MainSource Financial Group Announces Third Quarter 2012 Operating Results *Net income of $7.0 million *Earnings per share of $0.32 *Return on Assets of 1.02% *Increase in Non-interest Income of 13% *Decrease in NPA’s and Substandard Loans Business Wire GREENSBURG, Ind. -- October 24, 2012 Archie M. Brown,Jr., Presidentand Chief Executive Officer of MainSource Financial Group,Inc. (NASDAQ: MSFG), announced today the unaudited financial results for the third quarter of 2012. For the three months ended September30, 2012, the Company recorded net income of $7.0 million, or $0.32 per common share, compared to net income of $5.6 million, or $0.24 per common share, in the third quarter of 2011. A $1.7 million decrease in net interest income was more than offset by a decrease of $3.0 million in loan loss provision expense and a $1.3 million increase in non-interest income. While non-interest expenses increased by $500 thousand compared to the prior year, the increase was attributable to a $1.3 million prepayment penalty on the early extinguishment of an FHLB advance. CEO Comments Mr.Brown commented on the third quarter, “I am very pleased with the continued growth in operating earnings. Our core earnings were at their highest point in the history of the company. The increase in fee income combined with lower provision and non-interest expense accounted for the improvement in income. I am also pleased with our net interest margin. While it was down from the same period one year ago, it remained flat with the second quarter of this year despite the challenging interest rate environment. Provision expense for the quarter was at its lowest level since the first quarter of 2008 and reflects continued improvement in our overall loan quality.” Mr.Brown continued, “Loan growth for the quarter remained a challenge. I expect loan balances to remain relatively flat for the remainder of the year. While loan trends are much better than the previous two years, we are not satisfied with our current progress. Loan pipelines are building and we are hopeful that recent investments in higher growth markets will lead to loan growth within the next year.” Mr.Brown concluded his comments by discussing several new growth initiatives, “I am excited about several new initiatives that were begun during the quarter, including our purchase of brokerage agencies in Seymour,Indiana and Indianapolis. The additional revenue from the two agencies is expected to increase our brokerage revenue by approximately 50%. In September, we opened a new branch facility in Seymour,Indiana. The decision to enter Seymour at this time was due to disruption in the local market from recent bank acquisitions. We opened in a temporary office until we can construct a new building which is anticipated to be completed in the third quarter of 2013. Our new downtown Indianapolis office opened on October15. We have a team of very talented bankers on board offering a full suite of products and services. During the quarter, we also announced an agreement with American Founders Bank of Lexington, Kentucky, to purchase their Shelbyville, Kentucky branch. This purchase includes approximately $37 million in deposits and loans and provides us an entry point into the eastern side of the Louisville, Kentucky market area. The purchase remains subject to standard closing conditions and is anticipated to be completed in the fourth quarter of 2012. All of these initiatives are part of our strategy to strengthen our existing footprint and provide new sources of revenue growth. We will continue to be opportunistic in our effort to improve the operating results of the company.” Second Quarter Results NET INTEREST INCOME Net interest income was $23.3 million for the third quarter of 2012 compared to $25.1 million a year ago. The decrease in net interest income was primarily due to declining reinvestment rates on loans and securities as well as a $200 million repositioning in investment securities in December2011. In addition, earning assets declined by approximately $53 million year over year. Net interest margin, on a fully taxable equivalent basis, was 4.05% for the third quarter of 2012, which was a decline of twenty basis points from the third quarter of 2011 but flat when compared to the second quarter of 2012. NON-INTEREST INCOME The Company’s non-interest income was $11.6 million for the third quarter of 2012 compared to $10.3 million for the same period in 2011, an increase of 13%. Excluding securities gains, which are non-recurring in nature, the Company’s non-interest