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 first quarter of 2013. For the three months ended March 31, 2013, the Company recorded net income of $4.0 million, or $0.19 per common share, compared to net income of $6.0 million, or $0.32 per common share, in the first quarter of 2012. During the first quarter of 2013, the Company prepaid a $15 million Federal Home Loan Bank (FHLB) advance and incurred a $2.2 million prepayment penalty. In addition, the Company recorded $750 thousand in costs and/or write-downs associated with the previously announced closing of eight branches. Partially offsetting these items were $844 thousand in realized gains on investment securities. During the first quarter of 2012, the U.S. Treasury held an auction through the secondary market for the Company’s preferred shares. The Company requested and received approval to participate in the auction and was successful in retiring a portion of its preferred shares. The difference between the book value and the bid price of $1.2 million was credited to retained earnings, resulting in an increase to earnings per share of $0.06 during that period.
Mr. Brown stated, “Our first quarter results were mixed and included several non-operating items. Adjusting for write-downs for buildings and equipment related to branch closures, total revenue fell approximately three percent from the prior year as net interest income was lower by five percent. The primary driver for the decline in net interest income was a 17 basis point decline in the net interest margin. Earning asset levels have remained flat while asset yields have continued to fall throughout the last year and we have not reduced funding costs by a similar margin. Fee income was two percent higher than the first quarter of a year ago after adjusting for securities gains and the write-down of buildings and equipment related to branch closures. It is important that we begin to realize meaningful loan growth in order to grow our net interest income. This remains our primary focus.”
Mr. Brown discussed loan trends and credit quality, “Total loans were up one percent from a year ago and flat with the linked quarter. As a result of our new markets, loan activity has increased and pipelines are building. While the economy has seemed to slow down in recent weeks, we remain hopeful that we will experience additional loan growth in the coming quarters. We are very pleased with our continued improvement in credit quality. Nonperforming assets to total assets, at 1.69%, declined by 60 basis points from one year ago and 40 basis points from December 31, 2012. The improvement reflects the continued progress we have made in reducing loan problems. Additionally, the pace and size of new problem loans have slowed dramatically.”
Mr. Brown continued, “Adjusting for the prepayment penalty in relation to the payoff of the FHLB advance, non-interest expense increased seven percent from a year ago. The increase in expenses was primarily related to our recent investments in new markets. Several of these investments are already beginning to provide meaningful revenue and we anticipate that they will provide much greater opportunities for lending. Additionally, we experienced material increases in health and unemployment insurance costs. We will continue to work diligently to manage our expense base to help offset our new investments.”
Mr. Brown concluded, “While the first quarter did not meet our expectations, we are optimistic about the underlying changes we are making to position the company for growth in the future. We will continue working to improve the overall revenue capabilities of the company and we are hopeful that future quarters will show improvement in overall performance.”
First Quarter Results
NET INTEREST INCOME
Net interest income was $22.6 million for the first quarter of 2013 compared to $23.8 million a year ago. The decrease in net interest income was primarily due to lower asset yields. Net interest margin, on a fully-taxable equivalent basis, was 4.00% for the first quarter of 2013, which was seventeen basis points below the first quarter of 2012 and three basis points lower than the fourth quarter of 2012. On a linked-quarter basis the net interest margin stayed relatively flat as the Company was able to offset the decrease in the yield on earning assets by a reduction in the cost of funds.
The Company’s non-interest income was $10.3 million for the first quarter of 2013 compared to $9.8 million for the same period in 2012. The increase was primarily related to an increase in gains on the sales of investment securities of $0.4 million. Non-interest income decreased on a linked-quarter basis primarily due to the softening of the mortgage refinance market and the seasonal decrease in service charge income (mainly overdrafts).
The Company’s non-interest expense was $27.1 million for the first quarter of 2013 compared to $23.3 million for the same period in 2012. During the first quarter of 2013, the Company incurred $2.2 million in expenses related to the prepayment of a FHLB advance. In addition, the Company had $250 thousand of expenses related to the previously-announced closing of eight branches. Excluding these non-operating items, the Company’s non-interest expense would have been $24.6 million. The increase compared to the previous year was primarily related to the Company’s recent investments in new markets (i.e. Columbus, Seymour and Indianapolis, Indiana and Shelbyville, Kentucky). These investments were the primary cause of the increases in employee, occupancy and equipment expenses. Partially offsetting these increases was a decrease in the Company’s FDIC assessment.
BALANCE SHEET AND CAPITAL
Total assets were $2.73 billion at March 31, 2013, which represents a $32 million decrease from the balance a year ago of $2.76 billion. Loans increased $21 million year over year but were offset by a decrease in cash and fed funds. Loan balances were flat on a linked-quarter basis. The Company’s regulatory capital ratios remain strong and as of March 31, 2013 were as follows: leverage ratio of 10.4%, tier one capital to risk-weighted assets of 16.8%, and total capital to risk-weighted assets of 18.1%. In addition, as of March 31, 2013, the Company’s tangible common equity ratio was 8.9%.
Non-performing assets (NPA’s) were $46.3 million as of March 31, 2013, a decrease of approximately $11.5 million on a linked-quarter basis. NPA’s represented 1.69% of total assets as of March 31, 2013 compared to 2.09% as of December 31, 2012 and 2.29% as of March 31, 2012. Net charge-offs were $2.2 million for the first quarter of 2013 and represented 0.58% of average loans on an annualized basis. Total loan loss provision expense was $1.7 million in the first quarter of 2012. The Company’s allowance for loan losses as a percent of total outstanding loans was 2.04% as of March 31, 2013 compared to 2.07% as of December 31, 2012 and 2.52% as of March 31, 2012.
Tangible common equity, tangible assets and tangible book value per share are non-GAAP financial measures calculated using GAAP amounts. Tangible common equity is calculated by excluding the balance of preferred stock, goodwill and other intangible assets from the calculation of stockholders’ equity. Tangible assets are calculated by excluding the balance of goodwill and other intangible assets from the calculation of total assets. Tangible book value per share is calculated by dividing tangible common equity by the number of shares outstanding. The Company believes that these non-GAAP financial measures provide information to investors that is useful in understanding its financial condition. Because not all companies use the same calculation of tangible common equity and tangible assets, this presentation may not be comparable to other similarly titled measures calculated by other companies. A reconciliation of these non-GAAP financial measures is provided below (dollars in thousands, except per share data).
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 78 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; 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.