EXHIBIT 13
MAINSOURCE
FINANCIAL GROUP
---------------
2003 ANNUAL REPORT
MainSource Financial Group
About the Company
Contents
Financial Highlights 1
Report to Shareholders 2
Year in Review 4
Selected Financial Data 9
Management's Discussion
and Analysis 10
Report of Management on
Responsibility for Financial
Information 21
Independent Auditor's Report 22
Consolidated Financial Statements 23
Notes to Consolidated
Financial Statements 27
Directors and Officers 40
Shareholder Information 41
Corporate Profile
MainSource Financial Group (the "Company") is an Indiana-based, multi-bank
holding company. Its focus is to provide complete financial services in the more
personalized style of a community bank. These services go beyond traditional
community-bank products and services and include insurance, investment
brokerage, mutual funds, wealth management and financial planning.
At 2003 year-end, MainSource Financial Group owned four affiliate banks:
MainSource Bank with 33 branch offices in southeastern Indiana; First Community
Bank & Trust with 10 branch offices in south-central Indiana; Regional Bank with
six branch offices in southern Indiana; and Capstone Bank with seven branch
offices in eastern Illinois and one in Indiana. MainSource also owned an
insurance agency and an investment and trust operation. MainSource Insurance
operated five insurance offices in Indiana and one in Kentucky; MainSource
Wealth Management operated three offices in Indiana and one in Illinois. Both
MainSource Insurance and Wealth Management provide their services to all of the
Company's banking offices.
An acquisition is pending with Peoples Financial Corp. of Linton, Indiana, which
has 7 banking offices southwest of Indianapolis. The acquisition is expected to
close in the second quarter of 2004.
Stock Data
The common shares of the Company are listed on The Nasdaq Stock Market. The
trading symbol is MSFG. In newspaper listings, MainSource Financial shares are
frequently listed as MainSrce. Log on to our website at
www.mainsourcefinancial.com for additional information.
[MAP APPEARS HERE]
MainSource Financial Group Offices:
MainSource Bank o Capstone Bank o Regional Bank
First Community Bank & Trust Co. o MainSource Insurance
MainSource Financial Group
Financial Highlights
(Dollar amounts in thousands except per share data)
Percent
December 31 2003 2002 Change
- -----------------------------------------------------------------------------------------
At Year End
Total assets $ 1,442,729 $ 1,251,760 + 15.3%
Loans, excluding held for sale 855,471 740,167 + 15.6
Allowance for loan losses 11,509 9,517 + 20.9
Total deposits 1,191,310 1,034,307 + 15.2
Shareholders' equity 105,424 99,771 + 5.7
Results of Operations
Net interest income $ 44,232 $ 45,050 - 1.8%
Non-interest income 19,443 14,379 + 35.2
Provision for loan losses 1,325 2,995 - 55.8
Net income 15,305 14,011 + 9.2
Per Common Share *
Earnings per share (basic and diluted) $ 2.16 $ 1.96 + 10.2%
Dividends paid 0.686 0.626 + 9.6
Book value - end of period 14.91 13.99 + 6.6
Market price - end of period 30.67 22.87 + 34.1
Financial Ratios
Return on average assets 1.14% 1.16% - 1.7%
Return on average common
shareholders' equity 15.07 14.90 + 1.1
Allowance for loan losses to total loans
(year end) 1.35 1.29 + 4.7
* Adjusted for stock dividends
1
MainSource Financial Group
Report to Shareholders
[PHOTO APPEARS HERE]
James L. Saner, Sr., President and CEO
We just completed the finest year in our history, surpassing virtually every
benchmark by which banks are commonly measured. Earnings rose for the fifth year
in a row to set a new record of $15.3 million, which was 9.2 percent ahead of
the old record of $14.0 million set the year before. Earnings per share rose
10.2 percent to $2.16 from $1.96 in 2002. In addition, we completed one
acquisition and embarked on another. Finally, our stock price advanced again,
reaching $30.67* at year-end 2003, a 34.1 percent gain over 2002's closing price
of $22.87*.
Shareholders realized a total return of 37.1 percent in 2003 -- a combination of
the 34.1 percent increase in our stock's market value plus cash dividends
totaling 68.6 cents per share, an increase of 9.6 percent over the 2002 cash
dividend.
The 2003 annual cash dividend increase marks the 15th consecutive year for such
an increase. In addition, we also declared and paid a five-percent stock
dividend, the fourth such stock dividend in as many years.
In 2003, we completed the acquisition of First Community Bancshares, Inc., a
community bank holding company based in Bargersville, Indiana. It operates 10
branches in four Indiana counties, generally to the west of the markets served
by our MainSource Bank operation. We promptly started integrating some of its
back office operations into our holding company. We expect when this conversion
is completed, First Community's earnings contribution, which was modest in 2003,
will continue to add shareholder value because of the increased efficiencies our
systems provide.
Acquisition Strategy and Philosophy
In pursuing any acquisition, we look for banks with strong local identity and
deep, personal involvement with their communities, solid management and room for
healthy gains in efficiency.
Our goal is to improve the operations of these banks, add to their lending
capacity and increase the variety of their product/service menus while retaining
their local character. It is a strategy that we believe provides us with a
decisive, competitive edge in smaller, community-banking markets. By increasing
these smaller banks' lending
* Adjusted for stock dividends
2
capacity and providing them with more sophisticated financial products, we
expect these acquisitions will provide increased organic growth.
With regard to enhancing our friendly and professional community approach to
banking, I believe we have only scratched the surface as to what that concept
really entails. Ultimately, it means having employees who choose to put down
permanent roots in the same communities as our customers. It also means finding
employees that embody the value system that differentiates one small town from
another. If the predominate activity in one community is manufacturing, for
example, then it makes good sense for our local bank to employ some people with
similar backgrounds. That establishes a mutual bond, which will help our
employees understand intuitively the issues that are most important to their
customers. Consequently, it is essential to employ individuals that match the
needs of each community we serve, even though each community may have far
differing needs from another. In this regard, I believe it is far easier to
train a motivated, hard-working person in the ways of banking than it is to take
bankers from large, metropolitan areas and expect them to adapt to the values
and lifestyle of a small, Midwestern community.
New Stock Purchase Program
Effective February 1, 2004, our board of directors authorized the repurchase of
up to 170,000 shares of common stock, which is approximately 2.5 percent of the
common shares. The 12-month authorization replaces a repurchase plan that
expired at the end of January, 2004. The net effect of these repurchase plans
enables us to use these shares for acquisitions and other general corporate
purposes, and they also reduce the number of shares outstanding, which has a
beneficial effect on calculating earnings per share.
Throughout 2003, we continued to address corporate governance compliance issues
required by the Sarbanes-Oxley Act of 2002. In effect, the Act requires us to
formalize many of the practices and code of ethics we have had in place for more
than a decade. We believe that this ongoing compliance undertaking, which also
mandates company-wide standardization of processes and procedures, has the
potential to drive even greater operating efficiencies.
Looking ahead, I am increasingly confident about the strength of the current
economic recovery and its potential for MainSource. We enjoyed a strong fourth
quarter, with year-over-year gains in both net interest income and non-interest
income.
Long-term prospects seem positive in numerous ways. Our insurance and annuity
operations gained momentum as the 2003 year progressed, and they appear poised
for further growth in 2004. With the strengthening of the economy, commercial
lending operations hold the promise of significant growth in 2004. Finally, the
ongoing integration of our newly acquired banks should provide further gains in
overall efficiency.
As 2003 drew to a close, our efforts to improve the return on our investment
portfolio began to bear fruit. Our move to reposition a portion of our portfolio
with slightly longer maturities meshed with market gains in the latter half of
2003. Given the size of our portfolio, approximately $400 million, we stand to
reap significant benefits from even small increases in yield.
Finally, our strategic plan calls for a continued emphasis on developing and
enhancing customer relationships. With its implementation already in place and
our vigorous efforts to improve our non-performing assets, I feel confident
MainSource is well positioned to build upon its record of success in 2004.
In closing, I would like to thank our shareholders for their continued
confidence, our employees for their efforts, our directors for their leadership
and our customers for their patronage that made 2003 our finest year ever.
James L. Saner, Sr.
President and Chief Executive Officer
March 1, 2004
3
MainSource Financial Group
Year in Review
This year in review: Overall, an outstanding year. Earnings per share were up
more than 10 percent, and this double digit growth has been achieved for the
past four years in a row.
MainSource Financial finished the year on a great note. Our return on equity
exceeded 15 percent; our stock price soared; and our four-year record of
double-digit growth in earnings per share reflected the consistency and
predictability we provide our investors.
Highlights of 2003:
o Net income per share gained 10.2 percent to $2.16 from $1.96. Net income
increased 9.2 percent to $15.3 million from $14.0 million.
o Return on average shareholders' equity increased to 15.1 percent from 14.9
percent.
o Net interest margin, on a fully-taxable equivalent basis, equaled 3.73
percent.
2003
o Stock price up 34.1%
o Return on equity at 15.07%
o Net income per share up 10.2%
o Net income up 9.2%
o Acquired First Community Bancshares, which added 10 banking offices in
south central Indiana.
[CHART APPEARS HERE]
Return on Average Equity
03 15.07%
02 14.90%
01 13.24%
[PHOTO APPEARS HERE]
Doing business with our friends and neighbors in small towns in Indiana,
Illinois and Kentucky is a cornerstone to our banking philosophy.
4
o Return on average assets was 1.14 percent.
o Total assets increased by $191 million, rising to $1.44 billion.
o Total deposits rose by $157 million to $1.19 billion.
o Total loans, excluding those held for sale, grew to $855 million.
o Non-interest income rose 35.2 percent to $19.4 million.
Lending--2003
Our lending operations adjusted to changing market conditions as 2003
progressed. Refinancing of residential mortgages was strong for the first eight
months of last year and then gradually slowed by year end. Conversely, new
mortgage loans were modest at the start of 2003 but increased during the year,
growing quite strong by year's end. With mortgage rates now more stable, we
expect to make more new mortgage loans and fewer refinancings in 2004, but most
likely at overall lower volumes. The shift in mortgage activity was offset by an
increase in commercial lending applications as the year concluded. We anticipate
an increase in commercial loan volume will occur as 2004 unfolds.
Interest Rates and Margins
The long, steady decline in interest rates finally appears to have ended, after
reaching 40-year lows. Our net interest margin stabilized by the end of the
year, at 3.73 percent. As a result, net interest income declined to $44.2
million for 2003 from $45.1 million in 2002.
[PHOTO APPEARS HERE]
Earning the trust of our customers enables us to provide them with better
personal financial management through a variety of our other banking products
and services.
[PHOTO APPEARS HERE]
More than anything else, banking is about people, not numbers--something many
large banks simply don't understand.
5
MainSource Financial Group
Year in Review, continued
Being a good neighbor in a small community means more than just giving money to
charities. It means getting involved personally. Each year our employees
participate in a "Day of Caring." This is a day when they roll up their sleeves
to clean the homes of battered women, paint the houses of economically-deprived
individuals, or help remodel shelters for the disadvantaged. In addition,
MainSource gave to organizations such as the United Fund and made a contribution
to help underwrite a new maternity ward for Decatur County Memorial Hospital in
Greensburg, Indiana.
However, it is impossible to discuss net interest margins in a vacuum. In
some ways, low rates proved beneficial because the refinancing of mortgage loans
and applications for new loans became the order of the day. Fees earned on
mortgage banking in 2003 amounted to $5.7 million, an increase of $0.9 million
from the previous year. The gain in fees from mortgage activity offset the
decline in net interest income.
This illustrates how MainSource management adapts to a variety of conditions
and guides the corporation toward increased prosperity, regardless of economic
trends or current interest rates.
Cross Selling Gains
We scored solid gains in our insurance and annuity businesses last year. Our
associates became increasingly adept at addressing customers' total
financial-services needs by offering them more non-traditional banking products.
Customers not satisfied with current CD yields, for example, often opted for our
line of annuity products. As a result, we increased our annuity business at a
much faster rate during the second half of 2003 than we did during the first two
quarters.
First Community Bancshares Acquisition
Acquired in June, 2003, First Community added to earnings, income, deposits and
assets, and increased the number of customers, as well. Its 10 banking locations
provided us with an established presence in Johnson County, which is to the
immediate south of Marion County (Indianapolis) and the second-fastest growing
county in Indiana.
We expect to completely assimilate First Community during 2004. This should
increase its earning power because of increases in efficiencies. As we continue
to provide it with our more sophisticated banking products and expand its
lending capacity, we expect this acquisition may well prove to be our most
profitable to date.
6
[PHOTO APPEARS HERE]
We believe our approach --building upon our friendly and professional,
community-bank operating style while adding the sophisticated products of a
one-stop financial-services shop -- is a powerful formula.
By increasing the lending authority and product offerings of our acquired
banks, we become more formidable competitors and can dominate other smaller
banks in our markets.
By providing sophisticated financial services and traditional banking
products to our customers and delivering them through highly trained and
professional employees utilizing the personal, small-town touch, we are able to
compete more effectively through our branch locations than those of the larger,
mega-city banks.
[CHART APEARS HERE]
Net Income
($ in Millions)
03 $15.3
02 $14.0
01 $11.2
[CHART APEARS HERE]
Total Assets
($ in Billions)
03 $1.44
02 $1.25
01 $1.18
[CHART APEARS HERE]
Non-interest Income
($ in Millions)
03 $19.4
02 $14.4
01 $11.5
7
MainSource Financial Group
Proposed Acquisition
With the acquisition of First Community Bancshares in 2003 and the pending
acquisition of Peoples Financial Corp. in 2004, we will have increased the
number of our banking locations by 31 percent in less than two years.
Proposed Merger of Peoples Financial Corp.
On December 16, 2003, we announced a pending merger with Peoples Financial Corp.
of Linton, Indiana. It is a $120 million bank holding company that operates
seven banking locations in Greene County. Greene County lies southwest of Marion
County, which is the home of Indianapolis.
This proposed acquisition will expand our footprint westward into more rural
areas, but with promising growth potential. It will also give us proximity to
communities bordered by Bloomington, Terre Haute and Vincennes, Indiana. Within
this area are sizable commercial accounts that can be tapped by expanding
People's lending authority.
With a strong management team already in place, Peoples is expected to be
accretive to our earnings in 2004.
[CHART APPEARS HERE]
Stock Price
(adjusted for all stock dividends)
03 $30.67
02 $22.87
01 $15.91
[PHOTO APPEARS HERE]
The proposed Peoples Financial transaction affirms our commitment to the
community-banking philosophy as Peoples and its employees maintain strong ties
to their communities.
