable (862) (1,619)
Repayment of FHLB advances (76) (2,082)
Proceeds from FHLB borrowings 20,000 --
Purchase of treasury shares (598) --
Cash dividends and fractional shares (2,220) (2,039)
Cash received from branch acquisitions 15,654 --
--------- ---------
Net cash provided (used) by financing activities 58,239 (27,893)
--------- ---------
Net change in cash and cash equivalents 66,430 18,234
Cash and cash equivalents, beginning of period 59,419 70,088
--------- ---------
Cash and cash equivalents, end of period $ 125,849 $ 88,322
========= =========
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.
NOTE 2 ACQUISITIONS
In August 2002, the Company acquired one branch located in Lynn, Indiana. The
transaction was accounted for using the purchase method of accounting. The total
fair value of assets acquired and liabilities assumed was $13.0 million
including cash of $1.1 million, loans of $9.7 million and deposits of $12.0
million. An intangible asset was recorded of $1.0 million. This branch was
merged into People's Trust.
In July 2002, the Company acquired three branches in Vermillion County,
Illinois. The transaction was accounted for using the purchase method of
accounting. The total fair value of assets acquired and liabilities assumed was
$33.4 million including cash of $22.1 million, loans of $9.3 million and
deposits of $33.3 million. An intangible asset was recorded of $1.7 million.
These branches were merged into Capstone.
During the first quarter of 2002, the Company acquired one branch located in
Grant Park, Illinois. The transaction was accounted for using the purchase
method of accounting. The results of operations have been included since the
transaction date. The total fair value of assets acquired and liabilities
assumed was $20.2 million including cash of $15.7 million, loans of $3.2 million
and deposits of $20.1 million. A core deposit intangible was recorded of $0.5
million. This branch was merged into Capstone.
6
Effective April 1, 2001, the Company consummated its acquisition of the
insurance agencies of Vollmer & Associates, Inc. The transaction was accounted
for using the purchase method of accounting. The purchase price consisted of
$0.7 million cash and 25,393 shares of Company stock.
NOTE 3 - INVESTMENT 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 June 30, 2002 Value Gains Losses
- --------------------------------------------------------------------------------------------
Available for Sale
Federal agencies $85,422 $2,377 $0
State and municipal 50,532 1,289 (18)
Mortgage-backed securities 147,651 2,724 (9)
Equity and other securities 19,841 843 (1,023)
- --------------------------------------------------------------------------------------------
Total available for sale $303,446 $7,233 ($1,050)
- --------------------------------------------------------------------------------------------
As of December 31, 2001
- ----------------------------------------
Available for Sale
Federal agencies $97,654 $2,205 ($113)
State and municipal 41,920 558 (600)
Mortgage-backed securities 102,086 970 (505)
Equity and other securities 26,476 565 (852)
- --------------------------------------------------------------------------------------------
Total available for sale $268,136 $4,298 ($2,070)
- --------------------------------------------------------------------------------------------
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 June 30, 2002 Amount Gains Losses Value
- -----------------------------------------------------------------------------------------------------------
Held to Maturity
State and municipal $5,499 $103 - $5,602
Other securities 1,174 106 - 1,280
- -----------------------------------------------------------------------------------------------------------
Total held to maturity $6,673 $209 $0 $6,882
- -----------------------------------------------------------------------------------------------------------
As of December 31, 2001
- ----------------------------------------
Held to Maturity
State and municipal $7,018 $68 ($38) $7,048
Other securities 1,150 94 - 1,244
- -----------------------------------------------------------------------------------------------------------
Total held to maturity $8,168 $162 ($38) $8,292
- -----------------------------------------------------------------------------------------------------------
7
NOTE 4 - LOANS
June 30 December 31
2002 2001
- ------------------------------------------------------------------------------
Commercial and industrial loans $ 92,193 $ 89,706
Agricultural real estate and production 61,662 67,250
