MainSource Financial Group Inc.'s chief executive, Archie M. Brown Jr., was not with the Greensburg, Ind., company at the time it struck a deal for 1st Independence Financial Group Inc. of Kentucky, but it is up to him to make the combination work.
MainSource closed the $37 million deal in early September, less than a month after Mr. Brown left Integra Bank Corp. to join MainSource.
In acquiring the $325 million-asset 1st Independence, MainSource increased its assets to $2.8 billion and got a bigger share of the attractive Louisville market. But it also inherited the Louisville company's asset-quality problems, and fixing them will be one of Mr. Brown's priorities.
"This does create an additional layer of concern and difficulty," he said in an interview this week.
MainSource and 1st Independence had competed against each other in New Albany, Ind., a thriving Louisville suburb on the Indiana-Kentucky border. Though 1st Independence's nonaccruing loans swelled from $2 million at June 30, 2007, to $12.2 million a year later mostly because of bad real estate and construction loans MainSource officials concluded that the rewards of buying it outweighed the risks.
"This doubles our presence in New Albany," Mr. Brown said. "I think we have some opportunities to enhance our market share as we roll out our more robust product set there."
Jamie Anderson, MainSource's chief financial officer, said it examined 1st Independence's portfolio.
MainSource did not pressure the seller to charge off loans before the closing, Mr. Anderson said, but it helped 1st Independence assess its risk and reserves.
"We feel we understand where their portfolio is," Mr. Anderson said. "Could [the loans] deteriorate further? Sure. But if we pegged it right, it shouldn't have an effect on our income statement."
Brian Martin, an analyst with Howe Barnes Hoefer & Arnett Inc. in Chicago, said adding the problem loans to MainSource's $30 million of nonperforming assets presents a challenge but is hardly an insurmountable one.
"In this market there are a lot worse situations," he said.
Since it was a fill-in acquisition, MainSource's lenders near the Indiana-Kentucky border are likely familiar with the inherited credits, Mr. Martin said. "This is not a foreign market to them, so that's a leg up."
And MainSource has some experience with acquisitions.
Under James L. Saner, who resigned in early February as president, CEO, and director, it made four acquisitions in 2005. Its assets have doubled since then.
But as the company grew, so did its expenses. Efficiencies from the mergers were not realized, and analysts considered some of its branches to be underperforming because they had less than $15 million of deposits.
Mr. Saner resigned two weeks before the 1st Independence deal was announced. Longtime chairman and founding CEO Robert Hoptry led the company in the interim, and since then MainSource has closed or consolidated five branches.
Mr. Anderson said that, as a rural company, MainSource does not regard a branch with less than $15 million as underperforming.
"We think that is a overly generalized approach," he said. "We operate those branches with very little overhead and consider what we would lose if we close those branches."
David B. Scharf, an analyst with First Horizon National Corp.'s FTN Midwest Securities Corp., agreed that shuttering smaller branches could backfire. "I don't think it is a good idea to go in there with a hatchet approach," he said. "It would be better to give them the resources and the training they need to grow, instead."
Mr. Brown, who had been executive vice president of commercial and consumer banking at Integra, in Evansville, Ind., said he wants to increase commercial and industrial lending. "Our big focus will be on making more inroads to the small and medium-sized companies and building our core deposits."
Mr. Scharf said MainSource has a proven track record of commercial and industrial lending and is beginning to run off the one-to-four-family mortgages it has inherited through acquisitions.
On the deposit side, "people are moving to quality names and names that they can trust," he said. "That's tough right now to replicate from a big-bank perspective."
Mr. Brown said his company stands to benefit from the opening slated for this fall of a Honda Motors manufacturing plant in Greensburg for the popular Civic model. The plant is to have 4,000 employees eventually and is expected to attract feeder and ancillary businesses to the area, which would be good for MainSource's plan to expand commercial and industrial lending to small and midsize businesses, Mr. Brown said.
Mr. Scharf said the plant opening "is clearly an opportunity" for MainSource. "They are going to have to compete, but there are many instances where those types of plants can turn around a whole community."