8
Selected Financial Data
(Dollar amounts in thousands except per share data)
December 31 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------
Results of Operations
Net interest income $ 44,232 $ 45,050 $ 41,768 $ 39,089 $ 35,817
Provision for loan losses 1,325 2,995 2,136 1,658 1,826
Non-interest income 19,443 14,379 11,486 9,591 7,605
Non-interest expense 40,448 35,610 34,311 33,168 29,903
Income before income tax 21,902 20,824 16,807 13,854 11,693
Income tax 6,597 6,813 5,630 4,000 3,605
Net income 15,305 14,011 11,177 9,854 8,088
Dividends paid on common stock 4,857 4,485 4,114 4,121 3,932
Per Common Share*
Earnings per share (basic) $ 2.16 $ 1.96 $ 1.56 $ 1.38 $ 1.14
Earnings per share (diluted) 2.16 1.96 1.56 1.38 1.14
Dividends paid ** 0.686 0.626 0.574 0.539 0.527
Book value - end of period 14.91 13.99 12.26 10.93 9.57
Market price - end of period 30.67 22.87 15.91 12.74 15.43
At Year End
Total assets $1,442,729 $1,251,760 $1,178,392 $1,216,936 $1,110,252
Securities 425,542 351,143 276,304 294,395 290,337
Loans, excluding held for sale 855,471 740,167 760,785 790,550 710,661
Allowance for loan losses 11,509 9,517 8,894 8,716 7,718
Total deposits 1,191,310 1,034,307 1,014,687 1,053,570 940,905
Notes payable 12,500 2,400 4,062 6,510 6,885
Federal Home Loan Bank advances 62,751 50,235 20,346 22,463 24,484
Subordinated debentures 29,898 30,425 22,425 22,425 22,425
Shareholders' equity 105,424 99,771 87,872 78,005 68,172
Financial Ratios
Return on average assets 1.14% 1.16% 0.93% 0.85% 0.76%
Return on average common
shareholders' equity 15.07 14.90 13.24 13.76 11.67
Allowance for loan losses to total loans
(year end, excluding held for sale) 1.35 1.29 1.17 1.10 1.09
Shareholders' equity to total assets
(year end) 7.31 7.97 7.46 6.41 6.14
Average equity to average total assets 7.57 7.77 7.04 6.20 6.55
Dividend payout ratio 31.73 32.01 36.81 41.82 48.62
* Adjusted for stock dividends
** Dividends paid by MainSource Financial Group without restatement for
pooling of interests
9
MainSource Financial Group
Management's Discussion and Analysis
(Dollar amounts in thousands except per share data)
Forward-Looking Statements
Except for historical information contained herein, the discussion in this
Annual 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 cost 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, and 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.
Overview
MainSource Financial Group, Inc. ("Company") is a bank holding company whose
principal activity is the ownership and management of its four wholly owned
subsidiary banks ("Banks"): MainSource Bank headquartered in Greensburg,
Indiana, Regional Bank ("Regional"), headquartered in New Albany, Indiana,
Capstone Bank ("Capstone"), headquartered in Watseka, Illinois, and First
Community Bank & Trust ("First Community"), headquartered in Bargersville,
Indiana. All four banks operate under state charters and are subject to
regulation by their respective state regulatory agencies and the Federal Deposit
Insurance Corporation. MainSource Insurance (formerly The Insurance Group, Inc.)
is a wholly owned subsidiary of MainSource Bank operating five offices in
Indiana and one in Kentucky and is subject to regulation by the Kentucky and
Indiana Departments of Insurance. The Company also has wholly owned subsidiaries
to hold investment securities. These investment subsidiaries are incorporated in
Nevada. Additionally, the Company owns IUB Reinsurance Company, Ltd., a credit
life reinsurance company. In November 2003, the Company formed MSB Realty, Inc.,
which holds real estate backed assets of MainSource Bank.
Business Strategy
The Company operates under the broad tenets of a long-term strategic plan
("Plan") designed to improve the Company's financial performance, expand its
competitive position and enhance long-term shareholder value. The Plan is
premised on the belief of the Company's board of directors that it can best
promote long-term shareholder interests by pursuing strategies which will
continue to preserve its community-focused philosophy. The dynamics of the Plan
assure continually evolving goals, with the enhancement of shareholder value
being the constant, overriding objective. The extent of the Company's success
will depend upon how well it anticipates and responds to competitive changes
within its markets, the interest rate environment and other external forces.
The Company continued its history of external growth through acquisitions.
In June 2003, the Company acquired First Community Bancshares and its
wholly-owned subsidiary, First Community Bank & Trust, in a cash transaction.
Funding for this acquisition was derived from the issuance of $7,000 of floating
rate subordinated debentures, a $13,000 note payable, and internal cash. First
Community is headquartered in Bargersville, Indiana and operates ten branches in
four counties in south central Indiana with total assets of approximately $160
million. In 2003, the Company also purchased one branch in Illinois that added
$20 million in deposits and $6 million in loans. The Company is continuously
reviewing acquisition targets including branches, whole banks, and other
financial service related entities focusing on the four-state Midwest region of
Indiana, Illinois, Kentucky, and Ohio.
During 2003, the Company continued its focus on becoming a complete
financial services provider for its customers. The Company invested heavily in
the information technology and data processing areas in order to position itself
to support more products and services, to allow for future growth, and to stay
competitive in the current environment.
In 2003, the Company utilized these technologies in conjunction with its
MCIF system to fuel internal growth through marketing to its existing customer
base. The Company emphasized the cross-selling of insurance and annuity products
through its branch system. The insurance division of the Company has grown
steadily throughout the past several years and the Company views this area as a
potential source of increasing non-interest income. In addition to the insurance
division, the Company's wealth management division has experienced steady
growth. As of December 31, 2003, MainSource Wealth Management, which operates as
a division of MainSource Bank, had assets under management of approximately $138
million.
In 2004, the Company will continue to emphasize its wide array of both
traditional and non-traditional financial products and services. As the economy
rebounds, the Company believes that 2004 will see increased activity in its
lending areas and an increase in the yield on its investment portfolio.
Management expects that these items will be partially offset by a decrease in
mortgage banking as the refinancing boom that occurred throughout most of 2002
and 2003 appears to have slowed. Also, during the second quarter of 2004, the
Company expects to close on the acquisition of Peoples Financial Corp., Inc.
With its seven offices in southwest Indiana, this transaction will further
expand the Company's footprint in the southern part of the state.
Table 2 - Non-interest Income and Expense
Percent Change
2003 2002 2001 03/02 02/01
- -----------------------------------------------------------------------------------------------
Non-interest income
Insurance commissions $ 2,400 $ 2,156 $ 1,993 11.3% 8.2%
Fiduciary activities 602 561 506 7.3 10.9
Mortgage banking 5,671 4,757 2,767 19.2 71.9
Service charges on deposit accounts 5,092 4,011 3,835 27.0 4.6
Securities gains/(losses) 1,300 319 (111) 307.5 (387.4)
Other 4,378 2,575 2,496 70.0 3.2
- -----------------------------------------------------------------------------------------------
Total non-interest income $ 19,443 $ 14,379 $ 11,486 35.2% 25.2%
- -----------------------------------------------------------------------------------------------
Non-interest expense
Salaries and employee benefits $ 22,421 $ 20,381 $ 19,061 10.0% 6.9%
Net occupancy 2,753 2,414 2,247 14.0 7.4
Equipment 3,488 2,873 2,489 21.4 15.4
Telephone 1,287 1,038 855 24.0 21.4
Intangible amortization 909 828 1,966 9.8 (57.9)
Stationery, printing, and supplies 916 973 839 (5.9) 16.0
Other 8,674 7,103 6,854 22.1 3.6
- -----------------------------------------------------------------------------------------------
Total non-interest expense $ 40,448 $ 35,610 $ 34,311 13.6% 3.8%
- -----------------------------------------------------------------------------------------------
Results of Operations
Net income was $15,305 in 2003, $14,011 in 2002, and $11,177 in 2001. Earnings
per common share on a fully diluted basis were $2.16 in 2003, $1.96 in 2002 and
$1.56 in 2001. The 10.2% increase in 2003 earnings per share over 2002 was
primarily due to the acquisition of First Community in June 2003, strong
mortgage banking activity, and gains on the sales of investment securities. As
detailed in Note 7 to the consolidated financial statements, in 2002 the Company
adopted Statements of Financial Accounting Standards (FAS) No. 142 and 147,
which changed the method of accounting for intangible assets. The adoption of
these standards resulted in a reduction of goodwill amortization in 2002,
increasing net income $710, or $0.10 per share. In addition, the Company
realized gains related to the sales of investment securities and the merchant
credit card program of $.04, net of tax. The change in goodwill and sales of
securities and the merchant credit card program contributed $0.14 per share in
2002, representing approximately one-third of the increase in earnings per share
versus 2001.
Other key measures of the financial performance of the Company are return on
average shareholders' equity and return on average assets. Return on average
shareholders' equity was 15.07% in 2003, 14.90% in 2002, and 13.24% in 2001. The
Company's return on average assets was 1.14% in 2003, 1.16% in 2002, and .93% in
2001. The current levels of return on shareholders' equity and return on assets
are representative of the Company's continuing effort to improve profitability.
The Company believes that its steady improvement in performance validates its
strategic course of action and will continue to provide increased shareholder
value.
Net Interest Income
Net interest income and net interest margin are influenced by the volume and
yield or cost of earning assets and interest-bearing liabilities. Tax equivalent
net interest income of $45,655 in 2003 decreased slightly from $46,403 in 2002
(See Table 3). As rates stayed low throughout 2003, the Company's yield on
earning assets decreased to 5.64% in 2003 from 6.60% in 2002. Partially
offsetting the decrease in yield, the Company aggressively repriced its deposits
and borrowings and was able to significantly reduce its cost of funds to 2.09 %
in 2003 from 2.70% in 2002. The overall effect was a decrease in the Company's
spread, which represents the difference between the yield on earning assets
versus the cost of funds. The Company's spread in 2003 was 3.55% compared to
3.90% in 2002.
Provision for Loan Losses
The Company expensed $1,325 in provision for loan losses in 2003. This level of
provision allowed the Company to maintain an adequate allowance for loan losses.
This topic is discussed in detail under the heading "Loans, Credit Risk and the
Allowance and Provision for Loan Losses".
Non-interest Income
Non-interest income increased in 2003 to $19,443 compared to $14,379 in 2002,
which represents an increase of $5,064 and 35.2%. The acquisition of First
Community added a total of $926, contributing approximately 18% of the increase
in 2003. In addition to the acquisition of First Community, the Company realized
increases in several areas. As interest rates remained at historically low
11
MainSource Financial Group
Management's Discussion and Analysis
(Dollar amounts in thousands except per share data)
levels throughout much of 2003, the Company realized a significant increase in
its mortgage banking activity. Mortgage banking income, which consists of gains
and losses on loan sales and service fee income, net of mortgage servicing right
amortization, was $5,671 in 2003 compared to $4,757 in 2002, an increase of
19.2%. As many customers refinanced their existing loans, the Company elected to
sell the majority of these loans into the secondary market while maintaining the
servicing rights. The Company also realized net gains on sales of investment
securities in 2003 of $1,300 compared to gains of $319 in 2002. Other
non-interest income increased in 2003 versus 2002 as the Company realized
increases in the following areas: annuity fees ($360), cash surrender value of
company-owned life insurance policies ($418), gains on the sales of various OREO
properties ($245), and contingency fees from insurance companies ($165).
Non-interest income increased in 2002 to $14,379 compared to $11,486 in
2001, which represents a 25.2% increase. With the low interest rate environment
in 2002, the Company realized a significant increase in its mortgage banking
activity. Mortgage banking income was $4,757 in 2002 compared to $2,767 in 2001,
an increase of $1,990, or 71.9%. The Company also realized net gains on sales of
investment securities in 2002 of $319 compared to net losses in 2001 of $111.
Non-interest Expense
Total non-interest expense increased 13.6% in 2003 to $40,448 compared to
$35,610 in 2002, or an increase of $4,838. The largest component of non-interest
expense is salaries and benefits. These expenses increased 10.0%, or $2,040, in
2003 due primarily to the acquisition of First Community, which added $1,435 of
employee costs. The remaining increase would be attributable to normal merit
increases (see Table 2 for detail of non-interest expense). Other non-interest
expense increased in 2003 compared to 2002 as the Company incurred approximately
$850 of costs related to the redemption of trust preferred securities in the
first quarter of 2003. These costs related to the Company's investment in trusts
formed to issue trust preferred securities and are a result of accelerated
amortization of debt issuance costs by the trusts.
Total non-interest expense increased 3.8% in 2002 to $35,610 compared to
$34,311 in 2001, or an increase of $1,299. The largest component of non-interest
expense is salaries and benefits. These expenses increased 6.9%, or $1,320, in
2002 due to branch acquisitions, which increased the number of employees, an
increase in health care expense and normal merit increases (see Table 2 for
detail of non-interest expense). Due to the adoption of FAS 142 and 147, the
Company's intangible amortization decreased in 2002, as goodwill is no longer
amortized.
[CHART APPEARS HERE]
Net Income
($ in Millions)
03 $15.3
02 $14.0
01 $11.2
[CHART APPEARS HERE]
Non-interest Expense
($ in Millions)
03 $40.4
02 $35.6
01 $34.3
[CHART APPEARS HERE]
Non-interest Income
($ in Millions)
03 $19.4
02 $14.4
01 $11.5
12
Income Taxes
The effective tax rate was 30.1% in 2003, 32.7% in 2002, and 33.5% in 2001. The
decrease in the Company's effective tax rate in 2003 was a result of higher
levels of tax-exempt income from securities and company-owned life insurance
policies.
Balance Sheet
At December 31, 2003, total assets were $1,442,729 compared to $1,251,760 at
December 31, 2002, an increase of $190,969. The increase was primarily
attributable to the acquisition of First Community, which accounted for
approximately $160 million in assets.
Loans, Credit Risk and the Allowance and Provision for Loan Losses
Loans remain the Company's largest concentration of assets and continue to
represent the greatest potential 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 conservative loan underwriting standards have historically
resulted in higher loan quality and generally lower levels of net charge-offs
than peer bank averages. The Company also 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 concentration policy. The Company believes it has no undue
concentrations of loans.
Total loans (excluding those held for sale) increased by approximately $115
million from year-end 2002. The increase was primarily related to the
acquisition of First Community. Excluding the acquisition of First Community,
the Company's total loan portfolio remained relatively flat as the increase in
commercial loans of approximately $20 million was offset by a decrease in the
Company's residential real estate portfolio. As interest rates remained low
throughout 2003, many customers refinanced their existing residential mortgage
loans. The Company, in turn, elected not to retain new fixed rate loans in its
own portfolio and instead, sold these in the secondary market while maintaining
the servicing. Despite this decrease, residential real estate loans continue to
represent the largest portion of the total loan portfolio. Such loans
represented 36.9% and 40.7% of total loans at December 31, 2003 and 2002,
respectively.
