MAINSOURCE FINANCIAL GROUP—NASDAQ, MSFG —
Announces Fourth Quarter and Full Year
2011 Operating Results
Greensburg, Indiana, Archie M. Brown, Jr., President and Chief Executive Officer of MainSource Financial Group, Inc. (NASDAQ: MSFG), announced today the unaudited financial results for the quarter and year ended December 31, 2011. For the three months ended December 31, 2011, the Company recorded net income of $6.0 million, or $0.26 per common share, compared to net income of $4.8 million, or $0.20 per common share, in the fourth quarter of 2010. The primary driver of the increase in net income was a decrease in the Company’s loan loss provision expense to $3.2 million in the fourth quarter of 2011 compared to $6.0 million in the same period a year ago. During the fourth quarter of 2011, the Company realized $6.4 million of gains on the sale of investment securities. These gains were offset by consulting and severance expense totaling $6.4 million related to an efficiency improvement project that began in the second quarter of 2011.
For the twelve months ended December 31, 2011, the Company reported net income of $23.8 million, or $1.03 per common share, compared to net income in 2010 of $14.8 million, or $0.58 per common share. Similar to the fourth quarter results, the primary driver of the increase in net income in 2011 compared to 2010 was a decrease in loan loss provision expense to $17.8 million for the full year 2011 from $35.3 million in 2010.
Mr. Brown stated, “I am pleased with the quarter and year. Core earnings remained strong for the quarter relative to the same quarter last year and the linked quarter. Excluding the gains on securities and the expenses related to the efficiency project, earnings for the year were 80% higher than 2010 driven by lower provision expense as loan quality continued to improve from the impact of the recession. For the quarter, our net interest margin continued to be strong and stable, and core fee trends and non-interest expense both reflect improvement from one year ago.
Mr. Brown continued, “I am encouraged that nonperforming assets (NPAs) declined further during the 4th quarter. NPAs declined by 21.6% for the year and declined on an annualized basis by 13.4% from the linked quarter. The inflow of new non-performing loans slowed significantly from the previous two quarters, which aided the progress made during the quarter. One area that continues to be a concern is the further decline of loan balances. For the quarter, we continue to experience lower commercial line utilization and higher business checking balances per account indicating that many businesses in our markets continue to maintain a conservative approach to business expansion. However, at the end of the fourth quarter, we did experience a meaningful increase in our business loan pipeline for the first time since 2008 and are hopeful that it will mean the beginning of growth in our loan portfolio as we enter 2012.”
Mr. Brown concluded, “I am proud of our employees and their ability to remain focused on providing quality service and driving sales while going through our extensive efficiency project. Their efforts have helped position the company very favorably to compete in the challenging banking industry. We have made a meaningful improvement in our cost structure and are hopeful for incremental revenue gains as well.”
4TH QUARTER RESULTS
During the fourth quarter of 2011 the Company completed its efficiency project with the aid of a third party consulting firm. The project began in April 2011. Approximately 90% of the Company’s departments and corresponding headcount were reviewed, as well as the entire organizational structure of the Company. In addition, the Company’s processes and procedures were evaluated and “best practices” were implemented. As a result of the project, approximately 150 full-time equivalent positions were targeted for elimination (approximately 16% of the company’s FTE count as of March 31, 2011) equating to annualized savings of approximately $6.9 million. The Company negotiated a one-time payment with the consulting firm of $6.1 million. A portion of these savings were realized in 2011 as the Company held positions open and achieved a portion of the targeted reductions through normal attrition. The employee cost savings in 2012 are estimated to be approximately $4.5 million when compared to 2011. The Company’s products and fee structures were also reviewed with a significant number of recommendations implemented. The Company expects to realize some incremental improvement in fee related areas, although it is less certain of the full impact of these measures.
NET INTEREST INCOME
Net interest income was $24.4 million for the fourth quarter of 2011. Net interest margin, on a fully-taxable equivalent basis, was 4.15% for the fourth quarter of 2011 which was fourteen basis points above the fourth quarter of 2010 and ten basis points lower than the third quarter of 2011. The Company’s net interest margin decreased on a linked-quarter basis due to the seasonal inflow of public fund deposits related to Indiana property tax receipts. In addition, the Company had higher than average cash balances in the fourth quarter due to the investment security sales and the subsequent delay in reinvesting the funds.
The Company’s non-interest income was $14.2 million for the fourth quarter of 2011 compared to $10.7 million in the same period in 2010. During the fourth quarter of 2011, the Company realized gains on the sale of investment securities of $6.4 million. Partially offsetting these gains were losses/write-downs on OREO properties of $1.5 million and a $0.4 million write-down related to a lot the Company purchased in 2008 for potential future expansion. Approximately $1.0 million of the OREO losses related to the write-down of one problem asset. The write-down was a result of a new appraisal obtained on this property. Mortgage banking income, which was $1.6 million for the fourth quarter of 2011, decreased from the same period a year ago due to the record volume levels achieved during that prior period. While rates have remained low, mortgage refinancing levels have declined and represent more normal activity. During the fourth quarter of 2010 the Company sold the property and casualty business lines of its insurance division and recognized a gain of $1.0 million. This gain in the prior year was the primary reason for the decrease in the Company’s other income for the current quarter.