income was $10.7 million for the third quarter of 2012 and $9.0 million for the same period in 2011, an increase of 19%. Mortgage banking income and service charges on deposit accounts were the primary drivers of this increase. With interest rates at historic lows and an increase in the number of mortgage loan originators throughout the Company’s footprint, the Company experienced a significant increase in mortgage banking income over the same period a year ago. In addition, the Company incurred net OREO losses of $651 thousand in the third quarter of 2011 versus $172 thousand in the same period this year. NON-INTEREST EXPENSE The Company’s non-interest expense was $24.4 million for the third quarter of 2012 compared to $23.9 million in the same period in 2011. During the third quarter of 2012 the Company prepaid a $10 million FHLB advance and incurred a $1.3 million penalty. Excluding the prepayment penalty, the Company’s non-interest expenses would have been $23.1 million for the third quarter of 2012, which represents a decrease of $800 thousand (or 3%) compared to the same period a year ago. The primary driver of the decrease was a reduction in employee-related costs of $562 thousand as the Company reduced headcount through its efficiency improvement project in the second half of 2011. The recent closing of six small branch offices also contributed to the lower salary expense. Increases in occupancy and equipment expenses were incurred due to the Company’s recent investments in Columbus and Indianapolis but these were offset by a decrease in FDIC insurance expense. BALANCE SHEET AND CAPITAL Total assets were $2.76 billion at September30, 2012, which was basically flat compared to the same period a year ago. Loans decreased $30 million year over year and were offset by a $35 million increase in investment securities. On a linked-quarter basis loan balances were down $15 million, or 1%. On a YTD basis, loan balances were basically flat. The Company’s regulatory capital ratios remain strong and as of September30, 2012 were as follows: leverage ratio of 10.9%, tier one capital to risk-weighted assets of 17.5%, and total capital to risk-weighted assets of 18.8%. In addition, as of September30, 2012, the Company’s tangible common equity ratio was 8.8%. ASSET QUALITY Non-performing assets (NPA’s) were $60.4 million as of September30, 2012, a decrease of approximately $4.3 million on a linked-quarter basis. The decrease in NPA’s was primarily due to a decrease in non-accrual loans of $2.2 million and a decrease in accruing troubled debt restructurings (TDR’s) of $2.4 million. NPA’s represented 2.19% of total assets as of September30, 2012 compared to 2.34% as of June30, 2012 and 3.03% as of September30, 2011. In addition to the decrease in NPA’s, loans classified as substandard also decreased by 46% on a linked-quarter basis and are at their lowest level since June2009. Several credits were upgraded during the third quarter of 2012 including one large relationship totaling $18 million. Net charge-offs were $5.0 million for the third quarter of 2012 and represented 1.31% of average loans on an annualized basis. During the third quarter of 2012, the Company executed the sale of approximately $5.2 million of problem loans in the secondary market. This transaction resulted in charge-offs of $3.0 million. The Company had identified and specifically provided for these losses in previous quarters. The Company’s allowance for loan losses as a percent of total outstanding loans was 2.30% as of September30, 2012 compared to 2.48% as of June30, 2012 and 2.65% as of September30, 2011. MAINSOURCE FINANCIAL GROUP (unaudited) (Dollars in thousands except per share data) Three months ended Nine months ended September September 30 30 Income Statement 2012 2011 2012 2011 Summary Interest $ 26,832 $ 30,345 $ 82,419 $ 92,644 Income Interest 3,501 5,275 11,560 17,234 Expense Net Interest 23,331 25,070 70,859 75,410 Income Provision for 2,000 5,000 7,600 14,600 Loan Losses Noninterest Income: Trust and investment 819 740 2,555 2,493 product fees Mortgage 2,114 1,428 6,328 3,943 banking Service charges on 5,282 4,872 14,568 13,287 deposit accounts Gain on sales 832 1,263 1,367 4,917 of securities Interchange 1,582 1,642 4,964 4,622 income OREO (172 ) (651 ) (385 ) (1,212 ) gains/(losses) Other 1,120 984 2,745 3,067 Total Noninterest 11,577 10,278 32,142 31,117 Income Noninterest Expense: Employee 12,151 12,713 36,942 38,126 Occupancy & 3,899 3,586 11,488 10,919 equipment Intangible 445 493 1,345 1,477 amortization Marketing 