The Company regards its ability to identify and correct loan quality
problems as one of its greatest strengths. Loans are placed on "non-accrual"
status when, in management's judgment, the collateral value and/or the
borrower's financial condition does not justify accruing interest.
As a general rule, commercial and real estate loans are reclassified to
nonaccrual status at or before becoming 90 days past due. Interest previously
recorded, but not deemed collectible, is reversed and charged against current
income. Subsequent interest payments collected on nonaccrual loans may
thereafter be recognized as interest income or may be applied as a reduction of
the loan's principal balance, as circumstances warrant.
Non-performing assets were $17.3 million as of December 31, 2003 compared to
$10.9 million as of December 31, 2002 and represented 1.20% of total assets at
December 31, 2003 versus 0.87% one year ago. Approximately $4.0 million of
non-performing assets were obtained in the First Community acquisition.
Management believes that these assets were adequately provided for in its
allowance for loan losses at the time of acquisition. Of the $17.3 million of
non-performing assets at year-end 2003, approximately 52% are collateralized by
residential real estate properties, which have historically resulted in low
levels of charge-offs.
The provision for loan losses was $1,325 in 2003, $2,995 in 2002, and $2,136
in 2001. The decrease in the Company's provision in 2003 was primarily due to
the decrease in net charge-offs in 2003 and the upgrade of several credits to a
more favorable risk rating. As a percentage of average loans, net chargeoffs
equaled .18%, .31%, and .25% in 2003, 2002 and 2001, respectively.
Management maintains a list of loans warranting either the assignment of a
specific reserve amount or other special administrative attention. This watch
list, together with a listing of all classified loans, nonaccrual loans and
delinquent loans, is reviewed monthly by the board of directors of each
subsidiary. Additionally, the Company evaluates its consumer and residential
real estate loan pools for probable losses incurred based on historical trends,
adjusted by current delinquency and non-performing loan levels.
The ability to absorb loan losses promptly when problems are identified is
invaluable to a banking organization. Most often, losses incurred as a result of
prompt, aggressive collection actions are much lower than losses incurred after
prolonged legal proceedings. Accordingly, the Company observes the practice of
quickly initiating stringent collection efforts in the early stages of loan
delinquency.
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 upon management's continuing review and evaluation of loan loss
experience, changes in the composition of the loan portfolio, classified loans
including non-accrual and impaired loans, current economic conditions, the
amount of loans presently outstanding, and the amount and composition of loan
growth. The Company's allowance for loan losses was $11,509 at December 31, 2003
compared to $9,517 at the end of 2002. The increase in the allowance is
primarily attributable to the acquisition of First Community, which had a
reserve of $2,078 at the date of acquisition.
13
MainSource Financial Group
Management's Discussion and Analysis
(Dollar amounts in thousands except per share data)
Table 3 - Average Balance Sheet and Net Interest Analysis
(Taxable Equivalent Basis)*
2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------
Assets
Short-term investments $ 1,224 $ 7 0.57% $ 288 $ 5 1.74% $ 2,172 $ 80 3.68%
Federal funds sold and
money market accounts 15,679 192 1.22 38,002 727 1.91 50,534 2,139 4.23
Securities
Taxable 352,813 11,480 3.25 264,675 12,970 4.90 227,759 13,683 6.01
Non-taxable* 52,820 3,341 6.33 47,611 3,166 6.65 34,933 2,762 7.91
- --------------------------------------------------------------------------------------------------------------------------
Total securities 405,633 14,821 3.65 312,286 16,136 5.17 262,692 16,445 6.26
Loans **
Commercial 430,992 29,462 6.83 402,283 29,308 7.29 377,386 31,680 8.39
Residential real estate 218,461 14,543 6.66 237,709 17,627 7.42 296,709 24,194 8.15
Consumer 151,127 10,005 6.62 124,626 9,853 7.91 121,866 11,218 9.21
- --------------------------------------------------------------------------------------------------------------------------
Total loans 800,580 54,010 6.75 764,618 56,788 7.43 795,961 67,092 8.43
- --------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,223,116 69,030 5.64 1,115,194 73,656 6.60 1,111,359 85,756 7.72
- --------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 38,413 36,912 29,981
Unrealized gains (losses)
on securities 3,750 4,801 2,102
Allowance for loan losses (11,065) (9,404) (9,143)
Premises and equipment, net 21,500 18,521 16,883
Intangible assets and goodwill 34,206 23,363 23,482
Accrued interest receivable
and other assets 32,199 21,358 25,246
-------------------------------------------------------------------------
Total assets $1,342,119 $ 1,210,745 $ 1,199,910
- --------------------------------------------------------------------------------------------------------------------------
Liabilities
Interest-bearing deposits
DDA, savings and money
market accounts $ 476,627 $ 3,050 0.64% $ 443,684 $ 5,064 1.14% $ 401,349 $ 8,728 2.17%
Certificates of deposit 526,304 15,578 2.96 478,643 17,546 3.67 545,458 29,716 5.45
- --------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing deposits 1,002,931 18,628 1.86 922,327 22,610 2.45 946,807 38,444 4.06
Short-term borrowings 18,565 172 0.93 17,769 372 2.09 19,149 611 3.19
Subordinated debentures 26,845 1,638 6.10 22,758 2,035 8.94 22,425 2,023 9.02
Notes payable and FHLB borrowings 67,706 2,935 4.33 45,497 2,236 4.91 26,362 1,699 6.44
- --------------------------------------------------------------------------------------------------------------------------
Total interest-
bearing liabilities 1,116,047 23,373 2.09 1,008,351 27,253 2.70 1,014,743 42,777 4.22
Demand deposits 111,480 94,054 85,317
Other liabilities 13,013 14,283 15,452
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,240,540 1,116,688 1,115,512
Shareholders' equity 101,579 94,057 84,398
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,342,119 23,373 1.91*** $1,210,745 27,253 2.44 ***$1,199,910 42,777 3.85***
- --------------------------------------------------------------------------------------------------------------------------
Net interest income $45,657 3.73**** $46,403 4.16**** $42,979 3.87****
- --------------------------------------------------------------------------------------------------------------------------
Conversion of tax exempt income
to a fully taxable equivalent basis
using a marginal rate of 35% $ 1,425 $ 1,353 $ 1,211
* Adjusted to reflect income related to securities and loans exempt from
Federal income taxes.
** Nonaccruing loans have been included in the average balances.
*** Total interest expense divided by total earning assets.
**** Net interest income divided by total earning assets.
14
Table 4 - Loan Portfolio
December 31 2003 2002 2001 2000 1999
- --------------------------------------------------------------------------------------------
Types of loans
Commercial $141,571 $ 98,526 $ 83,143 $ 77,648 $ 65,426
Agricultural production financing and
other loans to farmers 25,897 25,105 20,726 20,744 22,107
Commercial real estate mortgage 183,938 156,277 150,677 138,132 104,150
Residential real estate mortgage 315,848 301,232 328,107 389,622 326,720
Farm real estate 37,107 43,762 46,524 49,284 44,367
Construction and development 34,686 34,987 53,753 40,813 50,721
Consumer 99,724 72,702 69,957 64,548 87,270
State and political 16,700 7,576 7,898 9,759 9,900
- --------------------------------------------------------------------------------------------
Total loans $855,471 $740,167 $760,785 $790,550 $710,661
- --------------------------------------------------------------------------------------------
Securities
Securities offer flexibility in the Company's management of interest rate risk,
and are the primary means by which the Company provides liquidity and responds
to changing maturity characteristics of assets and liabilities. The Company's
investment policy prohibits trading activities and does not allow investment in
high-risk derivative products or junk bonds.
As of December 31, 2003, 99.2% of the securities are classified as
"available for sale" ("AFS") and are carried at fair value with unrealized gains
and losses, net of taxes, excluded from earnings and reported as a separate
component of shareholders' equity. A net unrealized gain of $2,185 was recorded
to adjust the AFS portfolio to current market value at December 31, 2003
compared to a net unrealized gain of $7,065 at December 31, 2002. The remaining
0.8% of the investment portfolio is classified as "held to maturity" ("HTM") and
is carried at book value. The majority of the Company's HTM portfolio consists
of tax-exempt municipal bonds.
For 2003 the tax equivalent yield of the investment securities portfolio was
3.65%, compared to 5.17% and 6.26% for 2002 and 2001, respectively. The average
life of the Company's investment security portfolio was 2.82 years at December
31, 2003. During 2003 portfolio income was negatively impacted by the drop in
interest rates in the first half of the year as significant premium amortization
on mortgage related securities resulted in a lower yield on the investment
portfolio. Management targeted callable agencies and low premium mortgage
products for reinvestment to help stabilize earnings while keeping the average
life of the portfolio short. Throughout 2003 management enhanced the return of
the portfolio by selectively selling and buying securities that provided gains
and maintained the strategic position of the portfolio. At the beginning of 2004
the portfolio remains defensively positioned, maintaining a bias against price
and extension risk.
Sources of Funds
The Company relies primarily on customer deposits and securities sold under
agreement to repurchase ("repurchase agreements"), along with shareholders'
equity to fund earning assets. Federal Home Loan Bank ("FHLB") advances are used
to provide additional funding. The Company also attempts to purchase local
deposits through branch acquisitions.
Deposits generated within local markets provide the major source of funding
for earning assets. Average total deposits were 91.1% of total average earning
assets in 2003 and 2002. Total interest-bearing deposits averaged 90.0% and
90.7% of average total deposits during 2003 and 2002. Management is continuing
efforts to increase the
Loan Loss Reserves ($ in Millions)
[CHART APPEARS HERE]
03 $11.5
02 $9.5
01 $8.9
15
MainSource Financial Group
Management's Discussion and Analysis
(Dollar amounts in thousands except per share data)
percentage of transaction-related deposits to total deposits due to the positive
effect on earnings.
Repurchase agreements are high denomination investments utilized by public
entities and commercial customers as an element of their cash management
responsibilities. During 2003, repurchase agreements averaged $16,680.
Another source of funding is the Federal Home Loan Bank (FHLB). The Company
had FHLB advances of $62,751 outstanding at December 31, 2003. These advances
have interest rates ranging from 1.30% to 6.58% (see note 10 to the consolidated
financial statements for the maturity schedule of these advances). The Company
averaged $56,721 in FHLB advances during 2003 compared to $41,890 during 2002.
In February 1999 the Company borrowed $8,000 at a floating rate based upon
LIBOR. These funds were used to fund branch acquisitions. At year-end 2003, the
balance on this note was $800 with an effective interest rate of 2.41%. In June
2003 the Company borrowed $13,000 at a floating rate based on LIBOR. These funds
were used in the cash acquisition of First Community. At year-end 2003, the
balance on this note was $11,700 with an effective interest rate of 2.56%.
Capital Resources
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 ("Tier 1") consists of common shareholders'
equity adjusted for unrealized gains or losses on available for sale (AFS)
securities plus limited amounts of Trust Preferred Securities less goodwill and
intangible assets. Total capital consists of core capital, certain debt
instruments and a portion of the allowance for loan losses. At December 31,
2003, Tier 1 capital to average assets was 6.0%. Total capital to risk-weighted
assets was 11.3%. Both ratios exceed all required ratios established for bank
holding companies. Risk-adjusted capital levels of each of the Company's
subsidiary banks exceed regulatory definitions of well-capitalized institutions.
The 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 these securities cannot constitute more than 25% of the
total Tier 1 capital of the Company. Consequently, the amount of Trust Preferred
Securities in excess of the 25% limitation constitutes Tier 2 capital, or
supplementary capital, of the Company.
Common shareholders' equity is impacted by the Company's decision to
categorize a portion of its securities portfolio as available for sale (AFS).
Securities in this category are carried at fair value, and common shareholders'
equity is adjusted to reflect unrealized gains and losses, net of taxes.
The Company declared and paid common dividends of $.686 per share in 2003,
$.626 in 2002 and $.574 in 2001. Book value per common share increased to $14.91
at December 31, 2003 compared to $13.99 at the end of 2002. The net adjustment
for AFS securities increased book value per share by $.17 at December 31, 2003
and by $.64 at December 31, 2002. Depending on market conditions, the adjustment
for AFS securities can cause significant fluctuations in equity.
The Company declared its fourth consecutive annual five percent stock
dividend for shareholders of record as of December 22, 2003. All financial
information used throughout this report has been adjusted to reflect these
transactions.
In January 2002, the Company announced the commencement of a twelve-month
common stock repurchase plan that authorized the repurchase of approximately
2.5% of its outstanding common shares. The Company renewed this plan in January
2003 and again in January 2004. The purchase of stock will generally occur in
the open market but may involve unsolicited negotiated transactions.
Table 5 - Underperforming Loans
2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------
Nonaccruing loans $14,626 $ 7,695 $10,406 $ 3,454 $ 4,187
Accruing loans contractually past
due 90 days or more 196 245 766 532 978
- ---------------------------------------------------------------------------------------
Total $14,822 $ 7,940 $11,172 $ 3,986 $ 5,165
- ---------------------------------------------------------------------------------------
% of total loans 1.73% 1.07% 1.47% 0.50% 0.73%
[CHART APPEARS HERE]
Book Value Per Share
03 $14.91
02 $13.99
01 $12.26
16
Table 6 - Summary of the Allowance for Loan Losses
2003 2002 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
Balance at January 1 $ 9,517 $8,894 $8,716 $7,718 $ 6,600
Charge-offs
Commercial 588 1,715 1,392 403 321
Commercial real estate mortgage - - 100 107 458
Residential real estate mortgage 555 473 266 164 77
Consumer 777 583 621 443 589
- -------------------------------------------------------------------------------------------------------------------------
Total Charge-offs 1,920 2,771 2,379 1,117 1,445
Recoveries
Commercial 160 116 127 201 278
Commercial real estate mortgage 43 5 24 7 -
Residential real estate mortgage 54 127 40 35 63
Consumer 252 151 230 214 396
- -------------------------------------------------------------------------------------------------------------------------
Total Recoveries 509 399 421 457 737
Net Charge-offs 1,411 2,372 1,958 660 708
Addition resulting from acquisition 2,078 - - - -
Provision for loan losses 1,325 2,995 2,136 1,658 1,826
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31 $11,509 $9,517 $8,894 $8,716 $ 7,718
- -------------------------------------------------------------------------------------------------------------------------
Net Charge-offs to average loans 0.18% 0.31% 0.25% 0.09% 0.11%
Provision for loan losses to average loans 0.17 0.39 0.27 0.22 0.28
Allowance to total loans at year end 1.35 1.29 1.17 1.10 1.09
- -------------------------------------------------------------------------------------------------------------------------
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 approximately $390 million of
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, supports liquidity, extends the contractual
maturity of liabilities, and limits reliance on volatile short-term purchased
funds. Short-term funding needs may 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, which provide a sizable source of relatively stable low-cost funds.
