SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003 Commission file number 0-12422
MAINSOURCE FINANCIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-1562245
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
201 North Broadway
Greensburg, Indiana 47240
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (812) 663-0157
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act
Common shares, no-par value
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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 [ ]
The aggregate market value (not necessarily a reliable indication of the price
at which more than a limited number of shares would trade) of the voting stock
held by non-affiliates of the registrant was $163,655,506 as of June 30, 2003.
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 March 10, 2002, there were outstanding 7,051,173 common shares, without
par value, of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K
Documents Into Which Incorporated
--------- -----------------------
2003 Annual Report to Shareholders Part II (Items 5 through 8)
Definitive Proxy Statement for Annual Part III (Items 10 through 14)
Meeting of Shareholders to be held
April 21, 2004
EXHIBIT INDEX: Page 10-11
FORM 10-K TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Part I Page
Item 1 Business 3
Item 2 Properties 9
Item 3 Legal Proceedings 9
Item 4 Submission of Matters to a Vote of Security Holders 9
Part II
Item 5 Market For the Registrant's Common Equity and Related 9
Stockholder Matters
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial 9
Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk 9
Item 8 Financial Statements and Supplementary Data 9
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 10
Item 9A Controls and Procedures 10
Part III
Item 10 Directors and Executive Officers of the Registrant See below
Item 11 Executive Compensation See below
Item 12 Security Ownership of Certain Beneficial Owners and See below
Management
Item 13 Certain Relationships and Related Transactions See below
Item 14 Principal Accountant Fees and Services See below
Part IV
Item 15 Exhibits, Financial Statement Schedules, and Reports 10
on Form 8-K
Pursuant to General Instruction G, the information called for by Items 10-14 is
omitted by MainSource Financial Group, Inc. since MainSource Financial Group,
Inc. will file with the Commission a definitive proxy statement to shareholders
pursuant to regulation 14A not later than 120 days after the close of the fiscal
year containing the information required by Items 10-14.
2
PART I
ITEM 1. BUSINESS
- -------------------
(Dollars in thousands except per share data)
GENERAL
MainSource Financial Group, Inc. ("the Company") is a multi-bank holding company
based in Greensburg, Indiana. The Company's Common Stock is traded on NASDAQ's
National Market System under the symbol MSFG. As of December 31, 2003, the
Company owned four banking subsidiaries: MainSource Bank, Regional Bank,
Capstone Bank, and First Community Bank & Trust (together "the Banks"). Through
its non-bank affiliates, the Company provides services incidental to the
business of banking. Since its formation in 1982, the Company has acquired and
established various institutions and financial services companies and may
acquire additional financial institutions and financial services companies in
the future. For further discussion of the business of the Company see
Management's Discussion and Analysis in Part II, Item 7.
The Company operates 58 branch banking offices in Indiana and Illinois as well
as five insurance offices in Indiana and one in Kentucky. As of December 31,
2003, the Company had consolidated assets of $1,442,729, consolidated deposits
of $1,191,310 and shareholders' equity of $105,424.
Through its Banks, the Company offers a broad range of financial services,
including: accepting time and transaction deposits; making consumer, commercial,
agribusiness and real estate mortgage loans; renting safe deposit facilities;
providing general agency personal and business insurance services; providing
personal and corporate trust services; and providing other corporate services
such as letters of credit and repurchase agreements.
The lending activities of the Banks are separated into primarily the categories
of commercial/agricultural, real estate and consumer. Loans are originated by
the lending officers of the Banks subject to limitations set forth in lending
policies. The Board of Directors of the Banks reviews and approves loans up to
the Banks' legal lending limits, monitors concentrations of credit, problem and
past due loans and charge-offs of uncollectible loans and formulates loan
policy. The Banks maintain conservative loan policies and underwriting practices
in order to address and manage loan risks. These policies and practices include
granting loans on a sound and collectible basis, serving the legitimate needs of
the community and the general market area while obtaining a balance between
maximum yield and minimum risk, ensuring that primary and secondary sources of
repayment are adequate in relation to the amount of the loan, developing and
maintaining adequate diversification of the loan portfolio as a whole and of the
loans within each category and developing and applying adequate collection
policies.
Commercial loans include secured and unsecured loans, including real estate
loans, to individuals and companies and to governmental units within the market
area of the Banks for a myriad of business purposes.
