Greensburg-based MainSource Financial Group Inc. (Nasdaq: MSFG) is reporting second quarter net income of $7.8 million, compared to $7.3 million during the same period last year. Chief Executive Officer Archie Brown says the company expects to close on its acquisition of MBT Bancorp in West Harrison in the fourth quarter. July 22, 2014

News Release

GREENSBURG, Ind. – Archie M. Brown, Jr., President and Chief Executive Officer of MainSource Financial Group, Inc. (NASDAQ: MSFG), announced today the unaudited financial results for the second quarter of 2014. For the three months ended June 30, 2014, the Company recorded net income of $7.8 million, or $0.38 per common share, compared to net income of $7.3 million, or $0.35 per common share, in the second quarter of 2013. The Company also announced that the Board of Directors had approved a payment of a common dividend of $0.11 per share, payable on September 15, 2014 to common shareholders of record as of September 5, 2014. This dividend represents an increase of $0.01 per share.

CEO Comments

Mr. Brown stated, “We are pleased with our second quarter results. Our earnings per share of $.38 increased by 9 percent from the same period one year ago and by 27 percent when compared to the first quarter of this year. Total revenue increased by 1 percent from the second quarter of last year to $34.3 million. A 7 percent increase in loans, a 3 percent increase in total assets and lower provision expense led to the improvement from last year. Our growth in loans has slowed compared to our forecast, yet we continue to have good activity and full pipelines.”

Mr. Brown continued, “We continue to be encouraged by our control of non-interest expenses. Our non-interest expense was flat when compared to the second quarter of last year as higher employee expense (primarily related to our de novo investment in Louisville, Kentucky) was offset by lower marketing expense, lower collection expense and small declines in most other expense categories. Total non-interest expense for the second quarter was 2 percent lower than the linked quarter as a result of lower occupancy expense (related to the extreme bad winter conditions during the first quarter of this year).”

Mr. Brown concluded, “We are very pleased with the progression of The Merchants Bank and Trust Company (MBT) merger process. As of this time, we have received all regulatory approvals required for closing the merger. We await the approval of the MBT shareholders and satisfaction of other customary closing conditions. Subject to completion of these conditions, we anticipate the merger to close in the fourth quarter of this year. We are also pleased to report our Board has approved a 10 percent increase in the quarterly common dividend to $.11 per share payable in the third quarter of 2014. The increase reflects our continued improvement in earnings and general positive outlook.”

NET INTEREST INCOME

Net interest income was $23.1 million for the second quarter of 2014 compared to $22.5 million a year ago. The increase in net interest income was primarily due to an increase in the earning asset base. Net interest margin, on a fully-taxable equivalent basis, was 3.83% for the second quarter of 2014, which was eight basis points below the second quarter of 2013 and six points lower than the first quarter of 2014.

NON-INTEREST INCOME

The Company’s non-interest income was $11.2 million for the second quarter of 2014 compared to $11.4 million for the same period in 2013 and $9.3 million in the first quarter of 2014. Comparing to the same period a year ago a decrease in mortgage banking income was partially offset by an increase in service charge income. All other categories were relatively flat year over year. On a linked quarter basis, seasonal fluctuations in mortgage banking income, service charges and interchange income were the primary drivers of the increase. In addition, other income increased in the second quarter of 2014 compared to the first quarter of 2014 as the Company recorded a write-down of $500 thousand related to the closing of three branch offices in the first quarter.

NON-INTEREST EXPENSE

The Company’s non-interest expense was $23.8 million for the second quarter of 2014 compared to $23.9 million for the same period in 2013. An increase in employee costs related to the Company’s recent investments in new markets was offset by decreases in marketing and collections expenses. On a linked-quarter basis, non-interest expense decreased by approximately $400 thousand. A slight increase in employee costs was more than offset by a decrease in occupancy expenses. Occupancy expenses were abnormally high in the first quarter of 2014 due to the harsh winter.

BALANCE SHEET AND CAPITAL

Total assets were $2.86 billion at June 30, 2014, an increase of $90 million from a year ago. The increase was primarily due to an increase in loan balances of $118 million. On a linked-quarter basis the balance sheet was relatively flat. Loan balances grew by $13 million during the second quarter of 2014. The Company’s regulatory capital ratios remain strong and as of June 30, 2014 were as follows: leverage ratio of 10.2%, tier one capital to risk-weighted assets of 15.5%, and total capital to risk-weighted assets of 16.8%. In addition, as of June 30, 2014, the Company’s tangible common equity ratio was 9.2%.

ASSET QUALITY

Non-performing assets (NPAs) were $37.0 million as of June 30, 2014, an increase of approximately $9.0 million on a linked-quarter basis. During the second quarter the Company restructured a large problem credit using an A/B note structure. The B note related to this credit was charged off ($3.8 million) while the A note is now classified as a troubled debt restructuring (TDR). The Company had allocated for the charge off of the B note in its loan loss reserve in previous quarters. NPAs represented 1.29% of total assets as of June 30, 2014 compared to 0.97% as of March 31, 2014 and 1.45% as of June 30, 2013. During the second quarter of 2014 approximately $1.6 million of loans were transferred to non-accrual status representing the lowest quarter of inflows since the beginning of 2009. Net charge-offs were $4.1 million for the second quarter of 2014 and represented 0.98% of average loans on an annualized basis. As discussed above, $3.8 million of the charge-offs during the quarter were related to one credit. The Company’s allowance for loan losses as a percent of total outstanding loans was 1.40% as of June 30, 2014 compared to 1.61% as of March 31, 2014 and 1.77% as of June 30, 2013.

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