The Company defines core deposits as all deposits except certificates of
deposits greater than $100. Average core deposits funded approximately 81.2% of
total earning assets during 2003 and approximately 81.8% in 2002.
Management believes the Company has sufficient liquidity to meet all
reasonable borrower, depositor and creditor needs in the present economic
environment. The Company has not received any directives from regulatory
authorities that would materially affect liquidity, capital resources or
operations.
MainSource Financial Group
Management's Discussion and Analysis
(Dollar amounts in thousands except per share data)
Table 7 - Rate Sensitivity Analysis at December 31, 2003
Over 5
Years or
3 Months 1 Year 2 Years 5 Years Insensitive Total
- ----------------------------------------------------------------------------------------------------------------------------
Interest-earning assets
Loans $ 273,957 $ 195,240 $ 134,908 $ 149,615 $ 103,716 $ 857,436
Securities 28,438 89,847 87,900 141,694 77,663 425,542
Federal funds sold and money market fund 6,290 -- -- -- -- 6,290
Interest-bearing deposits in banks 201 -- -- -- -- 201
Restricted stock 6,639 -- -- -- -- 6,639
- ----------------------------------------------------------------------------------------------------------------------------
Total Interest-earning assets 315,525 285,087 222,808 291,309 181,379 1,296,108
- ----------------------------------------------------------------------------------------------------------------------------
Other assets -- -- -- -- 158,130 158,130
Allowance for loan losses -- -- -- -- (11,509) (11,509)
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $ 315,525 $ 285,087 $ 222,808 $ 291,309 $ 328,000 $ 1,442,729
- ----------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
Interest-bearing demand $ 311,333 -- -- -- -- $ 311,333
Savings 224,318 -- -- -- -- 224,318
Certificates of deposit 121,965 $ 227,740 $ 109,374 $ 52,810 $ 16,670 528,559
Short term borrowings 27,508 -- -- -- -- 27,508
Notes payable 12,500 -- -- -- -- 12,500
Federal Home Loan Bank advances 10,768 -- 10,000 16,277 25,706 62,751
Subordinated debentures 29,898 -- -- -- -- 29,898
- ----------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing liabilities 738,290 227,740 119,374 69,087 42,376 1,196,867
- ----------------------------------------------------------------------------------------------------------------------------
Demand deposits -- -- -- -- 127,100 127,100
Other liabilities -- -- -- -- 13,338 13,338
Stockholders' equity -- -- -- -- 105,424 105,424
- ----------------------------------------------------------------------------------------------------------------------------
Total Liabilities and stockholders' equity $ 738,290 $ 227,740 $ 119,374 $ 69,087 $ 288,238 $ 1,442,729
- ----------------------------------------------------------------------------------------------------------------------------
Rate sensitivity gap (assets less liabilities) $(422,765) $ 57,347 $ 103,434 $ 222,222
- ----------------------------------------------------------------------------------------------------------------------------
Rate sensitivity gap (cumulative) (422,765) (365,418) (261,984) (39,762)
- ----------------------------------------------------------------------------------------------------------------------------
Percent of total assets (cumulative) (29.30)% (25.33)% (18.16)% (2.76)%
Rate sensitive assets/liabilities (cumulative) 42.74% 62.17% 75.86% 96.56%
- ----------------------------------------------------------------------------------------------------------------------------
Interest Rate Sensitivity
At year-end 2003, the Company held approximately $601,000 in assets comprised of
securities, loans, short-term investments, and federal funds sold, which were
interest sensitive in one year or less time horizons. The Company's interest
rate sensitivity analysis for the year ended December 31, 2003 appears in Table
7. A significant assumption that creates the large negative gap in the 0 to 3
month category is that all interest-bearing demand and savings accounts are
subject to immediate repricing. While it is true that, contractually, those
accounts are subject to immediate repricing, the rates paid on those accounts
are generally not tied to specific indices and are influenced by market
conditions and other factors. Accordingly, a general movement in interest rates,
either up or down, may not have any immediate effect on the rates paid on these
deposit accounts. The foregoing table illustrates only one source of information
about sensitivity to interest rate movements. Our asset and liability management
process also uses simulations that take into account the time that various
assets and liabilities may reprice and the degree to which various categories of
such assets and liabilities will respond to general interest rate movements.
Interest rate risk can only be represented by a measurement of the effects of
changing interest rates given the capacity for and magnitude of change on
specific assets and liabilities.
Management believes that the Company has taken steps to position itself to
react to changes occurring in the current rate environment. Short-term interest
rates are at historically low levels and
18
the Company expects them to remain relatively stable with a possible slight
upward bias toward the latter half of 2004. The Company continues to monitor the
repricing characteristics of its balance sheet so as to maintain an acceptable
net interest margin during interest rate fluctuations. General economic
conditions improved significantly during the second half of 2003 and most
forecasts expect increased economic growth for 2004. Management believes that
this would result in a higher level of loan growth than the Company realized
during 2002 and 2003. Assuming a stable to moderately higher rate environment,
the Company does not foresee its earnings materially impacted for 2004. However,
if rates decline further, the Company believes that its earnings may be
adversely impacted as its net interest margin declines.
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.
Table 8 provides information about the Company's significant financial
instruments at December 31, 2003 that are sensitive to changes in interest
rates. The table presents principal cash flows and related weighted average
interest rates by maturity dates.
The table presents only a static measurement of asset and liability volumes
based on maturity, cash flow estimates and interest rates. It does not reflect
the differences in the timing and degree of repricing of assets and liabilities
due to interest rate changes.
In analyzing interest rate sensitivity, management considers these
differences and incorporates other assumptions and factors, such as balance
sheet growth and prepayments, to better measure interest rate risk. The Company
cannot make any assurances as to the outcome of these assumptions, nor can it
assess the impact of customer product preference changes and competitive factors
as well as other internal and external variables. In addition, this analysis
cannot reflect actions taken by the asset/liability management committees;
therefore, this analysis should not be relied upon as indicative of expected
operating results.
Effects of Changing Prices
The Company's asset and liability structure is substantially different from that
of an industrial company in that most of its assets and liabilities are monetary
in nature. Management believes the impact of inflation on financial results
depends upon the Company's ability to react to changes in interest rates and, by
such reaction, reduce the inflationary impact on performance. Interest rates do
not necessarily move in the same direction at the same time, or at the same
magnitude, as the prices of other goods and services. As discussed previously,
management relies on its ability to manage the relationship between
interest-sensitive assets and liabilities to protect against wide interest rate
fluctuations, including those resulting from inflation.
Critical Accounting Policies
The accounting and reporting policies of the Company comply with accounting
principles generally accepted in the United States and conform to general
practices within the banking industry. These policies require estimates and
assumptions. Changes in underlying factors, assumptions, or estimates in any of
these areas could have a material impact on the Company's future financial
condition and results of operations. In management's opinion, some of these
areas have a more significant impact than others on the Company's financial
reporting. These areas currently include accounting for the allowance for loan
losses and goodwill.
Allowance for Loan Losses -- The level of the allowance for loan losses is
based upon management's evaluation of the loan and lease portfolios, past loan
loss experience, known and inherent risks in the portfolio, adverse situations
that may affect the borrower's ability to repay (including the timing of future
payments), the estimated value of any underlying collateral, composition of the
loan portfolio, economic conditions, and other pertinent factors. This
evaluation is inherently subjective as it requires material estimates including
the amounts and timing of future cash flows expected to be received on impaired
loans that may be susceptible to significant change. The level of allowance
maintained is believed by management to be adequate to cover losses inherent in
the portfolio. The allowance is increased by provisions charged to expense and
decreased by charge-offs, net of recoveries of amounts previously charged-off.
Goodwill -- Statement of Financial Accounting Standards No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets" were issued in
June of 2001 and were effective for fiscal years beginning after December 15,
2001. Under these rules, goodwill and intangible assets deemed to have
indefinite lives, if any, will no longer be amortized, but will be subject to
annual impairment tests in accordance with the Statements. The Company has
selected June 30 as its date for annual impairment testing.
New Accounting Matters
See Note 1 to the Consolidated Financial Statements regarding the adoption of
new accounting standards in 2003. In December 2003, the Accounting Standards
Executive Committee issued SOP 03-3, Accounting for Certain Loans and Debt
Securities Acquired in a Transfer. Beginning in 2005, this SOP will change the
accounting for loans purchased. As a result, an allowance for loan losses will
not be recorded for loans acquired in business combinations; rather, loans will
be recorded net of purchase accounting adjustments for credit risk.
19
MainSource Financial Group
Management's Discussion and Analysis
(Dollar amounts in thousands except per share data)
Table 8 - Principal Cash Flows
There Fair
December 31 2004 2005 2006 2007 2008 after Total Value
- --------------------------------------------------------------------------------------------------------------------------
Assets
Securities
Fixed rate $ 29,021 $ 88,684 $ 96,372 $ 143,039 $ 21,135 $ 39,146 $417,397 $417,717
Average interest rate 3.97% 3.51% 3.55% 3.47% 4.03% 5.95% 3.79%
Variable rate - 836 347 2,857 99 4,006 8,145 8,077
Average interest rate - 2.40% 5.08% 4.93% 3.43% 3.41% 3.91%
Loans
Fixed rate $ 56,360 $ 25,190 $ 26,921 $ 29,497 $ 32,904 $ 87,900 $258,772 $262,034
Average interest rate 3.77% 4.56% 5.48% 5.54% 5.39% 5.93% 5.17%
Variable rate 109,703 8,806 16,946 10,047 13,690 439,472 598,664 603,232
Average interest rate 3.32% 3.17% 3.03% 3.37% 2.78% 6.12% 5.35%
Liabilities
Deposits
NOW, money market and
savings deposits
Variable rate $535,651 - - - - - $535,651 $538,592
Average interest rate 0.59% - - - - - 0.59%
Certificates of deposit
Fixed rate $310,886 $104,227 $ 25,319 $ 18,941 $ 17,791 $ 5,079 $482,223 $489,546
Average interest rate 2.61% 3.28% 3.40% 4.57% 3.74% 4.51% 2.94%
Variable rate 39,406 5,318 1,223 247 139 3 46,336 46,336
Average interest rate 1.43% 2.77% 2.78% 4.45% 3.60% - 1.65%
Borrowings
Variable rate $ 27,508 - - - - - $ 27,508 $ 27,508
Average interest rate 0.81% - - - - - 0.81%
FHLB advances
Fixed rate $ 10,605 $ 10,031 $ 132 $ 16,277 - $ 25,706 $ 62,751 $ 63,519
Average interest rate 3.22% 6.58% 6.20% 4.58% - 4.04% 4.45%
Long-term debt
Variable rate $ 3,400 $ 2,600 $ 2,600 $ 2,600 $ 1,300 - $ 12,500 $ 12,500
Average interest rate 2.52% 2.56% 2.56% 2.56% 2.56% - 2.55%
Subordinated debentures
Variable rate - - - - - $ 29,898 $ 29,898 $ 29,898
Average interest rate - - - - - 4.00% 4.00%
20
MainSource Financial Group
Report of Management on Responsibility
for Financial Information
The consolidated financial statements and related financial information
presented in this annual report have been prepared by the management of
MainSource Financial Group, Inc. in accordance with generally accepted
accounting principles, and include amounts based on management's best estimates
and judgments at the time of preparation. In presenting this financial
information, management is responsible for its integrity, content and
consistency of preparation.
To meet this responsibility, management maintains a system of internal control,
policies and administrative procedures designed to provide reasonable assurance
that transactions are recorded accurately. As an integral part of internal
control, the Company maintains a professional staff of internal auditors who
monitor compliance with regulations, policies and procedures, and assess the
effectiveness of internal control. In addition, the Company's audit committee,
which is comprised entirely of outside directors, meets periodically with
management, internal auditors and/or independent auditors and banking regulators
have unrestricted access to the audit committee. Management believes the
Company's system provides a basis for the preparation of reliable financial
statements.
The Company's consolidated financial statements have been audited by Crowe,
Chizek and Company LLC. Their responsibility is to express an opinion as to the
integrity of the company's consolidated financial statements and, in performing
their audit, to evaluate the Company's internal control to the extent they deem
necessary in order to issue such an opinion. As described further in their
report that follows, their opinion is based on their audit, which was conducted
in accordance with auditing standards generally accepted in the United States of
America and is believed by them to provide a reasonable basis for their opinion.
The selection of Crowe, Chizek and Company LLC was approved by the Board of
Directors and ratified by shareholders.
James L. Saner, Sr.
President and Chief Executive Officer
Donald A. Benziger
Senior Vice President and Chief Financial Officer
21
MainSource Financial Group
Report of Independent Auditors
Shareholders and Board of Directors
MainSource Financial Group
Greensburg, Indiana
We have audited the accompanying consolidated balance sheets of MainSource
Financial Group as of December 31, 2003 and 2002 and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MainSource Financial
Group as of December 31, 2003 and 2002, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2003
in conformity with accounting principles generally accepted in the United States
of America.