Agricultural loans are generated in the Banks' markets. Most of the loans are
real estate loans on farm properties. Loans are also made for agricultural
production and such loans are generally reviewed annually.
3
Residential real estate lending has been the largest component of the loan
portfolio for many years. All affiliate banks generate residential mortgages for
their own portfolios. However, the Company elects to sell the majority of its
fixed rate mortgages into the secondary market while maintaining the servicing.
At December 31, 2003, the Company was servicing a $498 million portfolio. By
originating loans for sale in the secondary market, the Company can more fully
satisfy customer demand for fixed rate residential mortgages and increase fee
income.
The principal source of revenues for the Company is interest and fees on loans,
which accounted for 61.8% of total revenues in 2003, 65.2% in 2002 and 69.6% in
2001.
The Company's investment securities portfolio is primarily comprised of U. S.
Treasuries, federal agencies, state and municipal bonds, mortgage-backed
securities and corporate securities. The Company has classified 99.2% of its
investment portfolio as available for sale, with market value changes reported
separately in shareholders' equity. Funds invested in the investment portfolio
generally represent funds not immediately required to meet loan demand. The
Company's investment portfolio accounted for 15.7% of total revenues in 2003,
17.3% in 2002 and 16.1% in 2001. As of December 31, 2003, the Company had not
identified any securities as being "high risk" as defined by the FFIEC
Supervisory Policy Statement on Securities Activities.
The primary sources of funds for the Banks are deposits generated in local
market areas. To attract and retain stable depositors, the Banks market various
programs for demand, savings and
4
time deposit accounts. These programs include interest and non-interest bearing
demand and individual retirement accounts.
Currently, national retailing and manufacturing subsidiaries, brokerage and
insurance firms and credit unions are fierce competitors within the financial
services industry. Mergers between financial institutions within Indiana and
neighboring states, which became permissible under the Interstate Banking and
Branching Efficiency Act of 1994, have also added competitive pressure.
The Company's Banks are located in predominantly non-metropolitan areas and
their business is centered in loans and deposits generated within markets
considered largely rural in nature. In addition to competing vigorously with
other banks, thrift institutions, credit unions and finance companies located
within their service areas, they also compete, directly and indirectly, with all
providers of financial services.
EMPLOYEES
As of December 31, 2003, the Company and its subsidiaries had approximately 614
full-time equivalent employees to whom it provides a variety of benefits and
with whom it enjoys excellent relations.
REGULATION AND SUPERVISION OF THE COMPANY
The Company is a bank holding company ("BHC") within the meaning of the Bank
Holding Company Act of 1956, as amended ("Act"). This Act subjects BHC's to
regulations of the Federal Reserve Board ("FRB") and restricts the business of
BHC's to banking and related activities.
Under the Act, a BHC is, with limited exceptions, prohibited from acquiring
direct or indirect ownership or control of voting stock of any company that is
not a bank or engaging in any activity other than managing or controlling banks.
A BHC may, however, own shares of a company engaged in activities, which the FRB
has determined to be so closely related to banking or managing or controlling
banks as to be a proper incident thereto. These activities include: operating a
savings association, mortgage company, finance company, credit card or factoring
company; performing certain data processing operations; providing investment and
financial advice; and, acting as an insurance agent for certain types of
credit-related insurance.
Acquisitions by the Company of banks and savings associations are subject to
federal and state regulation. Any acquisition by the Company of more than five
percent of the voting stock of any bank requires prior approval of the FRB.
Acquisition of savings associations is also subject to the approval of the OTS.
Indiana law permits BHCs to acquire BHCs and banks out of state on a reciprocal
basis, subject to certain limitations. Under current law, the Company may
acquire banks, and may be acquired by BHCs, located in any state in the United
States that permits reciprocal entry by Indiana BHCs. Under the Act, BHCs may
acquire savings associations without geographic restrictions.
A BHC and its subsidiaries are prohibited from engaging in certain tying
arrangements in connection with the extension of credit, lease or sale of
property, or the provision of any property or service.
5
The Company is under the jurisdiction of the Securities and Exchange Commission
("SEC") and state securities commission for matters relating to the offering and
sale of its securities. The Company is subject to the SEC's rules and
regulations relating to periodic reporting, reporting to shareholders, proxy
solicitation and insider trading.