Commercial real estate 89,886 106,522
Hotel 79,878 74,888
Residential real estate 321,658 318,332
Construction and development 30,846 34,130
Consumer 72,164 69,957
------------------------
Total loans 748,287 760,785
Allowance for loan lossess (9,544) (8,894)
- ------------------------------------------------------------------------------
Net loans $ 738,743 $ 751,891
==============================================================================
NOTE 5 - DEPOSITS June 30, December 31,
2002 2001
---- ----
Non-interest-bearing demand $ 89,466 $ 103,391
Interest-bearing demand 268,419 212,812
Savings 217,840 223,640
Certificates of deposit of $100 or more 105,414 87,480
Other certificates and time deposits 367,962 387,364
-------------- ---------------
Total deposits $ 1,049,101 $ 1,014,687
============== ===============
NOTE 6 - SHORT-TERM BORROWINGS
June 30, December 31,
2002 2001
---- ----
Short-term borrowings:
Federal funds purchased $ 10,100 $ -
Securities sold under agreement to repurchase 17,437 15,478
------------ ------------
Total short-term borrowings $ 27,537 $ 15,478
============ ============
NOTE 7 - EARNINGS PER SHARE
Earnings per share (EPS) were computed as follows:
For the three months ended June 30, 2002 June 30, 2001
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 $ 3,318 6,489,653 $ 0.51 $ 2,786 6,500,794 $ 0.43
For the six months ended June 30, 2002 June 30, 2001
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 $ 6,654 6,493,320 $ 1.02 $ 5,360 6,488,167 $ 0.83
8
Note 9 New Accounting Pronouncements
A new accounting standard requires all business combinations to be recorded
using the purchase method of accounting. Under the purchase method, all
identifiable tangible and intangible assets and liabilities of the acquired
company must be recorded at fair value at date of acquisition, and the excess
cost over fair value of net assets acquired is recorded as goodwill.
Identifiable intangible assets with finite useful lives will continue to
amortize under the new standard, whereas goodwill ceased being amortized
starting in 2002. Annual impairment testing will be required for goodwill with
impairment being recorded if the carrying amount of goodwill exceeds its implied
fair value. Amounts previously recorded as goodwill from depository institution
branch acquisitions are not presently considered to be goodwill under the new
standard and these amounts will continue to be amortized.
Goodwill is not being amortized in 2002, but was amortized in 2001. If goodwill
had not been amortized in 2001, the effect on second quarter net income would
have been a net increase of $53, consisting of reduced amortization expense of
$71 and increased income tax expense of $18, and earnings per share would have
been increased by $.01. The effect on the first six months net income in 2001 of
not amortizing goodwill would have been a net increase of $96, consisting of
reduced amortization expense of $124 and increased income tax expense of $28,
and earnings per share would have been increased by $.01.
The Company completed impairment testing of goodwill as of June 30, 2002 and
determined that no impairment adjustment was needed.
All intangible assets with finite useful lives are subject to amortization, and
amortization expense was $436 and $494 for the second quarter of 2002 and 2001.
For the first six months of 2002, amortization expense was $869 compared to $976
for the same period a year ago. Estimated amortization expense for the next five
years is as follows: 2002 $1,741, 2003 $1,687, 2004 $1,655, 2005 $1,655, 2006
$1,655. Intangible assets subject to amortization are as follows:
Gross Accumulated
Amount Amortization
June 30, 2002:
Core deposit intangible $ 9,597 $ 3,333
Unidentified branch acquisition intangible 16,358 2,812
-------- --------
Total $ 25,955 $ 6,145
December 31, 2001:
Core deposit intangible $ 9,059 $ 2,879
Unidentified branch acquisition intangible 16,358 2,396
-------- --------
Total $ 25,417 $ 5,275
Effective January 1, 2002, the Corporation adopted a new accounting standard on
impairment and disposal of long-lived assets. The effect of this new standard
was not material to the financial statements.
New accounting standards will apply for 2003 regarding asset retirement
obligations, debt extinguishment and certain lease modifications, and activity
exit costs. Management does not believe these standards will have a material
effect on the Company's financial statements, but the effects will depend on the
existence of applicable activities at the effective date of the standards.