/s/ Crowe Chizek and Company LLC
Indianapolis, Indiana
January 30, 2004
22
MainSource Financial Group
Consolidated Balance Sheets
(Dollar amounts in thousands except per share data)
December 31 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 50,564 $ 54,548
Money market fund 6,290 22,869
Federal funds sold - 500
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 56,854 77,917
Interest bearing time deposits 201 -
Securities
Available for sale 422,111 346,468
Held to maturity (fair value of $3,683 and $4,939) 3,431 4,675
- ------------------------------------------------------------------------------------------------------------------
Total securities 425,542 351,143
Loans held for sale 1,965 15,715
Loans, net of allowance for loan losses of $11,509 and $9,517 843,962 730,650
Restricted stock, at cost 6,639 5,690
Premises and equipment, net 22,886 19,258
Goodwill 36,047 20,708
Intangible assets 5,347 5,005
Cash surrender value of life insurance 22,203 4,061
Other assets 21,083 21,613
- ------------------------------------------------------------------------------------------------------------------
Total assets $1,442,729 $1,251,760
- ------------------------------------------------------------------------------------------------------------------
Liabilities
Deposits
Non-interest bearing $ 127,100 $ 104,282
Interest bearing 1,064,210 930,025
- ------------------------------------------------------------------------------------------------------------------
Total deposits 1,191,310 1,034,307
Short-term borrowings 27,508 19,529
Federal Home Loan Bank advances 62,751 50,235
Subordinated debentures 29,898 30,425
Notes payable 12,500 2,400
Other liabilities 13,338 15,093
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 1,337,305 1,151,989
- ------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred stock, no par value
Authorized shares - 400,000
Issued and outstanding - none -- --
Common stock, $.50 stated value:
Authorized shares - 25,000,000
Issued shares - 6,824,405 and 6,500,084
Outstanding shares - 6,729,256 and 6,469,873 3,413 3,251
Common stock to be distributed, 341,220 and 325,004 shares 170 163
Treasury stock - 95,149 and 30,211 shares, at cost (2,190) (694)
Additional paid-in capital 53,478 43,025
Retained earnings 49,338 49,529
Accumulated other comprehensive income 1,215 4,497
- ------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 105,424 99,771
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,442,729 $1,251,760
- ------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
23
MainSource Financial Group
Consolidated Statements of Income
(Dollar amounts in thousands except per share data)
For the years ended December 31 2003 2002 2001
- --------------------------------------------------------------------------------------------------------
Interest income:
Loans
Taxable $53,279 $56,088 $66,394
Tax exempt 475 455 454
Securities
Taxable 11,480 12,970 13,683
Tax exempt 2,172 2,058 1,795
Federal funds sold and money market funds 192 727 2,139
Deposits with financial institutions 7 5 80
- --------------------------------------------------------------------------------------------------------
Total interest income 67,605 72,303 84,545
Interest expense:
Deposits 18,628 22,610 38,444
Short-term borrowings 172 372 611
Subordinated debentures 1,638 2,035 2,023
Other borrowings 2,935 2,236 1,699
- --------------------------------------------------------------------------------------------------------
Total interest expense 23,373 27,253 42,777
Net interest income 44,232 45,050 41,768
Provision for loan losses 1,325 2,995 2,136
- --------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 42,907 42,055 39,632
Non-interest income:
Insurance commissions 2,400 2,156 1,993
Mortgage banking 5,671 4,757 2,767
Fiduciary activities 602 561 506
Service charges on deposit accounts 5,092 4,011 3,835
Net realized gains/(losses) on securities 1,300 319 (111)
Other income 4,378 2,575 2,496
- --------------------------------------------------------------------------------------------------------
Total non-interest income 19,443 14,379 11,486
Non-interest expense:
Salaries and employee benefits 22,421 20,381 19,061
Net occupancy expenses 2,753 2,414 2,247
Equipment expenses 3,488 2,873 2,489
Intangibles amortization 909 828 1,966
Telecommunications 1,287 1,038 855
Stationery printing and supplies 916 973 839
Other expenses 8,674 7,103 6,854
- --------------------------------------------------------------------------------------------------------
Total non-interest expense 40,448 35,610 34,311
Income before income tax 21,902 20,824 16,807
Income tax expense 6,597 6,813 5,630
- --------------------------------------------------------------------------------------------------------
Net income $15,305 $14,011 $11,177
- --------------------------------------------------------------------------------------------------------
Net income per share (basic and diluted) $ 2.16 $ 1.96 $ 1.56
See notes to consolidated financial statements.
24
MainSource Financial Group
Consolidated Statements of Shareholders' Equity
(Dollar amounts in thousands except per share data)
Accumulated
Other
Additional Compre- Compre-
Common Stock Paid-in Retained hensive hensive
Shares Amount Capital Earnings Income Total Income
- --------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 2001 6,167,048 $ 3,084 $ 29,739 $46,176 $ (994) $ 78,005
Net income 11,177 11,177 $11,177
Unrealized gains on securities, net 2,424 2,424 2,424
-------
Total comprehensive income $13,601
-------
Cash dividends - $.574 per share (4,114) (4,114)
Stock dividend and fractional shares 308,852 155 5,271 (5,433) (7)
Issuance of common stock in acquisition 24,184 12 375 387
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 6,500,084 3,251 35,385 47,806 1,430 87,872
Net income 14,011 14,011 $14,011
Unrealized gains on securities, net 3,067 3,067 3,067
-------
Total comprehensive income $17,078
-------
Cash dividends - $.626 per share (4,485) (4,485)
Stock dividend and fractional shares 325,004 163 7,640 (7,803) -
Purchase of treasury stock (30,211) (694) (694)
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 6,794,877 2,720 43,025 49,529 4,497 99,771
Net income 15,305 15,305 $15,305
Unrealized loss on cash flow hedge, net (117) (117) (117)
Unrealized losses on securities, net (3,165) (3,165) (3,165)
-------
Total comprehensive income $12,023
-------
Cash dividends - $.686 per share (4,857) (4,857)
Stock dividend and fractional shares 340,537 170 10,453 (10,639) (16)
Purchase of treasury stock (64,938) (1,497) (1,497)
- -------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 7,070,476 $ 1,393 $ 53,478 $49,338 $1,215 $105,424
- -------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
25
MainSource Financial Group
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
Years ended December 31 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 15,305 $ 14,011 $ 11,177
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,325 2,995 2,136
Depreciation and amortization 2,629 2,246 1,971
Amortization of mortgage servicing rights 1,863 649 1,117
Securities amortization, net 4,093 1,623 546
Amortization of intangibles 909 828 1,966
Increase in cash surrender value of life insurance policies (571) (208) (179)
Investment securities gains/losses (1,300) (319) 111
Change in loans held for sale 12,062 7,541 (21,373)
Change in other assets and liabilities 3,526 (496) 1,354
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 39,841 28,870 (1,174)
Investing Activities
Net change in short-term investments (201) 599 (5)
Proceeds from maturities and payments
on securities held to maturity 1,288 3,532 4,556
Purchases of securities available for sale (379,327) (227,229) (199,629)
Proceeds from maturities and payments
on securities available for sale 182,311 121,805 205,928
Proceeds from sales of securities available for sale 117,382 30,586 10,507
Purchases of restricted stock - (581) (1,842)
Loan originations and payments, net 4,197 36,646 27,807
Purchases of premises and equipment (1,960) (3,408) (1,888)
Cash (paid) received from branch acquisitions, net 12,203 37,054 (655)
Cash paid for bank acquisition, net (12,836) - -
Purchase of life insurance policies (15,000) - -
Proceeds from sale of premises and equipment - - 635
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by investing activities (91,943) (996) 45,414
Financing Activities
Net change in deposits 21,869 (44,475) (38,883)
Net change in short-term borrowings 7,229 4,051 (5,167)
Repayment of notes payable (2,900) (1,662) (2,448)
Proceeds from issuance of notes payable 13,000 - -
Proceeds from FHLB advances - 40,000 -
Repayment of FHLB advances (1,262) (10,111) (2,117)
Redemption of trust preferred securities (22,425) - -
Proceeds from issuance of trust preferred securities 21,898 8,000 -
Purchase of treasury shares (1,497) (694) -
Cash dividends and fractional stock dividends (4,873) (4,485) (4,121)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 31,039 (9,376) (52,736)
Net change in cash and cash equivalents (21,063) 18,498 (8,496)
Cash and cash equivalents, beginning of period 77,917 59,419 67,915
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 56,854 $ 77,917 $ 59,419
- --------------------------------------------------------------------------------------------------------------------------
Supplemental Information
Interest paid $ 23,683 $ 27,835 $ 44,435
Income tax paid 4,150 6,793 6,076
Loan balances transferred to foreclosed real estate 1,896 3,658 -
See note 2 regarding noncash transactions included in acquisitions. See notes to
consolidated financial statements.
26
MainSource Financial Group
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
1. Summary of Significant Accounting Policies
Nature of Operations and Principles of Consolidation: The consolidated financial
statements include MainSource Financial Group, Inc. and its wholly owned
subsidiaries, together referred to as "the Company". Intercompany transactions
and balances are eliminated in consolidation.
The Company's wholly owned subsidiaries include MainSource Bank, Regional
Bank ("Regional"), Capstone Bank ("Capstone"), First Community Bank and Trust
("First Community"), and IUB Reinsurance Company, Ltd. As further discussed in
Note 12, statutory trusts that had previously been consolidated with the Company
are now reported separately. MainSource Insurance, Inc. is a wholly owned
subsidiary of MainSource Bank.
The Company provides financial services through its offices in Indiana,
Illinois, and Kentucky. Its primary deposit products are checking, savings, and
term certificate accounts, and its primary lending products are residential
mortgage, commercial, and installment loans. Substantially all loans are secured
by specific items of collateral including business assets, consumer assets and
real estate. Commercial loans are expected to be repaid from cash flow from
operations of businesses. Real estate loans are secured by both residential and
commercial real estate. Other financial instruments which potentially represent
concentrations of credit risk include deposit accounts in other financial
institutions and federal funds sold.
Use of Estimates: To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, management makes
estimates and assumptions based on available information. These estimates and
assumptions affect the amounts reported and disclosed in the financial
statements, and future results could differ. The allowance for loan losses, loan
servicing rights, and fair values of financial instruments are particularly
subject to change.
Cash Flows: Cash and cash equivalents include cash, deposits with other
financial institutions under 90 days, and federal funds sold. Net cash flows are
reported for loan and deposit transactions.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive income.
Restricted stock, such as Federal Home Loan Bank stock, is carried at cost.
Interest income includes amortization of purchase premium or discount. Gains
and losses on sales are based on the amortized cost of the security sold.
Securities are written down to fair value when a decline in fair value is not
temporary.
Loans Held for Sale: Loans originated and intended for sale in the secondary
market are carried at the lower of cost or market in the aggregate. Net
unrealized losses, if any, are recorded as a valuation allowance and charged to
earnings.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs, and
an allowance for loan losses.
Interest income is reported on the interest method and includes amortization
of net deferred loan fees and costs over the loan term. Interest income is not
reported when full loan repayment is in doubt, typically when the loan is
impaired or payments are past due over 90 days. Loans are placed on non-accrual
or charged-off at an earlier date if collection of principal or interest is
considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is
reversed against interest income. Interest received on such loans is accounted
for on the cash-basis until qualifying for return to accrual. Loans are returned
to accrual status when all the principal and interest amounts contractually due
are brought current and future payments are reasonably assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses. Loan losses are charged against
the allowance when management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the allowance.
Management estimates the allowance balance required using past loan loss
experience, the nature and volume of the portfolio, information about specific
borrower situations and estimated collateral values, economic conditions, and
other factors. Allocations of the allowance may be made for specific loans, but
the entire allowance is available for any loan that, in management's judgment,
should be charged-off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or loans
otherwise classified as substandard or doubtful. The general component covers
non-classified loans and is based on historical loss experience adjusted for
current factors.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential real estate, consumer, and credit card loans, and are not
separately identified for impairment disclosure. Other loans are evaluated
individually for impairment. If a loan is impaired, a portion of the allowance
is allocated so that the loan is reported, net, at the present value of
estimated future cash flows using the loan's existing rate or at the fair value
of collateral if repayment is expected solely from the collateral.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at fair value when acquired, establishing a new cost basis.
If fair value declines, a valuation allowance is recorded through expense. Costs
after acquisition are expensed.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Buildings and related components
are depreciated using the straight-line method with useful lives ranging from 5
to 39 years. Furniture, fixtures and equipment are depreciated using the
straight-line method with useful lives ranging from 3 to 10 years.
27
MainSource Financial Group
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Company Owned Life Insurance: The Company has purchased life insurance policies
on certain key executives. Company owned life insurance is recorded at its cash
surrender value, or the amount that can be realized.
Servicing Assets: Servicing assets represent the allocated value of retained
servicing rights on loans sold. Servicing assets are expensed in proportion to,
and over the period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the assets, using groupings of the
underlying loans as to product type and interest rates. Fair value is determined
using prices for similar assets with similar characteristics, when available, or
based upon discounted cash flows using market-based assumptions. Any impairment
of a grouping is reported as a valuation allowance, to the extent that fair
value is less than the capitalized amount for a grouping.
Goodwill and Other Intangible Assets: Goodwill results from prior business
acquisitions and represents the excess of the purchase price over the fair value
of acquired tangible assets and liabilities and identifiable intangible assets.
Upon adopting new accounting guidance in 2002, the Company ceased amortizing
goodwill. Goodwill is assessed at least annually for impairment and any such
impairment will be recognized in the period identified.
Other intangible assets consist of core deposit intangibles arising from
whole bank and branch acquisitions. They are initially measured at fair value
and then are amortized on an accelerated method over their estimated useful
lives, generally, ten years.
Long-term Assets: Premises and equipment and other long-term assets are reviewed
for impairment when events indicate their carrying amount may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
fair value.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Loan Commitments and Related Financial Instruments: Financial instruments
include off-balance sheet credit instruments, such as commitments to make loans
and commercial letters of credit, issued to meet customer financing needs. The
face amount for these items represents the exposure to loss, before considering
customer collateral or ability to repay. Such financial instruments are recorded
when they are funded.
Derivatives: All derivative instruments are recorded at their fair values. If
derivative instruments are designated as hedges of fair values, both the change
in the fair value of the hedge and the hedged item are included in current
earnings. Fair value adjustments related to cash flow hedges are recorded in
other comprehensive income and reclassified to earnings when the hedged
transaction is reflected in earnings. Ineffective portions of hedges are
reflected in earnings as they occur.
Mortgage Banking Income: Mortgage banking income consists of gains on loan sales
and servicing fee income, net of mortgage servicing right amortization.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation.
December 31 2003 2002 2001
- --------------------------------------------------------------------------------
Net income as reported $ 15,305 $ 14,011 $ 11,177
Deduct: Stock-based
compensation expense, net,
determined under fair value
based method 29 -- --
- --------------------------------------------------------------------------------
Pro forma net income $ 15,276 $ 14,011 $ 11,177
- --------------------------------------------------------------------------------
Basic earnings per share as reported $ 2.16 $ 1.96 $ 1.56
Pro forma basic earnings per share $ 2.16 $ 1.96 $ 1.56
Diluted earnings per share
as reported $ 2.16 $ 1.96 $ 1.56
Pro forma diluted earnings
per share $ 2.16 $ 1.96 $ 1.56
The pro forma effects are computed using option pricing models, with the
following weighted-average assumptions for 2003 as of grant date: risk-free
interest rate 2.80%, expected option life 6.54 years, expected stock price
volatility 18.60% and dividend yield 2.90%. No options were granted in 2002 or
2001.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
Diluted earnings per common share includes the dilutive effect of additional
potential common shares issuable under stock options. Earnings and dividends per
share are restated for all stock splits and dividends through the date of issue
of the financial statements.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income. Other comprehensive income includes unrealized gains and
losses on securities available for sale and unrealized gains and losses on cash
flow hedges, which are also recognized as a separate component of equity.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss
28
can be reasonably estimated. Management does not believe there now are such
matters that will have a material effect on the financial statements.
Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by the banks to the holding company or
by the holding company to shareholders. These restrictions pose no practical
limit on the ability of the bank or holding company to pay dividends at
historical levels.
Fair Value of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Operating Segments: While the Company's chief decision-makers monitor the
revenue streams of the various Company products and services, the identifiable
segments are not material and operations are managed and financial performance
is evaluated on a Company-wide basis. Accordingly, all of the Company's
financial service operations are considered by management to be aggregated in
one reportable operating segment.
Reclassifications: Some items in the prior year financial statements were
reclassified to conform to the current presentation.
