MainSource Announces Earnings for Second Quarter 2010

7/22/2010

Greensburg, Indiana (NASDAQ: MSFG) Archie M. Brown, Jr., President & Chief Executive Officer of MainSource Financial Group, announced today the unaudited financial results for the second quarter ended June 30, 2010. The Company reported net income of $2.2 million for the second quarter of 2010 and earnings per common share of $0.07 compared to a $38.1 million net loss and $1.93 loss per common share reported in the second quarter of 2009. In the second quarter of 2009, the Company incurred a non-operating, non-cash goodwill impairment charge of $45.1 million (on a pre-tax basis). 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.

Mr. Brown stated, “Credit related expenses continued to weigh down our earnings for the second quarter. The high provision expense recorded for the quarter included approximately $6 million dollars related to two existing non-performing collateral-dependent loans for which we obtained updated appraisals. In both cases, the loans were land development loans that had been on non-accrual for more than a year. Former appraisals supported the net value for which we were carrying each loan. With the exception of one large loan that migrated to non-accrual status in the second quarter, we have no significant remaining non-performing collateral-dependent loans awaiting updated appraisals. I am not pleased with another quarter of high provision, but I am pleased that provision expense for new non-performing loans was down significantly. I am also encouraged that the number and dollar amount of new non-performing loans is beginning to trend downward.”

Mr. Brown continued, “I am very pleased that our revenue continues to be stable. Our net revenue for the second quarter of $36.7 million was six percent higher than the same quarter one year ago. Significantly lower interest expense than one year ago has enabled our net interest margin to improve to 4.05%, a 19 basis point improvement over the second quarter of 2009. This along with increases in fee income areas such as service charges, interchange income, and trust and investment income were the reasons for the improvement in total revenue. Our strong revenue continues to enable us to work through our credit related problems. I am hopeful that credit costs will begin to subside in the near future and we will begin to report much stronger earnings.”

Mr. Brown concluded, “I am happy to report that at the end of the quarter we converted our recently opened loan and deposit production office in Columbus, Indiana into a full service branch. Columbus is part of our home market and we are pleased with our early results and very excited about our future growth opportunities there.”

NET INTEREST INCOME
Net interest income was $25.4 million for the second quarter of 2010, which was a $926 thousand increase over the second quarter of 2009, representing an increase of 3.8%. As previously mentioned, the Company’s net interest margin, on a fully-taxable equivalent basis, was 4.05% for the second quarter of 2010 versus 3.86% for the second quarter of 2009. The increase in the net interest margin was primarily related to a significant decrease in the cost of funds as the Company’s funding mix shifted slightly from higher-cost CD’s and borrowings to lower-cost transaction-based accounts.

NON-INTEREST INCOME
The Company’s non-interest income increased to $11.4 million for the second quarter of 2010 compared to $10.3 million for the same period in 2009. Increases in investment securities gains, service charges, interchange income and trust and investment income were primarily offset by the decrease in mortgage banking income. Interchange income continues to increase each period as customers change their preferred method of payment from checks to debit cards. Mortgage banking income decreased year over year as refinancing volumes are down from the record levels realized in the 2009.

NON-INTEREST EXPENSE
The Company’s non-interest expense was $22.6 million for the second quarter of 2010 compared to $67.9 million for the same period in 2009, a decrease of $45.3 million. Excluding the impact of the goodwill impairment charge of $45.1 million taken in the second quarter of 2009, non-interest expenses were relatively flat.

BALANCE SHEET AND CAPITAL
Total assets were $2.9 billion as of June 30, 2010, virtually unchanged from the same period a year ago. Total loans were $1.7 billion as of June 30, 2010, a decrease of $198 million compared to June 30, 2009. Charge-offs of non-performing loans and overall weak loan demand continue to drive loan balances down. In addition, as on-balance sheet, fixed-rate mortgage loans refinanced throughout the past year, the Company generally sold these loans to the secondary market to mitigate its interest rate risk. On the liability side of the balance sheet, deposit balances remain at historically high levels. Total deposits were $2.2 billion as of June 30, 2010. The Company’s regulatory capital ratios remain strong and as of June 30, 2010 were the following: leverage ratio of 9.4%, tier one capital to risk-weighted assets of 14.7%, and total capital to risk-weighted assets of 16.0%. In addition, as of June 30, 2010 the Company’s tangible common equity ratio was 6.3%.

