EX-13 3 mff021598-ex13.txt ANNUAL REPORT MUTUALFIRST Financial, Inc. -------------------------------------------------------------------------------- 2001 ANNUAL REPORT MUTUALFIRST Financial, Inc. 110 E. Charles St. Muncie, IN 47305 MUTUAL FEDERAL SAVINGS BANK MISSION STATEMENT "The mission of the Bank will continue to be a growing community bank, building relationships with individuals, families and businesses by offering a broad range of innovative consumer and commercial products and services. The Bank will depend upon high quality service to set the Bank apart from all competitors. These goals are accomplished by continually focusing on employees to ensure proper training, technological competence, teamwork, motivation and rewards are provided. Shareholder value, measured by total return will be key in the decision process. The Bank is committed to the effective utilization of technology to meet customer needs. Directors, officers and staff fill roles of influence and responsibility in the communities served. The Bank will continue to build on the tradition of strength, security, stability, longevity, consistency and superior quality service." TABLE OF CONTENTS PAGE NO. President's Message 1 Selected Consolidated Financial Information 2 Management's Discussion and Analysis of Financial Condition and Results of Operation 4 Independent Accountants' Report 17 Consolidated Financial Statements 18 Notes to Consolidated Financial Statements 23 Corporate Information 46 Shareholder Information 48 PRESIDENT'S LETTER ANNUAL REPORT MUTUALFIRST Financial, Inc. completed its second full year as a public company in 2001, a year that will be forever remembered for the great tragedy that occurred on September 11th. It was also a year of unprecedented cuts in short term interest rates as the Federal Reserve attempted to ward off a deepening national recession. In light of all of these factors, I feel fortunate to be able to bring you a positive report of our financial results for 2001. As I reflect on 2001, I am proud of the fact that we made several leadership transitions by promoting key people within Mutual Federal Savings Bank, continued our integration with First Federal of Marion, and increased shareholder value. We fine-tuned our organization structure to allow focused effort on enhanced performance within Mutual Federal Savings Bank by the creation of the position of Executive Vice President and Chief Operating Officer. David W. Heeter was elected to fill that role. Vice Presidents Larry Phillips and Patrick Botts also assumed new responsibilities. Mr. Phillips was named Controller, and Mr. Botts will lead our Administration Division. Lynda Stoner and Ralph Spencer were both promoted to the position of Vice President. Mrs. Stoner leads the Delaware/Randolph County Community Banking Division. Mr. Spencer heads Consumer Lending within our Corporate Products and Services Division. Bill Curl and Glenda Thomas were elected to the position of Assistant Vice President in our Kosciusko County market to lead our lending and branch operations, respectively, in that rapidly growing community. We also created the position of Assistant Treasurer, and promoted Christopher Cook to fill that role. The low interest rate environment led to outstanding growth in consumer and commercial loans, as they grew by more than $9 million during the year, as well as record mortgage loan originations of over $186 million. Despite the volatility of interest rates, we were able to maintain our interest margins. The Bank's insurance business, through Mutual Financial Services and Family Financial Life Insurance Company, also performed well. In December, we entered into a joint agreement with two other banks to purchase two Delaware County title insurance agencies and form our own title insurance company, Indiana Title Insurance, LLC. These levels of growth and financial performance could not have been accomplished without a committed, competent staff dedicated to giving Mutual Federal Savings Bank and its customers their best each and every day. In a year when stock markets fluctuated, our stock price remained relatively flat throughout the year, ranging from a low of $13.875 during the first quarter to a high of $15.39 in the third quarter. However, early indications in 2002 have been positive in regards to price. In 2001, MUTUALFIRST Financial, Inc. was able to increase earnings per share and return on equity, while increasing our dividends paid to shareholders by 14%. At year-end, we were nearing completion of our third stock repurchase program. Our top priority continues to be growing Mutual Federal Savings Bank. We will do this by providing our customers with the combination of stability, security and quality products and services only a financially sound and federally insured community bank can provide. We believe in our ability to grow in a changing marketplace, without compromising the values and principles that have governed us for nearly 113 years. I would like to thank you for your continued confidence in our company and your willingness to grow with us. /s/ R. Donn Roberts President and Chief Executive Officer SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA The following information is only a summary and you should read it in conjunction with our financial statements and notes contained in this Annual Report.
AT OR FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------------------------------------------------------------------------------------------------------- (In Thousands) SELECTED FINANCIAL CONDITION DATA Total Assets $769,328 $770,370 $544,523 $469,515 $458,695 Cash and cash equivalents 30,558 21,046 19,983 12,938 10,349 Loans, net 636,635 639,362 442,787 398,146 399,290 Investment Securities: Available-for -sale, at fair value 31,580 35,142 29,599 14,208 12,370 Held-to-maturity 0 10,539 12,449 11,004 10,167 Total deposits 538,878 514,710 364,604 365,999 344,860 Total borrowings 110,743 116,182 74,898 52,462 66,255 Total stockholders' equity 109,744 129,941 96,712 43,846 39,660 SELECTED OPERATIONS DATA Total interest income $ 54,940 $ 41,180 $ 34,811 $ 34,474 $ 34,085 Total interest expense 29,081 21,645 19,242 19,690 19,082 ---------------------------------------------------------------------------------------------------------- Net interest income 25,859 19,535 15,569 14,784 15,003 Provision for loan losses 1,282 685 760 1,265 700 ---------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses 24,577 18,850 14,809 13,519 14,303 ---------------------------------------------------------------------------------------------------------- Service fee income 2,626 2,070 1,728 1,544 1,316 Gain on sale of loans and investment securities 1,350 144 32 807 188 Other non-interest income 2,126 1,402 1,091 1,077 579 ---------------------------------------------------------------------------------------------------------- Total non-interest income 6,102 3,616 2,851 3,428 2,083 ---------------------------------------------------------------------------------------------------------- Salaries and employee benefits 12,288 7,496 7,236 6,115 5,548 Charitable contributions -- 4 4,570 97 69 Other expenses 7,232 5,625 4,870 4,547 4,474 ---------------------------------------------------------------------------------------------------------- Total non-interest expense 19,520 13,125 16,676 10,759 10,091 ---------------------------------------------------------------------------------------------------------- Income before taxes 11,159 9,341 984 6,188 6,295 Income tax expense 3,079 3,106 138 2,049 2,160 ---------------------------------------------------------------------------------------------------------- Net income $ 8,080 $ 6,235 $ 846 $ 4,139 $ 4,135 ==========================================================================================================
2
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------------------------------------------------- SELECTED FINANCIAL RATIOS AND OTHER FINANCIAL DATA: Performance Ratios: Return on average assets (ratio of net income to average total assets) 1.05% 1.09% 0.17% 0.89% 0.93% Return on average equity (ratio of net income to average equity) 6.80 6.15 1.83 9.83 11.36 Interest rate spread information: Average during the period 3.22 3.09 3.24 3.21 3.34 Net interest margin(1) 3.67 3.71 3.41 3.42 3.58 Ratio of operating expense to average total assets 2.54 2.30 3.35 2.31 2.28 Ratio of average interest-earning assets to average interest-bearing liabilities 110.85 115.17 104.05 104.56 105.18 Efficiency ratio(2) 61.08 56.69 90.53 59.08 59.06 Asset Quality Ratios: Non-performing assets to total assets at end of period 1.05 0.56 0.30 0.29 0.62 Non-performing loans to total loans 1.03 0.53 0.17 0.28 0.19 Allowance for loan losses to non-performing loans 82.4 189.13 467.61 307.36 406.71 Allowance for loan losses to loans, net 0.85 1.01 0.82 0.85 0.77 Capital Ratios: Equity to total assets at end of period 14.26 16.87 17.76 9.34 8.65 Average equity to average assets 15.44 17.81 9.29 9.06 8.22 Share and Per Share Data: Average common shares outstanding Basic 6,949,879 5,558,377 Diluted 6,964,305 5,558,377 Per share: Basic earnings $1.16 $1.12 Diluted earnings $1.16 $1.12 Dividends 0.32 0.28 Dividend payout ratio (3) 27.59% 25.00% Other Data: Number of full-service offices 17 17 13 12 12
(1) Net interest income divided by average interest earning assets. (2) Total non-interest expense divided by net interest income plus total non-interest income. (3) Dividends per share divided by earnings per share. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION MUTUALFIRST Financial, Inc., a Maryland corporation, is a savings and loan holding company, which has as its wholly owned subsidiary, Mutual Federal Savings Bank, Muncie, Indiana. MFS Financial, Inc. was formed in September 1999 to become the holding company of Mutual Federal in connection with Mutual Federal's conversion from the mutual to stock form of organization on December 29, 1999. In April 2000, MFS Financial, Inc. formally changed its corporate name to MUTUALFIRST Financial, Inc. ("MUTUALFIRST") The words "we," "our" and "us" refer to MUTUALFIRST and Mutual Federal on a consolidated basis, except that references to us prior to December 29, 1999 refer only to Mutual Federal. Our principal business consists of attracting retail deposits from the general public and investing those funds primarily in permanent loans secured by first mortgages on owner-occupied, one to fourfamily residences and in a variety of consumer loans. We also originate loans secured by commercial and multi-family real estate, commercial business loans and construction loans secured primarily by residential real estate. We are headquartered in Muncie, Indiana with 17 retail offices primarily serving Delaware, Randolph, Kosciusko, and Grant counties in Indiana. We also originate mortgage loans in contiguous counties, and we originate indirect consumer loans throughout Indiana. The following discussion is intended to assist your understanding of our financial condition and results of operations. The information contained in this section should be read in conjunction with our consolidated financial statements and the accompanying notes to our consolidated financial statements. Our results of operations depend primarily on our net interest income, which is the difference between interest income on interest-earning assets, which principally consist of loans and mortgage-backed and investment securities, and interest expense on interest-bearing liabilities, which principally consist of deposits and borrowings. Our results of operations also are affected by the level of our non-interest income and expenses and income tax expense. FORWARD-LOOKING STATEMENTS This discussion contains various forward-looking statements, which are based on assumptions and describe our future plans and strategies and our expectations. These forward-looking statements are generally identified by words such as "believe," "expect," "intend," "anticipate," "estimate," "project," or similar words. Our ability to predict results or the actual effect of future plans or strategies is uncertain. Factors which could cause actual results to differ materially from those estimated include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of our loan and investment portfolios, demand for our loan products, deposit flows, our operating expenses, competition, demand for financial services in our market areas and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and you should not rely too much on these statements. We do not undertake, and specifically disclaim any obligation, to publicly revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. MANAGEMENT STRATEGY Our strategy is to operate as an independent, retail oriented financial institution dedicated to serving customers in our market areas. Our commitment is to provide a broad range of products and services to meet the needs of our customers. As part of this commitment, we are looking to increase our 4 emphasis on commercial business products and services. We have also created a fully interactive transactional website. In addition, we are continually looking at cost-effective ways to expand our market area. Financial highlights of our strategy include: o CONTINUING AS A DIVERSIFIED LENDER. We have been successful in diversifying our loan portfolio to reduce our reliance on any one type of loan. From 1995 through 2000 approximately 36% of our loan portfolio has consisted of loans other than one-to-four family real estate loans. At the end of 2001 that percentage had increased to 41.1%. o CONTINUING AS A LEADING ONE TO FOUR-FAMILY LENDER. We are one of the largest originators of one-to-four family residential loans in our four-county market area. During 2001, we originated $185.0 million of one-to-four family residential loans. o CONTINUING TO FOCUS ON ASSET QUALITY. Although 2001 saw a rise in non-performing assets to total assets to 1.03%, our historical ratios had not exceeded .62% since 1994. We are confident that our underwriting standards will continue to provide for a quality loan portfolio. o CONTINUING OUR STRONG CAPITAL POSITION. As a result of our consistent profitability, we have historically maintained a strong capital position. At December 31, 2001, our ratio of stockholders' equity to total assets was 14.3%. ASSET AND LIABILITY MANAGEMENT AND MARKET RISK OUR RISK WHEN INTEREST RATES CHANGE. The rates of interest we earn on assets and pay on liabilities generally are established contractually for a period of time. Market interest rates change over time. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is our most significant market risk. HOW WE MEASURE OUR RISK OF INTEREST RATE CHANGES. As part of our attempt to manage our exposure to changes in interest rates and comply with applicable regulations, we monitor our interest rate risk. In monitoring interest rate risk, we continually analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities, and their sensitivity to actual or potential changes in market interest rates. In order to minimize the potential for adverse effects of material and prolonged increases in interest rates on our results of operations, we adopted asset and liability management policies to better match the maturities and repricing terms of our interest-earning assets and interest-bearing liabilities. Mutual Federal's board of directors sets and recommends asset and liability policies which are implemented by the asset and liability management committee. The asset and liability management committee is chaired by the chief financial officer and is comprised of members of our senior management. The purpose of the asset and liability management committee is to communicate, coordinate and control asset/liability management consistent with our business plan and board approved policies. This committee establishes and monitors the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objectives are to manage assets and funding sources consistent with liquidity, capital adequacy, growth, risk and profitability goals. The asset and liability management committee generally meets monthly to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to net present value of portfolio equity analysis and income simulations. At each meeting, the asset and liability management committee recommends appropriate strategy changes based on this review. The chief financial officer is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the board of directors, at least quarterly. 5 In order to manage our assets and liabilities and achieve the desired liquidity, credit quality, interest rate risk, profitability and capital targets, we have sought to: o originate and purchase adjustable rate mortgage loans and commercial business loans, o originate shorter-term consumer loans, o manage our deposits to establish stable deposit relationships, o acquire longer-term borrowings at fixed rates, when appropriate, to offset the negative impact of longer-term fixed rate loans in our loan portfolio, and o limit the percentage of fixed-rate loans in our portfolio. Depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the asset and liability management committee may increase our interest rate risk position somewhat in order to maintain our net interest margin. We intend to increase our emphasis on the origination of relatively short-term and/or adjustable rate loans. In addition, in an effort to maintain our limit on the percentage of fixed-rate loans, in 2001, we sold $58.4 million of fixed rate, one-to-four family mortgage loans in the secondary market. The asset and liability management committee regularly reviews interest rate risk by forecasting the impact of alternative interest rate environments on net interest income and market value of portfolio equity, which is defined as the net present value of an institution's existing assets, liabilities and offbalance sheet instruments, and evaluating such impacts against the maximum potential changes in net interest income and market value of portfolio equity that are authorized by our board of directors. The Office of Thrift Supervision provides Mutual Federal with the information presented in the following tables. The tables present the change in our net portfolio value at December 31, 2001 and 2000 that would occur upon an immediate and sustained change in market interest rates of 100 to 300 basis points as required by the Office of Thrift Supervision, and do not give any effect to actions that management might take to counteract that change. All changes in net portfolio value under all rate changes listed were within board of director approved guidelines. 6 DECEMBER 31, 2001 NET PORTFOLIO VALUE
NPV AS % OF PV OF ASSETS CHANGES ------------------------- IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) +300 bp 72,270 -31,165 -30% 9.92% -341 bp +200 bp 83,082 -20,353 -20% 11.16% -217 bp +100 bp 93,661 -9,774 -9% 12.32% -102 bp 0 bp 103,435 13.33% -100 bp 109,059 5,624 5% 13.85% +51 bp -200 bp n/m(1) n/m(1) n/m(1) n/m(1) n/m(1) -300 bp n/m(1) n/m(1) n/m(1) n/m(1) n/m(1)
(1) Not meaningful because some market rates would compute to a rate less than zero. DECEMBER 31, 2000 NET PORTFOLIO VALUE
NPV AS % OF PV OF ASSETS CHANGES ------------------------- IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE ------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) +300 bp 75,383 -29,360 -28% 10.47% -323 bp +200 bp 85,990 -18,753 -18% 11.69% -201 bp +100 bp 95,979 -8,764 -8% 12.79% -91 bp 0 bp 104,743 13.70% -100 bp 110,794 6,051 6% 14.28% +58 bp -200 bp 115,006 10,263 10% 14.63% +93 bp -300 bp 121,141 16,398 16% 15.18% +148 bp
The Office of Thrift Supervision uses certain assumptions in assessing the interest rate risk of savings associations. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market value of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the foregoing tables. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features, which restrict changes in interest rates on short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the tables. FINANCIAL CONDITION AT DECEMBER 31, 2001 COMPARED TO DECEMBER 31, 2000 GENERAL. Our total assets remained stable, decreasing $1.0 million during 2001 ending the year at $769.3 million compared to $770.3 million at December 31, 2000, primarily due to the sale of $58.4 million of one-to-four family real estate mortgage loans. Liabilities increased $19.2 million due to increased deposits and stockholders' equity decreased $20.2 million primarily due to the repurchase of common stock. 7 LOANS. Our net loan portfolio decreased $2.8 million from $639.4 million at December 31, 2000, to $636.6 million at December 31, 2001. Consumer loans increased $5.3 million or 3.4% from $156.9 million at December 31, 2000 to $162.2 million at December 31, 2001, despite the sale of our $1.9 million credit card portfolio in November. Most of the consumer loan growth came from auto loans, which increased $4.2 million or 14.7% from $28.9 million to $33.1 million and recreation vehicle loans, which increased $10.0 million or 28.7% from $34.7 million to $44.7 million. Commercial business loans increased $3.7 million or 14.1% from $26.4 million to $30.1 million at December 31, 2001. Real estate mortgage loans decreased $10.7 million, or 2.3% from $465.5 million to $454.8 million at December 31, 2001. Mortgage loans held for sale increased $7.6 million and mortgage loans sold during the period totaled $58.4 million, primarily to mitigate interest rate risk. ALLOWANCE FOR LOAN LOSS. The allowance for loan losses decreased to $5.4 million at December 31, 2001 from $6.5 million at December 31, 2000, a decrease of $1.1 million, or 16%. Net charge offs were $2.3 million during the year ended 2001 as compared to net charge offs of $1.0 million for 2000. This, along with a $1.3 million loan loss provision during 2001, resulted in the allowance for loan losses as a percentage of total loans decreasing to .85% at December 31, 2001 compared to 1.01% at December 31, 2000. The allowance for loan losses as a percentage of non-performing loans was 82.4% and 189.1% at December 31, 2001 and December 31, 2000, respectively. Non-performing loans were $6.6 million or 1.03% of total loans at December 31, 2001 compared to $3.4 million or .53% at December 31, 2000. The decrease in allowance for loan losses is due to the write down to fair value of several non-performing commercial real estate loans acquired in the merger of Marion Capital Holdings. SECURITIES. Investment securities amounted to $31.6 million at December 31, 2001 compared to $45.7 million at December 31, 2000, a 30.9% decrease. This decrease was primarily due to the shifting of funds from longer-term securities to short-term interest-bearing accounts and loans held for sale. LIABILITIES. Our total liabilities increased $19.2 million, or 3.0%, to $659.6 million at December 31, 2001 from $640.4 million at December 31, 2000. This increase was due primarily to an increase in deposits of $24.2 million. Borrowed funds decreased $5.4 million. STOCKHOLDERS' EQUITY. Stockholders' equity decreased $20.2 million from $129.9 million at December 31, 2000 to $109.7 million at December 31, 2001. The decrease was due primarily to the repurchase of 1,905,979 shares at a cost of $28.2 million and dividend payments of $2.3 million. These decreases were partially offset by net income of $8.1 million, Employee Stock Ownership Plan (ESOP) shares earned of $464,000, RRP shares earned of $1.4 million, and proceeds from the exercise of stock options of $54,000. Also, unrealized gain on securities available for sale increased $300,000. FINANCIAL CONDITION AT DECEMBER 31, 2000 COMPARED TO DECEMBER 31, 1999 GENERAL. Our total assets increased by $225.9 million, or 41.5%, to $770.4 million at December 31, 2000 from $544.5 million at December 31, 1999. The increase was mainly due to an increase in net loans of $196.6 million, or 44.4% and an increase in cash surrender value of life insurance of $12.2 million or 113.3%. These increases were funded primarily by an increase of $150.1 million in total deposits and $41.3 million in borrowed funds. Most of these increases resulted from the merger with Marion Capital Holdings, Inc., which was approved by our shareholders on December 8, 2000. LOANS. Our net loan portfolio increased from $442.8 million at December 31, 1999 to $639.4 million at December 31, 2000. The increase in the loan portfolio over this time period was due primarily to the merger with Marion Capital, which had a $163.7 million loan portfolio. The loan portfolio increased most in the one-to-four family category, from $286.6 million at December 31, 1999 to $388.9 million at December 31, 2000. All other loan categories increased from $163.2 million at December 31, 1999 to $259.9 million at December 31, 2000. 8 ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses increased to $6.5 million at December 31, 2000 from $3.7 million at December 31, 1999 an increase of $2.8 million or 75.7%. Net charge-offs were $1.0 million during the year ended 2000 as compared to net charge-offs of $532,000 for 1999. An additional $3.2 million allowance was acquired as a result of the merger with Marion Capital. This, along with a $685,000 loan loss provision during 2000, resulted in the allowance for loan losses as a percentage of total loans increasing to 1.01% at December 31, 2000 compared to .82% at December 31, 1999. The allowance for loan losses as a percentage of non-performing loans was 189.1% and 467.6% at December 31, 2000 and December 31, 1999, respectively. Non-performing loans were $3.4 million or .53% of total loans at December 31, 2000 compared to $781,000 or .17% at December 31, 1999. SECURITIES. Investment securities amounted to $42.0 million at December 31, 1999 and $45.7 million at December 31, 2000 or an 8.8% increase. LIABILITIES. Our total liabilities increased $196.6 million, or 43.0%, to $640.4 million at December 31, 2000 from $447.8 million at December 31, 1999. This increase was due primarily to an increase in deposits of $150.1 million and an increase in borrowed funds of $41.3 million. Deposits from Marion Capital at the merger date were $134.0 million and borrowed funds were $30.0 million. STOCKHOLDERS' EQUITY. Stockholders' equity increased $33.2 million from $96.7 million at December 31, 1999 to $129.9 million at December 31, 2000. The increase was primarily due to stock issued in the Marion Capital acquisition net of costs of $27.6 million and net income for 2000 of $6.2 million. These increases were partially offset by dividend payments of $1.5 million. 9 AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. No tax equivalent adjustments were made. All average balances are daily average balances. Non-accruing loans have been included in the table as loans carrying a zero yield.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands) Interest-Earning Assets: Interest-bearing deposits $6,210 $189 3.04% $1,003 $56 5.58% $3,664 $161 4.39% Trading account securities -- -- -- 186 9 4.84 1,134 67 5.91 Mortgage-backed securities: Available-for-sale 11,124 759 6.82 13,637 931 6.83 5,006 323 6.45 Investment securities: Available-for-sale (1) 18,413 1,184 6.43 18,530 1,243 6.71 8,294 470 5.67 Held-to-maturity 5,155 270 5.24 11,423 673 5.89 12,365 733 5.93 Loans 656,579 52,018 7.92 475,912 37,811 7.94 422,611 32,739 7.75 Stock in FHLB of Indianapolis 6,993 520 7.44 5,464 457 8.36 3,926 318 8.10 ----- ------ ------- ------ ------- ------ Total interest-earning assets (2) 704,474 54,940 7.80 526,155 41,180 7.83 457,000 34,811 7.62 ------ ------ ------ Non-interest earning assets, net of allowance for loan losses and unrealized gain/loss 65,438 43,583 40,162 ------ ------ ------ Total assets $769,912 $569,738 $497,162 ======== ======== ======== Interest-Bearing Liabilities Demand and NOW accounts $74,545 729 0.98 $56,288 516 0.92 $54,122 553 1.02 Savings deposits 49,468 921 1.86 39,842 845 2.12 42,709 853 2.00 Money market accounts 43,042 1,270 2.95 33,310 1,369 4.11 29,299 1,056 3.60 Certificate accounts 366,375 20,394 5.57 261,693 14,814 5.66 252,452 13,392 5.30 ------- ------ ------- ------ ------- ------ Total deposits 533,430 23,314 4.37 391,133 17,544 4.49 378,582 15,854 4.19 Borrowings 102,087 5,767 5.65 65,728 4,101 6.24 60,620 3,388 5.59 ------- ------ ------- ------ ------- ------ Total interest-bearing accounts 635,517 29,081 4.58 456,861 21,645 4.74 439,202 19,242 4.38 ------ ------ ------ Other liabilities 15,544 11,419 11,767 ------- ------- ------- Total liabilities 651,061 468,280 450,969 Stockholders' equity 118,851 101,458 46,193 ------- ------- ------- Total liabilities and stockholders' equity $769,912 $569,738 $497,162 ======== ======== ======== Net earning assets $68,957 $69,294 $17,798 ======= ======= ======= Net interest income $25,859 $19,535 $15,569 ======= ======= ======= Net interest rate spread 3.22% 3.09% 3.24% ==== ==== ==== Net yield on average interest-earning assets 3.67% 3.71% 3.41% ==== ==== ==== Average interest-earning assets to average interest-bearing liabilities 110.85% 115.17% 104.05% ====== ====== ======