Adoption of New Accounting Standards: During 2003, the Company adopted FASB
Statement 143, Accounting for Asset Retirement Obligations, FASB 145, Rescission
of FASB Statement 4, 44 and 64, Amendment of FAS Statement 13, and Technical
Corrections, FASB Statement 146, Accounting for Cost Associated with Exit or
Disposal Activities, FASB Statement 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, FASB Statement 150, Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and
Equities, FASB Interpretation 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, and FASB Interpretation 46, Consolidation of
Variable Interest Entities. Adoption of the new standards did not materially
affect the Company's operating results or financial condition.
2. Business Combinations
Whole Bank Acquisition: In June 2003, the Company acquired 100% of the
outstanding shares of First Community Bancshares, parent of First Community Bank
and Trust. Operating results of this acquisition are included in the
consolidated financial statements since the date of the acquisition. As a result
of this acquisition, the Company expects to further solidify its market share in
the south central Indiana market, expand its customer base to enhance deposit
fee income, provide an opportunity to market additional products and services to
new customers, and reduce operating costs through economies of scale. In
addition, the acquisition helped to prevent another institution from entering
the market.
The aggregate purchase price was $24.2 million in cash. The purchase price
resulted in approximately $15.0 million in goodwill, and $1.1 million in core
deposit intangible. The core deposit intangible asset will be amortized over 10
years, using an accelerated method. Goodwill will not be amortized but will
instead be evaluated periodically for impairment. Goodwill and the core deposit
intangible asset are not deductible for tax purposes.
The following table summarizes the estimated fair value of assets acquired
and liabilities assumed at the date of acquisition.
Cash $ 11,448
Securities available for sale 3,826
Loans, net 114,819
Goodwill 14,521
Core deposit intangible 1,080
Other assets 10,526
- ------------------------------------------------------------------------------
Total assets acquired 156,220
Deposits (115,481)
Borrowings (14,527)
- ------------------------------------------------------------------------------
Other liabilities (1,964)
Total liabilities assumed (131,972)
Net assets acquired $ 24,248
- ------------------------------------------------------------------------------
The following table presents pro forma information as if the acquisition had
occurred at the beginning of 2003 and 2002. The pro forma information includes
adjustments for interest income on loans and securities acquired, amortization
of intangibles arising from the transaction, depreciation expense on property
acquired, interest expense on deposits and borrowings acquired, and the related
income tax effects. The pro forma financial information is not necessarily
indicative of the results of operations as they would have been had the
transactions been effected on the assumed dates.
December 31 2003 2002
- ------------------------------------------------------------------------------
Net interest income $ 46,523 $ 50,611
Net income 14,146 14,175
Earnings per share (basic and diluted) 2.00 1.98
Branch Purchase: In February, 2003, the Company purchased a branch office
facility in Illinois and assumed related deposits from another financial
institution. Approximately $6.4 million of loans were acquired, $19.6 million of
deposits were assumed, $0.2 million in fixed assets acquired, and $12.2 million
in liquid assets were received. The transaction resulted in amortizable core
deposit intangible assets of $0.2 million and non-amortizable goodwill of $0.8
million. The core deposit intangible will be amortized over 10 years, using an
accelerated method, and the goodwill and core deposit intangible assets will be
deducted for tax purposes over 15 years using the straight line method. The
Company acquired the branch at this premium to further solidify its market share
in the eastern Illinois market, expand its customer base to enhance deposit fee
income, provide an opportunity to market additional products and services to new
customers, and improve customer convenience by adding a new location. Operating
results of the branch are included since the date of the acquisition. The pro
forma information for this acquisition is not significantly different from
actual results.
29
MainSource Financial Group
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Pending Acquisition: In December 2003, the Company executed a definitive
agreement to acquire Peoples Financial Corp, Inc. ("Peoples"). Peoples has seven
bank offices in southwest Indiana with total assets of approximately $120
million. The transaction, which is subject to approval by regulatory agencies
and Peoples' shareholders, is expected to close in the second quarter of 2004.
3. Restriction on Cash and Due From Banks
The Banks are required to maintain reserve funds in cash or on deposit with the
Federal Reserve Bank. The reserve required at December 31, 2003 and 2002 was
$14,588 and $13,089, respectively.
4. Securities
The fair value of securities available for sale and related gross gains/losses
recognized in accumulated other comprehensive income (loss) were as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
- -----------------------------------------------------------------------
2003
- -------------------------------
Available for Sale
Federal agencies $ 92,867 $ 1,409 $ (36)
State and municipal 61,324 1,899 (152)
Mortgage-backed securities 255,541 1,297 (1,710)
Equity and other securities 12,379 103 (625)
- -----------------------------------------------------------------------
Total available for sale $422,111 $ 4,708 $ (2,523)
- -----------------------------------------------------------------------
2002
- -------------------------------
Available for Sale
Federal agencies $ 80,483 $ 2,928 $ --
State and municipal 49,027 1,682 (5)
Mortgage-backed securities 194,490 2,901 (54)
Equity and other securities 22,468 227 (614)
- -----------------------------------------------------------------------
Total available for sale $346,468 $ 7,738 $ (673)
- -----------------------------------------------------------------------
The carrying amount, unrecognized gains and losses, and fair value of
securities held to maturity were as follows:
Gross Gross
Unrecog- Unrecog-
Carrying nized nized Fair
Amount Gains Losses Value
- ----------------------------------------------------------------------
2003
- -------------------------------
Held to Maturity
State and municipal $2,682 $ 122 $ -- $2,804
Other securities 749 130 -- 879
- ----------------------------------------------------------------------
Total held to maturity $3,431 $ 252 $ -- $3,683
- ----------------------------------------------------------------------
2002
- -------------------------------
Held to Maturity
State and municipal $3,977 $ 119 $ -- $4,096
Other securities 698 145 -- 843
- ----------------------------------------------------------------------
Total held to maturity $4,675 $ 264 $ -- $4,939
- ----------------------------------------------------------------------
Contractual maturities of securities for 2003 were as follows. Securities
not due at a single maturity date are shown separately.
Available
Held to Maturity for Sale
- ----------------------------------------------------------------------
Carrying Fair Fair
Amount Value Value
- ----------------------------------------------------------------------
Within one year $ 237 $ 238 $ 10,376
Two through five years 1,875 2,069 112,824
Six through ten years 1,319 1,376 19,364
After ten years -- -- 11,627
Mortgage-backed securities -- -- 255,541
Equity and other securities -- -- 12,379
- ----------------------------------------------------------------------
Total investment securities $3,431 $3,683 $422,111
- ----------------------------------------------------------------------
Gross proceeds from sales of securities available for sale during 2003, 2002
and 2001 were $117,382, $30,586, and $10,507. Gross gains of $1,443, $373, and
$72 and gross losses of $143, $65, and $232 were realized on those sales in
2003, 2002 and 2001, respectively. In addition, the Company also realized $11
and $49 of gains on called securities in 2002 and 2001, respectively.
Securities with a carrying value of $50,560 and $59,337 were pledged at
December 31, 2003 and 2002 to secure certain deposits and for other purposes as
permitted or required by law.
Below is a summary of securities with unrealized losses as of year-end 2003,
presented by length of time the securities have been in an unrealized loss
position.
Fair Unrealized
Less than 12 months Value Losses
- ---------------------------------------------------------------------
Federal agencies $ 32,512 $ (36)
State and municipal 8,061 (152)
Mortgage-backed securities 144,882 (1,710)
Equity and other securities -- --
- ---------------------------------------------------------------------
$ 185,455 $ (1,898)
- ---------------------------------------------------------------------
Fair Unrealized
12 months or longer Value Losses
- ---------------------------------------------------------------------
Federal agencies $ -- $ --
State and municipal -- --
Mortgage-backed securities -- --
- ---------------------------------------------------------------------
Equity and other securities 5,594 (625)
$ 5,594 $ (625)
- ---------------------------------------------------------------------
Fair Unrealized
Total Value Losses
- ---------------------------------------------------------------------
Federal agencies $ 32,512 $ (36)
State and municipal 8,061 (152)
Mortgage-backed securities 144,882 (1,710)
Equity and other securities 5,594 (625)
- ---------------------------------------------------------------------
$ 191,049 $ (2,523)
- ---------------------------------------------------------------------
Unrealized losses on equity and other securities have not been recognized
into income because management has the intent and ability to hold for the
foreseeable future. The fair value of debt securities is expected to recover as
the securities approach their maturity date.
30
Unrealized losses on mortgage-backed securities have not been recognized
into income as the decline in fair value is largely due to increases in market
interest rates. The fair value is expected to recover as the bonds approach
their maturity date and/or market rates decline.
5. Loans and Allowance
December 31 2003 2002
- ------------------------------------------------------------------------
Commercial and industrial loans $158,271 $105,093
Agricultural production financing 25,897 25,105
Farm real estate 37,107 43,762
Commercial real estate 101,022 84,024
Hotel 83,997 73,262
Residential real estate 315,848 301,232
Construction and development 33,605 34,987
Consumer 99,724 72,702
- ------------------------------------------------------------------------
Total loans 855,471 740,167
Allowance for loan losses (11,509) (9,517)
- ------------------------------------------------------------------------
Net loans $843,962 $730,650
- ------------------------------------------------------------------------
December 31 2003 2002 2001
- ------------------------------------------------------------------------
Allowance for loan losses
Balances, January 1 $ 9,517 $ 8,894 $ 8,716
Addition resulting from
acquisition 2,078 - -
Provision for losses 1,325 2,995 2,136
Recoveries on loans 509 399 421
Loans charged off (1,920) (2,771) (2,379)
- ------------------------------------------------------------------------
Balances, December 31 $ 11,509 $ 9,517 $ 8,894
- ------------------------------------------------------------------------
December 31 2003 2002 2001
- ------------------------------------------------------------------------
Impaired loans with
an allowance $ 6,954 $ 2,267 $ 5,989
Impaired loans with no
allocated allowances - - -
- ------------------------------------------------------------------------
Total impaired loans $ 6,954 $ 2,267 $ 5,989
- ------------------------------------------------------------------------
Allowance allocated for
impaired loans $ 1,086 $ 269 $ 898
- ------------------------------------------------------------------------
Average balance of
impaired loans $ 4,997 $ 2,866 $ 4,174
Interest income recognized
on impaired loans - - -
Cash basis interest included above - - -
Nonperforming loans were as follows:
December 31 2003 2002
- ------------------------------------------------------------------------
Loans past due over 90 days
still on accrual $ 196 $ 245
Nonaccrual loans 14,626 7,695
- ------------------------------------------------------------------------
Total nonperforming loans $ 14,822 $ 7,940
- ------------------------------------------------------------------------
Nonperforming loans include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired
loans.
6. Premises & Equipment
December 31 2003 2002
- -------------------------------------------------------------------------
Land $ 3,731 $ 3,037
Buildings 21,556 18,312
Equipment 21,451 18,507
- -------------------------------------------------------------------------
Total cost 46,738 39,856
Accumulated depreciation (23,852) (20,598)
- -------------------------------------------------------------------------
Net $ 22,886 $ 19,258
- -------------------------------------------------------------------------
Depreciation expense was $2,629, $2,246 and $1,971 for 2003, 2002 and 2001.
7. Goodwill and Intangible Assets
Goodwill
Upon adopting new accounting guidance in 2002, unidentifiable intangibles from
bank branch acquisitions were reclassified to goodwill.
The change in the carrying amount of goodwill for the year is as follows:
2003 2002
- ---------------------------------------------------------------------------
Beginning of year $ 20,708 $ 2,673
Reclassified from unidentifiable
intangible asset - 15,295
Goodwill from acquisitions during year 15,339 2,740
- ---------------------------------------------------------------------------
End of year $ 36,047 $ 20,708
- ---------------------------------------------------------------------------
Upon adopting new accounting guidance, goodwill was no longer amortized
starting in 2002. The effect of not amortizing goodwill is summarized as
follows:
2003 2002 2001
- ---------------------------------------------------------------------------
Reported net income $ 15,305 $ 14,011 $11,177
Add back:
goodwill amortization, net of tax - - 710
- ---------------------------------------------------------------------------
Adjusted net income $ 15,305 $ 14,011 $11,887
- ---------------------------------------------------------------------------
Basic and diluted earnings per share:
Reported net income $ 2.16 $ 1.96 $ 1.56
Goodwill amortization,
net of tax - - .10
- ---------------------------------------------------------------------------
Adjusted net income $ 2.16 $ 1.96 $ 1.66
- ---------------------------------------------------------------------------
Acquired Intangible Assets
2003 2002
- ---------------------------------------------------------------------------
Core deposit intangibles $ 9,804 $ 8,553
Accumulated amortization (4,457) (3,548)
- ---------------------------------------------------------------------------
Core deposit intangibles, net $ 5,347 $ 5,005
- ---------------------------------------------------------------------------
31
MainSource Financial Group
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Aggregate amortization expense was $909, $828, and $1,700 for 2003, 2002 and
2001.
Estimated amortization expense for each of the next five years:
2004 $ 916
2005 908
2006 899
2007 887
2008 779
8. Deposits
December 31 2003 2002
- ------------------------------------------------------------------
Non-interest bearing $ 127,100 $ 104,282
Interest bearing demand 311,333 260,120
Savings deposits 224,318 196,056
Certificates and other time deposits
of $100 or more 141,327 93,192
Other certificates and time deposits 387,232 380,657
- ------------------------------------------------------------------
Total deposits $1,191,310 $1,034,307
- ------------------------------------------------------------------
Certificates and other time deposits maturing in years ending after December
31, 2003:
2004 $ 350,618
2005 109,374
2006 26,435
2007 19,152
2008 6,353
Thereafter 16,627
- -------------------------------------------------------------------
Total $ 528,559
- -------------------------------------------------------------------
9. Short-Term Borrowings
December 31 2003 2002
- -------------------------------------------------------------------
Short-term borrowings consisted of the
following at year-end:
Federal funds purchased $ 7,460 $ -
Securities sold under repurchase
agreements 20,048 19,529
- -------------------------------------------------------------------
Total short-term borrowings $27,508 $19,529
- -------------------------------------------------------------------
Securities sold under repurchase agreements ("agreements") consist of
obligations secured by U.S. Treasury and Federal agency securities, and a
safekeeping agent holds such collateral. The maximum amount of outstanding
agreements at any month-end during 2003 and 2002 totaled $20,048 and $19,529.
The daily average of such agreements during 2003 and 2002 totaled $16,680 and
$17,372. The weighted average rate was 0.71% and 1.15% at December 31, 2003 and
2002, while the weighted average rate during 2003 and 2002 was approximately
0.88% and 1.64%, respectively. The majority of the agreements at December 31,
2003 mature within 30 days.