ASSET QUALITY
Non-performing assets were $93.3 million as of June 30, 2010 compared to $89.4 million as of June 30, 2009, and represented 3.27% of total assets at June 30, 2010 compared to 3.05% at June 30, 2009. On a linked-quarter basis, non-performing assets decreased by approximately $7.9 million. The decrease was primarily attributable to charge-offs taken during the quarter and the sale of foreclosed assets. Net charge-offs for the second quarter of 2010 were $14.4 million. Through the six months ended June 30, 2010 net charge-offs were $27.5 million and represented 3.02% of average loans. During the quarter, the Company obtained updated appraisals on two large non-performing loans where the Company is dependent on the liquidation of real estate to repay the loans. The Company charged these loans down to their appraised values less estimated costs to sell. These charge-downs decreased the loan loss reserve coverage of non-performing loans. As of June 30, 2010, the Company was carrying approximately $18 million of non-performing loans at their estimated net realizable value with little or no loan loss reserve. The Company’s allowance for loan losses was $41.4 million and represented 2.36% of total outstanding loans at June 30, 2010. This compares to $47.5 million as of June 30, 2009, or 2.43% as a percent of loans and $43.0 million as of March 31, 2010, or 2.36% of total loans. 

MAINSOURCE FINANCIAL GROUP

(unaudited)

(Dollars in thousands except per share data)

Income Statement Summary

Three months ended June 30

Six months ended June 30

2010

2009

2010

2009

    Interest Income

 $      34,039

 $      36,104

 $       68,310

 $      71,327

    Interest Expense

           8,675

         11,666

          17,715

         23,515

    Net Interest Income

         25,364

         24,438

          50,595

         47,812

    Provision for Loan Losses

         12,750

         10,395

          22,250

         21,795

    Noninterest Income:

          Insurance commissions

              599

              555

            1,117

           1,036

          Trust and investment product fees

              617

              335

            1,182

              641

          Mortgage banking

           1,687

           2,969

            3,211

           5,591

          Service charges on deposit accounts

           4,378

           4,054

            8,247

           7,402

          Gain on sales of securities

           1,925

              171

            2,978

              209

          Interchange income

           1,410

           1,122

            2,674

           2,106

          Other

              744

           1,140

            1,782

           2,522

                    Total Noninterest Income

         11,360

         10,346

          21,191

         19,507

    Noninterest Expense:

          Employee

         12,431

         11,643

          24,876

         23,181

          Occupancy

           1,531

           1,611

            3,386

           3,429

          Equipment

           1,990

           1,886

            3,888

           3,570

          Intangible amortization

              517

              549

            1,033

           1,095

          Telecommunications

              482

              565

               946

           1,048

          Stationary, printing, and supplies

              386

              431

               719

              790

          Goodwill impairment

                 -  

         45,076

                 -  

         45,076

          FDIC assessment

           1,095

           2,094

            2,358

           2,822

          Other

           4,145

           4,006

            7,856

           7,328

                    Total Noninterest Expense

         22,577

         67,861

          45,062

         88,339

    Earnings (Loss) Before Income Taxes

           1,397

       (43,472)

            4,474

       (42,815)

    Provision (benefit) for Income Taxes

            (768)

         (5,403)

             (940)

         (5,924)

    Net Income (Loss)

 $        2,165

 $    (38,069)

 $         5,414

 $    (36,891)

    Preferred Dividends & Accretion

 $         (764)

 $         (764)

 $       (1,527)

 $      (1,392)

    Net Income (Loss) Available to Common Shareholders

 $        1,401

 $    (38,833)

 $         3,887

 $    (38,283)

Three months ended June 30

Six months ended June 30

Average Balance Sheet Data

2010

2009

2010

2009

    Gross Loans

 $ 1,797,297

 $ 2,002,239

 $  1,831,020

 $ 2,008,063

    Earning Assets

    2,627,683

    2,610,159

     2,625,928

    2,596,735

    Total Assets

    2,891,335

    2,902,971

     2,884,303

    2,894,784

    Noninterest Bearing Deposits

       254,829

       238,536

        247,933

       233,490

    Interest Bearing Deposits

    2,010,897

    1,929,271

     2,001,588

    1,870,832

    Total Interest Bearing Liabilities

    2,310,300

    2,279,143

     2,312,247

    2,280,653

    Shareholders' Equity

       300,104

       360,193

        299,138

       355,679

Three months ended June 30

Six months ended June 30

Per Share Data

2010

2009

2010

2009

    Diluted Earnings Per CommonShare

 $          0.07

 $        (1.93)

