Archie Brown, coming off his first turnaround, has a newfound appreciation for the complexity of building a bank.
Fixing a bank is easier because a repair team can create a checklist of things that need to be done and then execute, says Brown, chief executive of MainSource Financial (MSFG). A bank can shed bad assets, install skilled managers and change the broken policies that fostered problems.
Adding new assets is more difficult. It is predictive and, in the case of acquisitions, carries significant execution risk.
Brown says his $2.9 billion-asset company has a solid footing and is building again. Last week, the Greensburg, Ind., company agreed to buy the $225 million-asset MBT Bancorp in West Harrison, Ind., for $33.8 million in cash and stock.
"Growing is much more of a challenge," Brown says. "In a turnaround, there are a lot of easy decisions because you're focused on a goal. In growing, you're making sure you're picking the right opportunities and picking the right talent. We think we've set up the company for more sustainable growth."
Brown arrived at MainSource in the summer of 2008 from Integra Bank. MainSource had grown largely through acquisitions and one was closing as Brown arrived.
Brown was expecting to continue to lead the bank on an offensive path, but analysts at the time were concerned that prior management hadn't fully realized the efficiencies of past deals. Analysts were also worried that the company would soon begin to feel the effects of the real estate bust that had started to take hold.
"The prevailing thinking at the time was that, while the industry was starting to see cracks, those cracks had not shown up here," Brown says. "Maybe we were going to get through unscathed without too many problems."
Though it remained "well capitalized" through the financial crisis, MainSource had a fair amount of problem loans. The company lost money in 2009, but was deemed healthy enough to receive $57 million from the Treasury Department's Troubled Asset Relief Program. MainSource's Tarp shares were among the first auctioned by the Treasury in 2012.
In the meantime, the company was working on retooling itself, Brown says. Nearly 90% of its lending team changed. There was an increased focus on commercial-and-industrial lending. Credit administration became a focus. The loan portfolio contracted 22% from the end of 2008 to the end of 2012, to $1.55 billion.
The company hit an inflection point last year. Total loans increased 8% in 2013 from a year earlier, to $1.67 billion. The increase reflected expansion into Indiana cities such as Bloomington, Columbus and Indianapolis, along with a push into Cincinnati.
MainSource also started to revisit M&A. Brown says there was just one problem: the company's stock price. Its stock topped out at 130% of its tangible book value of $11.53 for most of last year.
"We knew a year and a half ago that we were ready to buy, but we knew our stock had to get back into the $17 to $18 a share range," Brown says. MainSource hit its stock goals earlier this year. In the mean, management was planning. The company had a list of banks it wanted to buy, and MBT was on the short list.
MBT will give roots to the five lenders MainSource has in the Cincinnati market. It will also add six branches to MainSource's franchise.
MainSource is expecting to cut MBT's annual costs by 35%. Priced at 140% of MBT's tangible book value, the deal is expected to add 6% to MainSource's earnings and reduce its tangible book value by 4%. It says it can earn the tangible book value dilution back in four years.
"With the company's recent emphasis on maintaining growth momentum, especially in the greater Cincinnati area, we believe the MBT Bancorp acquisition makes a lot of sense for MainSource," Chris McGratty, an analyst at Keefe, Bruyette & Woods, wrote in a recent note to clients.
The deal is a small one. That was part of the company's and the board's goal to be more disciplined, Brown says.
"We are just getting back into acquisition mode, so we didn't want to do a large one right away," Brown says. "We felt we could do something small that strengthened our market share."
MainSource is looking for other acquisition opportunities, Brown says.
The fact that MainSource is doing a deal is perhaps bigger than the deal itself, says Scott Siefers, an analyst at Sandler O'Neill.
"Often when we come through a downturn, a deal like this can be viewed as symbolic," Siefers says. "They are moving from defense to offense. With the turnaround done, they can run the company and grow it."