The Company's liquidity is principally derived from dividends paid on the common
stock of its subsidiaries. The payment of these dividends is subject to certain
regulatory restrictions.
Under FRB policy, the Company is expected to act as a source of financial
strength to, and commit resources to support, its affiliates. As a result of
such policy, the Company may be required to commit resources to its affiliate
banks in circumstances where it might not otherwise do so.
REGULATION AND SUPERVISION OF THE SUBSIDIARY BANKS
The Company's affiliate banks are supervised, regulated and examined by their
respective state regulatory banking agencies and the Federal Deposit Insurance
Corporation ("FDIC"). A cease-and-desist order may be issued against the banks,
if the respective agency finds that the activities of the bank represent an
unsafe and unsound banking practice or violation of law. The deposits of all
three banking subsidiaries are insured to the maximum extent permitted by law by
the Bank Insurance Fund ("BIF") of the FDIC.
Branching by banks in Indiana is subject to the jurisdiction, and requires the
prior approval, of the bank's primary federal regulatory authority and, if the
branching bank is a state bank, of the DFI. Under Indiana law, banks may branch
anywhere in the state.
The Company is a legal entity separate and distinct from its subsidiary Banks.
There are various legal limitations on the extent to which the Banks can supply
funds to the Company. The principal source of the Company's funds consists of
dividends from its subsidiary Banks. State and Federal law restrict the amount
of dividends that may be paid by banks. In addition, the Banks are subject to
certain restrictions on extensions of credit to the Company, on investments in
the stock or other securities of the Company and in taking such stock or
securities as collateral for loans.
LEGISLATION
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
represented a comprehensive and fundamental change to banking supervision and
mandates the development of additional regulations governing almost every aspect
of the operations, management and supervision of banks and BHCs.
FDICIA also included several supervisory reforms related to the frequency of
regulatory examinations and audit requirements. FDICIA also required the
adoption of safety and soundness standards on matters such as loan underwriting
and documentation, and compensation and other employee benefits; mandated
consumer protection disclosures with respect to deposit accounts; and the
establishment of a risk-based deposit insurance system. The federal banking
agencies have issued guidelines establishing standards for safety and soundness,
for operational and managerial standards and compensation standards. The federal
banking agencies have issued guidelines for asset quality and earnings.
FDICIA requires banking regulators to take prompt corrective actions with
respect to depository institutions that fall below certain capital levels and
prohibit any depository institution from making a capital distribution that
would cause it to be considered undercapitalized. Banking regulators were also
required to revise their capital standards to take into account interest rate
risk. A policy statement has been proposed providing a supervisory framework to
measure and monitor interest
6
rate risk at individual banks. Banks may use an internal model that provides a
measure of the change in a bank's economic value.
The results of the supervisory and internal models would be one factor
regulators would consider in their assessment of capital adequacy. Other factors
will also be considered.
Certain regulations define relevant capital measures for five capital
categories. A "well capitalized" institution is one that has a total risk-based
capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 8%,
a leverage ratio of at least 5% and is not subject to regulatory direction to
maintain a specific level for any capital measure. An "adequately capitalized"
institution is one that has ratios greater than 8%, 4% and 4%. An institution is
"undercapitalized" if its respective ratios are less than 8%, 4% and 4%.
"Significantly undercapitalized" institutions have ratios of less than 6%, 3%
and 3%. An institution is deemed to be "critically undercapitalized" if it has a
ratio of tangible equity to total assets that is 2% or less. Institutions with
capital ratios at levels of "undercapitalized" or lower are subject to various
limitations that, in most situations, will reduce the competitiveness of the
institution.
The Riegle Community Development and Regulatory Improvement Act of 1994 ("1994
Act") made several changes in existing law affecting bank holding companies.
These include a reduction in the minimum post-approval antitrust review waiting
period for depository institution mergers and acquisitions, and the substitution
of a notice for an application when a bank holding company proposes to engage
in, or acquire a company to engage in, non-bank activities. The 1994 Act also
contains seven titles pertaining to community development and home ownership
protection, small business capital formation, paperwork reduction and regulatory
improvement, money laundering and flood insurance. No regulations have yet been
approved. The Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994 ("Branching Act") substantially changed the geographic constraints
applicable to the banking industry. In general, the Branching Act permits BHCs
that are adequately capitalized and adequately managed to acquire banks located
in any other state, subject to certain total deposit limitations. Effective June
1, 1997, the Branching Act also allows banks to establish interstate branch
networks through acquisitions of other banks. Establishment of de novo
interstate branches or the acquisition of individual branches of a bank in
another state is also allowed if authorized by state law. Institutions must
maintain a loan activity-to-deposit ratio within a state at least equal to
one-half of the average percentage for all banks in the state or the
institution's federal regulator may close the branch and restrict the
institution from opening new branches in the state. The Branching Act allowed
individual states to "opt out" of certain provisions by enacting appropriate
legislation prior to June 1, 1997.
