MainSource Financial Group Announces Fourth Quarter and Full Year 2012 Operating Results and Increas

MainSource Financial Group Announces Fourth Quarter and Full Year 2012 Operating Results and Increase to Common Dividend

• Fourth quarter earnings of $7.3 million - 21% increase over previous year

• Fourth quarter earnings of $0.34 per common share

• Common stock dividend increased to $.06 per share

• 43% Increase in stock price for the year

• Return on Average Assets of 1.05%

• Tangible Common Equity Ratio of 8.8%

• Non-performing assets lower by $2.6 million from the third quarter of 2012

GREENSBURG, Ind.--(BUSINESS WIRE)-- Archie M. Brown, Jr., President and Chief Executive Officer of MainSource Financial Group, Inc. (NAS: MSFG) , announced today the unaudited financial results for the quarter and year ended December 31, 2012. For the three months ended December 31, 2012, the Company recorded net income of $7.3 million, or $0.34 per common share, compared to net income of $6.0 million, or $0.26 per common share, in the fourth quarter of 2011. The primary drivers of the increase in net income were an increase in mortgage banking income and a decrease in loan loss provision expense. During the fourth quarter of 2012, the Company repurchased 19,050 shares of its Series A preferred stock in a privately negotiated transaction. As a result of its repurchase of these shares, the Company has retired a total of 41,900 shares of the 57,000 shares of Series A preferred stock originally issued to the U.S. Treasury as part of the TARP program. Also, during the fourth quarter of 2012, the Company completed its purchase of a branch in Shelbyville, Kentucky, as a result of which it acquired $27 million in loans and $35 million in deposits.

For the twelve months ended December 31, 2012, the Company reported net income of $27.3 million, or $1.30 per common share, compared to net income in 2011 of $23.8 million, or $1.03 per common share. Similar to the fourth quarter results, the primary drivers of the increase in net income in 2012 compared to 2011 were an increase in mortgage banking income and a decrease in loan loss provision expense.

The Company also announced that the Board of Directors declared a first quarter common dividend of $0.06 per share at its January 22, 2013 meeting. This represents an increase of $.03 per share from the dividend paid during the previous quarter. The dividend is payable on March 15, 2013 to common shareholders of record as of March 5, 2013.

Mr. Brown commented on the fourth quarter, "We continue to be pleased with the growth in operating earnings. Our earnings of $7.3 million were 21% higher than the same period one year ago. Significant increases in mortgage banking, trust and brokerage and service charge income and lower loan loss provision expense more than offset a five percent decline in net interest income to provide a historically high level of earnings for the Company."

Mr. Brown continued, "Total revenue for the quarter (excluding securities gains) increased 8.6% over the fourth quarter of 2011 and 2.6% over the linked quarter. The increase in revenue was primarily related to higher fee income. While we are pleased with this trend, we remain cautious about future revenue due to low levels of loan growth, continued low interest rates, minimal benefits from additional reductions in deposit rates and the eventual slowdown in mortgage refinancing activity."

Mr. Brown continued, "Asset quality improved during the fourth quarter as non-performing assets, including troubled debt restructurings ("TDRs"), declined $2.6 million and were 2.09% of total assets, an 84 basis point decline from one year ago and a ten basis point reduction from September 30, 2012. We anticipate further improvement in 2013 as $9.7 million in TDRs were moved to performing status effective January 1, 2013."

Mr. Brown discussed expense trends, "Non-interest expense, excluding non-operating items, increased five percent over the fourth quarter of 2011. This increase was primarily related to the purchase of the Shelbyville, Kentucky branch from American Founders Bank, the purchase of two retail brokerages in Seymour and Indianapolis, Indiana respectively, and the opening of three new branches in Columbus, Seymour, and Indianapolis, Indiana. Seymour and Indianapolis were de novo entries into those communities and included investments in both commercial and retail banking." (See Regulation G disclosure below for a reconciliation of the non-GAAP measure "Non- interest expense excluding non-operating items" to GAAP.)

Mr. Brown discussed priorities for 2013, "Our primary focus is on the generation of loan balances. Additionally, our priorities include continued reduction in problem loans and related expenses, limiting the growth in non-interest expense, evaluating the repurchase of the remaining Series A preferred stock and continuing to evaluate future dividend payout levels. While the next year will present many challenges, we will continue to focus on improving the fundamentals of the Company."

Mr. Brown concluded by saying, "We are pleased that MainSource is able to announce a dividend increase at this time. The decision to raise the dividend was based upon the improved performance of the Company and our stable outlook. We will continue to evaluate the level of the dividend, considering among other things the level of earnings, level of capital, asset quality and the underlying strength of the economy. We appreciate the support of our shareholders over the last few years as we have worked to improve the Company."