10. Federal Home Loan Bank Advances
Federal Home Loan Bank ("FHLB") advances at year end were:
2003 2002
- -------------------------------------------------------------------
Maturities January 2004 through
August 2012, with rates from
1.3% to 6.6%, averaging 4.5% $62,751 $ -
Maturities March 2003 through
August 2012, with rates from
3.3% to 6.6%, averaging 5.0% - 50,235
- -------------------------------------------------------------------
$62,751 $50,235
- -------------------------------------------------------------------
The FHLB advances are secured by first mortgage loans totaling approximately
145% of the advance under a blanket security agreement. The advances are subject
to restrictions or penalties in the event of prepayment.
Maturities over the next five years are:
2004 $10,549
2005 10,031
2006 132
2007 15,703
2008 -
Thereafter 26,336
11. Notes payable
Notes payable include a term note secured by the common stock of MainSource Bank
and Regional Bank with a balance of $800 and $2,400 at December 31, 2003 and
2002. The note requires semi-annual principal payments of $800 plus quarterly
interest payments. Interest accrues at LIBOR+1.20%, which resulted in a rate of
2.41% at December 31, 2003. The loan matures July 1, 2004.
Notes payable also include a term note secured by the common stock of
MainSource Bank and First Community Bank & Trust with a balance of $11,700 at
December 31, 2003. The note requires semi-annual principal payments of $1,300
plus quarterly interest payments. Interest accrues at LIBOR+1.40%, which
resulted in a rate of 2.56% at December 31, 2003. The loan matures June 30,
2008.
The Company has certain debt covenants related to these notes payable. As of
December 31, 2003 the Company was in compliance with all of these covenants.
12. Subordinated Debentures and Trust Preferred Securities The Company formed
three separate trusts in 2002 and 2003 that issued floating rate trust preferred
securities as part of pooled offerings of such securities. The Company issued
subordinated debentures to the trusts in exchange for the proceeds of the
offerings, which debentures represent the sole asset of the trusts. Other than
the items detailed below, the terms of the subordinated debentures are generally
the same. Interest payments are payable quarterly in arrears and the Company has
the option to defer payments from time to time for a period not to exceed 20
consecutive quarters. The subordinated debentures mature in 30 years from
issuance and can be called anytime after five years at par. The following table
summarizes the other terms of each issuance.
32
Date of Rate as of Maturity
Issuance Amount Variable Rate 12/31/03 Date
- ---------------------------------------------------------------------
Trust 1 12/2002 $ 8,248 LIBOR +3.25% 4.42% 12/2032
Trust 2 4/2003 14,433 LIBOR +3.25% 4.41% 4/2033
Trust 3 6/2003 7,217 LIBOR +3.15% 4.32% 6/2033
An interest rate swap was utilized to obtain a five-year fixed rate of
6.65% on the first $14,000 of the $14,433 issue.
Prior to 2003, the trusts were consolidated in the Company's financial
statements, with the trust preferred securities issued by the trusts reported in
liabilities as "guaranteed preferred beneficial interests" and the subordinated
debentures eliminated in consolidation. Under new accounting guidance, FASB
Interpretation No. 46, as revised in December 2003, 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 and held by the
trusts, as these are no longer eliminated in consolidation. Since the amount of
the subordinated debentures and the trust preferred securities was substantially
the same, the effect of no longer consolidating the trust does not significantly
change the amounts reported as the Company's assets, liabilities, equity, or
interest expense. Accordingly, the amounts previously reported as "guaranteed
preferred beneficial interests" in liabilities have been recaptioned
"subordinated debentures" and continue to be presented in liabilities on the
balance sheet.
13. Loan Servicing
Loans serviced for others are not included in the accompanying consolidated
balance sheet. The unpaid principal balances of loans serviced for others
totaled $498,385 and $395,359 at December 31, 2003 and 2002. Mortgage servicing
rights are included in other assets on the consolidated balance sheets. The fair
value of capitalized mortgage servicing assets is based on comparable market
values and expected cash flows, with impairment assessed based on portfolio
characteristics including product type and interest rates. No valuation
allowance was necessary during 2003 or 2002. The fair value of capitalized
mortgage servicing rights was $3,395 and $2,498 at year end 2003 and 2002.
2003 2002
- --------------------------------------------------------------------
Mortgage servicing assets
Balances, January 1 $2,134 $1,105
Additions resulting from acquisition 143 -
Servicing assets capitalized 2,204 1,678
Amortization of servicing assets (1,863) (649)
- --------------------------------------------------------------------
Balance, December 31 $2,618 $2,134
- --------------------------------------------------------------------
14. Income Tax
Retained earnings of Regional Bank include approximately $2,162 for which no
deferred income tax liability has been recognized. This amount represents an
allocation of income to bad debt deductions as of December 31, 1987 for tax
purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses including redemption of Regional Bank stock or excess dividends, or
loss of "bank" status for Regional Bank would create income for tax purposes
only, which would be subject to the then-current corporate income tax rate. The
unrecorded deferred income tax liability on the above amount for Regional at
December 31, 2003 was approximately $757. Income tax expense (benefit) was as
follows:
Year Ended December 31 2003 2002 2001
- --------------------------------------------------------------------
Income tax expense
Currently payable $4,749 $5,899 $5,378
Deferred 2,102 914 252
Net operating loss carryforward (254) - -
- --------------------------------------------------------------------
Total income tax expense $6,597 $6,813 $5,630
- --------------------------------------------------------------------
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax rate 35% 35% 35%
Federal statutory income tax $7,666 $7,288 $5,883
Tax exempt interest (893) (838) (672)
Effect of state income taxes 397 483 351
Non-deductible expenses 52 42 109
Tax exempt income on life insurance (219) (73) (66)
Low income housing credits (175) - -
Other (231) (89) 25
- --------------------------------------------------------------------
Income tax expense $6,597 $6,813 $5,630
- --------------------------------------------------------------------
The components of the net deferred tax asset (liability) are as follows:
December 31 2003 2002
- --------------------------------------------------------------------
Assets
Allowance for loan losses $ 4,556 $ 3,781
Deferred compensation 452 486
Fair value adjustments on assets acquired 472 -
Accrued expenses 323 350
Alternative minimum tax credits 106 -
Net operating loss carryforward 189 -
Net unrealized appreciation on interest
rate swap 78 -
Other 338 170
- --------------------------------------------------------------------
Total assets $ 6,514 $ 4,787
- --------------------------------------------------------------------
Liabilities
Accretion on securities $ (17) $ (23)
Depreciation (1,282) (798)
Fair value adjustments on assets acquired - (354)
Intangibles (1,538) (466)
Mortgage servicing rights (1,037) (844)
Deferred loan fees/costs (237) (327)
FHLB stock dividends (160) (19)
Unrealized gain on securities available
for sale (853) (2,568)
Other (780) (309)
- --------------------------------------------------------------------
Total liabilities $(5,904) $(5,708)
- --------------------------------------------------------------------
Net deferred tax asset $ 610 $ (921)
- --------------------------------------------------------------------
33
MainSource Financial Group
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
15. Other Comprehensive Income
Before-Tax Tax (Expense) Net-of-Tax
Year Ended December 31, 2003 Amount /Benefit Amount
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized holding losses on available for sale securities $(3,580) $ 1,260 $(2,320)
Unrealized holding losses on interest rate swap and cap (195) 78 (117)
Less: reclassification adjustment for gains realized in net income 1,300 (455) 845
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive income $(5,075) $ 1,793 $(3,282)
- ---------------------------------------------------------------------------------------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Year Ended December 31, 2002 Amount /Benefit Amount
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized holding gains on available for sale securities $ 5,156 $(1,882) $3,274
Less: reclassification adjustment for gains realized in net income 319 (112) 207
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 4,837 $(1,770) $3,067
- ---------------------------------------------------------------------------------------------------------------------------
Before-Tax Tax (Expense) Net-of-Tax
Year Ended December 31, 2001 Amount /Benefit Amount
- ---------------------------------------------------------------------------------------------------------------------------
Unrealized holding gains on available for sale securities $ 3,707 $(1,355) $2,352
Less: reclassification adjustment for losses realized in net income (111) 39 (72)
- ---------------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 3,818 $(1,394) $2,424
- ---------------------------------------------------------------------------------------------------------------------------
16. Financial Instruments with Off-Balance Sheet Risk and Derivative Instruments
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying financial statements. The
Banks' exposure to credit loss in the event of nonperformance by the other party
to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual or notional amount of those
instruments. The Banks use the same credit policies in making such commitments
as they do for instruments that are included in the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
2003 2002
- ---------------------------------------------------------------
Commitments to extend credit $152,494 $139,685
Standby letters of credit 2,936 1,766
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Commitments are predominantly short-term or variable
in rate. Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Collateral held varies, but may include accounts receivable,
inventory, property and equipment and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Banks to
guarantee the performance of a customer to a third party.
During 2003, the Company entered into an interest rate swap and cap. Both
the interest rate swap and the cap have a 60 month term and a notional principal
balance of $14,000. The interest rate swap and cap were designated to hedge a
portion of the subordinated debentures. Under the interest rate swap agreement,
the Company made fixed rate payments at 6.65%, and received variable payments
based on LIBOR. Net settlement expense or benefit is included in interest
expense. The interest rate cap requires the counter-party to pay the Company the
excess of 3-month LIBOR over 12%. No payments are currently required under the
agreement. The fair values for the interest rate swap and cap were $146 and $49
at year end and were included in other liabilities. Both the interest rate swap
and cap expire in April 2008.
17. Stock Dividends
On November 26, 2003, the Company announced a 5% stock dividend to be paid
on January 9, 2004 to shareholders of record as of December 22, 2003. The stock
dividend was recorded in 2003, and all share and per share amounts have been
retroactively adjusted for all prior years to reflect this stock dividend.
On December 17, 2002, the Company announced a 5% stock dividend to be paid
on January 17, 2003 to shareholders of record as of December 31, 2002. The stock
dividend was recorded in 2002, and all share and per share amounts have been
retroactively adjusted for all prior years to reflect this stock dividend.
On December 19, 2001, the Company announced a 5% stock dividend to be paid
on January 25, 2002 to shareholders of record as of December 31, 2001. The stock
dividend was recorded in 2001, and all share and per share amounts have been
retroactively adjusted for all prior years to reflect this stock dividend.
34
18. Dividends and Capital Restrictions
Without prior approval, the Banks are restricted by state regulations and
regulatory agencies as to the maximum amount of dividends the Banks can pay to
the parent in any calendar year to their retained net profits (as defined) for
that year and the two preceding years.
At December 31, 2003, total shareholders' equity of the Banks was $141,610
of which $130,938 was restricted or limited from dividend distribution to the
Company. As a practical matter, the Banks may restrict dividends to a lesser
amount because of the need to maintain an adequate capital structure.
19. Dividend Reinvestment Plan
The Company maintains an Automatic Dividend Reinvestment Plan. The plan enables
shareholders to elect to have their cash dividends on all or a portion of shares
held automatically reinvested in additional shares of the Company's common
stock. The stock is purchased by the Company's transfer agent on the open market
and credited to participant accounts at fair market value. Dividends are
reinvested on a quarterly basis.
20. Regulatory Capital
Banks and bank holding companies are subject to various regulatory capital
requirements administered by the federal banking agencies and are assigned to a
capital category. The assigned capital category is largely determined by three
ratios that are calculated according to the regulations. The ratios are intended
to measure capital relative to assets and credit risk associated with those
assets and off-balance sheet exposures. The capital category assigned to an
entity can also be affected by qualitative judgments made by regulatory agencies
about the risk inherent in the entity's activities that are not part of the
calculated ratios.
There are five capital categories defined in the regulations, ranging from
well capitalized to critically undercapitalized. Classification in any of the
undercapitalized categories can result in actions by regulators that could have
a material effect on operations. At December 31, 2003 and 2002, the most recent
regulatory notifications categorized the banks as well capitalized under the
regulatory framework for prompt corrective actions. There are no conditions or
events since that notification that management believes have changed the
institutions' category.
Required for To Be Well
Actual Adequate Capital Capitalized
December 31, 2003 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------
MainSource Financial Group
Total capital (to risk-weighted assets) $103,223 11.3% $ 73,011 8.0% N/A N/A
Tier 1 capital (to risk-weighted assets) 83,753 9.2 36,505 4.0 N/A N/A
Tier 1 capital (to average assets) 83,753 6.0 55,914 4.0 N/A N/A
MainSource Bank
Total capital (to risk-weighted assets) $ 63,280 11.8% $ 43,061 8.0% $53,826 10.0%
Tier 1 capital (to risk-weighted assets) 56,552 10.5 21,530 4.0 32,296 6.0
Tier 1 capital (to average assets) 56,552 7.1 32,033 4.0 40,041 5.0
Regional
Total capital (to risk-weighted assets) $ 17,991 11.2% $ 12,853 8.0% $16,066 10.0%
Tier 1 capital (to risk-weighted assets) 16,330 10.2 6,426 4.0 9,640 6.0
Tier 1 capital (to average assets) 16,330 6.7 9,710 4.0 12,137 5.0
Capstone
Total capital (to risk-weighted assets) $ 14,352 15.9% $ 7,233 8.0% $ 9,042 10.0%
Tier 1 capital (to risk-weighted assets) 13,418 14.8 3,617 4.0 5,425 6.0
Tier 1 capital (to average assets) 13,418 6.7 8,011 4.0 10,014 5.0
First Community
Total capital (to risk-weighted assets) $ 13,699 11.5% $ 9,544 8.0% $11,930 10.0%
Tier 1 capital (to risk-weighted assets) 12,208 10.2 4,772 4.0 7,158 6.0
Tier 1 capital (to average assets) 12,208 8.4 5,840 4.0 7,300 5.0
35
MainSource Financial Group
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
Required for To Be Well
Actual Adequate Capital Capitalized
December 31, 2002 Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------
MainSource Financial Group
Total capital (to risk-weighted assets) $109,503 14.1% $ 62,243 8.0% N/A N/A
Tier 1 capital (to risk-weighted assets) 92,516 11.9 31,121 4.0 N/A N/A
Tier 1 capital (to average assets) 92,516 7.6 49,061 4.0 N/A N/A
MainSource Bank
Total capital (to risk-weighted assets) $ 60,536 11.3% $ 43,048 8.0% $53,810 10.0%
Tier 1 capital (to risk-weighted assets) 53,887 10.1 21,524 4.0 32,286 6.0
Tier 1 capital (to average assets) 53,887 6.8 31,608 4.0 39,510 5.0
Regional
Total capital (to risk-weighted assets) $ 17,341 11.6% $ 11,930 8.0% $14,912 10.0%
Tier 1 capital (to risk-weighted assets) 15,543 10.4 5,965 4.0 8,947 6.0
Tier 1 capital (to average assets) 15,543 6.4 9,748 4.0 12,186 5.0
Capstone
Total capital (to risk-weighted assets) $ 12,866 15.4% $ 6,704 8.0% $ 8,381 10.0%
Tier 1 capital (to risk-weighted assets) 11,818 14.1 3,352 4.0 5,028 6.0
Tier 1 capital (to average assets) 11,818 6.4 7,425 4.0 9,281 5.0
21. Employee Benefit Plans
The Company has a defined-contribution retirement plan in which substantially
all employees may participate. The Company matches a portion of employees'
contributions and makes additional Company contributions based on employee
compensation and Company profitability. Expense was $1,284 in 2003, $1,138 in
2002, and $1,337 in 2001.