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
June 30, 2002, the Company controlled four bank subsidiaries, People's Trust
Company ("People's"), Union Bank and Trust Company of Indiana ("Union"),
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, IUB
Reinsurance Company, Ltd., People's Investment Company, Ltd., PTC Investments,
Inc., RB Investments, Inc. and Union Investment Company, Ltd.
The Company is in the process of merging People's and Union, its two largest
banking affiliates, with the newly formed bank being named MainSource Bank. This
merger is expected to take place in the early part of the fourth quarter.
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 second quarter of 2002 increased $532 to $3,318, or 19.1%,
compared to the second quarter of 2001, due primarily to an increase in the
Company's non-interest income and an improvement in net interest income.
Earnings per share for the second quarter equaled $.51 in 2002, compared to $.43
in 2001, an increase of 18.6%. During the quarter, the Company realized
non-operating gains related to sales of investment securities of approximately
$186. Offsetting these gains was an expense of approximately $75 related to the
recent acquisition of four branches. The net effect of these items resulted in
non-operating income of $111, which represents $.01 per share on an after-tax
basis. Excluding these non-operating items, the Company's earnings per share
would have been $.50 per share, an increase of 16.3% as compared to the second
quarter of 2001. The Company's return on average total assets for the second
quarter was 1.11% in 2002 compared to .93% in 2001. Return on average
shareholders' equity for the second quarter was 14.50% in 2002 and 13.39% in
2001.
For the six months ended June 30, 2002, earnings per share were $1.02 versus
$.83 for the same period in 2001. Excluding the aforementioned non-operating
items, as well as gains of $175 in the first quarter from the sale of investment
securities and the merchant credit card processing portfolio amounting to $.03
per share in the first quarter of 2002, the Company's earnings per share would
have been $.98 for the six months ended June 30, 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. Second quarter net interest income
of $11,169 in 2002 was an increase of 12.8% over the second quarter of 2001. Net
interest income on a tax equivalent basis, reflected as a percentage of average
earning assets (net interest margin), was 4.12% for the second quarter of 2002
and 3.67% for the same time frame in 2001. The increase in the Company's net
interest margin was primarily due to the repricing and runoff of higher priced
CDs and the repricing of core deposits at market rates.
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
Second quarter non-interest income for 2002 was $3,309, which was an increase
over the same period a year ago of $413 or 14.3%. The increase was primarily due
to the aforementioned securities gains of $186 realized in the second quarter of
2002 versus securities losses of $137 incurred in the second quarter of 2001.
For the first six months of 2002, the Company's non-interest income was $6,808
versus $5,452 for the comparable period a year ago. The increase of 24.9% was
primarily related to the aforementioned securities gains, increases in mortgage
banking income, and increases in insurance commissions related to the April 2001
acquisition of the Vollmer agencies. Mortgage banking income consists of gains
and losses on loan sales to the secondary market and loan servicing fee income.
Income for this line of business has been strong, as origination volumes have
increased in light of declining interest rates.
Non-interest Income
Three months ended Six months ended
June 30, June 30,
------------------- --------------------
2002 2001 2002 2001
------- ------- ------- -------
Service charges on deposit accounts $ 970 $ 999 $ 1,875 $ 1,875
Mortgage banking income 738 719 1,803 1,056
Insurance commissions 561 565 1,120 946
Trust fees 168 114 365 279
Gain (loss) on sales of securities 186 (137) 314 (124)
Other income * 686 636 1,331 1,420
------- ------- ------- -------
Total $ 3,309 $ 2,896 $ 6,808 $ 5,452
======= ======= ======= =======
* 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 $9,011 for the second quarter of 2002, which
represented an increase of $744 from the second quarter of 2001. The largest
component of non-interest expense is personnel expense. Personnel expenses
increased in the second quarter of 2002 by $515, or 11.1% compared to the prior
year period. Normal staff salary increases and increased benefit costs were
incurred in 2002. Included in the 11.1% increase are the personnel costs related
to the first quarter 2002 acquisition of the Grant Park branch in Illinois.