---------------- (1) Average balances were calculated using amortized cost, which excludes FASB 115 valuation allowances. (2) Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves. 10 RATE/VOLUME ANALYSIS The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. For each category of interest earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume, which are changes in volume multiplied by the old rate, and (2) changes in rate, which are changes in rate multiplied by the old volume. Changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
YEAR ENDED DECEMBER 31, 2001 VS. 2000 2000 VS. 1999 --------------------------------- ---------------------------------- INCREASE INCREASE (DECREASE) (DECREASE) DUE TO TOTAL DUE TO TOTAL ------------------- INCREASE ----------------- INCREASE VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) ----------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Interest-earning assets: Interest-bearing deposits $ 169 $ (36) $ 133 $ (140) $ 35 $ (105) Trading account securities (9) -- (9) (48) (10) (58) Investment securities: Available-for-sale (174) (58) (232) 1,261 120 1,381 Held-to-maturity (335) (68) (403) (56) (4) (60) Loans 14,314 (106) 14,208 4,217 855 5,072 Stock in FHLB of Indianapolis 118 (55) 63 128 11 139 -------- ------- -------- -------- ------- ------- Total interest-earning assets $14,083 $ (323) 13,760 $ 5,362 $ 1,007 6,369 ======== ======= -------- ======== ======= ------- Interest-bearing liabilities: Savings deposits $ 188 $ (112) $ 76 $ (59) $ 51 $ (8) Money market accounts 343 (442) (99) 155 158 313 Demand and NOW accounts 177 36 213 21 (58) (37) Certificate accounts 5,831 (249) 5,580 502 919 1,422 Borrowings 2,085 (419) 1,666 299 414 713 -------- ------- -------- -------- ------- ------- Total interest-bearing liabilities $ 8,624 $(1,186) 7,436 $ 918 $ 1,484 2,403 ======== ======= -------- ======== ======= ------- Change in net interest income $ 6,324 $ 3,966 ======== =======
COMPARISON OF RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2001 AND 2000. GENERAL. Net income for the year ended December 31, 2001 increased $1.9 million to $8.1 million compared to $6.2 million for the year ended December 31, 2000. The increase in net income was primarily due to the merger with Marion Capital Holdings completed in December, 2000 and accounted for as a purchase. NET INTEREST INCOME. Interest income increased $13.7 million, or 33.4%, to $54.9 million for the year ended December 31, 2001 from $41.2 million for the year ended December 31, 2000. Interest expense increased $7.4 million, or 34.4%, from $21.6 million for the year ended December 31, 2000 to $29.0 million for the year ended December 31, 2001. As a result, net interest income for the year ended December 31, 2001 increased $6.3 million, or 32.4% compared to 2000. The increase in net interest income was due to the increase in the average balance of net earning assets related to the merger with Marion Capital. In addition, the average interest rate spread increased from 3.09% to 3.22%. 11 INTEREST INCOME. The increase in interest income during the year ended December 31, 2001 was due to an increase in the average balance of interest-earnings assets (primarily from the December, 2000 merger with Marion Capital Holdings). The average balance of the loan portfolio increased $180.7 million, or 38.0%, to $656.6 million for 2001, from $475.9 million for 2000, primarily due to the merger with Marion Capital Holdings. The average yield on our loan portfolio decreased slightly from 7.94% in 2000 to 7.92% in 2001, primarily due to lower market rates of interest. INTEREST EXPENSE. The increase in interest expense during the year ended December 31, 2001 was due primarily to increased average balances of borrowings and deposits. As a result of the merger with Marion Capital Holdings, average balances of borrowings and deposits increased from $456.9 million in 2000, to $635.5 million in 2001. The average rate paid on deposits and borrowed funds decreased from 4.74% in 2000 to 4.58% in 2001, primarily due to decreasing market rates throughout the year. PROVISION FOR LOAN LOSSES. For the year ended December 31, 2001, the provision for loan losses amounted to $1.3 million compared to $685,000 in 2000. The primary reason for this increase was an increase of non-accruing one-to-four family and commercial real estate loans. Non-accruing one-to-four family loans increased from $710,000 at December 31, 2000 to $2.9 million at December 31, 2001 as a result of the slowing economy, primarily in the Grant County market. Non-accruing commercial real estate loans increased from $1.5 million at December 31, 2000 to $2.9 million at December 31, 2001, due primarily to two nursing home loans becoming more than ninety days delinquent. At the present time it is management's opinion that these loans are sufficiently reserved and no additional allowance will be necessary. The 2001 provision and the allowance for loan losses were considered adequate based on size, condition and components of the loan portfolio, past history of loan losses, and current qualitative factors such as the local and national economy. OTHER INCOME. Other income for the year ended December 31, 2001 increased $2.5 million, or 68.8%, to $6.1 million for the year ended December 31, 2001 compared to $3.6 million for the year 2000. This improvement was primarily due to an increase of $555,000 in service fee income; $190,000 increase in commission income; $1.3 million gain on sale of loans; and a $587,000 increase in cash surrender value of life insurance. Most of these increases, with the exception of the gain on sale of loans, were due to the merger with Marion Capital Holdings. OTHER EXPENSES. Total operating expenses increased $6.4 million from $13.1 million for the year ended December 31, 2000 to $19.5 million for 2001. Salaries and employees benefits were $12.3 million for the year ended December 31, 2001 compared to $7.5 million for the 2000 period, an increase of $4.8 million, or 63.9%. The reasons for the increase in salaries and benefits included an increase in the number of full time equivalent employees resulting from the merger with Marion Capital Holdings, the grant of restricted stock awards under the Recognition and Retention Plan, and an increased incentive bonus due to increased profitability. All other expenses increased $1.6 million, or 28.5%, for the year ended December 31, 2001, compared to 2000. These increases were due primarily to the merger with Marion Capital Holdings. INCOME TAX EXPENSE. Income tax expense for the year ended December 31, 2001 was $3.1 million, the same as for the year ended December 31, 2000. During 2001, there was increased tax-exempt income and increased low-income housing tax credits related to the Marion Capital Holdings merger. The effective tax rate was 27.6% and 33.3% for 2001 and 2000, respectively. COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 GENERAL. Net income for the year ended December 31, 2000 increased $5.4 million to $6.2 million compared to $846,000 for the year ended December 31, 1999. The increase in net income was primarily due to the lack of nonrecurring charges in 2000 compared to a one-time nonrecurring $4.5 million contribution in 1999 to the Mutual Federal Savings Bank Charitable Foundation, Inc. made in connection with the stock conversion. 12 NET INTEREST INCOME. Net interest income increased $3.9 million, or 25%, to $19.5 million for 2000 from $15.6 million for 1999 reflecting a $6.4 million or 18.3% increase in interest income and a $2.4 million or 12.5% increase in interest expense. Our interest rate spread decreased to 3.09% for 2000 from 3.24% for 1999, primarily due to rising market interest rates. Offsetting the decrease in spread, the ratio of average interest earning assets to average interest bearing liabilities increased to 115.17% for 2000 from 104.05% for 1999. INTEREST INCOME. The increase in interest income during the year ended December 31, 2000 was due to an increase in the average balance of interest earning assets (primarily from December, 1999 stock conversion proceeds) and a higher yield. The average balance of the loan portfolio increased $53.3 million or 12.6% to $476 million for 2000 from $422.6 million for 1999 primarily due to increases in the consumer and commercial loan products due to strong demand. The average yield on our loan portfolio increased from 7.75% in 1999 to 7.94% in 2000 primarily due to higher market rates of interest in non-mortgage related products. INTEREST EXPENSE. The increase in interest expense during the year ended December 31, 2000 was primarily due to an increase in the average rate paid on deposits and borrowed funds from 4.38% in 1999 to 4.74% in 2000. Also, average balances of borrowings and deposits increased from $439.2 million in 1999 to $456.9 million in 2000. PROVISION FOR LOAN LOSSES. For the year ended December 31, 2000, the provision for loan losses amounted to $685,000 compared to a provision for loan losses in 1999 of $760,000. The 2000 provision and the allowance for loan losses were considered adequate based on size, condition and components of the loan portfolio, past history of loan losses and peer comparisons. OTHER INCOME. Other income amounted to $3.6 million and $2.9 million for the years ended December 31, 2000 and 1999, respectively. For the year 2000, service fee income was $2.1 million compared to $1.7 million for 1999 representing an increase of $342,000 or 19.8%. This increase was primarily due to higher fees collected as a result of increased volumes in checking account activity. Net gains on loan sales in 2000 were $144,000; there were no sales in 1999. OTHER EXPENSES. Total operating expenses increased to $13.1 million for 2000 compared to $12.1 million, exclusive of the $4.5 million contribution to the foundation, for the year 1999 representing an increase of $948,000 or 7.8%. This increase was primarily attributed to a $763,000 or 22.5% increase in data processing fees, advertising and promotion, ATM expenses and other expenses. These increases were due to normal growth and increased activity relating to delivery channels, such as more ATM's and an on-line transactional Internet web site. INCOME TAX EXPENSE. Income tax expense increased $3.0 million from 1999 to 2000. This variation in income tax expense is directly related to taxable income and the low income housing income tax credits earned during those years. The effective tax rate was 33.2% and 14.1% for 2000 and 1999, respectively. The effective rate increased in 2000 as compared to 1999 because the low-income housing income tax credits remained relatively constant while the level of income increased. LIQUIDITY AND COMMITMENTS Mutual Federal is required to maintain adequate levels of investments that qualify as liquid assets under Office of Thrift Supervision regulations to ensure the institution's safe and sound operations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, we have maintained liquid assets at levels above the minimum requirements imposed by Office of Thrift Supervision regulations and above levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to ensure that adequate liquidity is maintained. At December 31, 2001, our liquidity ratio, which is our liquid assets as a percentage of net withdrawable savings deposits and current borrowings, was 9.48%. 13 Our liquidity, represented by cash and cash equivalents, is a product of our operating, investing and financing activities. Our primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. In addition, we invest excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements. We also generate cash through borrowings. We utilize Federal Home Loan Bank advances to leverage our capital base and provide funds for our lending and investment activities, and to enhance our interest rate risk management. Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally invested in short-term investments such as overnight deposits or U.S. Agency securities. We use our sources of funds primarily to meet our ongoing commitments, to pay maturing certificates of deposit and savings withdrawals, to fund loan commitments and to maintain our portfolio of mortgage-backed securities and investment securities. At December 31, 2001, the total approved loan origination commitments outstanding amounted to $22.4 million. At the same date, the unadvanced portion of construction loans was $5.2 million. At December 31, 2001, unused lines of credit totaled $35.9 million and outstanding letters of credit totaled $7.3 million. As of December 31, 2001, certificates of deposit scheduled to mature in one year or less totaled $237.5 million, and investment and mortgage-backed securities scheduled to mature in one year or less totaled $3.0 million. Based on historical experience, management believes that a significant portion of maturing deposits will remain with us. We anticipate that we will continue to have sufficient funds, through deposits and borrowings, to meet our current commitments. CAPITAL Consistent with our goals to operate a sound and profitable financial organization, Mutual Federal actively strives to remain a "well capitalized" institution in accordance with regulatory standards. Total stockholders' equity of MUTUALFIRST Financial, Inc. was $109.7 million at December 31, 2001, or 14.3% of total assets on that date. As of December 31, 2001, Mutual Federal exceeded all capital requirements of the Office of Thrift Supervision, with regulatory capital ratios as follows: core capital 13.5%; Tier I risk-based capital, 19.6%; and total risk-based capital, 20.7%. The regulatory capital requirements to be considered well capitalized are 5.0%, 6.0% and 10.0%, respectively. IMPACT OF NEW ACCOUNTING STANDARDS ACCOUNTING FOR A BUSINESS COMBINATION. Statement of Financial Accounting Standards ("SFAS") No. 141 requires that all business combinations should be accounted for using the purchase method of accounting; use of the pooling method is prohibited. A business combination occurs when an enterprise acquires all or a portion of the net assets that constitutes a business or equity interests of one or more other enterprises and obtains control over the enterprise or enterprises. All two-party and multi-party business combinations, including "roll-up" and "put-together" transactions are included in the scope of this Statement. This Statement requires that goodwill be initially recognized as an asset in the financial statement and measured as the excess of the cost of an acquired entity over the net of the amounts assigned to identifiable assets acquired and liabilities assumed. In addition, SFAS No. 141 requires all other intangibles, such as core deposit intangibles for a financial institution, to be identified. 14 The provisions of Statement No. 141 are effective for any business combination that is initiated after June 30, 2001. ACCOUNTING FOR GOODWILL. Under the provisions of SFAS No. 142, goodwill should not be amortized but should be tested for impairment at the reporting unit level. Impairment test of goodwill should be done on an annual basis unless events or circumstances indicate impairment has occurred in the interim period. The annual impairment test can be performed at any time during the year as long as the measurement date is used consistently from year to year. Impairment testing is a two step process. The first step is a comparison of the fair value of a reporting unit to its carrying amount including goodwill. If the fair value of the reporting unit is greater than its carrying value, goodwill is not impaired and no further work is required. Companies should perform the first step of the impairment test on all goodwill within six months of initially applying the Statement. If the fair value is less, the second step should be performed. The second step is to compare the fair value of goodwill to its carrying amount. If the fair value of goodwill is less than its carrying value, then the goodwill is deemed impaired and a loss recognized. Any impairment loss recognized as a result of completing the transitional impairment test should be treated as a change in accounting principle and recognized in the first interim period financial statements. The provisions of Statement No. 142 would be effective for fiscal years beginning after December 15, 2001. Early adoption would be permitted for companies with a fiscal year beginning after March 15, 2001 provided that the first quarter financial statements have not been previously issued. In all cases, the Statement must be adopted as of the beginning of a fiscal year. Goodwill and intangible assets acquired in a transaction completed after June 30, 2001 but before this Statement is initially applied would be accounted for in accordance with the amortization and non-amortization provisions of the Statement. The useful economic life of previously recognized intangible assets should be reassessed upon adoption of the Statement, and remaining amortization periods should be adjusted accordingly. Intangible assets deemed to have an indefinite life would no longer be amortized. The Company will adopt these new accounting rules on January 1, 2002. The impact of Statements No. 141 and No. 142 is not expected to have a material impact on MUTUALFIRST'S financial conditions or results of operations. IMPACT OF INFLATION Our consolidated financial statements have been prepared in accordance with generally accepted accounting principles. The principles require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Our primary assets and liabilities are monetary in nature. As a result, interest rates affect our performance more than general levels of inflation. Interest rates, however, do not necessarily move in the same direction or with the same magnitude as the price of goods and services, since such prices are affected by inflation. In a period of rapidly rising interest rates, the liquidity and maturity structure of our assets and liabilities are critical to the maintenance of acceptance performance levels. The principal effect of inflation, as distinct from levels of interest rates, on earnings is in the area of non-interest expense. Expense items such as employee compensation, employee benefits and occupancy and equipment cost may increase because of inflation. Inflation also may increase the dollar value of the collateral securing loans that we have made. We are unable to determine the extent to which properties securing our loans have appreciated in dollar value due to inflation. 15 SELECTED QUARTERLY FINANCIAL INFORMATION The following table sets forth certain quarterly results for the years ended December 31, 2001 and 2000.
BASIC DILUTED PROVISION EARNINGS EARNINGS NET FOR PER PER QUARTER INTEREST INTEREST INTEREST LOAN NET COMMON COMMON ENDED INCOME EXPENSE INCOME LOSSES INCOME SHARE SHARE ----------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 2001 ---- March $ 14,057 $ 7,734 $ 6,323 $ 189 $ 1,739 $ 0.23 $ 0.22 June 14,112 7,514 6,598 296 2,164 0.30 0.30 September 13,667 7,173 6,494 607 2,116 0.31 0.31 December 13,104 6,660 6,444 190 2,061 0.33 0.33 ----------------------------------------------------------------- Total $ 54,940 $ 29,081 $ 25,859 $ 1,282 $ 8,080 1.16 1.16 ================================================================= 2000 ---- March $ 9,538 $ 4,738 $ 4,800 $ 172 $ 1,507 $ 0.28 $ 0.28 June 9,883 4,984 4,899 171 1,569 0.29 0.29 September 10,270 5,586 4,684 171 1,462 0.27 0.27 December 11,489 6,337 5,152 171 1,697 0.28 0.28 ----------------------------------------------------------------- Total $ 41,180 $ 21,645 $ 19,535 $ 685 $ 6,235 1.12 1.12 =================================================================
16 INDEPENDENT ACCOUNTANTS' REPORT Board of Directors MUTUALFIRST Financial, Inc. Muncie, Indiana We have audited the accompanying consolidated balance sheets of MUTUALFIRST Financial, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements described above present fairly, in all material respects, the consolidated financial position of MUTUALFIRST Financial, Inc. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. BKD, LLP Indianapolis, Indiana February 14, 2002 17 MUTUALFIRST FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000
2001 2000 --------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks $ 24,140,688 $ 19,913,870 Interest-bearing demand deposits 6,416,985 1,132,187 --------------------------------- Cash and cash equivalents 30,557,673 21,046,057 Investment securities Available for sale 31,580,095 35,141,744 Held to maturity (fair value of $10,413,000) -- 10,539,129 --------------------------------- Total investment securities 31,580,095 45,680,873 Loans held for sale 11,559,158 3,913,328 Loans, net of allowance for loan losses of $5,449,292 and $6,472,430 636,635,126 639,362,186 Premises and equipment 8,674,152 9,042,462 Federal Home Loan Bank stock 6,993,400 6,993,400 Investment in limited partnerships 5,677,060 6,437,467 Deferred income tax benefit 4,553,975 5,407,532 Cash surrender value of life insurance 24,231,091 23,055,091 Other assets 8,866,143 9,431,206 --------------------------------- Total assets $ 769,327,873 $ 770,369,602 ================================= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Deposits Noninterest-bearing $ 23,433,570 $ 24,485,387 Interest-bearing 515,444,601 490,224,150 --------------------------------- Total deposits 538,878,171 514,709,537 Federal Home Loan Bank advances 107,484,586 112,542,194 Notes payable 3,258,677 3,639,751 Other liabilities 9,962,261 9,536,728 --------------------------------- Total liabilities 659,583,695 640,428,210 --------------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.01 par value Authorized and unissued - 5,000,000 shares Common stock, $.01 par value Authorized - 20,000,000 shares Issued and outstanding - 6,693,841 and 8,379,447 shares 66,938 83,794 Additional paid-in capital 59,575,884 84,553,285 Retained earnings 55,195,694 49,380,571 Accumulated other comprehensive income 356,009 55,528 Unearned employee stock ownership plan shares (3,813,946) (4,131,786) Unearned recognition and retention plan shares (1,636,401) -- --------------------------------- Total stockholders' equity 109,744,178 129,941,392 --------------------------------- Total liabilities and stockholders' equity $ 769,327,873 $ 770,369,602 =================================
18 MUTUALFIRST FINANCIAL, INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999 ------------------------------------------------------------------------------------------------------------ INTEREST AND DIVIDEND INCOME Loans receivable $52,018,175 $ 37,810,620 $32,739,166 Trading account securities -- 8,192 66,535 Investment securities 2,212,568 2,847,684 1,526,993 Federal Home Loan Bank stock 519,859 457,271 317,938 Deposits with financial institutions 189,272 56,116 160,812 ---------------------------------------------- Total interest and dividend income 54,939,874 41,179,883 34,811,444 ---------------------------------------------- INTEREST EXPENSE Deposits 23,314,477 17,543,506 15,854,093 Federal Home Loan Bank advances 5,719,922 4,095,843 3,350,567 Other interest expense 46,980 5,497 37,598 ---------------------------------------------- Total interest expense 29,081,379 21,644,846 19,242,258 ---------------------------------------------- NET INTEREST INCOME 25,858,495 19,535,037 15,569,186 Provision for loan losses 1,281,648 685,000 760,000 ---------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 24,576,847 18,850,037 14,809,186 ---------------------------------------------- OTHER INCOME Service fee income 2,625,649 2,070,326 1,728,487 Net realized gains on sales of available-for-sale securities 46,241 -- 32,326 Net trading assets profit (loss) 25,116 (189,741) Commissions 750,524 560,831 486,706 Net gains sales of loans and servicing 1,304,077 143,791 -- Increase in cash surrender value of life insurance 1,176,000 589,389 490,957 Other income 199,300 226,198 303,115 ---------------------------------------------- Total other income 6,101,791 3,615,651 2,851,850 ---------------------------------------------- OTHER EXPENSES Salaries and employee benefits 12,288,117 7,496,211 7,235,933 Net occupancy expenses 973,568 692,132 655,494 Equipment expenses 906,636 782,116 829,058 Data processing fees 780,360 559,631 472,621 Advertising and promotion 516,487 462,230 412,604 Automated teller machine expense 524,886 457,356 228,162 Charitable contributions -- 3,800 4,569,937 Other expenses 3,529,753 2,671,140 2,272,841 ---------------------------------------------- Total other expenses 19,519,807 13,124,616 16,676,650 ---------------------------------------------- INCOME BEFORE INCOME TAX 11,158,831 9,341,072 984,386 Income tax expense 3,078,700 3,105,850 138,004 ---------------------------------------------- NET INCOME $ 8,080,131 $ 6,235,222 $ 846,382 ============================================== EARNINGS PER SHARE Basic $ 1.16 $ 1.12 -- Diluted 1.16 1.12 --
19 MUTUALFIRST FINANCIAL, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
