Add
MSFG to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| MSFG > SEC Filings for MSFG > Form 10-K on 13-Mar-2009 | All Recent SEC Filings |
13-Mar-2009
Annual Report
Forward-Looking Statements
Except for historical information contained herein, the discussion in this Annual Report includes certain forward-looking statements based upon management expectations. Actual results and experience could differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The Company disclaims any intent or obligation to update such forward looking statements. Factors which could cause future results to differ from these expectations include the following: general economic conditions; legislative and regulatory initiatives; monetary and fiscal policies of the federal government; deposit flows; the cost 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 the risk factors set forth in Item 1A of this Annual Report on Form 10-K and in other reports we file from time to time with the Securities and Exchange Commission. The Company intends the forward looking statements set forth herein to be covered by the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995.
Overview
MainSource Financial Group, Inc. ("MainSource" or the "Company") is a financial holding company whose principal activity is the ownership and management of its three wholly owned subsidiary banks ("Banks"): MainSource Bank headquartered in Greensburg, Indiana, MainSource Bank of Illinois headquartered in Kankakee, Illinois, and MainSource Bank - Ohio headquartered in Troy, Ohio. The banks operate under state charters and are subject to regulation by their respective state regulatory agencies and the Federal Deposit Insurance Corporation. Non-banking subsidiaries include MainSource Insurance, LLC and MainSource Title, LLC. Both of these subsidiaries are subject to regulation by the Indiana Department of Insurance. The Company also owns all of the outstanding stock of MainSource Bank - Hobart, although substantially all of the assets of that bank were transferred to MainSource Bank in May, 2007.
Business Strategy
The Company operates under the broad tenets of a long-term strategic plan ("Plan") designed to improve the Company's financial performance, expand its competitive position and enhance long-term shareholder value. The Plan is premised on the belief of the Company's Board of Directors that it can best promote long-term shareholder interests by pursuing strategies which will continue to preserve its community-focused philosophy. The dynamics of the Plan assure continually evolving goals, with the enhancement of shareholder value being the constant, overriding objective. The extent of the Company's success will depend upon how well it anticipates and responds to competitive changes within its markets, the interest rate environment and other external forces.
Results of Operations
Net income was $19,152 in 2008, $21,870 in 2007, and $22,241 in 2006. Earnings per common share on a fully diluted basis were $1.00 in 2008, $1.17 in 2007, and $1.29 in 2006. The primary driver that led to the decrease in net income in 2008 was the $15,173 increase in the Company's loan loss provision expense. The increase in provision expense was partially offset by an increase of $13,128 in net interest income as the Company's net interest margin increased by 30 basis points year over year. The decrease from 2006 to 2007 in overall net income and earnings per share was primarily attributable to three factors: the decrease in the Company's net interest margin, the increase in the Company's loan loss provision expense, and the expenses incurred for the data processing system conversions of the Hobart and Crawfordsville affiliates. Key measures of the operating performance of the Company are return on average assets, return on average shareholders' equity, and efficiency ratio. The Company's return on average assets was 0.73% for 2008 compared to 0.90% for 2007 and 1.06% in 2006. The Company's return on average shareholders' equity was 6.9% in 2008 compared to 8.5% in 2007 and 10.4% in 2006. The Company's efficiency ratio, which measures the non-interest expenses of the Company as a percentage of its net interest income (on a fully taxable equivalent basis) and its non-interest income, was 60.7% in 2008 compared to 64.4% in 2007 and 63.6% in 2006.
Net Interest Income
Net interest income and net interest margin are influenced by the volume and yield or cost of earning assets and interest-bearing liabilities. Tax equivalent net interest income of $91,358 in 2008 increased from $77,603 in 2007. Net interest margin, on a fully-taxable equivalent basis, was 3.90% for 2008 compared to 3.60% for the same period a year ago. Due to rate reductions by the Federal Reserve during the year, the Company's cost of funds decreased steadily throughout the year and outpaced the decrease in the yield on earning assets. In addition, there was a favorable shift in the Company's volume and mix of earning assets as lower-yielding residential real estate loans were replaced by higher-yielding commercial loans.
The following table summarizes net interest income (on a tax-equivalent basis) for each of the past three years.
