MainSource Financial Group Announces Earnings for Second Quarter 2009

7/29/2009

Greensburg, Indiana (NASDAQ: MSFG) Archie M. Brown, Jr., President & Chief Executive Officer of MainSource Financial Group, Inc., announced today the unaudited results for the quarter ended June 30, 2009. For the three months ended June 30, 2009, the Company realized a net loss of $38.1 million. The loss included a non-operating, non-cash goodwill impairment charge of $45.1 million (on a pre-tax basis) taken in accordance with Statement of Financial Accounting Standards 142 “Goodwill and Other Intangible Assets”. Excluding the effect of this charge, the Company would have realized a profit for the quarter of $2.1 million, or $0.07 per common share. This compares to net income of $6.2 million and $0.33 per common share for the same period a year ago and $1.2 million and $0.03 per common share in the first quarter of 2009.

Two other significant items were included in the results for the second quarter of 2009. The first was a $1.4 million charge related to the FDIC’s special assessment. This assessment equated to five basis points of total assets (less Tier 1 capital) and was imposed on all banks. The second item was a $10.4 million provision for loan losses. Although non-performing loans decreased on a linked-quarter basis, the aforementioned provision for loan losses was required due to the increase in net charge-offs during the quarter, the continuing deterioration in the real estate market, and an increase in specific allocations for existing non-performing credits.

Mr. Brown stated, "During the second quarter of 2009, we experienced a leveling off of non-performing loans. We are encouraged, but given that the economy is still in recession and unemployment continues to rise, it is too early to conclude that credit quality is on the mend."

Mr. Brown continued, "On an operating basis, we did notice improvement from the first quarter. On a per share basis, operating earnings (excluding the goodwill impairment charge) increased four cents from the first quarter, even after accounting for the FDIC special assessment. I am very pleased with the strength and stability of our net interest margin. We continued to experience growth in DDA balances, up 9% for the quarter and 14% annualized from year-end 2008. Our savings balances grew 27% for the quarter and have increased 21% on an annualized basis from year end. Our base of checking accounts grew at an annual growth rate of 4% for the quarter. Our mortgage originations continued to be strong during the second quarter. For the first six months of 2009, we have originated approximately $301 million in mortgage loans compared to $87 million for the first six months of 2008. Our other key non-interest income categories, service charges on deposits accounts and interchange revenue, rebounded nicely and now are up 10% and 21% respectively from the first six months of 2008.

"On May 4th, we completed our purchase of three American Founders Bank branches in Frankfort and Lawrenceburg, Kentucky. We are very excited to be part of the Frankfort community and to enhance our overall presence in Central Kentucky. The total loans and deposits acquired were $63 million and $95 million respectively.”

GOODWILL IMPAIRMENT CHARGE

As required under SFAS 142, "Goodwill and Other Intangible Assets," the Company completed its annual impairment testing during the second quarter of 2009. As a result of the general decline in stock market valuations for the banking sector and the deterioration of economic conditions during 2008 and the first half of 2009, the Company concluded that the goodwill resulting from the Company’s acquisitions over the past several years was impaired. It is important to note that the impairment charge is a non-cash, non-operating item and has no effect on liquidity, cash flows, operations, or regulatory capital ratios. In fact, all of the Company’s regulatory capital ratios are significantly above the minimum levels to qualify for "well capitalized" status. As of June 30, 2009, the Company’s capital levels and ratios were as follows:

  • Tangible common equity of $150.6 million, or 5.3% of tangible assets.
  • Tangible equity of $206.5 million, or 7.3% of tangible assets.
  • Tangible book value per common share of $7.48.
  • Leverage ratio of 9.2%, which is well above the regulatory well-capitalized level of 5.0%
  • Tier 1 risk-based capital ratio of 12.7%, which is well above the regulatory well-capitalized requirement of 6.0%.
  • Total risk-based capital ratio of 13.9%, which is well above the regulatory well-capitalized requirement of 10.0%.

Mr. Brown commented on the goodwill impairment charge, "We are disappointed in the goodwill charge, however it was a non-cash charge and does not effect future operations. As a result of the historic economic downturn, we have experienced deterioration in our credit quality and level of earnings. These factors, along with the general decline in the banking sector, led to a decline in our stock price and the subsequent goodwill impairment charge."

Mr. Brown continued. "Goodwill is carried on the balance sheet as an intangible asset. As such, it is already excluded in the calculations for regulatory capital. Therefore, even though we have reported a loss for the quarter, our capital ratios were not negatively impacted and remain significantly above the well-capitalized minimums established by banking regulators. Most importantly, excluding the goodwill impairment charge, our earnings of $2.1 million were an improvement from the prior quarter."