The monetary policies of regulatory authorities have a significant effect on the
operating results of banks and BHCs. The nature of future monetary policies and
the effect of such policies on the future business and earnings of the Company
and its subsidiaries cannot be predicted.
The Federal Reserve Board has adopted procedures for bank holding companies and
foreign banks with U.S. offices to be treated as financial holding companies.
Financial holding companies may engage in a broad range of securities, insurance
and other financial activities under the Gramm-Leach-Bliley Act. Bank holding
companies and foreign banks that meet the relevant qualifications may file
elections to become financial holding companies at any time. The Company has
chosen not to become a financial holding company and remains a bank holding
company.
7
CAPITAL REQUIREMENTS
The Company and its subsidiary Banks must meet certain minimum capital
requirements mandated by the FRB, FDIC and DFI. These regulatory agencies
require BHCs and banks to maintain certain minimum ratios of primary capital to
total assets and total capital to total assets. The FRB requires BHCs to
maintain a minimum Tier 1 leverage ratio of 3 percent capital to total assets;
however, for all but the most highly rated institutions which do not anticipate
significant growth, the minimum Tier 1 leverage ratio is 3 percent plus an
additional cushion of 100 to 200 basis points. As of December 31, 2003, the
Company's leverage ratio of capital to total assets was 6.0%. The FRB and FDIC
each have approved the imposition of "risk-adjusted" capital ratios on BHCs and
financial institutions. The Company's Tier 1 Capital to Risk-Weighted Assets
Ratio was 9.2% and its Total Capital to Risk-Weighted Assets Ratio was 11.3% at
December 31, 2003. The Company's Banks had capital to asset ratios and
risk-adjusted capital ratios at December 31, 2003, in excess of the applicable
regulatory minimum requirements.
STATISTICAL DISCLOSURES
The following statistical data should be read in conjunction with Management's
Discussion and Analysis (Item 7), Selected Financial Data (Item 6) and the
Financial Statements and Supplementary Data (Item 8).
VOLUME/RATE ANALYSIS OF CHANGES IN NET INTEREST INCOME
The table on page 8a analyzes the change in net interest income due to rate and
volume. Changes due to both rate and volume have been allocated in proportion to
the absolute dollar value of rate and volume changes.
AVERAGE DEPOSITS
The table on page 8b discloses the average deposits for the Company for 2003,
2002 and 2001, and the maturity schedule of the over $100 certificates of
deposit at December 31, 2003.
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES OF COMMERCIAL AND
CONSTRUCTION LOANS AT DECEMBER 31, 2003
Maturities and sensitivity to changes in interest rates of commercial and
construction loans at December 31, 2003 are disclosed in the table on page 8c.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The table on page 8d discloses the allocation of the allowance for loan losses
to the major loan categories.
INVESTMENT SECURITIES
The composition and maturity of the investment portfolio is depicted in the
table on page 8e.
CONTRACTUAL OBLIGATIONS
The table on page 8f discloses the contractual obligations of the Company at
December 31, 2003.