Average Balance Sheet and Net Interest Analysis (Taxable Equivalent Basis)*
2008 2007 2006
Average Average Average Average Average Average
Assets Balance Interest Rate Balance Interest Rate Balance Interest Rate
Short-term investments $ 1,993 $ 36 1.81 % $ 2,601 $ 131 5.04 % $ 4,210 $ 141 3.35 %
Federal funds sold and money market accounts 8,303 158 1.90 10,458 575 5.50 8,249 394 4.78
Securities
Taxable 398,851 20,395 5.11 401,006 19,661 4.90 382,912 18,176 4.75
Non-taxable* 139,498 8,763 6.28 121.737 7,621 6.26 121,257 7,540 6.22
Total securities 538,349 29,158 5.42 522,743 27,282 5.22 504,169 25,716 5.10
Loans**
Commercial 975,499 63,272 6.49 770,269 55,243 7.17 594,294 43,128 7.26
Residential real estate 508,019 33,802 6.65 556,136 41,625 7.48 488,477 33,362 6.83
Consumer 308,211 22,066 7.16 290,930 23,177 7.97 270,885 21,067 7.78
Total loans 1,791,729 119,140 6.65 1,617,335 120,045 7.42 1,353,656 97,557 7.21
Total earning assets 2,340,374 148,492 6.34 2,153,137 148,033 6.88 1,870,284 123,808 6.62
Cash and due from banks 52,698 56,498 58,562
Unrealized gains (losses) on securities 1,896 (4,634 ) (7,643 )
Allowance for loan losses (19,747 ) (13,296 ) (12,667 )
Premises and equipment,net 43,885 39,829 35,926
Intangible assets 138,079 136,189 103,008
Accrued interest receivable and other assets 71,367 70,789 55,580
Total assets $ 2,628,552 $ 2,438,512 $ 2,103,050
Liabilities
Interest-bearing deposits DDA, savings,
and money market accounts $ 864,842 $ 10,017 1.16 $ 776,693 $ 14,853 1.91 $ 711,111 $ 11,130 1.57
Certificates of deposit 873,731 32,052 3.67 864,074 38,820 4.49 731,603 28,152 3.85
Total interest-bearing
deposits 1,738,573 42,069 2.42 1,640,767 53,673 3.27 1,442,714 39,282 2.72
Short-term borrowings 44,913 1,293 2.88 48,943 1,856 3.79 33,586 1,332 3.97
Subordinated debentures 43,000 2,782 6.47 41,239 3,333 8.08 31,750 2,475 7.80
Notes payable and FHLB borrowings 297,333 10,990 3.70 236,706 11,568 4.89 189,171 9,374 4.96
Total interest-bearing
liabilities 2,123,819 57,134 2.69 1,967,655 70,430 3.58 1,697,221 52,463 3.09
Demand deposits 203,979 190,162 174,218
Other liabilities 23,059 23,062 17,622
Total liabilities 2,350,857 2,180,879 1,889,061
Shareholders' equity 277,695 257,633 213,989
Total liabilities and shareholders' equity $ 2,628,552 57,134 2.44 *** $ 2,438,512 70,430 3.27 *** $ 2,103,050 52,463 2.81 ***
Net interest income $ 91,358 3.90 **** $ 77,603 3.60 **** $ 71,345 3.81 ****
Conversion of tax exempt income to a fully
taxable equivalent basis using a marginal rate
of 35% $ 3,833 $ 3,206 $ 3,077
|
º **
º Nonaccruing loans have been included in the average balances.
º ***
º Total interest expense divided by total earning assets.
º ****
º Net interest income divided by total earning assets.
The following table sets forth for the periods indicated a summary of the changes in interest income and interest expense resulting from changes in volume and changes in rates.
Volume/Rate Analysis of Changes in Net Interest Income
(Tax Equivalent Basis)
2008 OVER 2007 2007 OVER 2006
Volume Rate Total Volume Rate Total
Interest income
Loans $ 11,548 $ (12,453 ) $ (905 ) $ 19,645 $ 2,843 $ 22,488
Securities 831 1,045 1,876 961 605 1,566
Federal funds sold and money
market funds (41 ) (376 ) (417 ) 117 64 181
Short-term investments (11 ) (84 ) (95 ) (81 ) 71 (10 )
Total interest income 12,327 (11,868 ) 459 20,643 3,582 24,225
Interest expense
Interest-bearing DDA, savings,
and money market accounts $ 1,021 $ (5,857 ) $ (4,836 ) $ 1,305 $ 2,418 $ 3,723
Certificates of deposit 354 (7,122 ) (6,768 ) 5,986 4,682 10,668
Borrowings 2,125 (3,266 ) (1,141 ) 2,911 (193 ) 2,718
Subordinated debentures 114 (665 ) (551 ) 769 89 858
Total interest expense 3,614 (16,910 ) (13,296 ) 10,971 6,996 17,967
Change in net interest income $ 8,713 $ 5,042 13,755 $ 9,672 $ (3,414 ) 6,258
Change in tax equivalent
adjustment 627 129
Change in net interest income
before tax equivalent adjustment $ 13,128 $ 6,129
|
Provision for Loan Losses
The Company expensed $20,918 in provision for loan losses in 2008. This
level of provision allowed the Company to maintain an adequate allowance for
loan losses. This topic is discussed in detail under the heading "Loans, Credit
Risk and the Allowance and Provision for Loan Losses".