NET INTEREST INCOME

Net interest income was $24.4 million for the second quarter of 2009. Net interest margin, on a fully-taxable equivalent basis, was 3.86% for the second quarter of 2009 and 3.80% for the first six months of 2009. This compares to a net interest margin of 3.92% for the second quarter of 2008 and 3.78% for the first half of 2008. The Company was able to maintain its net interest margin despite a significant year-over-year increase in its non-performing loans. On a linked quarter basis, the Company’s net interest margin increased by 12 basis points.

NON-INTEREST INCOME

The Company’s non-interest income increased to $10.3 million for the second quarter of 2009 compared to $7.7 million for the same period in 2008. On a linked-quarter basis, non-interest income increased by $1.2 million. The increase was primarily attributable to the increase in mortgage banking income due to the heavy volume of refinance activity. In addition, the Company realized its typical seasonal increase in service charges on deposit accounts.

NON-INTEREST EXPENSE

The Company’s non-interest expense was $67.9 million for the second quarter of 2009 compared to $17.3 million for the same period in 2008. Excluding the aforementioned goodwill impairment charge, non-interest expense would have been $22.8 for the second quarter of 2009. On a linked-quarter basis and excluding the impairment charge, non-interest expense increased by $2.3 million and was primarily attributable to the $1.4 million FDIC special assessment. This assessment was levied on all banks and equated to five basis points of total assets minus Tier 1 capital. In addition, the Company incurred additional costs related to mortgage origination commissions and increased credit and collection costs related to its elevated level of non-performing assets. The Company’s efficiency ratio (excluding the impairment charge) was 64.0% for the second quarter of 2009 compared to 58.3% for the same period a year ago.

ASSET QUALITY

Non-performing assets were $89.4 million as of June 30, 2009, which was a decrease of approximately $2.0 million on a linked-quarter basis. Non-performing assets represented 3.05% of total assets as of June 30, 2009 compared to 3.18% as of March 31, 2009 and 2.25% as of December 31, 2008. The Company’s construction and land development loans continue to comprise a disproportionate percentage of its non-performing loans. As of June 30, 2009, this portfolio comprised 8% of the total outstanding loan balances but contributed to 37% of the Company’s non-performing loans. Annualized net charge-offs were 1.21% of average loans for the second quarter of 2009 and 0.89% of average loans on a year-to-date basis. The Company’s allowance for loan losses as a percent of total outstanding loans was 2.43% as of June 30, 2009 compared to 1.73% as of December 31, 2008 and 1.04% a year ago. Total loan loss provision expense was $10.4 million in the second quarter of 2009 and was comparable to the Company’s provision expense in the fourth quarter of 2008 of $10.0 million and $11.4 million in the first quarter of 2009.

Regulation G Disclosure

This press release includes non-GAAP financial measures. The non-GAAP financial information should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. However, we believe that non-GAAP reporting, giving effect to the adjustments shown in the reconciliations provided below, provides meaningful information and therefore we use it to supplement our GAAP information. We have chosen to provide this supplemental information to investors, analysts and other interested parties to enable them to perform additional analyses of operating results, to illustrate the results of operations giving effect to the non-GAAP adjustments shown in the reconciliations and to provide an additional measure of performance.

The Company recorded a goodwill impairment charge during the three month and six month periods ended June 30, 2009. The Company believes that excluding the after-tax effects of this charge will provide investors with a basis to compare the Company's core operating results in 2009 as compared to 2008 without the material distortions caused by this non-operating charge. The following table reconciles the non-GAAP financial measure “Net Income Excluding Goodwill Impairment Charge” with Net Income calculated in accordance with GAAP.

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 $2.9 billion. The Company operates 69 offices in 32 Indiana counties, 6 offices in 3 Illinois counties, 4 offices in 3 Kentucky counties, and 6 offices in 2 Ohio counties through its three banking subsidiaries, MainSource Bank, Greensburg, Indiana, MainSource Bank of Illinois, Kankakee, Illinois, and MainSource Bank - Ohio, Troy, Ohio. Through its non-banking subsidiaries, MainSource Insurance LLC, and MainSource Title LLC, the Company and its banking subsidiaries provide various related financial services.

Forward-Looking Statements

Except for historical information contained herein, the discussion in this press release may include certain forward-looking statements based upon management expectations, goals and projections, which are subject to numerous assumptions, risks and uncertainties. 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.

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