For the first six months of 2002 non-interest expense was $17,893 compared to
$16,501 for the same period in 2001. The increase of 8.4% was attributable to
the acquisitions of the Grant Park branch and the Vollmer insurance agencies, an
increase in employee benefit expense, and expenses related to the name change of
the holding company.
A ratio frequently used to measure the efficiency of a financial institution is
computed by dividing non-interest expense by the total of tax-effected net
interest income plus non-interest income excluding securities gains or losses.
The lower the ratio, the more efficient the Company is in managing net interest
margin, non-interest income and non-interest expense. The Company's efficiency
ratios were 61.1% for the second quarter of 2002 compared to 63.5% for the same
period in 2001.
Non-interest Expense
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
------- ------- ------- -------
Salaries and employee benefits $ 5,159 $ 4,644 $10,161 $ 9,374
Net occupancy 589 510 1,168 1,053
Equipment expense 730 658 1,329 1,223
Intangible amortization 436 494 869 976
Stationary, printing, and supplies 231 207 485 434
Other expenses * 1,866 1,754 3,881 3,441
------- ------- ------- -------
Total non-interest expense $ 9,011 $ 8,267 $17,893 $16,501
======= ======= ======= =======
* 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 six months was 33.7% for 2002 and 32.7% for
2001. The increase in the effective tax rate compared to the prior year was a
direct result of higher pre-tax income of which the incremental portion was
generally taxable at the highest tax rate. 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 June 30, 2002 were $1,249,837 compared to $1,178,392 as of
December 31, 2001. Average earning assets represented 92.6% of average total
assets for the first six months of 2002 and 2001. Average loans represented
approximately 75.7% of average deposits in the first six months of 2002 and
75.9% for the comparable period in 2001. Management continues to emphasize
quality loan growth to increase these averages. Average loans as a percent of
average assets were 64.0% and 65.6% for the six-month period ended June 30, 2002
and 2001 respectively.
The increase in deposits of $34,414 from December 31, 2001 to June 30, 2002 was
due mainly to the increase in public fund deposits at June 30, 2002, as well as
the Grant Park branch acquisition involving the assumption of $20,132 of
deposits.
Shareholders' equity was $94,190 on June 30, 2002 compared to $87,872 on
December 31, 2001. Book value per common share was $14.55 at June 30, 2002
versus $13.52 at year-end 2001. The unrealized gain on securities available for
sale, net of taxes, totaled $3,912 or $.60 per share at June 30, 2002 compared
to $1,430 or $.22 per share at December 31, 2001. Excluding the net unrealized
gains and losses on securities available for sale, book value per share would
have been $13.95 at June 30, 2002 or an increase of 4.9% over the comparable
book value at year-end 2001.
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 43.0% of total loans at June 30,
2002 and 41.8% at December 31, 2001.
On June 30, 2002, the Company had $5,396 of residential real estate loans held
for sale, which was a decrease from the year-end balance of $23,256 as new loan
originations slowed during the first quarter. The Company generally retains the
servicing rights on mortgages sold.
Total non-performing assets were $18.4 million as of June 30, 2002 compared to
$10.7 million as of June 30, 2001 and represented 1.47% of total assets at June
30, 2002 versus 0.89% one year ago. Two commercial credits represent $9.1
million of the total. Excluding these two credits, the Company's non-performing
assets would have been $9.3 million. The Company's management has reviewed these
two credits and an allowance allocation has been provided for these loans.
The provision for loan losses was $565 in the second quarter of 2002 compared to
$369 for the same period in 2001 and $1,115 for the first six months of 2002
compared to $738 for the same period in 2001. Net charge-offs were $465 for the
first six months of 2002 compared to $285 for the comparable period in 2001. On
an annualized basis as a percentage of average loans, net charge-offs equaled
..12% for the six-month period ended June 30, 2002, compared to .07% for the
comparable period in 2001.
Foreclosed real estate and repossessions held by the Company at June 30, 2002
were $542 and $733 at December 31, 2001.