Non-interest Income and Expense
Percent Change
2008 2007 2006 08/07 07/06
Non-interest income
Insurance commissions $ 2,073 $ 1,864 $ 1,821 11.2% 2.4%
Mortgage banking 2,565 2,921 2,279 -12.2% 28.2%
Trust and investment product fees 1,575 1,569 1,187 0.4% 32.2%
Service charges on deposit accounts 14,555 13,312 9,491 9.3% 40.3%
Net realized gains/(losses) on securities sales 1,118 114 145 880.7% -21.4%
Increase in cash surrender value of life insurance 967 1,535 1,255 -37.0% 22.3%
Interchange income 3,600 3,159 2,617 14.0% 20.7%
Other 3,244 3,652 4,244 -11.2% -13.9%
Total non-interest income $ 29,697 $ 28,126 $ 23,039 5.6% 22.1%
Non-interest expense
Salaries and employee benefits $ 41,033 $ 38,063 $ 33,073 7.8% 15.1%
Net occupancy 6,061 5,347 4,755 13.4% 12.5%
Equipment 6,496 5,788 5,361 12.2% 8.0%
Intangibles amortization 2,607 2,666 2,236 -2.2% 19.2%
Telecommunications 1,863 1,924 1,916 -3.2% 0.4%
Stationery, printing, and supplies 1,374 1,475 1,408 -6.8% 4.8%
Other 13,339 12,757 10,893 4.6% 17.1%
Total non-interest expense $ 72,773 $ 68,020 $ 59,642 7.0% 14.0%
|
Non-interest Income
Non-interest income was $29,697 for 2008 compared to $28,126 for the same period in 2007. Increases in service charges on deposit accounts, interchange income and gains on the sale of investment securities were offset by the decrease in mortgage banking income and a reduction in income related to bank-owned life insurance policies as the Company recorded a $400 charge on its separate account investments. Despite an increase in the level of mortgage loans originated for sale, mortgage banking income decreased as the Company incurred an impairment charge of $1,226 related to its mortgage servicing rights. Non-interest income as a percent of non-interest expense was 40.8% for 2008 compared to 41.3% for 2007.
Total non-interest income was $28,126 for 2007 compared to $23,039 for 2006, an increase of $5,087 and 22.1% The acquisitions closed in 2006 were the primary driver of the increase as the Company realized the full-year effect in 2007.
Non-interest Expense
Total non-interest expense was $72,773 in 2008 compared to $68,020 in 2007, an increase of $4,753 and 7.0%. The increase was primarily attributable to the acquisition of 1st Independence Bancorp, Inc. in August 2008, severance costs related to the resignation of the Company's former Chief Executive Officer, and normal employee merit increases.
Total non-interest expense was $68,020 in 2007 compared to $59,642 in 2006, an increase of $8,378 and 14.0%. The full-year effect of the 2006 acquisitions was the primary driver of this increase and added approximately $6,000 of expenses to 2007. In addition, the Company incurred approximately $900 of expenses related to the data processing system conversions of its Hobart and Crawfordsville, Indiana affiliates.
Income Taxes
The effective tax rate was 18.6% in 2008, 24.0% in 2007, and 25.5% in 2006. The decrease in the Company's effective tax rate from 2007 to 2008 was primarily due to lower pretax earnings with earnings from tax exempt assets remaining relatively flat. The decrease in the Company's effective tax rate from 2006 to 2007 was primarily attributable to the purchase of a new markets tax credit investment in 2007. The Company and its subsidiaries file consolidated income tax returns.
Balance Sheet
At December 31, 2008, total assets were $2,899,835 compared to $2,536,437 at December 31, 2007, an increase of $363 million. The increase was primarily attributable to the acquisition of 1st Independence which added $319,014 in assets.
Loans, Credit Risk and the Allowance and Provision for Loan Losses
Loans remain the Company's largest concentration of assets and continue to represent the greatest potential risk. The loan underwriting standards observed by the Company's subsidiaries are viewed by management as a means of controlling problem loans and the resulting charge-offs.
The Company's conservative loan underwriting standards have historically resulted in higher loan quality and generally lower levels of net charge-offs than peer group averages. The Company also believes credit risks may be elevated if undue concentrations of loans in specific industry segments and to out-of-area borrowers are incurred. Accordingly, the Company's Board of Directors regularly monitors such concentrations to determine compliance with its loan concentration policy. The Company believes it has no undue concentrations of loans.
Total loans (excluding those held for sale) increased by $301,923 from year-end 2007. The acquisition of 1st Independence in August 2008 accounted for $236,992 of the increase in loans. The $64,931 of organic loan growth was primarily concentrated in the commercial real estate area. Residential real estate loans continue to represent the largest portion of the total loan portfolio and were 44% of total loans at December 31, 2008 compared to 46% of total loans at the end of 2007.