4^THQUARTER RESULTS

NET INTEREST INCOME

Net interest income was $23.2 million for the fourth quarter of 2012. Net interest margin, on a fully-taxable equivalent basis, was 4.03% for the fourth quarter of 2012 which was twelve basis points below the fourth quarter of 2011 and two basis points lower than the third quarter of 2012. The Company's net interest margin decreased from a year ago due to the repricing of the asset side of the balance sheet. While deposit and other funding costs have decreased over the same period, many of these accounts have reached, or are approaching, their floors. Linked quarter net interest income (and the accompanying net interest margin) remained relatively flat as the repricing pressure on assets was offset by a decrease in funding costs as the Company prepaid a high-cost FHLB advance in the third quarter of 2012. In addition, the Company closed on its branch acquisition in Shelbyville, Kentucky and added approximately $27 million in loan balances along with $35 million in deposit balances.

NON-INTEREST INCOME

The Company's non-interest income was $11.7 million for the fourth quarter of 2012 compared to $14.2 million in the same period in 2011. During the fourth quarter of 2011, the Company realized gains on the sale of investment securities of $6.4 million. Excluding these gains, non-interest income would have been $7.8 million in the fourth quarter of 2011. Mortgage banking income, which was $3.6 million for the fourth quarter of 2012, increased by $2.0 million from the same period a year ago due to the low rate environment and the addition of mortgage loan originators. Other non-interest income increased from a year ago as the Company incurred a $0.4 million write-down in the prior period related to a lot the Company purchased in 2008 for potential future expansion.

NON-INTEREST EXPENSE

The Company's non-interest expense was $23.7 million for the fourth quarter of 2012 compared to $28.7 million for the same period in 2011. During the fourth quarter of 2011, the Company incurred non-recurring consulting expenses of $6.1 million. Excluding this charge, total non-interest expense would have been $22.6 million. The increase in operating expenses in the fourth quarter of 2012 compared to the same period a year ago related primarily to marketing and occupancy expenses as the Company entered several new markets in 2012 and consulting expenses related to fee revenue projects.

FULL YEAR RESULTS

NET INTEREST INCOME

Net interest income was $94.1 million for the full year 2012, which represents a decrease of $5.8 million when compared to the twelve months ended December 31, 2011. Net interest margin, on a fully-taxable equivalent basis, decreased from 4.24% in 2011 to 4.08% in 2012. As rates have remained at historic lows for an extended period of time, the Company's asset base has continued to reprice lower. The Company's cost of funds also decreased over the same period but to a lesser extent. In addition to the decrease in the Company's net interest margin, average earning assets decreased by approximately $47 million in 2012 compared to 2011.

NON-INTEREST INCOME

The Company's non-interest income was $43.9 million for the full year 2012 compared to $45.3 million for 2011. Excluding securities gains, non-interest income was $42.5 million in 2012 compared to $34.0 million in 2011. The primary drivers of the increase were related to increases in mortgage banking income of $4.4 million and service charge income of $1.7 million as well as a decrease in OREO losses of $1.4 million.

NON-INTEREST EXPENSE

The Company's non-interest expense was $94.8 million for the full year 2012 compared to $99.8 million for 2011. During 2012, the Company incurred the following non-operating expenses: a $1.3 million charge related to the prepayment of an FHLB advance, $0.7 million of costs related to the closure of six branches, and $0.3 million of costs related to the U.S. Treasury's auction of the Company's Series A preferred stock. Excluding these items, the Company's non-interest expense would have been $92.5 million. Excluding the non-recurring consulting expense charge of $6.1 million incurred in the fourth quarter of 2011, the Company's non-interest expense would have been $93.7 million in 2011. The decrease of $1.3 million was primarily attributable to the decrease in employee costs of $1.0 million which was achieved through the Company's efficiency project in 2011.

ASSET QUALITY

Non-performing assets (NPA's) were $57.8 million as of December 31, 2012, a decrease of $22.9 million from year-end 2011 and $2.6 million on a linked-quarter basis. NPA's represented 2.09% of total assets as of December 31, 2012 compared to 2.19% as of September 30, 2012 and 2.93% as of December 31, 2011. Included in the $57.8 million of NPA's was $15.1 million of loans classified as troubled debt restructurings (TDR's). Subsequent to year-end, five of these loans totaling $9.7 million are now classified as performing. These credits were previously re-written using an A/B note structure. As of January 1, 2013, the "A" notes related to these credits have performed in accordance with their terms and have a market rate of interest. Therefore, the Company moved them out of non-performing status.

Net charge-offs were $5.3 million for the fourth quarter of 2012 and represented 1.35% of average loans on an annualized basis. Total loan loss provision expense was $2.3 million in the fourth quarter of 2012. The Company had specifically provided $1.8 million in provision expense in previous quarters for the three largest charge-offs taken during the fourth quarter which totaled approximately $2.7 million. For the full year 2012, net charge-offs were $17.5 million or 1.13% of average loans. The Company's allowance for loan losses as a percent of total outstanding loans was 2.07% as of December 31, 2012 compared to 2.60% as of December 31, 2011.