MainSource Financial Group Announces Earnings for the Third Quarter 2010

10/20/2010

Greensburg, Indiana, Archie M. Brown, Jr., President & Chief Executive Officer of MainSource Financial Group (NASDAQ: MSFG), announced today the unaudited financial results for the third quarter ended September 30, 2010. The Company reported net income of $4.6 million for the third quarter of 2010 and earnings per common share of $0.19 compared to $1.4 million in net income and $0.03 earnings per common share reported in the third quarter of 2009.

Mr. Brown stated, “Credit related expenses, specifically provision expense, declined significantly for the first time in two years, reflecting improvement in our overall loan quality. The lower provision expense led to a substantial increase in our overall profitability. We continue to be encouraged that the number and dollar amount of new non-performing loans has slowed significantly. While I believe credit quality has begun to mend, we remain diligent in our focus on returning our loan quality to acceptable levels.”

Mr. Brown continued, “Revenue remained stable for the third quarter due to a strong net interest margin, which was aided by the payoff of a large non-performing loan and healthy mortgage and service charge revenue. The implementation of Regulation E in August appears to have had a minimal impact on our service charge revenue. For the past couple of years our revenue has been positively impacted by the significant decline in deposit costs resulting from lower interest rates. Over this period, deposit and borrowing costs have declined quicker than income from loans and securities, even while loan balances have decreased at a moderate pace. We are beginning to experience a flattening in our deposit costs, yet the continued decline in interest rates and in loan balances is beginning to have an impact on our overall revenue. We believe this trend will continue for the foreseeable future and, as a result, we are placing additional emphasis on growing core checking balances, particularly from small and medium-sized businesses, and providing credit to those businesses. However, to date loan demand from this segment has not returned on an industry-wide basis; we will continue to prioritize this strategy over the next few years as we believe there is a significant opportunity in our markets.”

Mr. Brown concluded, “On October 1, 2010, we announced the sale of our property, casualty and health insurance lines of business from our insurance subsidiary, MainSource Insurance, to Encore Insurance, LLC. We will continue to sell annuity and life insurance products as they are more aligned with other core products we offer. The sale was made to the former management team of MainSource Insurance and we wish Encore and its employees much success.”

NET INTEREST INCOME
Net interest income was $25.8 million for the third quarter of 2010, which was an $861 thousand increase over the third quarter of 2009, representing an increase of 3.5%. During the quarter, the Company received a payoff of a $6.0 million non-performing loan. As a result of this payoff, the Company recovered $1.2 million in interest income. The Company’s net interest margin, on a fully-taxable equivalent basis, was 4.14% for the third quarter of 2010 versus 3.83% for the third quarter of 2009. The increase in the net interest margin was primarily related to the aforementioned interest recovery. In addition the Company’s cost of funds decreased significantly due to the current interest rate environment and a slight shift in the funding mix.

NON-INTEREST INCOME
The Company’s non-interest income was $9.4 million for the third quarter of 2010 compared to $9.8 million for the same period in 2009. The decrease was primarily due to the swing in gains/losses on OREO properties. In the third quarter of 2010, the Company recorded $595 thousand of losses on OREO properties compared to $323 thousand of OREO gains in the same period a year ago. The majority of the loss in the third quarter of 2010 was related to one property that has been in OREO for slightly over a year. An updated appraisal on this property triggered the write-down.

NON-INTEREST EXPENSE
The Company’s non-interest expense was $23.0 million for the third quarter of 2010 compared to $21.7 million for the same period in 2009, an increase of $1.3 million. The increase was primarily related to an increase in employee expenses as a result of the de novo office in Columbus, Indiana and an increase in FDIC insurance expense.

