Whoever becomes the next chief executive at MainSource Financial Group Inc. will have some work to do to boost its lackluster performance, analysts said.
The $2.5 billion-asset Greensburg, Ind., company said Monday that James L. Saner, its president and CEO since 1999, had resigned. Robert E. Hoptry, the chairman, will be the interim president and CEO until a successor is named.
The company did not return calls seeking comment.
David B. Scharf, an analyst at First Horizon National Corp.'s FTN Midwest Research Securities Corp. in Nashville, said Mr. Saner's departure was abrupt but was not all that surprising, given MainSource's languishing stock price.
It hit a high of $24.63 in late 2004 and has been falling steadily since then, partly because the acquisitions the company began making in 2005 have left it bloated and hurt its profitability, Mr. Scharf said.
The shares fell 4% Monday on the news of Mr. Saner's departure but rose 0.69% Tuesday, to close at $14.55.
Mr. Darst and other analysts said MainSource needs to cut costs to get back on track.
Over the past three years it has bought three thrift companies, a banking company, and a handful of branches. It now has 80 branches, most of them in Indiana.
Mr. Scharf said that MainSource has yet to consolidate branches from the acquisitions, and that its efficiency ratio has remained above 60% as a result. The ratio was 64.4% for last year and 63.6% the previous year.
He also said MainSource's performance has been hampered because it operates in slower-growth markets, mostly rural areas and small towns in Indiana.
Its returns on equity and assets began sliding in 2005, just as its series of acquisitions began with the $215 million-asset Madison Bank and Trust Co.
Last year MainSource's ROE was 8.49%, compared with 14.70% for 2004, and its ROA was 0.9%, compared with 1.13% for 2004.
Stephen Geyen, an analyst at Stifel, Nicolaus & Co. Inc. in Minneapolis, said the new CEO should consider closing up to 10 branches and trimming back-office expenses to boost profitability.
"There's a fair amount of overlap in branches in very small towns in Indiana," Mr. Geyen said.
In addition, MainSource should consider beefing up its investment and trust services staffing levels, he said. "On the other side of the balance sheet, they could grow revenues by deriving more fee income, particularly investment and trust income."
The analysts said MainSource has not been immune to problem loans from the slowdown in the housing construction market.
Its fourth-quarter net income fell 20% from a year earlier, to $4.8 million, because its loan-loss provision jumped more than fivefold, to $2.97 million.
The company said it needed the provision increase to cover higher chargeoffs and to reserve against potential exposure to deteriorating credit quality in its $50 million land development loan portfolio.
MainSource also took a $500,000 impairment charge on an investment security that was tied to the housing industry.
However, the company said in its earnings release Jan. 23 that it "remained cautiously optimistic about 2008," and that credit quality has been holding up relatively well so far through the economic downturn.
Fourth-quarter net chargeoffs rose 25% from a year earlier, to $4.2 million. But the net chargeoff rate for last year rose only 1 basis point from the previous year, to 0.26% of average loans.
Mr. Scharf said that MainSource's board and its new CEO ultimately might consider selling the company in light of its woes.
The $8 billion-asset Old National Bancorp in Evansville could be a buyer, he added.
"Old National's footprint mirrors MainSource's really well, and this could fill a void" in its southern Indiana markets, Mr. Scharf said.
John C. Reed, the president of the financial institutions group at David A. Noyes & Co. in Indianapolis, said that the $3.2 billion-asset Integra Bank Corp. of Evansville also could be a buyer, because it caters predominantly to lower-growth rural and small-town markets.
Mr. Hoptry, 69, had been MainSource's president and CEO from 1983 to 1999. Considering that he came out of retirement to be the interim CEO and has been chairing MainSource since its inception in 1983, "it would not be an unnatural time to decide to sell," Mr. Reed said. "And right now, with a little downturn in their markets, a sale would be pretty logical."
Old National did not return a call for comment. Integra would not discuss the speculation.