8
Volume/Rate Analysis of Changes in Net Interest Income
(Tax Equivalent Basis)
- ---------------------------------------------- --------------------------------- ---------------------------------
2003 OVER 2002 2002 OVER 2001
- ---------------------------------------------- --------------------------------- ---------------------------------
Volume Rate Total Volume Rate Total
- ---------------------------------------------- --------------------------------- ---------------------------------
Interest income
Loans $ 2,672 $ (5,450) $ (2,778) $ (2,564) $ (7,740) $(10,304)
Securities 4,826 (6,141) (1,315) 2,823 (3,132) (309)
Federal funds sold and money market funds (426) (109) (535) (440) (972) (1,412)
Short-term investments 16 (14) 2 (47) (28) (75)
- ---------------------------------------------- --------------------------------- ---------------------------------
Total interest income 7,088 (11,714) (4,626) (228) (11,872) (12,100)
- ---------------------------------------------- --------------------------------- ---------------------------------
Interest expense
Interest-bearing DDA, savings,
and money market accounts $ 376 $ (2,390) $ (2,014) $ 841 $ (4,505) $ (3,664)
Certificates of deposit 1,749 (3,717) (1,968) (3,316) (8,854) (12,170)
Borrowings 1,091 (592) 499 787 (489) 298
Subordinated debentures 365 (762) (397) 30 (18) 12
- ---------------------------------------------- --------------------------------- ---------------------------------
Total interest expense 3,581 (7,461) (3,880) (1,658) (13,866) (15,524)
- ---------------------------------------------- --------------------------------- ---------------------------------
Change in net interest income $ 3,507 $ (4,253) (746) $ 1,430 $ 1,994 3,424
-------------------- --------------------
Change in tax equivalent adjustment 72 142
- ---------------------------------------------- --------------------------------- ---------------------------------
Change in net interest income before
tax equivalent adjustment $ (818) $ 3,282
- ---------------------------------------------- --------------------------------- ---------------------------------
8a
Average Deposits
- ---------------------------------------------- -------------------- --------------------
2003 2002 2001
- ---------------------------------------------- -------------------- --------------------
Amount Rate Amount Rate Amount Rate
- ---------------------------------------------- -------------------- --------------------
Demand $ 111,480 $ 94,054 $ 85,317
Interest Bearing Demand 258,213 0.60% 236,802 1.06% 182,557 1.55%
Savings 218,414 0.69 206,882 1.18 218,792 2.69
Certificates of Deposit 526,304 2.96 478,643 3.67 545,458 5.45
- ------------------------------------ ---------- ----------
Totals $1,114,411 1.67% $1,016,381 2.22% $1,032,124 3.72%
========== ========== ==========
As of December 31, 2003, certificates of deposit and other time deposits of $100
or more mature as follows:
3 months or less 4-6 months 6-12 months over 12 months Total
---------------- ---------- ----------- -------------- -----
Amount $56,903 $19,808 $27,715 $36,901 $141,327
Percent 40% 14% 20% 26%
8b
Maturities and Sensitivity to Changes in Interest Rates of Commercial and
Construction Loans at December 31, 2003
- --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Due: Within 1 Year 1 - 5 Years Over 5 years Total
- ---------------------------------------------------------------------------------------------------------
Loan Type
Commercial and industrial $ 51,155 $ 36,903 $ 53,513 141,571
Agricultural production financing and other
loans to farmers 18,829 4,541 2,527 25,897
Construction and development 29,938 263 4,485 34,686
- ---------------------------------------------------------------------------------------------------------
Totals $ 99,922 $ 41,707 $ 60,525 $202,154
- ---------------------------------------------------------------------------------------------------------
Percent 49% 21% 30% 100%
- ---------------------------------------------------------------------------------------------------------
Rate Sensitivity
Fixed Rate $ 36,887 $ 17,795 $ 6,301 $ 60,983
Variable Rate 98,199 35,716 7,256 141,171
- ---------------------------------------------------------------------------------------------------------
Totals $135,086 $ 53,511 $ 13,557 $202,154
- ---------------------------------------------------------------------------------------------------------
8c
Allocation of the Allowance for Loan Losses
2003 2002 2001 2000 1999
------------------- ------------------ ------------------- ----------------- ------------------
Percent Percent Percent Percent Percent
of loans of loans of loans of loans of loans
to total to total to total to total to total
December 31 Amount loans Amount loans Amount loans Amount loans Amount loans
- ----------------------------------------------------------------------------------------------------------------------------------
Real estate
Residential $ 1,230 37% $ 2,097 41% $ 2,159 43% $ 1,076 47% $ 598 46%
Farm real estate 704 4 776 6 301 6 442 6 397 6
Commercial 3,907 21 2,715 21 2,453 20 1,004 16 829 15
Construction and
development 658 4 647 5 858 7 909 6 965 7
- ----------------------- --------------- --------------- --------------- --------------- ---------------
Total real estate 6,499 66 6,235 73 5,771 75 3,431 75 2,789 74
- ----------------------- --------------- --------------- --------------- --------------- ---------------
Commercial
Agribusiness 491 3 388 3 368 3 965 3 1,011 3
Other commercial 3,003 19 1,810 14 1,349 11 1,204 12 812 11
- ----------------------- --------------- --------------- --------------- --------------- ---------------
Total Commercial 3,494 22 2,198 17 1,717 14 2,169 15 1,823 14
- ----------------------- --------------- --------------- --------------- --------------- ---------------
Consumer 1,053 12 951 10 952 11 1,349 10 1,413 12
Unallocated 463 133 554 1,767 1,693
- ----------------------- --------------- --------------- --------------- --------------- ---------------
Total $11,509 100% $ 9,517 100% $ 8,994 100% $ 8,716 100% $ 7,718 100%
- ----------------------- --------------- --------------- --------------- --------------- ---------------
8d
INVESTMENT SECURITIES
The composition and maturity of the investment portfolio is depicted in the
table on page 8e.