BALANCE SHEET AND CAPITAL
Total assets were $2.85 billion as of September 30, 2010 compared to $2.93 billion a year ago. Total loans were $1.7 billion as of September 30, 2010, a decrease of $218 million compared to September 30, 2009. Charge-offs of non-performing loans and overall weak loan demand continue to drive loan balances down. In addition, as mortgage rates have hit all-time lows, a portion of the Company’s on-balance sheet, fixed-rate mortgage loans refinanced and were sold to the secondary market. On the liability side of the balance sheet, deposit balances remain at historically high levels. Total deposits were $2.3 billion as of September 30, 2010. The Company’s regulatory capital ratios remain strong and as of September 30, 2010 were as follows: leverage ratio of 9.5%, tier one capital to risk-weighted assets of 15.1%, and total capital to risk-weighted assets of 16.3%. In addition, as of September 30, 2010 the Company’s tangible common equity ratio was 6.6%.

ASSET QUALITY
Non-performing assets were $89.3 million as of September 30, 2010 compared to $99.3 million as of September 30, 2009, and represented 3.13% of total assets at September 30, 2010 compared to 3.38% at September 30, 2009. On a linked-quarter basis, non-performing assets decreased by approximately $4.0 million. Net charge-offs for the third quarter of 2010 were $6.0 million. Through the nine months ended September 30, 2010 net charge-offs were $33.4 million and represented 2.48% of average loans. The Company’s allowance for loan losses was $42.5 million and represented 2.46% of total outstanding loans at September 30, 2010. This compares to $54.9 million as of September 30, 2009, or 2.83% as a percent of loans and $41.4 million as of June 30, 2010, or 2.36% of total loans.

MAINSOURCE FINANCIAL GROUP

(unaudited)

(Dollars in thousands except per share data)

Income Statement Summary

Three months ended September 30

Nine months ended September 30

2010

2009

2010

2009

    Interest Income

 $         34,017

 $         36,307

 $      102,327

 $       107,634

    Interest Expense

              8,223

            11,374

           25,938

            34,889

    Net Interest Income

            25,794

            24,933

           76,389

            72,745

    Provision for Loan Losses

              7,000

            13,515

           29,250

            35,310

    Noninterest Income:

          Insurance commissions

                 562

                 520

             1,679

              1,556

          Trust and investment product fees

                 508

                 425

             1,690

              1,066

          Mortgage banking

              1,917

              1,706

             5,128

              7,297

          Service charges on deposit accounts

              4,634

              4,542

           12,881

            11,944

          Gain on sales of securities

                    -  

                  (24)

             2,978

                 185

          Interchange income

              1,415

              1,380

             4,089

              3,486

          Other

                 370

              1,247

             2,152

              3,769

                    Total Noninterest Income

              9,406

              9,796

           30,597

            29,303

    Noninterest Expense:

          Employee

            12,713

            11,895

           37,589

            35,076

          Occupancy

              1,620

              1,627

             5,006

              5,056

          Equipment

              1,874

              1,882

             5,762

              5,452

          Intangible amortization

                 517

                 552

             1,550

              1,647

          Telecommunications

                 474

                 519

             1,420

              1,567

          Stationary, printing, and supplies

                 388

                 423

             1,107

              1,213

          Goodwill impairment

                    -  

                    -  

                   -  

            45,076

          FDIC assessment

              1,289

                 724

             3,647

              3,546

          Other

              4,131

              4,049

           11,987

            11,377

                    Total Noninterest Expense

            23,006

            21,671

           68,068

          110,010

    Earnings (Loss) Before Income Taxes

              5,194

                (457)

             9,668

           (43,272)

    Provision (benefit) for Income Taxes

                 594

             (1,845)

               (346)

             (7,769)

    Net Income (Loss)

 $           4,600

 $           1,388

 $        10,014

 $        (35,503)

    Preferred Dividends & Accretion

 $            (763)

 $             (763)

 $         (2,290)

 $          (2,155)

    Net Income (Loss) Available to Common Shareholders

 $           3,837

 $              625

 $          7,724

 $        (37,658)