 $           0.19

 $        (1.90)

    Cash Dividends Per Common Share

             0.01

             0.05

              0.02

             0.20

    Market Value - High

             9.00

           10.35

              9.00

           15.16

    Market Value - Low

             6.70

             7.00

              4.40

             4.85

    Average Outstanding Shares (diluted)

  20,161,976

  20,136,362

   20,150,499

  20,136,362

Three months ended June 30

Six months ended June 30

Key Ratios

2010

2009

2010

2009

    Return on Average Assets

0.30%

-5.26%

0.38%

-2.57%

    Return on Average Equity

2.89%

-42.39%

3.65%

-20.92%

    Net Interest Margin

4.05%

3.86%

4.07%

3.80%

    Efficiency Ratio (1)

59.49%

64.00%

60.74%

62.79%

    Net Overhead to Average Assets (1)

1.56%

1.72%

1.67%

1.65%

Balance Sheet Highlights

June 30

March 31

December 31

June 30

2010

2010

2009

2009

    Total Loans (Excluding Loans Held for Sale)

 $ 1,755,201

 $ 1,824,824

 $  1,885,447

 $ 1,959,856

    Allowance for Loan Losses

         41,436

         43,025

          46,648

         47,546

    Total Securities

       741,351

       727,279

        714,607

       581,837

    Goodwill and Intangible Assets

         73,044

         73,561

          74,077

       109,342

    Total Assets

    2,851,700

    2,861,257

     2,906,530

    2,928,661

    Noninterest Bearing Deposits

       270,682

       256,099

        250,438

       247,370

    Interest Bearing Deposits

    1,973,643

    1,963,264

     2,020,212

    2,009,950

    Other Borrowings

       240,496

       269,003

        272,231

       282,047

    Shareholders' Equity

       303,592

       297,787

        294,462

       315,808

Other Balance Sheet Data

June 30

March 31

December 31

June 30

2010

2010

2009

2009

    Book Value Per Common Share

 $        12.29

 $        12.01

 $         11.84

 $        12.91

    Loan Loss Reserve to Loans

2.36%

2.36%

2.47%

2.43%

    Loan Loss Reserve to Non-performing Loans

48.28%

47.25%

58.05%

60.55%

    Nonperforming Assets to Total Assets

3.27%

3.54%

3.12%

3.05%

    Tangible Common Equity Ratio

6.28%

6.03%

5.80%

5.34%

    Outstanding Shares

  20,136,362

  20,136,362

   20,136,362

  20,136,362

Asset Quality

June 30

March 31

December 31

June 30

2010

2010

2009

2009

    Loans Past Due 90 Days or More and Still Accruing

 $           421

 $        1,055

 $         3,279

 $        2,218

    Non-accrual Loans

         85,399

         89,999

          77,074

         76,302

    Other Real Estate Owned

           7,501

         10,107

          10,386

         10,869

    Total Nonperforming Assets

 $      93,321

 $    101,161

 $       90,739

 $      89,389

    Net Charge-offs - YTD

 $      27,462

 $      13,123

 $       34,245

 $        8,832

    Net Charge-offs as a % of average loans

3.02%

2.85%

1.73%

0.89%

(1) 2009 ratios exclude a goodwill impairment charge of $45.1 million.

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 effect of this charge will provide investors with a basis to compare the Company's core operating results in the second quarter of 2010 to the second quarter of 2009 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. 

Qtr. Ended

EPS

6/30/09

Impact

Net Income as Reported

          $ (38,069)

        $ (1.93)

Goodwill Impairment Charge, Net of Income Tax

           (40,191)

        (2.00)

Net Income Excluding Goodwill Impairment Charge

          $     2,122

       $     .07

Six Months

Ended

EPS

6/30/09

Impact

Net Income as Reported

          $ (36,891)

        $ (1.90)

Goodwill Impairment Charge, Net of Income Tax

           (40,191)

         (2.00)

Net Income Excluding Goodwill Impairment Charge

         $     3,300

       $   0.10



MainSource Financial Group is listed on the NASDAQ Global Select Market (under the symbol: “MSFG”) and is a community-focused, financial holding company with assets of approximately $2.9 billion. The Company operates 68 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 banking subsidiary, MainSource Bank, Greensburg, Indiana. Through its non-banking subsidiaries, MainSource Insurance LLC, and MainSource Title LLC, the Company provides various related financial services.

Forward-Looking Statements

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 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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