Investment Securities
(Carrying Values at December 31)
Beyond
Within 10 Total
1 Year 2-5 Yrs 6-10 Yrs Years 2003
- --------------------------------------------------------------------------------------------------
Available for sale
Federal agencies $ 4,049 $ 88,818 $ -- $ -- $ 92,867
State and municipal 6,327 24,006 19,364 11,627 61,324
Mortgage-backed securities -- 9,798 106,025 139,718 255,541
Equity and other securities -- 1,625 500 10,254 12,379
- --------------------------------------------------------------------------------------------------
Total available for sale $ 10,376 $124,247 $125,889 $161,599 $422,111
==================================================================================================
Weighted average yield* 4.74% 3.21% 4.47% 3.70% 3.81%
Held to Maturity
- --------------------------------------------------------------------------------------------------
State and municipal $ 237 $ 1,126 $ 1,319 $ -- $ 2,682
Other securities -- 749 -- -- 749
- --------------------------------------------------------------------------------------------------
Total held to maturity $ 237 $ 1,875 $ 1,319 $ -- $ 3,431
==================================================================================================
Weighted average yield* 7.91% 6.39% 6.29% -- 6.45%
Amounts in the table above are based on scheduled maturity dates. Variable
interest rates are subject to change not less than annually based upon certain
interest rate indexes. Expected maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with
or without call or prepayment penalties.
As of December 31, 2003, there are no corporate bonds and other securities which
represent more than 10% of shareholders' equity.
*Adjusted to reflect income related to securities exempt from Federal income
taxes
8e
Contractual Obligations as of December 31, 2003
Less than 1 - 3 3 - 5 More than
Total 1 Year Years Years 5 Years
-------- -------- -------- -------- --------
Notes Payable $ 12,500 $ 3,400 $ 5,200 $ 3,900 $ --
FHLB Advances 62,751 10,549 10,163 15,703 26,336
Subordinated Debentures 29,898 -- -- -- 29,898
Total Deposits 1,191,310 1,013,369 135,809 25,505 16,627
---------- ---------- -------- -------- --------
Total $1,296,459 $1,027,318 $151,172 $ 45,108 $ 72,861
========== ========== ======== ======== ========
8f
ITEM 2. PROPERTIES
- -------------------
(Dollars in Thousands)
MainSource Financial Group owns no physical properties. In February 2002, the
Company entered into a five-year lease of approximately 28,000 square feet of
space to be used as an operations center in Greensburg, Indiana. Its
subsidiaries own, or lease, all of the facilities from which they conduct
business. All leases are comparable to other leases in the respective market
areas and do not contain provisions detrimental to the Company or its
subsidiaries. As of December 31, 2003 the Company had 58 banking locations of
which MainSource Bank has 33, Regional has 6, Capstone has 8, and First
Community has 10. In addition, the Company operates five insurance offices in
Indiana and one in Kentucky. At December 31, 2003, the Company had approximately
$23 million invested in premises and equipment.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The subsidiaries may be parties (both plaintiff and defendant) to ordinary
litigation incidental to the conduct of business. Management is presently not
aware of any material claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted during the fourth quarter of 2003 to a vote of
security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
- --------------------------------------------------------------------------
The information required under this item is incorporated by reference to the
information provided in the "Shareholder Information" section on the inside back
cover page of the Company's Annual Report to Shareholders filed with this report
as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information required under this item is incorporated by reference to the
information provided on page 9 of the Company's Annual Report to Shareholders
filed with this report as Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------
The information required under this item is incorporated by reference to the
information provided on pages 10 through 20 of the Company's Annual Report to
Shareholders filed with this report as Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The information required under this item is incorporated by reference to the
information provided on page 20 of the Company's Annual Report to
Shareholders filed with this report as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ---------------------------------------------------
The financial statements and supplementary data required under this item are
incorporated herein by reference to the information provided on pages 22 through
39 of the Company's Annual Report to Shareholders filed with this report as
Exhibit 13.