COMMON STOCK ADDITIONAL SHARES PAID-IN COMPREHENSIVE RETAINED OUTSTANDING AMOUNT CAPITAL INCOME EARNINGS ----------------------------------------------------------------------------------------------------------------------- BALANCES, JANUARY 1, 1999 $43,801,385 Comprehensive income Net income $ 846,382 846,382 Other comprehensive loss, net of tax Unrealized losses on securities, net of reclassification adjustment (328,458) ---------- Comprehensive income $ 517,924 ========== Stock issued in conversion, net of costs 5,595,780 $55,958 $54,510,552 Stock contributed to charitable foundation 223,831 2,238 2,236,072 Contribution of unearned ESOP shares ESOP shares earned (6,434) ------------------------------------- ------------ BALANCES, DECEMBER 31, 1999 5,819,611 58,196 56,740,190 44,647,767 Comprehensive income Net income $6,235,222 6,235,222 Other comprehensive income, net of tax Unrealized gains on securities 339,575 ---------- Comprehensive income $6,574,797 ========== Cash dividends ($.28 per share) (1,502,418) Exercise of stock options 18,774 188 203,886 Stock issued in acquisition, net of costs 2,541,062 25,410 27,567,304 ESOP shares earned 41,905 ------------------------------------- ------------ BALANCES, DECEMBER 31, 2000 8,379,447 83,794 84,553,285 49,380,571 Comprehensive income Net income $8,080,131 8,080,131 Other comprehensive income, net of tax Unrealized gains on securities 300,481 ---------- Comprehensive income $8,380,612 ========== Cash dividends ($.32 per share) (2,265,008) Exercise of stock options 11,373 114 53,836 Stock repurchased (1,905,979) (19,060) (28,205,313) RRP shares granted 209,000 2,090 3,028,410 RRP shares earned ESOP shares earned 145,666 ------------------------------------- ------------ BALANCES, DECEMBER 31, 2001 6,693,841 $66,938 $59,575,884 $55,195,694 ===================================== ============
[WIDE TABLE CONTINUED ON FOLLOWING PAGE] [WIDE TABLE CONTINUED FROM PREVIOUS PAGE]
ACCUMULATED OTHER COMPREHENSIVE UNEARNED UNEARNED INCOME ESOP RRP (LOSS) SHARES SHARES TOTAL -------------------------------------------------------------------------------------------------------- BALANCES, JANUARY 1, 1999 $ 44,411 $43,845,796 Comprehensive income Net income 846,382 Other comprehensive loss, net of tax Unrealized losses on securities, net of reclassification adjustment (328,458) (328,458) Comprehensive income Stock issued in conversion, net of costs 54,566,510 Stock contributed to charitable foundation 2,238,310 Contribution of unearned ESOP shares $(4,655,680) (4,655,680) ESOP shares earned 205,894 199,460 ------------------------------------------------------- BALANCES, DECEMBER 31, 1999 (284,047) (4,449,786) 96,712,320 Comprehensive income Net income 6,235,222 Other comprehensive income, net of tax Unrealized gains on securities 339,575 339,575 Comprehensive income Cash dividends ($.28 per share) (1,502,418) Exercise of stock options 204,074 Stock issued in acquisition, net of costs 27,592,714 ESOP shares earned 318,000 359,905 ------------------------------------------------------- BALANCES, DECEMBER 31, 2000 55,528 (4,131,786) 129,941,392 Comprehensive income Net income 8,080,131 Other comprehensive income, net of tax Unrealized gains on securities 300,481 300,481 Comprehensive income Cash dividends ($.32 per share) (2,265,008) Exercise of stock options 53,950 Stock repurchased (28,224,373) RRP shares granted $(3,030,500) RRP shares earned 1,394,099 1,394,099 ESOP shares earned 317,840 463,506 ------------------------------------------------------- BALANCES, DECEMBER 31, 2001 $ 356,009 $(3,813,946) $(1,636,401) $109,744,178 =======================================================
20 MUTUALFIRST FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 --------------------------------------------------------------------------------
2001 2000 1999 OPERATING ACTIVITIES Net income $ 8,080,131 $ 6,235,222 $ 846,382 Items not requiring cash Provision for loan losses 1,281,648 685,000 760,000 Common stock contributed to charitable foundation 2,238,310 ESOP shares earned 463,506 359,905 199,460 RRP shares earned 1,394,099 -- -- Depreciation and amortization 3,336,680 2,416,172 2,174,208 Deferred income tax 650,457 1,324,430 (1,418,864) Loans originated for sale (66,040,391) (11,779,434) -- Proceeds from sales on loans held for sale 59,698,638 8,009,898 -- Gains on sales of loans held for sale (1,304,077) (65,130) -- Change in Trading account securities -- 1,234,884 (1,234,884) Interest receivable 616,615 (916,078) (466,407) Other assets 534,165 (119,882) 573,417 Interest payable (12,512) (896,500) (174,491) Other liabilities 426,810 (1,510,608) 1,246,392 Cash surrender value of life insurance (1,176,000) (589,389) (490,957) Other adjustments 1,325,092 398,881 257,776 ---------------------------------------------- Net cash provided by operating activities 9,274,861 4,787,371 4,510,342 ---------------------------------------------- INVESTING ACTIVITIES Purchases of securities available for sale (11,517,408) (3,489,519) (25,866,267) Proceeds from maturities and paydowns of securities available for sale 7,331,030 2,186,922 1,711,883 Proceeds from sales of securities available for sale 10,261,210 -- 8,252,785 Purchases of securities held to maturity -- -- (8,463,897) Proceeds from maturities and paydowns of securities held to maturity 7,110,618 1,893,239 7,021,088 Proceeds from sales of securities held to maturity 1,499,928 -- -- Net change in loans (1,992,175) (36,317,394) (47,744,581) Purchases of premises and equipment (802,172) (1,442,449) (874,377) Proceeds from real estate owned sales 184,606 1,822,824 266,798 Purchase of FHLB of Indianapolis stock -- (1,726,100) Cash received in acquisition, net -- 6,362,718 -- Other investing activities (11,988) (758,940) (1,023,065) ---------------------------------------------- Net cash provided by (used in) investing activities 12,063,649 (29,742,599) (68,445,733) ---------------------------------------------- FINANCING ACTIVITIES Net change in Noninterest-bearing, interest-bearing demand and savings deposits 11,977,689 (4,841,526) 1,275,554 Certificates of deposits 12,190,945 20,938,838 (2,670,565) Securities sold under repurchase agreements (840,000) 840,000 Repayment of note payable (443,824) (61,358) (61,357) Proceeds from FHLB advances 192,200,000 282,000,000 157,000,000 Repayment of FHLB advances (197,327,508) (269,855,188) (135,342,923) Net change in advances by borrowers for taxes and insurance 11,235 (24,268) 28,881 Proceeds from sale of common stock, net of costs -- -- 49,910,830 Stock repurchased (28,224,373) -- -- Proceeds from stock options exercised 53,950 204,074 -- Cash dividends (2,265,008) (1,502,418) -- ---------------------------------------------- Net cash provided by (used in) financing activities (11,826,894) 26,018,154 70,980,420 ---------------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS 9,511,616 1,062,926 7,045,029 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 21,046,057 19,983,131 12,938,102 ---------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 30,557,673 $ 21,046,057 $ 19,983,131 ============================================== ADDITIONAL CASH FLOWS INFORMATION Interest paid $ 29,093,891 $ 22,425,869 $ 19,416,749 Income tax paid 1,505,000 2,042,000 1,716,402 Transfers from loans to foreclosed real estate 684,649 1,307,005 971,983 Loans transferred to loans held for sale -- 7,866,107 -- Mortgage servicing rights capitalized 581,773 78,661 -- Common stock issued to leveraged ESOP -- -- 4,655,680 Fair value of net assets in acquisition -- 28,013,809 --
21 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of MUTUALFIRST Financial, Inc. (Company) and its wholly owned subsidiary, Mutual Federal Savings Bank (Bank) and the Bank's wholly owned subsidiaries, First MFSB Corporation and Third MFSB Corporation, conform to accounting principles generally accepted in the United States of America and reporting practices followed by the thrift industry. The more significant of the policies are described below. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company is a thrift holding company whose principal activity is the ownership of the Bank. The Bank operates under a federal thrift charter and provides full banking services. As a federally chartered thrift, the Bank is subject to regulation by the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation. The Bank generates mortgage, consumer and commercial loans and receives deposits from customers located primarily in central Indiana. The Bank's loans are generally secured by specific items of collateral including real property, consumer assets and business assets. First MFSB sells various insurance products and Third MFSB offers tax-deferred annuities and long-term health care and life insurance products. CONSOLIDATION - The consolidated financial statements include the accounts of the Company and the Bank after elimination of all material intercompany transactions. INVESTMENT SECURITIES - Debt securities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. Debt securities not classified as held to maturity and marketable equity securities are classified as available for sale. Securities available for sale are carried at fair value with unrealized gains and losses reported separately in accumulated other comprehensive income, net of tax. Amortization of premiums and accretion of discounts are recorded using the interest method as interest income from securities. Realized gains and losses are recorded as net security gains (losses). Gains and losses on sales of securities are determined on the specific-identification method. LOANS HELD FOR SALE are carried at the lower of aggregate cost or market. Market is determined using the aggregate method. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income based on the difference between estimated sales proceeds and aggregate cost. LOANS are carried at the principal amount outstanding. A loan is impaired when, based on current information or events, it is probable that the Company will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with insignificant delays not exceeding 90 days outstanding are not considered impaired. Certain nonaccrual and substantially delinquent loans may be considered to be impaired. The Company considers its investment in one-to-four family residential loans and consumer loans to be homogeneous and therefore excluded from separate 22 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) identification for evaluation of impairment. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired and nonaccrual loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible. Interest income is subsequently recognized only to the extent cash payments are received. Certain loan fees and direct costs are being deferred and amortized as an adjustment of yield on the loans over the contractual maturity of the loans. ALLOWANCE FOR LOAN LOSSES is maintained to absorb loan losses based on management's continuing review and evaluation of the loan portfolio and its judgment as to the impact of economic conditions on the portfolio. The evaluation by management includes consideration of past loss experience, changes in the composition of the portfolio, the current condition and amount of loans outstanding, and the probability of collecting all amounts due. Impaired loans are measured by the present value of expected future cash flows, or the fair value of the collateral of the loan, if collateral dependent. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. Management believes that as of December 31, 2001, the allowance for loan losses is adequate based on information currently available. A worsening or protracted economic decline in the areas within which the Bank operates would increase the likelihood of additional losses due to credit and market risks and could create the need for additional loss reserves. PREMISES AND EQUIPMENT are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based principally on the estimated useful lives of the assets which range from 3 to 50 years. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations. FEDERAL HOME LOAN BANK STOCK is a required investment for institutions that are members of the Federal Home Loan Bank system. The required investment in the common stock is based on a predetermined formula and is carried at cost. INVESTMENT IN LIMITED PARTNERSHIPS is recorded primarily on the equity method of accounting. Losses due to impairment are recorded when it is determined that the investment no longer has the ability to recover its carrying amount. The benefits of low income housing tax credits associated with the investment are accrued when earned. INCOME TAX in the consolidated statements of income includes deferred income tax provisions or benefits for all significant temporary differences in recognizing income and expenses for financial reporting and income tax purposes. The Company files consolidated income tax returns with the Bank. EARNINGS PER SHARE is computed based upon the weighted-average common and common equivalent shares outstanding during the periods subsequent to the Bank's conversion to a stock savings bank on December 29, 1999. Net income per share for the periods prior to the conversion is not meaningful. Unearned ESOP shares have been excluded from the weighted-average shares outstanding calculation. RECLASSIFICATIONS of certain amounts in the 2000 and 1999 consolidated financial statements have been made to conform to the 2001 presentation. 