Three months ended September 30

Nine months ended September 30

Average Balance Sheet Data

2010

2009

2010

2009

    Gross Loans

 $    1,743,061

 $    1,974,496

 $   1,801,700

 $    1,996,874

    Earning Assets

       2,593,086

       2,684,644

      2,611,571

       2,626,038

    Total Assets

       2,871,961

       2,943,079

      2,880,190

       2,910,883

    Noninterest Bearing Deposits

          267,501

          238,336

         254,456

          235,105

    Interest Bearing Deposits

       1,993,964

       2,030,515

      1,999,046

       1,924,060

    Total Interest Bearing Liabilities

       2,265,158

       2,358,384

      2,296,551

       2,306,591

    Shareholders' Equity

          309,238

          320,058

         302,505

          343,805

Three months ended September 30

Nine months ended September 30

Per Share Data

2010

2009

2010

2009

    Diluted Earnings Per CommonShare

 $             0.19

 $             0.03

 $            0.38

 $            (1.87)

    Cash Dividends Per Common Share

                0.01

                0.05

               0.03

              0.245

    Market Value - High

                7.67

                7.74

               9.00

              15.16

    Market Value - Low

                5.43

                5.64

               4.40

                4.85

    Average Outstanding Shares (diluted)

     20,149,906

     20,148,462

    20,149,742

     20,136,362

Three months ended September 30

Nine months ended September 30

Key Ratios

2010

2009

2010

2009

    Return on Average Assets

0.64%

0.19%

0.46%

-1.63%

    Return on Average Equity

5.90%

1.72%

4.43%

-13.81%

    Net Interest Margin

4.14%

3.83%

4.07%

3.81%

    Efficiency Ratio (1)

63.08%

60.70%

61.51%

62.08%

    Net Overhead to Average Assets (1)

1.88%

1.60%

1.74%

1.64%

Balance Sheet Highlights

September 30

June 30

March 31

December 31

September 30

2010

2010

2010

2009

2009

    Total Loans (Excluding Loans Held for Sale)

 $    1,725,241

 $    1,755,201

 $   1,824,824

 $    1,885,447

 $   1,943,797

    Allowance for Loan Losses

            42,460

            41,436

           43,025

            46,648

           54,941

    Total Securities

          812,160

          741,351

         727,279

          714,607

         678,486

    Goodwill and Intangible Assets

            72,527

            73,044

           73,561

            74,077

         109,863

    Total Assets

       2,853,541

       2,851,700

      2,861,257

       2,906,530

      2,934,326

    Noninterest Bearing Deposits

          270,212

          270,682

         256,099

          250,438

         245,697

    Interest Bearing Deposits

       1,982,417

       1,973,643

      1,963,264

       2,020,212

      1,990,007

    Other Borrowings

          230,251

          240,496

         269,003

          272,231

         281,704

    Shareholders' Equity

          311,996

          303,592

         297,787

          294,462

         326,441

Other Balance Sheet Data

September 30

June 30

March 31

December 31

September 30

2010

2010

2010

2009

2009

    Book Value Per Common Share

 $           12.71

 $           12.29

 $          12.01

 $           11.84

 $          13.43

    Loan Loss Reserve to Loans

2.46%

2.36%

2.36%

2.47%

2.83%

    Loan Loss Reserve to Non-performing Loans

52.86%

48.28%

47.25%

58.05%

61.43%

    Nonperforming Assets to Total Assets

3.13%

3.27%

3.54%

3.12%

3.38%

    Tangible Common Equity Ratio

6.59%

6.28%

6.03%

5.80%

5.69%

    Outstanding Shares

     20,136,362

     20,136,362

    20,136,362

     20,136,362

    20,136,362

Asset Quality

September 30

June 30

March 31

December 31

September 30

2010

2010

2010

2009

2009

    Loans Past Due 90 Days or More and Still Accruing

 $              624

 $              421

 $          1,055

 $           3,279

 $          3,130

    Non-accrual Loans

            79,705

            85,399

           89,999

            77,074

           86,314

    Other Real Estate Owned

              9,020

              7,501

           10,107

            10,386

             9,874

    Total Nonperforming Assets

 $         89,349

 $         93,321

 $      101,161

 $         90,739

 $        99,318

    Net Charge-offs - YTD

 $         33,439

 $         27,462

 $        13,123

 $         34,245

 $        14,952

    Net Charge-offs as a % of average loans

2.48%

3.02%

2.85%

1.73%

1.00%

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

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.mainsourcebank.com.

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