22. Related Party Transactions
The Company has entered into transactions with certain directors, executive
officers, significant stockholders and their affiliates or associates (related
parties). Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features.
The aggregate amount of loans, as defined, to such related parties were as
follows:
Balances, January 1, 2003 $ 9,048
Changes in composition of related parties (1,483)
New loans, including renewals and advances 6,734
Payments, etc. including renewals (7,089)
- -------------------------------------------------------------
Balances, December 31, 2003 $ 7,210
- -------------------------------------------------------------
Deposits from related parties held by the company at December 31, 2003 and 2002
totaled $5,980 and $4,360.
23. Stock Option Plans
Options to buy stock were granted to directors and officers of the Company under
the Company's Stock Option Plan, which was adopted in 2003 and provides for the
issue of up to 367,500 options.
Exercise price is the market price at date of grant, so there is no
compensation expense recognized in the income statement. The maximum option term
is ten years, and options vest immediately for the directors' grant and over
four years for the officers' grant. The weighted average remaining contractual
life is 9.4 years. A summary of the activity in the plan is as follows:
Year Ended December 31 2003
- ----------------------------------------------------------------
Weighted
Average
Exercise
Options (restated for stock dividend) Shares Price
- ----------------------------------------------------------------
Outstanding, beginning of year - -
Granted 36,225 $22.10
Exercised or redeemed - -
- ----------------------------------------------------------------
Outstanding, end of year 36,225 $22.10
Options exercisable at year end 11,183 $22.10
Weighted average fair value of options
granted during the year $3.56
36
24. Earnings Per Share
Earnings per share were computed as follows:
Weighted
Average Per-Share
Year Ended December 31, 2003 Income Shares Amount
- --------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Net income available to common shareholders $15,305 7,084,408 $2.16
Effect of dilutive stock options 2,089
---------
Diluted Earnings Per Share
Net income available to common shareholders and assumed conversions $15,305 7,086,497 $2.16
- --------------------------------------------------------------------------------------------------------
Year Ended December 31, 2002
- --------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Net income available to common shareholders $14,011 7,146,391 $1.96
Effect of dilutive stock options -
---------
Diluted Earnings Per Share
Net income available to common shareholders and assumed conversions $14,011 7,146,391 $1.96
- --------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001
- --------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Net income available to common shareholders $11,177 7,160,222 $1.56
Effect of dilutive stock options -
---------
Diluted Earnings Per Share
Net income available to common shareholders and assumed conversions $11,177 7,160,222 $1.56
- --------------------------------------------------------------------------------------------------------
37
MainSource Financial Group
Notes to Consolidated Financial Statements
(Dollar amounts in thousands except per share data)
25. Fair Values of Financial Instruments
December 31, 2003 December 31, 2002
- --------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 56,854 $ 56,854 $ 77,917 $ 77,917
Interest-bearing time deposits 201 201 - -
Securities available for sale 422,111 422,111 346,468 346,468
Securities held to maturity 3,431 3,683 4,675 4,939
Loans including loans held for sale, net 845,927 865,266 746,365 772,126
Restricted stock 6,639 6,639 5,690 5,690
Interest receivable 6,938 6,938 5,171 5,171
Liabilities
Deposits (1,191,310) (1,201,574) (1,034,307) (1,035,483)
Borrowings
Short-term (27,508) (27,508) (19,529) (19,529)
FHLB advances (62,751) (63,519) (50,235) (52,386)
Notes payable (12,500) (12,500) (2,400) (2,400)
Interest payable (3,192) (3,192) (3,502) (3,502)
Subordinated debentures (29,898) (29,898) (30,425) (30,582)
Interest rate swap (195) (195) - -
The methods and assumptions used to estimate fair value are described as
follows.
Carrying amount is the estimated fair value of cash and cash equivalents,
interest-bearing time deposits, restricted stock, accrued interest receivable
and payable, demand deposits, short-term borrowings, variable rate notes payable
and subordinated debentures, and variable rate loans or deposits that reprice
frequently and fully. Security fair values are based on market prices or dealer
quotes, or if no such information is available, on the rate and term of the
security and information about the issuer. For fixed rate loans or deposits and
for variable rate loans or deposits with infrequent repricing or repricing
limits, fair value is based on discounted cash flows using current market rates
applied to the estimated life and credit risk. Fair values for impaired loans
are estimated using discounted cash flow analysis or underlying collateral
values. Fair value of loans held for sale is based on market quotes. Fair value
of FHLB advances is based on current rates for similar financing.
The fair value of off-balance-sheet items is based on the current fees or
cost that would be charged to enter into or terminate such arrangements, and are
not considered significant.
26. Quarterly Financial Data (Unaudited)
Interest Net Interest Net Earnings Per Share
Income Income Income Basic Fully Diluted
- --------------------------------------------------------------------------------
2003
First quarter $16,732 $10,714 $3,505 $0.50 $0.50
Second quarter 16,524 10,720 3,734 0.52 0.52
Third quarter 17,216 11,304 3,849 0.54 0.54
Fourth quarter 17,133 11,494 4,217 0.60 0.60
2002
First quarter $18,365 $11,063 $3,336 $0.47 $0.47
Second quarter 18,127 11,169 3,318 0.47 0.47
Third quarter 18,292 11,693 3,419 0.47 0.47
Fourth quarter 17,519 11,125 3,938 0.55 0.55
38
27. Parent Only Condensed Financial Statements
Parent Only Condensed Balance Sheets
December 31 2003 2002
- --------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents $ 1,744 $ 15,131
Securities available for sale 1,057 1,057
Investment in subsidiaries 142,945 112,717
Other assets 3,290 6,182
- --------------------------------------------------------------------------------------------------------------------------
Total assets $149,036 $135,087
- --------------------------------------------------------------------------------------------------------------------------
Liabilities
Subordinated debentures $ 29,898 $ 31,367
Notes payable 12,500 2,400
Other liabilities 1,186 1,523
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 43,584 35,290
Shareholders' equity 105,452 99,797
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $149,036 $135,087
- --------------------------------------------------------------------------------------------------------------------------
Parent Only Condensed Statements of Income
Year ended December 31 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Income
Dividends from subsidiaries $ 14,250 $ 18,261 $ 11,020
Fees from subsidiaries 7,813 6,370 4,016
Other income 207 170 207
- --------------------------------------------------------------------------------------------------------------------------
Total income 22,270 24,801 15,243
Expenses
Interest expense 1,898 2,172 2,395
Salaries and benefits 4,869 4,854 3,890
Professional fees 582 573 503
Other expenses 5,085 3,882 1,967
- --------------------------------------------------------------------------------------------------------------------------
Total expenses 12,434 11,481 8,755
Income before income tax and equity in undistributed income of subsidiaries 9,836 13,320 6,488
Income tax expense (benefit) (1,877) (1,995) (1,844)
- --------------------------------------------------------------------------------------------------------------------------
Income before equity in undistributed income of subsidiaries 11,713 15,315 8,332
Equity in undistributed income of subsidiaries 3,592 (1,304) 2,845
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 15,305 $ 14,011 $ 11,177
- --------------------------------------------------------------------------------------------------------------------------
Parent Only Condensed Statements of Cash Flows
Year ended December 31 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 15,305 $ 14,011 $ 11,177
Undistributed income of subsidiaries (3,592) 1,304 (2,845)
Changes in other assets and liabilities 3,228 (291) 989
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 14,941 15,024 9,321
Investing Activities
Capital contributed to subsidiary (5,600) (4,348) -
Cash paid for acquisition (24,283) - -
Purchases of equipment (705) (1,720) (1,764)
Purchase of securities available for sale - (208) -
- --------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (30,588) (6,276) (1,764)
Financing Activities
Payments on long-term debt (2,900) (1,600) (2,400)
Payments on subordinated debentures (23,119) - -
Proceeds from issuance of subordinated debentures 21,650 8,248 -
Proceeds from issuance of long-term debt 13,000 - -
Purchase of treasury shares (1,497) (694) -
Cash dividends and fractional stock dividends (4,874) (4,485) (4,121)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 2,260 1,469 (6,521)
- --------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (13,387) 10,217 1,036
Cash and cash equivalents, beginning of period 15,131 4,914 3,878
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,744 $ 15,131 $ 4,914
- --------------------------------------------------------------------------------------------------------------------------
39
MainSource Financial Group
Directors and Officers
MainSource Financial Group Directors
Robert E. Hoptry, Chairman
Retired President and CEO
MainSource Financial Group
William G. Barron, CCIM
Chairman and President
Wm. G. Barron Enterprises, Inc.
Dale J. Deffner
Retired Partner
Deffner and Tebbe
Don Dunevant, M.D.
Family Physician
Portage Medical Group
Philip A. Frantz
Attorney at Law; Partner
Coldren and Frantz
Rick S. Hartman, CPA
President
The HRH Group, Ltd.
James L. Saner, Sr.
President and CEO
MainSource Financial Group
MainSource Financial Group
Senior Management
James L. Saner, Sr.
President and CEO
Donald A. Benziger
Senior Vice President and CFO
John C. Parker
Senior Vice President of Operations
James M. Anderson
Principal Accounting Officer
- --------------------------------------------------------------------------------
MainSource Bank Directors
Daryl R. Tressler, Chairman
President and CEO
MainSource Bank
John G. Seale, CPA
Partner, Rettig, Blankman, Mack and Seale
Accounting Firm
Norman L. Winkler
Farmer
Philip A. Frantz
Attorney at Law; Partner
Coldren and Frantz
Robert E. Hoptry
Retired President and CEO
MainSource Financial Group
David L. Miers
President
Miers Farm Corporation
Lawrence R. Rueff, D.V.M.
President
Swine Veterinary Services
MainSource Bank Senior Management
Daryl R. Tressler
Chairman, President and CEO
Keith Lindauer
Senior Vice President - Commercial Lending
Dawn M. Schwering
Senior Vice President - Retail Services
Mark W. Dunevant
Senior Vice President - Mortgage Lending
Daniel F. Anderson
Senior Vice President - Wealth Management
Regional Bank Directors
Michael K. Bauer, Chairman
President and CEO
Regional Bank
William G. Barron, CCIM
Chairman and President
Wm. G. Barron Enterprises, Inc.
D.J. Hines
President
Schuler Bauer Realty
Michael J. Kapfhammer
President
Buckhead Mountain Grill
Edward J. Zoeller
President
E.M. Cummings Veneer, Inc.
Regional Bank Senior Management
Michael K. Bauer
Chairman, President and CEO
John Baumann
Vice President - Retail Services
Larry W. Brumley
Senior Vice President - Commercial Lending
Capstone Bank Directors
Wm. Brent Hoptry, Chairman
President and CEO
Capstone Bank
Rick S. Hartman, CPA
President
The HRH Group, Ltd.
Roy A. Koester
Farmer
Ronald H. Kinzinger
Part owner
R&R, Inc.
James M. Anderson
Principal Accounting Officer
MainSource Financial Group
Capstone Bank Senior Management
Wm. Brent Hoptry
Chairman, President and CEO
William J. Krones
Senior Vice President - Lending
Georgann J. Buttefield
Vice President - Retail Services
MainSource Insurance Directors
James L. Saner, Sr., Chairman
President and CEO
MainSource Financial Group
C. Todd Anderson
President
MainSource Insurance
William G. Barron, CCIM
Chairman and President
Wm. G. Barron Enterprises, Inc.
Daryl R. Tressler
Chairman, President and CEO
MainSource Bank
Jerry Vollmer
Sales Manager - Indiana
MainSource Insurance
MainSource Insurance
Senior Management
C. Todd Anderson
President
Sales Manager - Kentucky
Jerry Vollmer
Vice President
Sales Manager - Indiana
First Community Bank & Trust Co. Directors
Albert R. Jackson, III, Chairman
President and CEO
John G. Hall
Mayor
City of North Vernon
Larry Gesse
Partner
Rogers and Gesse Attorneys At Law
James L. Saner, Sr.
President and CEO
MainSource Financial Group
Donald A. Benziger
Senior Vice President and CFO
MainSource Financial Group
First Community Bank & Trust Co.
Senior Management
Albert R. Jackson, III
Chairman, President and CEO
Wm. Dean Jackson
Executive Vice President - Retail Services
Richard Morris
Senior Vice President - Commercial Lending
40
MainSource Financial Group
Shareholder Information
Annual Meeting
Wednesday, April 21, 2004, 10:00 AM
MainSource Financial Group
Operations Center o 1927 Greensburg Crossing o Greensburg, IN 47240
Corporate Address
MainSource Financial Group
201 North Broadway o P. O. Box 87 o Greensburg, Indiana 47240
Tel: 812-663-0157
Fax : 812-663-4812
www.mainsourcefinancial.com
Form 10-K
Copies of the Company's 2003 Form 10-K filed with the Securities and Exchange
Commission are available without charge to all shareholders upon request. Please
direct requests to the attention of the Chief Financial Officer.
The Form 10-K and other SEC filings can also be accessed from the Company's
website.
Transfer Agent
Investor Relations Department
Registrar and Transfer Company
10 Commerce Drive o Cranford, New Jersey 07016-9982
Tel: 800-368-5948
Common Shares
The Common shares of the Company are listed on The Nasdaq Stock Market(R). The
trading symbol is MSFG. In newspaper listings, Company shares are frequently
listed as MainSrce.
Market Makers
Market Makers in the Company's common stock include:
Stifel, Nicolaus & Company, Inc.
J.J.B. Hilliard/W.L. Lyons, Inc.
NatCity Investments, Inc.
Howe Barnes Investments, Inc.
FTN Financial Securities
The range of known per share prices by calendar quarter, based on actual
transactions, excluding commissions, is shown below.
2003 Q4 Q3 Q2 Q1 2002 Q4 Q3 Q2 Q1
- -------------------------------------- --------------------------------------
High $31.76 $25.71 $24.59 $24.35 $23.76 $22.77 $22.86 $18.27
Low $25.47 $23.10 $21.90 $21.43 $20.83 $20.23 $18.15 $15.51
Last Sale $30.67 $24.68 $23.16 $22.38 $22.87 $21.58 $21.94 $18.05
The following dividends per share were paid by MainSource Financial Group:
2003 Q4 Q3 Q2 Q1 2002 Q4 Q3 Q2 Q1
- -------------------------------------- --------------------------------------
$0.171 $0.171 $0.171 $0.171 $0.163 $0.154 $0.154 $0.154
Amounts have been adjusted to reflect the 5% stock dividends declared in 2002
and 2003.
41