23 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) NOTE 2: CONVERSION On December 29, 1999, the Bank completed the conversion from a federally chartered mutual institution to a federally chartered stock savings bank and the formation of the Company as the holding company of the Bank. As part of the conversion, the Company issued 5,595,780 shares of common stock at $10 per share. Net proceeds of the Company's stock issuance, after costs of $1,391,000 and excluding the shares issued for the ESOP, were $49,911,000, of which $27,284,000 was used to acquire 100% of the stock and ownership of the Bank. The transaction was accounted for at historical cost in a manner similar to that utilized in a pooling of interests. In connection with the Conversion, the Company contributed 223,831 shares of common stock and cash of $2,238,000 to Mutual Federal Savings Bank Charitable Foundation, Inc. (Foundation), a charitable foundation dedicated to community development activities in the Company's market areas. This resulted in the recognition of an additional $4,477,000 charitable contribution expense for the year ended December 31, 1999. NOTE 3: ACQUISITION On December 8, 2000, the Company acquired Marion Capital Holdings, Inc. (Marion), the holding company of First Federal Savings Bank of Marion (First Federal), a federally chartered savings bank. Marion was merged into the Company and First Federal was merged into the Bank. First Marion Service Corporation, a wholly owned subsidiary of Marion, was dissolved. Shareholders of Marion received 1.862 shares of the Company's common stock for each share of Marion common stock. The Company issued 2,541,062 shares of its common stock at a cost of $27,593,000, net of registration costs of $211,000. The combination was accounted for under the purchase method of accounting, and accordingly, the net assets were recorded at their estimated fair values at date of acquisition. Fair value adjustments on the assets and liabilities purchased are being amortized over the estimated lives of the related assets and liabilities. The excess of the estimated fair value of the underlying net assets over the purchase price was allocated as a reduction in the carrying value of premises and equipment and investments in limited partnerships acquired as part of the acquisition. Marion's results of operations and financial position were included in the Company's consolidated financial statements beginning December 9, 2000. The following pro forma information discloses the results of operations as though the merger had taken place at the beginning of each year. 2000 1999 -------------------------------------------------------------------------------- Net Interest Income $22,338 $22,634 =================== Net Income $ 7,408 $ 3,577 =================== Combined Net Income per Share - basic and diluted $ .89 N/A 24 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) NOTE 4: RESTRICTION ON CASH The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank. The reserve required at December 31, 2001, was $6,781,000. NOTE 5: INVESTMENT SECURITIES
2001 GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------------------------------------------------------------------------------------------------ Available for sale Mortgage-backed securities $ 5,613 $ 157 $ (2) $ 5,768 Collateralized mortgage obligations 4,867 111 (24) 4,954 Federal agencies 2,940 67 (2) 3,005 Corporate obligations 7,238 311 -- 7,549 Marketable equity securities 10,179 -- (25) 10,154 Municipal obligation 150 -- -- 150 -------------------------------------------------------- Total investment securities $ 30,987 $ 646 $ (53) $ 31,580 ======================================================== 2000 GROSS GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------------------------------------------------------------------------------------------------ Available for sale Mortgage-backed securities $ 7,934 $ 70 $ (25) $ 7,979 Collateralized mortgage obligations 4,529 55 -- 4,584 Federal agencies 4,364 56 -- 4,420 Corporate obligations 10,300 105 -- 10,405 Marketable equity securities 7,925 (171) 7,754 -------------------------------------------------------- Total available for sale 35,052 286 (196) 35,142 -------------------------------------------------------- Held to maturity Federal agencies 9,400 4 (130) 9,274 Corporate obligations 989 -- -- 989 Municipal obligation 150 -- -- 150 -------------------------------------------------------- Total held to maturity 10,539 4 (130) 10,413 -------------------------------------------------------- Total investment securities $ 45,591 $ 290 $ (326) $ 45,555 ========================================================
25 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) Marketable equity securities consist of shares in mutual funds which invest in government obligations and mortgage-backed securities. The amortized cost and fair value of securities available for sale at December 31, 2001, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. 2001 AMORTIZED FAIR COST VALUE ---------------------------------------------------------------------- Within one year $ 2,999 $ 3,027 One to five years 6,398 6,715 Five to ten years 476 509 After ten years 150 150 ------------------- 10,023 10,401 Mortgage-backed securities 5,613 5,768 Collateralized mortgage obligations 4,867 4,954 Small Business Administration 305 303 Marketable equity securities 10,179 10,154 ------------------- Totals $30,987 $31,580 =================== Securities with a carrying value of $5,049,000 and $29,974,000 were pledged at December 31, 2001 and 2000 to secure FHLB advances. Proceeds from sales of securities available for sale during 2001 and 2000 were $10,261,000 and $8,253,000. Gross gains of $93,000 and $79,000 and gross losses of $69,000 and $47,000 were recognized on those sales in 2001 and 2000. Proceeds from sales of securities held to maturity during 2001 were $1,500,000. Gross gains of $28,000 were realized on those sales in 2001. Gross losses of $6,000 were recognized on those sales in 2001. The remaining balance of held-to-maturity securities totaling $2,290,000 was reclassified as available for sale. There were no trading securities at December 31, 2001 or 2000. Unrealized holding losses of $212,000 were included in earnings for 1999. 26 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) NOTE 6: LOANS AND ALLOWANCE 2001 2000 ------------------------------------------------------------------------------ Loans Real estate loans One-to-four family $ 376,772 $ 388,919 Multi family 10,059 9,787 Commercial 51,503 53,197 Construction and development 16,438 13,591 ------------------------ 454,772 465,494 ------------------------ Consumer loans Auto 33,159 28,909 Home equity 18,365 17,428 Home improvement 19,782 23,304 Mobile home 7,910 9,865 Recreational vehicles 44,700 34,744 Boats 33,904 35,180 Other 4,411 7,508 ------------------------ 162,231 156,938 Commercial business loans 30,092 26,375 ------------------------ 647,095 648,807 Undisbursed loans in process (7,669) (5,247) Unamortized deferred loan fees and costs, net 2,658 2,274 Allowance for loan losses (5,449) (6,472) ------------------------ Total loans $ 636,635 $ 639,362 ======================== 27 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data)
2001 2000 1999 ---------------------------------------------------------------------------------------- Allowance for loan losses Balances, January 1 $ 6,472 $ 3,652 $ 3,424 Allowance acquired in acquisition -- 3,172 -- Provision for losses 1,282 685 760 Recoveries on loans 61 57 119 Loans charged off (2,366) (1,094) (651) --------------------------------- Balances, December 31 $ 5,449 $ 6,472 $ 3,652 =================================
Information on impaired loans is summarized below
2001 2000 ---------------------------------------------------------------------------------------- Impaired loans with an allowance $ 2,690 $ 1,839 ==================== Allowance for impaired loans included in the Company's allowance for loan losses $ 404 $ 990 ====================
2001 2000 1999 ---------------------------------------------------------------------------------------- Average balance of impaired loans $ 3,642 $ 141 $ 429 Interest income recognized on impaired loans 114 -- 9 Cash-basis interest included above 23 -- 9
NOTE 7: PREMISES AND EQUIPMENT
2001 2000 ---------------------------------------------------------------------------------------- Cost Land $ 2,285 $ 2,486 Buildings and land improvements 8,981 8,741 Equipment 6,525 5,995 -------------------- Total cost 17,791 17,222 Accumulated depreciation and amortization (9,117) (8,180) -------------------- Net $ 8,674 $ 9,042 ====================
28 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) NOTE 8: INVESTMENT IN LIMITED PARTNERSHIPS 2001 2000 -------------------------------------------------------------------------------- Pedcor Investments 1987-II (99.00 percent ownership) $ 748 $ 748 Pedcor Investments 1988-V (98.97 percent ownership) 472 511 Pedcor Investments 1990-XI (19.79 percent ownership) 72 84 Pedcor Investments 1990-XIII (99.00 percent ownership) 698 708 Pedcor Investments 1997-XXVIII (99.00 percent ownership) 3,320 3,707 ----------------- Pedcor Investments 1997-XXIX (99.00 percent ownership) 367 679 ================= The limited partnerships build, own and operate apartment complexes. The Company records its equity in the net income or loss of the Pedcor Investments 1987-II, 1988-V, 1990-XIII, 1997-XXVIII and 1997-XXIX based on the Company's interest in the partnerships. The Company has recorded its investment in Pedcor Investments 1990-XI, which represents less than a 20 per cent ownership, at amortized cost and records income when distributions are received. The Company recorded losses from these limited partnerships of $249,000, $210,000 and $12,000 for 2001, 2000 and 1999. In addition, the Company has recorded the benefit of low income housing credits of $817,000, $339,000 and $262,000 for 2001, 2000 and 1999. Combined financial statements for the limited partnerships recorded under the equity method of accounting are as follows: 2001 2000 ----------------------------------------------------------------------------- Combined balance sheets condensed Assets Cash $ 192 $ 256 Land and property 30,306 31,042 Other assets 1,402 1,136 ---------------------- Total assets $ 31,900 $ 32,434 ====================== Liabilities Notes payable $ 29,525 $ 30,061 Other liabilities 1,370 884 ---------------------- Total liabilities 30,895 30,945 ====================== Partners' equity (deficit) General partners (3,285) (3,076) Limited partners 4,290 4,565 ---------------------- Total partners' equity 1,005 1,489 ---------------------- Total liabilities and partners' equity $ 31,900 $ 32,434 ====================== 29 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) 2001 2000 1999 -------------------------------------------------------------------------------- Combined condensed statements of operations Total revenue $ 3,567 $ 3,743 $ 2,497 Total expenses 4,124 4,353 2,499 --------------------------------- Net loss $ (557) $ (610) $ (2) ================================= NOTE 9: DEPOSITS 2001 2000 -------------------------------------------------------------------------------- Noninterest-bearing demand $ 23,434 $ 24,485 Interest-bearing demand 60,013 52,497 Passbook 49,702 48,189 Money market savings 48,110 43,898 Certificates and other time deposits of $100,000 or more 83,126 66,916 Other certificates 274,493 278,725 --------------------- Total deposits $538,878 $514,710 ===================== Certificates including other time deposits of $100,000 or more maturing in years ending December 31: 2002 $237,540 2003 53,637 2004 12,720 2005 46,853 2006 6,869 -------- $357,619 ======== NOTE 10: FEDERAL HOME LOAN BANK ADVANCES MATURITIES YEAR ENDING DECEMBER 31 AMOUNT -------------------------------------------------------------------------------- 2002 $ 23,361 2003 25,061 2004 18,304 2005 8,381 2006 4,902 Thereafter 27,476 -------- $107,485 ======== 30 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) The terms of a security agreement with the FHLB require the Bank to pledge as collateral for advances and outstanding letters of credit both qualifying first mortgage loans and investment securities in an amount equal to at least 170 percent of these advances and letters of credit. Advances are subject to restrictions or penalties in the event of prepayment. NOTE 11: NOTES PAYABLE The Bank has a noninterest-bearing, unsecured term note payable to Pedcor Investments 1997-XXVIII, L.P. of $1,646,000 and $1,707,000 at December 31, 2001 and 2000 payable in semiannual installments through January 1, 2010. At December 31, 2001 and 2000, the Bank was obligated under an irrevocable direct pay letter of credit for the benefit of a third party in the amount of $1,254,000 relating to this note and the financing for an apartment project by Pedcor Investments 1997-XXVIII L.P. The Bank also has a noninterest-bearing, unsecured term note payable to Pedcor Investments 1997-XXIX, LP. The note, which is payable in annual installments through August 15, 2008, had a balance of $1,613,000 and 1,933,000 at December 31, 2001 and 2000. MATURITIES YEAR ENDING DECEMBER 31 -------------------------------------------------------------------------------- 2002 $ 360 2003 358 2004 352 2005 349 2006 345 Thereafter 1,495 ------ $3,259 ====== NOTE 12: LOAN SERVICING Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans consist of the following: 2001 2000 1999 -------------------------------------------------------------------------------- Mortgage loan portfolio serviced for Freddie Mac $ 82,629 $40,585 $22,128 Fannie Mae 4,924 8,467 9,977 Other investors 12,993 17,559 311 -------------------------------- $100,546 $66,611 $32,416 ================================ The aggregate fair value of capitalized mortgage servicing rights at December 31, 2001, 2000 and 1999 is based on comparable market values and expected cash flows, with impairment assessed based on portfolio characteristics including product type, investor type, and interest rates. 31 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) No valuation allowance was necessary at December 31, 2001, 2000 and 1999.