9
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
In connection with its audits for the three most recent fiscal years ended
December 31, 2003, there have been no disagreements with the Company's
independent certified public accountants on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure.
ITEM 9A. CONTROLS & PROCEDURES
- -------------------------------
As of the end of the period covered be this report, an evaluation was carried
out under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of our disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934). Based on their evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures are, to the best of their knowledge, effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms as of such date.
PART IV
ITEM 15--EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
Included in
(a) 1. Financial statements Annual
Report
MainSource Financial Group and Subsidiaries
Report of Independent Auditors 22
Consolidated balance sheets at December 31, 2003 and 2002 23
Consolidated statements of income, years ended December 24
31, 2003, 2002 and 2001
Consolidated statements of shareholders' equity, years 25
ended December 31, 2003, 2002 and 2001
Consolidated statements of cash flows, years ended 26
December 31, 2003, 2002 and 2001
Notes to consolidated financial statements 27-39
(a) 2. Financial statement schedules
All schedules are omitted because they are not applicable or not
required, or because the required information is included in the consolidated
financial statements or related notes.
(a) 3. Exhibits:
3.1 Restated Articles of Incorporation
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)).
10
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
10.2 Form of Stock Option Agreement Under 2003 Stock Option Plan for
Directors of Registrant dated May 19, 2003.
10.3 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)).
10.4 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)).
10.5 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)).
13 2003 Annual Report to Shareholders (Except for the pages and information
thereof expressly incorporated by reference in this Form 10-K, the Annual Report
to Shareholders is provided solely for the information of the Securities and
Exchange Commission and is not deemed "filed" as part of this Form 10-K).
14 Code of Ethical Conduct
21 List of subsidiaries of the Registrant.
23.1 Consent of Crowe Chizek and Company LLC
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 are not part of this periodic
report, shall not be deemed filed 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
(b) Reports on Form 8-K
During the quarter ended December 31, 2003, the Company filed two reports
on Form 8-K.
The Form 8-K dated November 26, 2003 reported under "Item 5. Other Events"
that the Company's Board of Directors had approved a 5% stock dividend to be
paid on January 9, 2004 to shareholders of record as of December 22, 2003.
The Form 8-K dated December 17, 2003 reported under "Item 5. Other Events"
that the Company had executed a definitive agreement that will lead to the
merger of Peoples Financial Corp. into MainSource Financial Group, Inc.
11
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned; thereunto duly authorized, on the 10th day of March,
2004.
MAINSOURCE FINANCIAL GROUP, INC.
/s/ James L. Saner, Sr.
------------------------------
James L. Saner, Sr., President
And Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
on Form 10-K has been signed by the following persons on behalf of the
registrant and in the capacities with the Company and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ William G. Barron
- --------------------------------
William G. Barron Director March 10, 2004
/s/ Dale J. Deffner
- --------------------------------
Dale J. Deffner Director March 10, 2004
/s/ Don Dunevant
- --------------------------------
Don Dunevant Director March 10, 2004
/s/ Philip A. Frantz
- --------------------------------
Philip A. Frantz Director March 10, 2004
/s/ Rick S. Hartman
- --------------------------------
Rick S. Hartman Director March 10, 2004
/s/ Robert E. Hoptry
- --------------------------------
Robert E. Hoptry Director March 10, 2004
Chairman of the
Board
/s/ James M. Anderson
- --------------------------------
James M. Anderson Controller & March 10, 2004
Principal
Accounting Officer
/s/ Donald A. Benziger
- --------------------------------
Donald A. Benziger Senior Vice March 10, 2004
President &
Chief Financial
Officer
/s/ James L. Saner, Sr.
- --------------------------------
James L. Saner, Sr. Director March 10, 2004
President & Chief
Executive Officer