1,139 1,085 3,081 3,292 Collection 821 1,298 2,838 3,214 expenses FDIC 542 898 1,962 3,066 assessment FHLB advance prepayment 1,313 — 1,313 — penalty Other 4,093 3,832 12,157 11,014 Total Noninterest 24,403 23,905 71,126 71,108 Expense Earnings Before Income 8,505 6,443 24,275 20,819 Taxes Provision (benefit) for 1,519 828 4,296 3,032 Income Taxes Net Income $ 6,986 $ 5,615 $ 19,979 $ 17,787 Preferred Dividends & $ (458 ) $ (763 ) $ (1,694 ) $ (2,290 ) Accretion Net Income Available to $ 6,528 $ 4,852 $ 18,285 $ 15,497 Common Shareholders Three months ended Nine months ended September September 30 30 Average Balance Sheet 2012 2011 2012 2011 Data Gross Loans $ 1,549,307 $ 1,598,290 $ 1,552,972 $ 1,634,602 Earning Assets 2,458,138 2,511,553 2,484,750 2,529,381 Total Assets 2,735,365 2,776,543 2,760,986 2,789,080 Noninterest Bearing 352,915 293,064 340,648 283,234 Deposits Interest Bearing 1,778,818 1,901,442 1,821,951 1,935,865 Deposits Total Interest Bearing 2,014,569 2,135,926 2,053,488 2,167,272 Liabilities Shareholders’ 334,682 326,147 334,005 314,919 Equity Three months ended Nine months ended September September 30 30 Per Share Data 2012 2011 2012 2011 Diluted Earnings Per $ 0.32 $ 0.24 $ 0.96 $ 0.77 Common Share Cash Dividends Per Common 0.03 0.01 0.05 0.03 Share Market Value - 13.00 9.24 13.00 10.60 High Market Value - 11.27 7.46 8.84 6.98 Low Average Outstanding 20,347,598 20,231,095 20,312,960 20,211,742 Shares (diluted) Three months ended Nine months ended September September 30 30 Key Ratios 2012 2011 2012 2011 (annualized) Return on 1.02 % 0.80 % 0.97 % 0.85 % Average Assets Return on 8.30 % 6.83 % 7.99 % 7.55 % Average Equity Net Interest 4.05 % 4.25 % 4.09 % 4.27 % Margin Efficiency 66.63 % 64.34 % 65.72 % 63.57 % Ratio Net Overhead to Average 1.87 % 1.95 % 1.89 % 1.92 % Assets September June 30 December 31 September 30 30 Balance Sheet 2012 2012 2011 2011 Highlights Total Loans (Excluding $ 1,531,525 $ 1,546,510 $ 1,534,379 $ 1,562,292 Loans Held for Sale) Allowance for 35,246 38,289 39,889 41,433 Loan Losses Total 902,178 896,037 876,090 867,272 Securities Goodwill and Intangible 69,337 68,182 69,082 69,544 Assets Total Assets 2,755,006 2,766,633 2,754,180 2,757,549 Noninterest Bearing 350,790 364,030 334,345 321,529 Deposits Interest Bearing 1,732,228 1,821,066 1,825,555 1,846,218 Deposits Other 251,499 196,492 201,694 201,727 Borrowings Shareholders’ 338,524 329,858 336,553 334,105 Equity September June 30 December 31 September 30 30 Other Balance 2012 2012 2011 2011 Sheet Data Tangible Book Value Per $ 11.59 $ 11.23 $ 10.45 $ 10.31 Common Share Loan Loss Reserve to 2.30 % 2.48 % 2.60 % 2.65 % Loans Loan Loss Reserve to 78.08 % 81.48 % 89.05 % 95.73 % Non-performing Loans Nonperforming Assets to 1.99 % 2.05 % 2.19 % 2.23 % Total Assets NPA’s (w/ TDR’s) to 2.19 % 2.34 % 2.93 % 3.03 % Total Assets Tangible Common Equity 8.76 % 8.44 % 7.86 % 7.75 % Ratio Outstanding 20,297,325 20,280,225 20,206,214 20,197,084 Shares September June 30 December 31 September 30 30 Asset Quality 2012 2012 2011 2011 Special $ 89,289 $ 76,118 $ 136,099 $ 153,078 Mention Loans Substandard Loans 33,255 61,991 63,379 56,487 (Accruing) Loans Past Due 90 Days or $ 379 $ 34 $ 3,266 $ 993 More and Still Accruing Non-accrual 44,763 46,959 41,529 42,288 Loans Other Real 9,677 9,737 15,535 18,308 Estate Owned Total Nonperforming $ 54,819 $ 56,730 $ 60,330 $ 61,589 Assets (NPA’s) Troubled Debt Restructurings 5,556 7,951 20,402 21,950 (Accruing) Total NPA’s with Troubled $ 60,375 $ 64,681 $ 80,732 $ 83,539 Debt Restructurings Net Charge-offs - $ 5,043 $ 2,752 $ 4,744 $ 5,029 QTD Net Charge-offs as a % of average 1.31 % 0.71 % 1.21 % 1.26 % loans (annualized) 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 $2.8 billion. The Company operates 76 full-service offices throughout Indiana,Illinois, Kentucky and Ohio through its banking subsidiary, MainSource Bank, headquartered in Greensburg,Indiana. Through its non-banking subsidiary, 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 Section27A of the Securities Act of 1933, as amended, and Section21E 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 continuing acquisition strategy; and other factors, including various “risk factors” as set forth in our most recent Annual Report on Form10-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. Contact: MainSource Financial Group,Inc. Archie M. Brown,Jr., President and CEO, 812-663-6734
MainSource Financial Group Announces Third Quarter 2012 Operating Results
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