The following table details the Company's loan portfolio by type of loan.
Loan Portfolio
December 31
2008 2007 2006 2005 2004
Types of loans
Commercial and industrial $ 226,696 $ 214,393 $ 173,557 $ 149,074 $ 154,717
Agricultural production financing 40,334 29,812 25,588 23,871 22,647
Farm real estate 45,918 42,185 46,051 38,833 38,281
Commercial real estate mortgage 515,964 376,759 326,284 202,047 213,359
Residential real estate mortgage 877,145 780,102 790,962 368,953 353,515
Construction and development 173,551 123,611 82,261 51,736 38,056
Consumer 115,993 126,816 129,681 123,481 108,430
Total loans $ 1,995,601 $ 1,693,678 $ 1,574,384 $ 957,995 $ 929,005
|
The following table indicates the amounts of loans (excluding residential and commercial mortgages and consumer loans) outstanding as of December 31, 2008 which, based on remaining scheduled repayments of principal, are due in the periods indicated.
Maturities and Sensitivity to Changes in Interest Rates of Commercial and
Construction Loans
Due: Within 1
Year 1-5 Years Over 5 years Total
Loan Type
Commercial and industrial $ 102,805 $ 55,121 $ 68,770 $ 226,696
Agricultural production financing 29,121 7,983 3,230 40,334
Construction and development 125,159 35,034 13,358 173,551
Totals $ 257,085 $ 98,138 $ 85,358 $ 440,581
Percent 58% 22% 20% 100%
Rate Sensitivity
Fixed Rate $ 38,225 $ 47,211 $ 32,052 $ 117,488
Variable Rate 285,665 34,555 2,873 323,093
Totals $ 323,890 $ 81,766 $ 34,925 $ 440,581
|
The Company regards its ability to identify and correct loan quality problems as one of its greatest strengths. Loans are placed on "non-accrual" status when, in management's judgment, the collateral value and/or the borrower's financial condition does not justify accruing interest. As a general rule, commercial and real estate loans are reclassified to nonaccrual status at or before becoming 90 days past due. Interest previously recorded is reversed and charged against current income. Subsequent interest payments collected on nonaccrual loans are thereafter applied as a reduction of the loan's principal balance. Non-performing loans were $59,310 as of December 31, 2008 compared to $20,493 as of December 31, 2007 and represented 2.97% of total loans at December 31, 2008 versus 1.21% one year ago.
The following table details the Company's non-performing loans as of December 31 for the years indicated.
Non-performing Loans
2008 2007 2006 2005 2004
Nonaccruing loans $ 55,671 $ 18,800 $ 16,021 $ 9,984 $ 13,611
Accruing loans contractually past due 90 days or more 3,639 1,693 1,460 233 431
Total $ 59,310 $ 20,493 $ 17,481 $ 10,217 $ 14,042
% of total loans 2.97% 1.21% 1.11% 1.07% 1.51%
|
Approximately 80% of the increase in non-accruing loans was attributable to 11 large credit relationships over $1,000. The provision for loan losses was $20,918 in 2008, $5,745 in 2007, and $1,819 in 2006. The increase in the Company's provision in 2008 was primarily due to the increase in non-performing loans, the increase in net charge-offs during 2008, and the deterioration of the economy and real estate market. Net charge-offs were $6,230 in 2008 compared to $4,206 in 2007 and $3,363 in 2006. As a percentage of average loans, net charge-offs equaled .35%, .26%, and .25% in 2008, 2007 and 2006, respectively.
Substandard loans that were not classified as non-accrual were $39,339 at December 31, 2008 and $17,979 at December 31, 2007. The large increase in these substandard loans related to substandard commercial loans as they increased $19,099 from $15,694 at December 31, 2007 to $34,793 at December 31, 2008. Substandard mortgage loans totaled $3,806 and substandard installment loans were $740 at December 31, 2008. These loans are reviewed at least quarterly by senior management. Management believes these loans were well secured and had adequate allowance allocated at December 31, 2008.
Summary of the Allowance for Loan Losses
2008 2007 2006 2005 2004
Balance at January 1 $ 14,331 $ 12,792 $ 10,441 $ 11,698 $ 11,509
Chargeoffs
Commercial 1,866 1,642 1,653 1,164 1,069
Commercial real estate mortgage 948 136 - 594 43
Residential real estate mortgage 1,421 446 412 869 534
Consumer 3,032 3,134 1,834 956 886
Total Chargeoffs 7,267 5,358 3,899 3,583 2,532
Recoveries
Commercial 214 258 65 46 123
Commercial real estate mortgage 17 - - - 2
. . .
|
|
|