The Company’s non-interest expense was $28.7 million for the fourth quarter of 2011 compared to $24.2 million for the same period in 2010. The aforementioned consulting expenses of $6.1 million were the primary reason for the increase in non-interest expenses. Offsetting the consulting expenses were decreases in virtually all expense categories as efficiencies from the project were achieved.
FULL YEAR RESULTS
NET INTEREST INCOME
Net interest income was $99.8 million for the full year 2011, which represents a decrease of $1.4 million or 1.4% when compared to the twelve months ended December 31, 2010. While net interest margin, on a fully-taxable equivalent basis, increased to 4.24% in 2011 compared to 4.08% for 2010, the Company’s net interest income decreased due to the decrease in the earning asset base. The increase in the Company’s net interest margin was primarily due to the shift in the Company’s funding mix from higher-priced borrowings and time deposits to lower-priced transaction-based deposits.
The Company’s non-interest income was $45.3 million for the full year 2011 compared to $41.3 million for 2010. Increases in realized gains on the sales of investment securities of $8.4 million, service charge income of $0.7 million, and brokerage income of $0.9 million were offset by a decrease in mortgage banking income of $2.1 million and revenue related to the Company’s insurance agency of $2.7 million (this includes insurance commissions of $1.7 million and the $1.0 million gain on the sale of the business in the fourth quarter of 2010).
The Company’s non-interest expense was $99.8 million for the full year 2011 compared to $92.3 million for 2010. The increase of $7.5 million was primarily attributable to the consulting fees related to the aforementioned efficiency project completed in 2011. In addition, the Company incurred additional costs in 2011 for credit and collection expenses related to problem assets.
Non-performing assets (NPA’s) were $80.7 million as of December 31, 2011, a decrease of approximately $2.8 million on a linked-quarter basis. NPA’s represented 2.93% of total assets as of December 31, 2011 compared to 3.03% as of September 30, 2011 and 3.72% as of December 31, 2010. Included in the $80.7 million of NPA’s was $3.3 million of loans past due 90 days or more and still accruing. Subsequent to year-end, one loan totaling $2.7 million that was included in this category is now current. NPA’s also include $20.4 million of loans classified as troubled debt restructurings (TDR’s). Subsequent to year-end, two loans totaling $6.5 million were transferred out of TDR status and are now classified as performing. These credits were previously re-written using an A/B note structure. As of January 1, 2012, the “A” notes related to these credits have performed as to the terms of the agreement for at least six months and had a market rate of interest. Therefore, the Company moved them out of TDR status.
Net charge-offs were $4.7 million for the fourth quarter of 2011 and represented 1.21% of average loans on an annualized basis. Total loan loss provision expense was $3.2 million in the fourth quarter of 2010. The Company had identified losses and specifically provided for $2.2 million in previous quarters for the two largest charge-offs taken during the fourth quarter totaling approximately $2.5 million. For the full year 2011, net charge-offs were $20.5 million or 1.27% of average loans. The Company’s allowance for loan losses as a percent of total outstanding loans was 2.60% as of December 31, 2011 compared to 2.53% as of December 31, 2010.
MainSource Financial Group is listed on the NASDAQ National Market (under the symbol: “MSFG”) and is a community-focused, financial holding company with assets of approximately $2.8 billion. The Company operates 80 full-service offices throughout Indiana, Illinois, Kentucky and Ohio through its banking subsidiary, MainSource Bank, headquartered in Greensburg, Indiana. Through its non-banking subsidiary, MainSource Title LLC, the Company provides various related financial services.
Except for historical information contained herein, the discussion in this press release includes certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are covered by the safe harbor provisions of such sections. These statements are based upon management expectations, goals and projections, which are subject to numerous assumptions, risks and uncertainties (many of which are beyond management’s control). Factors which could cause future results to differ materially from these expectations include, but are not limited to, the following: general economic conditions; legislative and regulatory initiatives; monetary and fiscal policies of the federal government; deposit flows; the costs of funds; general market rates of interest; interest rates on competing investments; demand for loan products; demand for financial services; changes in accounting policies or guidelines; changes in the quality or composition of the Company’s loan and investment portfolios; the Company’s ability to integrate acquisitions; the impact of our continuing acquisition strategy; and other factors, including various “risk factors” as set forth in our most recent Annual Report on Form 10-K and in other reports we file from time to time with the Securities and Exchange Commission. These reports are available publicly on the SEC website, www.sec.gov, and on the Company’s website, www.mainsourcefinancial.com.