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 June 30, 2002 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 June 30, 2002, $303,446 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 $6,183 was recorded to adjust the AFS
portfolio to current market value at June 30, 2002, compared to an unrealized
pre-tax gain of $2,228 at December 31, 2001. AFS securities increased $35,310
from December 31, 2001 to June 30, 2002. With favorable interest rates, the
Company determined that it would have a favorable impact on net interest income
by increasing FHLB borrowings and investing in AFS securities. Much of the
increase in AFS securities and FHLB advances is attributable to this activity.
In September 2000, the Company formed two investment subsidiaries, People's
Investment Company, Ltd. and Union Investment Company, Ltd., which are
incorporated in Bermuda. Effective January 1, 2002 the Company formed two
additional 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 of the investment portfolios.
At June 30, 2002 the Company had $31,071 held in a money market fund with
Fidelity in its Institutional Fund. This amount represented approximately 30% of
total capital.
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. Total deposits funded 91.8% and 93.8% of total earning assets at
June 30, 2002 and December 31, 2001. Total interest-bearing deposits averaged
91.0% and 91.7% of average total deposits for the periods ending June 30, 2002
and December 31, 2001, respectively. Management constantly strives to increase
the percentage of transaction-related deposits to total deposits due to the
positive effect on earnings.
Short-term borrowings increased $12,059 from year-end 2001 as higher-rate
certificates of deposit matured and were not aggressively pursued. The Company
had FHLB advances of $40,270 outstanding at June 30, 2002. These advances have
interest rates ranging from 2.26% to 6.95% with $10,000 maturing in the third
quarter of 2002 and the first quarter of 2004. Approximately $20,000 of these
advances mature in 2005 or later.
Capital Resources
Total shareholders' equity increased $6,318 to $94,190 at June 30, 2002 as
compared to December 31, 2001.
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 June 30, 2002, Tier 1 capital to total average assets was 7.67%.
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 $.17 per share in the second
quarter of 2002 versus $.157 for the second quarter of 2001.
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 84.5% of total earning assets for the six months ended June
30, 2002 and 81.3% for the same period in 2001.
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 June 30, 2002, the Company held approximately $445,196 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 June 30, 2002 from the
analysis and disclosures provided in the Corporation's Form 10-K for the year
ended December 31, 2001.
18
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of Shareholders of the Company was held on
April 24, 2002.
(b) All director nominees were elected.
(c) Certain matters voted upon at the meeting and the votes cast with
respect to such matters are as follows:
Proposals and Vote Tabulations
Votes Cast
--------------------------
For Against
Management Proposals --------------------------
Approval of the appointment of
independent auditors for 2002 5,317,489 66,758
Approval of a proposed amendment to the
Company's articles of incorporation to
change the Company's name 4,960,171 424,076
Election of Directors
Director Votes Received Votes Withheld
- -------- -------------- --------------
Eric E. Anderson 5,353,796 30,452
William G. Barron 5,351,472 32,776
Dale J. Deffner 5,351,202 33,046
Don S. Dunevant, M.D. 5,352,946 31,302
Philip A. Frantz 5,354,602 29,646
Rick S. Hartman 5,354,834 29,414
Robert E. Hoptry 5,354,767 29,481
James L. Saner 5,354,674 29,574
Edward J. Zoeller 5,354,952 29,296
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.
3. Articles of Incorporation, as amended
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
On May 1, 2002, the Company filed a report on Form 8-K, which reported
under item 5 that, effective May 1, 2002; the Company had changed its
name from Indiana United Bancorp to MainSource Financial Group, Inc. As
a result of the name change, the Company's common stock now trades
under the new trading symbol MSFG and the Company's trust preferred
securities now trades under the new trading symbol MSFGP.
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.
August 9, 2002
/s/ James L. Saner Sr
-------------------------------------------------
James L. Saner Sr
President and Chief Executive Officer
August 9, 2002
/s/ Donald A. Benziger
-------------------------------------------------
Donald A. Benziger
Senior Vice President & Chief Financial Officer
August 9, 2002
/s/ James M. Anderson
-------------------------------------------------
James M. Anderson
Controller & Principal Accounting Officer
21