MainSource Financial Group — NASDAQ, MSFG — Announces Second Quarter 2013 Operating Results

MainSource Financial Group — NASDAQ, MSFG — Announces Second Quarter 2013 Operating Results

• Net Income of $7.3 million, or $0.35 per common share

• Common stock dividend increased to $.08 per share

• ROA of 1.06%

• Tangible Common Equity Ratio of 8.5%

• Non-performing assets lower by $6.0 million from the first quarter of 2013

• Redemption of remaining preferred shares anticipated in mid-August

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 second quarter of 2013. For the three months ended June 30, 2013, the Company recorded net income of $7.3 million, or $0.35 per common share, compared to net income of $7.0 million, or $0.32 per common share, in the second quarter of 2012. The Company also announced that its third quarter common dividend will be $0.08 per share, which represents an increase of $0.02 per share. The dividend is payable on September 16, 2013 to common shareholders of record as of September 6, 2013. Finally, the Company announced that it received approval from its primary regulator to redeem the remaining outstanding shares of preferred stock that were originally issued under the U.S. Treasury's Capital Purchase Program. The Company provided notice to the preferred shareholders and anticipates the redemption to take place in mid-August.

CEO Comments

Mr. Brown stated, "I am very pleased with our second quarter results. Our earnings per share of $0.35 were nine percent higher than the same quarter a year ago and significantly higher than the first quarter 2013. The increase in earnings was driven by broad-based improvement in almost all areas of the company. Net revenue was $33.9 million, which was slightly lower than a year ago due to a continued decline in the net interest margin, but an increase from the first quarter of this year due to an increase in non-interest income. We are very happy with the progress we made in growing the loan portfolio. Total loans grew by $30 million during the quarter which represents an annualized growth rate of 8%. We believe our recent strategies of entering nearby, higher-growth markets and building quality local teams in those markets, along with continued improvement in our legacy markets, has begun to make an impact on our ability to grow loans on a more sustainable basis."

Mr. Brown continued, "We are very pleased with the rebound in our non-interest income, our ability to control expenses and our continued improvement in credit quality. With the exception of mortgage banking income, virtually all major areas of fee income have increased year over year and on a linked quarter basis. In addition, we continue to rationalize and control our expense base as evidenced by the linked-quarter decrease in operating expenses. And finally, our trends in credit quality continue to improve. Non-performing assets declined 13% from the linked quarter and our inflow of new problem loans has subsided."

Mr. Brown concluded, "In early July, we received approval to repurchase the remaining preferred shares outstanding, which have a redemption value of $15.1 million. We have given notice to the holders and anticipate completing the redemption in mid-August. On July 16, our Board of Directors approved a $.02 per share increase to the common dividend payable in September 2013. This increase raises the quarterly common dividend to $.08 per share. We are very pleased to increase the dividend for the second time this year. The decision to increase the dividend reflects our continued confidence in the strength of our capital levels and earnings as well as our general outlook."

Second Quarter Results

NET INTEREST INCOME

Net interest income was $22.5 million for the second 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 3.91% for the second quarter of 2013, which was fourteen basis points below the second quarter of 2012 and nine points lower than the first quarter of 2013.

NON-INTEREST INCOME

The Company's non-interest income was $11.4 million for the second quarter of 2013 compared to $10.7 million for the same period in 2012 and $10.3 million in the first quarter of 2013. With the exception of gains on the sale of investment securities and mortgage banking income, every other major category of fee income increased. Mortgage banking income of $1.9 million declined by 8.8% year over year and by 5.7% from the first quarter of this year due to the recent increase in interest rates which has slowed mortgage refinancing activity. On a linked quarter basis, trust and investment product fees increased 23%, interchange income increased 18% and service charges on deposit accounts increased by 14%. Seasonal fluctuations and the increase in the number of checking accounts were the primary drivers of the increase in fee income.

NON-INTEREST EXPENSE

The Company's non-interest expense was $23.9 million for the second quarter of 2013 compared to $23.4 million for the same period in 2012. The increase year over year was primarily due to employee and occupancy costs related to the Company's recent investments in new markets (i.e. Columbus, Seymour and Indianapolis, Indiana and Shelbyville, Kentucky). On a linked-quarter basis, non-interest expense decreased by $3.3 million. During the first quarter of 2013, the Company incurred $2.2 million in expenses related to the prepayment of a FHLB advance. In addition, employee costs decreased on a linked-quarter basis by approximately $700 thousand. The decrease was primarily due to the closing of eight branches and a decrease in unemployment costs.

BALANCE SHEET AND CAPITAL

Total assets were $2.77 billion at June 30, 2013, relatively flat from a year ago and a $38 million increase from the balance at March 31, 2013. The increase was primarily due to an increase in loan balances of $30 million on a linked-quarter basis. The Company's regulatory capital ratios remain strong and as of June 30, 2013 were as follows: leverage ratio of 10.6%, tier one capital to risk-weighted assets of 16.7%, and total capital to risk-weighted assets of 17.9%. In addition, as of June 30, 2013, the Company's tangible common equity ratio was 8.5%.

ASSET QUALITY

Non-performing assets (NPAs) were $40.3 million as of June 30, 2013, a decrease of approximately $6.0 million on a linked-quarter basis. NPAs represented 1.45% of total assets as of June 30, 2013 compared to 1.69% as of March 31, 2013 and 2.34% as of June 30, 2012. A primary driver of the improvement in credit quality is the significant decline in the inflow of new problem loans. During the second quarter of 2013 approximately $2.7 million of loans were transferred to non-accrual status representing the lowest quarter of inflows since the beginning of 2009 and compares to an average of $8.2 million for the four previous quarters. Net charge-offs were $4.7 million for the second quarter of 2013 and represented 1.20% of average loans on an annualized basis. Approximately $2.1 million of the charge-offs during the quarter were related to previously-identified and allocated losses. The Company's allowance for loan losses as a percent of total outstanding loans was 1.77% as of June 30, 2013 compared to 2.04% as of March 31, 2013 and 2.48% as of June 30, 2012.