2001 2000 1999 ------------------------------------------------------------------------------------- Mortgage Servicing Rights Balances, January 1 $ 428 $ 279 $ 340 Servicing rights acquired -- 133 -- Servicing rights capitalized 572 79 -- Amortization of servicing rights (121) (63) (61) ----------------------------------- Balances, December 31 $ 879 $ 428 $ 279 ===================================
NOTE 13: INCOME TAX
2001 2000 1999 ------------------------------------------------------------------------------------- Income tax expense Currently payable Federal $ 1,804 $ 1,669 $ 1,088 State 628 113 469 Deferred Federal 552 864 (1,408) State 94 460 (11) ----------------------------------- Total income tax expense $ 3,078 $ 3,106 $ 138 =================================== Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $ 3,794 $ 3,176 $ 335 Effect of state income taxes 477 378 302 Low income housing credits (817) (339) (262) Tax-exempt income (430) (217) (167) Other 54 108 (70) ----------------------------------- Actual tax expense $ 3,078 $ 3,106 $ 138 =================================== Effective tax rate 27.6% 33.3% 14.0% ===================================
32 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) The components of the deferred asset are as follows: The components of the deferred asset are as follows: 2001 2000 -------------------------------------------------------------------------------- ASSETS Allowance for loan losses $ 2,144 $ 2,319 Deferred compensation 1,949 1,830 Charitable contribution carryover 857 1,141 Depreciation and amortization 361 261 Business tax and AMT credit carryovers 861 832 Investments in limited partnerships 435 811 Other 328 335 --------------------- Total assets 6,935 7,529 --------------------- LIABILITIES FHLB stock (210) (210) State income tax (210) (241) Loan fees (1,358) (1,462) Unrealized gain on securities available for sale (237) (29) Mortgage servicing rights (366) (179) --------------------- Total liabilities (2,381) (2,121) --------------------- $ 4,554 $ 5,408 ===================== The Company has a charitable contribution carryover of $2,521,000 that expires in 2005 and unused business income tax credits of $688,000 expiring in 2019 through 2021. In addition, the Company has an AMT credit carryover of $173,000 with an unlimited carryover period. Income tax expense attributable to securities gains was $12,500 and $12,800 for 2001 and 2000. Retained earnings include approximately $14,743,000 for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amounts was approximately $5,013,000. 33 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) NOTE 14: OTHER COMPREHENSIVE INCOME
2001 BEFORE-TAX TAX NET-OF-TAX AMOUNT EXPENSE AMOUNT ---------------------------------------------------------------------------------------- Unrealized gains on securities Unrealized holding gains arising during the year $ 549 $(216) $ 333 Less: reclassification adjustment for gains realized in net income 46 (13) 33 --------------------------- Net unrealized gains $ 503 $(203) $ 300 =========================== 2000 BEFORE-TAX TAX NET-OF-TAX AMOUNT EXPENSE AMOUNT ---------------------------------------------------------------------------------------- Net unrealized gains on securities $ 563 $(223) $ 340 =========================== 1999 TAX BEFORE-TAX (EXPENSE) NET-OF-TAX AMOUNT BENEFIT AMOUNT ----------------------------------------------------------------------------------------- Unrealized losses on securities Unrealized holding losses arising during the year $(515) $ 206 $(309) Less: reclassification adjustment for gains realized in net income 32 (13) 19 --------------------------- Net unrealized losses $(547) $ 219 $(328) ===========================
NOTE 15: COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated statement of financial condition. 34 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) Financial instruments whose contract amount represents credit risk as of December 31 were as follows: 2001 2000 -------------------------------------------------------------------------------- Loan commitments $65,915 $57,600 Standby letters of credit 7,269 3,548 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies, but may include residential real estate, income-producing commercial properties, or other assets of the borrower. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The Company and subsidiary are also subject to claims and lawsuits which arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Company. NOTE 16: DIVIDEND AND CAPITAL RESTRICTIONS The Company is not subject to any regulatory restrictions on the payment of dividends to its stockholders. Without prior approval, current regulations allow the Bank to pay dividends to the Company not exceeding retained net income for the current calendar year plus those for the previous two calendar years. At December 31, 2001, the stockholder's equity of the Bank was $104,377,000, of which approximately $3,281,000 was available for the payment of dividends and $101,096,000 was restricted from dividend distribution to the Company. At the time of conversion, a liquidation account was established in an amount equal to the Banks' net worth as reflected in the latest statement of condition used in its final conversion offering circular. The liquidation account is maintained for the benefit of eligible deposit account holders who maintain their deposit account in the Bank after conversion. In the event of a complete liquidation, and only in such event, each eligible deposit account holder will be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted subaccount balance for deposit accounts then held, before any liquidation distribution may be made to stockholders. Except for the repurchase of stock and payment of dividends, the existence of the liquidation account will not restrict the use or application of net worth. The initial balance of the liquidation account was $45,619,000. 35 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) NOTE 17: REGULATORY CAPITAL The Bank is subject to various regulatory capital requirements administered by the federal banking agencies and is assigned to a capital category. The assigned capital category is largely determined by three ratios that are calculated according to the regulations: total risk adjusted capital, Tier1 risk-based capital, and core leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios. There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. At December 31, 2001 and 2000, the Bank was categorized as well capitalized and met all subject capital adequacy requirements. There are no conditions or events since December 31, 2001 that management believes have changed the Bank's classification. The Bank's actual and required capital amounts and ratios are as follows:
REQUIRED FOR TO BE WELL ACTUAL ADEQUATE CAPITAL(1) CAPITALIZED(1) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ----------------------------------------------------------------------------------------------------------------------- AS OF DECEMBER 31, 2001 Total risk-based capital (1) (to risk-weighted assets) $108,340 20.7% $ 41,951 8.0% $ 52,439 10.0% Tier 1 risk-based capital (1) (to risk-weighted assets) 102,969 19.6% 20,975 4.0% 31,463 6.0% Core capital (1) (to adjusted total assets) 102,969 13.5% 22,912 3.0% 38,186 5.0% Core capital (1) (to adjusted tangible assets) 102,969 13.5% 15,275 2.0% NA NA Tangible capital (1) (to adjusted total assets) 102,969 13.5% 11,456 1.5% NA NA AS OF DECEMBER 31, 2000 Total risk-based capital (1) (to risk-weighted assets) $109,552 20.7% $ 42,276 8.0% $ 52,846 10.0% Tier 1 risk-based capital (1) (to risk-weighted assets) 103,882 19.7% 21,138 4.0% 31,707 6.0% Core capital (1) (to adjusted total assets) 103,882 13.6% 22,869 3.0% 38,115 5.0% Core capital (1) (to adjusted tangible assets) 103,882 13.6% 15,246 2.0% NA NA Tangible capital (1) (to adjusted total assets) 103,882 13.6% 11,435 1.5% NA NA
--------------------------------- (1) As defined by regulatory agencies 36 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) NOTE 18: EMPLOYEE BENEFITS The Company has a retirement savings 401(k) plan in which substantially all employees may participate. The contributions are discretionary and determined annually. In 2001, 2000 and 1999, the Company matched employees' contributions at the rate of 50% for the first $600 participant contributions to the 401(k) and made a contribution to the profit-sharing plan of 7% of qualified compensation. The Company's expense for the plan was $253,000, $216,000 and $286,000 for 2001, 2000 and 1999. The Company has a supplemental retirement plan and deferred compensation arrangements for the benefit of certain officers. The Company also has deferred compensation arrangements with certain directors whereby, in lieu of currently receiving fees, the directors or their beneficiaries will be paid benefits for an established period following the director's retirement or death. These arrangements are funded by life insurance contracts which have been purchased by the Company. The Company records a liability for these vested benefits based on the present value of future payments. The Company's expense for the plan was $689,000, $416,000 and $320,000 for 2001, 2000 and 1999. As part of the conversion in 1999, the Company established an ESOP covering substantially all its employees. The ESOP acquired 465,568 shares of the Company common stock at $10 per share in the conversion with funds provided by a loan from the Company. Accordingly, the $4,655,680 of common stock acquired by the ESOP is shown as a reduction of stockholders' equity. At December 31, 2001 and 2000, the Company had 381,395 and 413,179 unearned ESOP shares with a fair value of $5,759,000 and $6,094,000. Shares are released to participants proportionately as the loan is repaid. Dividends on allocated shares are recorded as dividends and charged to retained earnings. Dividends on unallocated shares, which may be distributed to participants, or used to repay the loan are treated as compensation expense. Compensation expense is recorded equal to the fair market value of the stock when contributions, which are determined annually by the Board of Directors of the Company and Bank, are made to the ESOP. Expense under the ESOP for 2001 and 2000 was $464,000 and $360,000. At December 31, 2001, the ESOP had 52,389 allocated shares, 381,395 suspense shares and 31,784 committed-to-be released shares. At December 31, 2000, the ESOP had 20,589 allocated shares, 413,179 suspense shares and 31,800 committed-to-be released shares. At December 31, 1999, the ESOP had no allocated shares, 444,979 suspense shares and 20,589 committed-to-be released shares. The shareholders approved a Recognition and Retention Plan (RRP) in 2000 for the award of up to 232,784 shares of the common stock of the Company to directors and executive officers. Common stock awarded under the RRP vests ratably over a three or five-year period commencing with the date of the grants. In 2001 the Company granted 209,000 RRP shares under the plan and expense recognized on the vested shares totaled approximately $1,394,000 in 2001. The unearned portion of these stock awards is presented as a reduction of stockholders' equity. NOTE 19: STOCK OPTION PLAN Under the Company's stock option plan approved in 2000, which is accounted for in accordance with Accounting Principles Board Opinion (APB) No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations, the Company grants selected executives and other key employees and directors incentive and non-qualified stock option awards which vest and become fully exercisable at the discretion of the stock option committee as the options are granted. The Company is authorized to grant options for 37 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) up to 581,961 shares of the Company's common stock. Under certain provisions of the plan, the number of shares available for grant may be increased without shareholder approval by the amount of shares surrendered as payment of the exercise price of the stock option and by the number of shares of common stock of the Company that could be repurchased by the Company using proceeds from the exercise of stock options. The exercise price of each option, which has a 10 or 15 year life, may not be less than the market price of the Company's stock on the date of grant; therefore, no compensation expense will be recognized when the options are granted. Except for 58,295 options issued as part of the acquisition of Marion, no options were granted under the plan during 2000. The following is a summary of the status of the Company's stock option plan and changes in that plan for 2001 and 2000.
2001 2000 WEIGHTED- WEIGHTED- AVERAGE AVERAGE OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------------------------------------------------------------------------------------------------ Outstanding, beginning of year 39,521 $ 10.97 -- $ -- Granted 507,000 14.50 58,295 -- Exercised (5,807) 9.29 (18,774) 10.87 Forfeited/expired (5,000) 14.50 -- -- ------- ------ Outstanding, end of year 535,714 14.30 39,521 10.97 ======= ====== Options exercisable at year end 165,714 39,521 Weighted-average fair value of options granted during the year 2.77
At December 31, 2001 other information by exercise price for options outstanding and exercisable is as follows:
WEIGHTED AVERAGE REMAINING NUMBER EXERCISE NUMBER CONTRACTUAL OF SHARES PRICE OF SHARES LIFE EXERCISABLE -------------------------------------------------------------------------------- $ 5.37 1,227 1.2 years 1,227 10.87 18,774 4.7 years 18,774 12.35 13,913 5.6 years 13,913 14.50 506,800 3.2 years 131,800
38 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) Although the Company has elected to follow APB No. 25, SFAS No. 123 requires pro forma disclosures of net income and earnings per share as if the Company had accounted for its employee stock options under that statement. The fair value of each option grant was estimated on the grant date using an option-pricing model with the following assumptions: 2001 2000 -------------------------------------------------------------------------------- Risk-free interest rates 5.14% -- Dividend yields 2.19% -- Volatility factors of expected market price of common stock 8.40% -- Weighted-average expected life of the options 8 -- Under SFAS No. 123, compensation cost is recognized in the amount of the estimated fair market value of the options and amortized to expense over the options' vesting period. The pro forma effect on net income and earnings per share of this statement are as follows: 2001 2000 -------------------------------------------------------------------------------- Net income As reported $8,080,131 $ -- Pro forma 7,787,654 -- Basic and diluted earnings per share As reported 1.16 -- Pro forma 1.12 -- 39 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) NOTE 20: EARNINGS PER SHARE Earnings per share were computed as follows:
2001 WEIGHTED- AVERAGE PER-SHARE INCOME SHARES AMOUNT --------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE Income available to common shareholders $8,080,131 6,949,879 $ 1.16 EFFECT OF DILUTIVE SECURITIES Stock options -- 14,426 -- -------------------------------------- DILUTED EARNINGS PER SHARE Income available to common stockholders and assumed conversions $8,080,131 6,964,305 $ 1.16 ====================================== 2000 WEIGHTED- AVERAGE PER-SHARE INCOME SHARES AMOUNT --------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE Income available to common shareholders $6,235,222 5,557,775 $ 1.12 EFFECT OF DILUTIVE SECURITIES Stock options -- 602 -- -------------------------------------- DILUTED EARNINGS PER SHARE Income available to common stockholders and assumed conversions $6,235,222 5,558,377 $ 1.12 ======================================
40 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) NOTE 21: FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument: CASH AND CASH EQUIVALENTS - The fair value of cash and cash equivalents approximates carrying value. TRADING ACCOUNT, INVESTMENT AND MORTGAGE-BACKED SECURITIES - Fair values are based on quoted market prices. LOANS HELD FOR SALE - Fair values are based on quoted market prices. LOANS - The fair value for loans are estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. FHLB STOCK - Fair value of FHLB stock is based on the price at which it may be resold to the FHLB. CASH SURRENDER VALUE OF LIFE INSURANCE - The fair value of life insurance values approximate carrying value. INTEREST RECEIVABLE/PAYABLE - The fair values of interest receivable/payable approximate carrying values. DEPOSITS - The fair values of noninterest-bearing, interest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits. FEDERAL HOME LOAN BANK ADVANCES - The fair value of these borrowings are estimated using a discounted cash flow calculation, based on current rates for similar debt for periods comparable to the remaining terms to maturity of these advances. NOTES PAYABLE - The fair value of this note is estimated using a discount calculation based on current rates. ADVANCES BY BORROWERS FOR TAXES AND INSURANCE - The fair value approximates carrying value. OFF-BALANCE SHEET COMMITMENTS - Commitments include commitments to purchase and originate mortgage loans, commitments to sell mortgage loans, and standby letters of credit and are generally of a short-term nature. The fair values of such commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The carrying amount of these investments are reasonable estimates of the fair value of these financial statements. 41 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) The estimated fair values of the Company's financial instruments are as follows:
2001 2000 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------------------------------------------------------------------------------------------------- ASSETS Cash and cash equivalents $ 30,558 $ 30,558 $ 21,046 $ 21,046 Securities available for sale 31,580 31,580 35,142 35,142 Securities held to maturity -- -- 10,539 10,413 Loans held for sale 11,559 11,586 3,913 3,983 Loans 636,635 650,212 639,362 644,143 Stock in FHLB 6,993 6,993 6,993 6,993 Cash surrender value of life insurance 24,231 24,231 23,055 23,055 Interest receivable 3,697 3,697 4,313 4,313 LIABILITIES Deposits 538,878 539,883 514,710 518,293 FHLB Advances 107,485 112,026 112,542 112,788 Notes payable 3,259 2,693 3,640 2,698 Interest payable 1,360 1,360 1,372 1,372 Advances by borrowers for taxes and insurance 1,463 1,463 1,452 1,452
42 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) NOTE 22: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company: CONDENSED BALANCE SHEETS
2001 2000 ----------------------------------------------------------------------------------- ASSETS Cash on deposit with Bank $ 831 $ 17,973 Cash on deposit with others 112 17 --------------------- Total cash and cash equivalents 943 17,990 Investment securities available for sale 1,001 2,516 Loans receivable 2,500 2,889 Investment in common stock of Bank 104,377 105,176 Deferred income tax 857 1,140 Other assets 133 359 --------------------- Total assets $109,811 $130,070 ===================== LIABILITIES - other $ 67 $ 129 STOCKHOLDERS' EQUITY 109,744 129,941 --------------------- Total liabilities and stockholders' equity $109,811 $130,070 =====================
43 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) CONDENSED STATEMENTS OF INCOME
2001 2000 1999 ----------------------------------------------------------------------------------------- INCOME Interest income from Bank $ 401 $ 904 $ -- Interest income from investments 136 158 -- Interest income from loans 404 -- -- Dividends from Bank 10,000 -- -- Other income 4 -- -- -------------------------------- Total income 10,945 1,062 -- -------------------------------- EXPENSES Interest expense -- -- 40 Charitable contribution -- -- 4,477 Other 181 120 -- -------------------------------- Total expenses 181 120 4,517 ================================ INCOME (LOSS) BEFORE INCOME TAX AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 10,764 942 (4,517) INCOME TAX EXPENSE (BENEFIT) 297 374 (1,536) -------------------------------- INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 10,467 568 (2,981) EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY (2,387) 5,667 3,827 -------------------------------- NET INCOME $ 8,080 $6,235 $ 846 ================================
44 MUTUALFIRST FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 (Table Dollar Amounts in Thousands, Except Share and Per Share Data) CONDENSED STATEMENTS OF CASH FLOWS
2001 2000 1999 ----------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 8,080 $ 6,235 $ 846 Item not requiring (providing) cash ESOP shares earned 464 360 199 Charitable contribution of Company's common stock -- -- 2,238 Deferred income tax benefit 289 246 (1,393) Distributions in excess of earnings (undistributed income) of Bank 2,387 (5,667) (3,827) Other 276 (488) (221) ------------------------------------- Net cash provided by (used in) operating activities 11,496 686 (2,158) ------------------------------------- INVESTING ACTIVITIES Capital contribution to subsidiary -- -- (27,283) Cash received in acquisition, net -- 630 -- Net change in loans 389 -- -- Purchase of securities available for sale -- (2,498) -- Proceeds from sales of securities available for sale 503 -- -- Proceeds from maturities of securities available for sale 1,000 -- -- ------------------------------------- Net cash used in investing activities 1,892 (1,868) (27,283) ------------------------------------- FINANCING ACTIVITIES Proceeds from sale of common stock, net of costs -- -- 49,911 Stock repurchased (28,224) -- -- Cash dividends (2,265) (1,502) -- Proceeds from stock options exercised 54 204 -- ------------------------------------- Net cash provided by (used in) financing activities (30,435) (1,298) 49,911 ------------------------------------- NET CHANGE IN CASH AND CASH EQUIVALENTS (17,047) (2,480) 20,470 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 17,990 20,470 -- ------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 943 $ 17,990 $ 20,470 ===================================== ADDITIONAL CASH FLOW AND SUPPLEMENTARY INFORMATION Common stock issued to ESOP leveraged with an employee loan $ -- $ -- $ 4,656 Fair value of stock issued in acquisition of Marion -- 27,804 -- Fair value of net assets, excluding cash, in acquisition -- 2,411 --
45 OFFICERS & DIRECTORS OF MUTUALFIRST FINANCIAL, INC. BOARD OF DIRECTORS Wilbur R. Davis Steven L. Banks Chairman of the Boards of MUTUALFIRST Financial Senior Vice President of MUTUALFIRST Financial and Mutual Federal Savings Bank; and Mutual Federal Savings Bank President, Ontario Systems Corporation John M. Dalton Julie A. Skinner Former Chairman, President and Chief Executive Vice Chairman of the Boards of MUTUALFIRST Financial Officer of Marion Capital Holdings and Mutual Federal Savings Bank; civic leader Jon R. Marler R. Donn Roberts President, Carrico Systems; President and Chief Executive Officer of MUTUALFIRST Senior Vice President, Ralph M. Williams and Financial and Mutual Federal Savings Bank Associates; President, Empire Real Estate Edward J. Dobrow Jerry L. McVicker President, D&M Leasing Director of Operations, Marion Community Schools Linn A. Crull OFFICERS Certified Public Accountant; R. Donn Roberts, President and Chief Executive Member/Owner, Whitinger & Company, LLC Officer James D. Rosema Timothy McArdle, Senior Vice President and President, Rosema Corporation Treasurer William V. Hughes Steven L. Banks, Senior Vice President Attorney, Partner in Beasley & Gilkison, LLP Rosalie Petro, Secretary
OFFICERS AND DIRECTORS OF MUTUAL FEDERAL SAVINGS BANK BOARD OF DIRECTORS WARSAW ADVISORY BOARD The Directors of MUTUALFIRST Financial, Inc. also serve J. Kevin Zachary, Advisory Director as the Board of Directors of Mutual Federal Savings Candace Wolkins, Advisory Director Bank John Sadler, Advisory Director David Carey, Advisory Director SENIOR DIRECTORS Stephen Harris, Advisory Director Charles R. McCormick, Senior Director Phillip J. Harris, Senior Advisory Director Jack E. Buckles, Senior Director G. Richard Benson, Senior Director WINCHESTER ADVISORY BOARD Kenneth W. Girton, Advisory Director Robert Morris, Advisory Director Clark G. Loney, Advisory Director Gene Gulley, Senior Advisory Director
46 CORPORATE OFFICERS R. Donn Roberts, President and Chief Executive Officer David Heeter, Executive Vice President and Chief Operating Officer Steven Campbell, Senior Vice President Stephen Selby, Senior Vice President Timothy McArdle, Senior Vice President and Treasurer Steven Banks, Senior Vice President Max Courtney, Vice President Marvin Vincent, Vice President Patrick Botts, Vice President Michael Barber, Vice President Larry Phillips, Vice President and Controller Cynthia Fortney, Vice President Michael Fisher, Vice President James Tinkey, Vice President Lynda Stoner, Vice President Ralph Spencer, Vice President Norb Adrian, Assistant Vice President Lori Ritchey, Assistant Vice President Connie Bower, Assistant Vice President Crystal Bradford, Assistant Vice President Lila Piper, Assistant Vice President Manfred Walgram, Assistant Vice President William Curl, Assistant Vice President Glenda Thomas, Assistant Vice President Rosalie Petro, Corporate Secretary -------------------------------------------------------------------------------- ADMINISTRATIVE OFFICERS Norma Lozier, Branch Manager, North Webster Jean DeHart, Branch Manager, Northwest Carla Burt, Business Development Officer Tammy Hefflin, Assistant Controller & Manager, Accounting Jan Heminger, Branch Manager, West Bethel Kim Evans, Branch Manager, South Madison Patti Decker, Branch Manager, Yorktown Denise Abrams, Branch Manager, East Jackson Vicki Reade, Branch Manager, Albany Kristen Mattingly, Manager, Marketing Sharon Ferguson, Manager, Deposit Products Brad Zimmerman, Manager, Information Systems Cathy Coolman, Branch Manager, Gas City Barbara Wright, Manager, Loan Operations Dorothy Douglass, Manager, Human Resources Beth Winters, Branch Manager, Wal-Mart, Marion JoEllen Frazier, Branch Manager, Marion Third Street Stephanie Salyer, Branch Manager, Warsaw Market Street Marlene Hoffer, Branch Manager, Warsaw East Center Street Sonya Sochor, Branch Manager, West Jackson Street Chris Cook, Assistant Treasurer Angel Workman, Branch Manager, Broadway 47 MUTUALFIRST FINANCIAL, INC. SHAREHOLDER INFORMATION -------------------------------------------------------------------------------- ANNUAL MEETING The annual meeting of shareholders will be held at 3:00 p.m. local time, on May 1, 2002, at the Company's main office, located at 110 E. Charles Street, Muncie, Indiana. TRANSFER AGENT: Continental Stock Transfer & Trust Company 17 Battery Place New York, New York 10004 (212) 509-4000 GENERAL COUNSEL: SPECIAL COUNSEL: Beasley Gilkison, LLP Silver, Freedman & Taff, L.L.P. 110 E. Charles St. 1700 Wisconsin Av. N.W. Muncie, IN 47305 Washington, D.C. 20007 INDEPENDENT AUDITOR: BKD, LLP 201 N. Illinois, Suite 700 Indianapolis, IN 46204 SHAREHOLDER AND GENERAL INQUIRIES: R. Donn Roberts Timothy J. McArdle President & Chief Executive Officer Senior Vice President and Treasurer MUTUALFIRST Financial, Inc. 110 E. Charles Street Muncie, IN 47305 ANNUAL AND OTHER REPORTS Copies of the Company's Annual Report or Form 10-K filed with the Securities and Exchange Commission, without cost, by writing or calling: MUTUALFIRST Financial, Inc. Investor Relations, Attn: R. Donn Roberts, President and Chief Executive Officer, 110 E. Charles Street, Muncie, Indiana 47305. The common stock for MUTUALFIRST Financial, Inc. is traded under the symbol "MFSF" on the NASDAQ National Market. The table below shows the high and low closing prices for our common stock for the periods indicated. This information was provided by the NASDAQ. At March 7, 2002, there were 6,327,293 shares of common stock issued and outstanding and approximately 1,541 shareholders of record. ______Stock Price____ Dividends per Share QUARTER ENDING: HIGH LOW First Quarter (ended 03/31/01) $15.125 $13.875 $0.08 Second Quarter (ended 06/30/01) $14.65 $13.938 $0.08 Third Quarter (ended 09/30/01) $15.39 $14.34 $0.08 Fourth Quarter (ended 12/31/01) $15.20 $14.50 $0.08 Our cash dividend payout policy is continually reviewed by management and the Board of Directors. The company intends to continue its policy of paying quarterly dividends; however, the payment will depend upon a number of factors, including capital requirements, regulatory limitations, the Company's financial condition, results of operations and the Bank's ability to pay dividends to the Company. The Company relies significantly upon such dividends originating from the Bank to accumulate earnings for payment of cash dividends to shareholders. 48 [LOGO] MUTUAL FEDERAL SAVINGS BANK Serving North and East Central Indiana [GRAPHIC - MAP -- LOCATIONS IN INDIANA] DELAWARE COUNTY MUNCIE: 110 East Charles Street 2918 West Jackson Street 4710 East Jackson Street Oakwood & McGalliard 2000 South Madison Street 3613 North Broadway Avenue 3701 West Bethel Avenue YORKTOWN: 2101 South Tiger Drive ALBANY: 401 West State Street RANDOLPH COUNTY WINCHESTER: 110 West Pearl Street Marsh Supermarket-- SR 32 East KOSCIUSKO COUNTY WARSAW: 219 West Market Street 2034 East Center Street NORTH WEBSTER: Crystal Flash Road & SR 13 North GRANT COUNTY MARION: 100 West 3rd Street Wal-Mart-- 3240 S. Western Ave. GAS CITY: 1010 East Main Street MUTUALFIRST FINANCIAL INC. www.mfsbank.com