10-Q 1 march10q.htm
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q


(Mark One)

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended March 31, 2002 or
[   ] Transition Report Pursuant to Section 13 or 15 (D) of the Securities Exchange Act of 1934 for the Transition Period from _______________ to _______________

Commission File Number: 000-27905

MutualFirst Financial, Inc.
(Exact Name of registrant specified in its charter)

Maryland
(State or other jurisdiction of
incorporation or organization)		   35-2085640
(I.R.S. Employer
Identification Number)


110 East Charles Street
Muncie, Indiana 47305


(765) 747-2800
(Registrant's telephone number, including area code)



Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such report), and (2) has been subject to such filing requirements for the past 90 days.                      Yes [X] No[   ]

The number of shares of the Registrant's common stock, without par value, outstanding as of March 31, 2002 was 6,325,078.





Next Page




FORM 10 - Q
MutualFirst Financial, Inc.

INDEX

Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
  March 31, 2002 and December 31, 2001 1
Consolidated Condensed Statement of Income for the
three and six months ended March 31, 2002 and March 31, 2001 2
Consolidated Condensed Statement of Stockholders' Equity
for the three months ended March 31, 2002 3
Consolidated Condensed Statement of Cash Flows for the
three months ended March 31, 2002 and March 31, 2001 4
Notes to Unaudited Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 7
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signature Page 11







Next Page


PART 1

FINANCIAL INFORMATION

ITEM 1. Financial Statements

MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY
Consolidated Condensed Balance Sheets

March 31, December 31,
2002
 2001
(Unaudited)
Assets
Cash $19,325,255 $24,140,688
Interest-bearing deposits 1,945,989
 6,416,985
Cash and cash equivalents 21,271,244 30,557,673
Investment securities available for sale 29,005,112 31,580,095
Loans held for sale 0 11,559,158
Loans 661,441,687 642,084,418
Allowance for loan losses (5,844,933)
 (5,449,292)
Net loans 655,596,754 636,635,126
Premises and equipment 8,586,329 8,674,152
Federal Home Loan Bank of Indianapolis stock, at cost 6,993,400 6,993,400
Investment in limited partnerships 5,610,270 5,677,060
Cash surrender value of life insurance 24,531,091 24,231,091
Foreclosed real estate 1,075,256 1,045,765
Interest receivable 3,629,601 3,696,560
Core deposit intangibles and goodwill 1,007,352 1,052,491
Deferred income tax benefit 4,612,149 4,553,975
Other assets 3,716,042
 3,071,327
    Total assets $765,634,600
 $769,327,873
Liabilities
Deposits
Non-interest-bearing $26,110,741 $23,433,570
Interest bearing 516,371,159
 515,444,601
Total deposits 542,481,900 538,878,171
Federal Home Loan Bank advances 102,781,099 107,484,586
Other borrowings 3,243,604 3,258,677
Advances by borrowers for taxes and insurance 2,515,503 1,463,384
Interest payable 1,893,148 1,359,940
Other liabilities 7,053,656
 7,138,937
Total liabilities 659,968,910
 659,583,695
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 --- 6,325,078 and 6,693,841 shares 63,250 66,938
Additional paid-in capital 53,977,415 59,575,884
Retained earnings 56,524,414 55,195,694
Accumulated other comprehensive income 268,748 356,009
Unearned employee stock ownership plan (ESOP) shares (3,734,486) (3,813,946)
Unearned recognition and retention plan (RRP) shares (1,433,651)
 (1,636,401)
Total stockholders' equity 105,665,690
 109,744,178
Total liabilities and stockholders' equity $765,634,600
 $769,327,873


See notes to consolidated condensed financial statements.


1
Next Page


MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY
Consolidated Condensed Statements of Income
(Unaudited)

Three Months Ended
March 31
2002
 2001
Interest Income
Loans receivable, including fees $12,214,887 $13,213,697
Investment securities:
Mortgage-backed securities 154,116 212,872
Federal Home Loan Bank stock 103,464 137,952
Other investments 216,590 466,270
Deposits with financial institutions 65,895
 26,349
    Total interest income 12,754,952
 14,057,140
 
Interest Expense
Passbook savings 159,552 238,598
Certificates of deposit 4,226,990 5,447,330
Daily Money Market accounts 209,710 381,686
Demand and NOW accounts 119,937 228,200
Federal Home Loan Bank advances 1,384,264 1,438,090
Other interest expense 24,710
 0
Total interest expense 6,125,163
 7,733,904
 
Net Interest Income 6,629,789 6,323,236
Provision for losses on loans 587,483 189,250
Net Interest Income After Provision for Loan Losses 6,042,306 6,133,986
 
Other Income
Service fee income 606,672 572,895
Equity in losses of limited partnerships (37,390) (45,391)
Commissions 189,124 182,522
Net gains on loan sales 0 123,160
Increase in cash surrender value of life insurance 300,000 286,500
Other income 113,299
 114,330
Total other income 1,171,705
 1,234,016
Other Expenses
Salaries and employee benefits 3,008,935 3,196,233
Net occupancy expenses 241,986 230,739
Equipment expenses 197,746 232,215
Data processing fees 193,748 204,214
Automated teller machine 85,456 118,135
Deposit insurance expense 24,167 26,091
Advertising and promotion 93,492 159,491
Goodwill amortization 45,140 51,775
Other expenses 769,611
 889,061
Total other expenses 4,660,281
 5,107,954
 
Income Before Income Tax 2,553,730 2,260,048
Income tax expense 669,600
 521,000
Net Income $1,884,130
 $1,739,048
Basic earnings per share $0.32 $0.23
Diluted earnings per share $0.32 $0.22
Dividends per share $0.09 $0.08


See notes to consolidated condensed financial statements.


2
Next Page


Mutual First Financial
Consolidated Statements of Cash Flows

Three Months Ended
March 31,
2002
 2001
Operating Activities
Net income $1,884,130 $1,739,048
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses 587,483 189,250
Net loss on disposal of premise and equipment - 143,811
Net loss on sale of real estate owned 45,102
Securities amortization (accretion), net 5,425 (10,227)
ESOP shares earned 129,774 114,816
RRP shares earned 202,750 773,015
Equity in losses of limited partnerships 37,390 45,391
Amortization of net loan origination costs 568,599 478,227
Amortization of core deposit intangibles and goodwill 45,139 51,774
Depreciation and amortization 204,633 295,748
Deferred income tax - (20,233)
Loans originated for sale - (11,340,727)
Proceeds from sales on loans held for sale - 6,735,306
Gains on sales of loans held for sale - (58,360)
Change in
Interest receivable 66,959 536,974
Other assets (644,715) (663,899)
Interest payable 533,208 837,173
Other liabilities (53,161) (1,339,411)
Increase in cash surrender value of life insurance (300,000)
 (286,500)
Net cash provided by operating activities 3,312,716
 (1,778,824)
Investing Activities
Purchases of securities available for sale (3,429,656) (684,437)
Proceeds from maturities and paydowns of securities available for sale 5,853,778 1,676,633
Proceeds from maturities and paydowns of securities held to maturity - 4,008,766
Net change in loans (8,982,400) (1,884,588)
Purchases of premises and equipment (116,810) (158,351)
Proceeds from real estate owned sales 374,800 -
Distribution from limited partnership 29,400 154,136
Other investing activities (25,545)
 (86,479)
Net cash used by investing activities (6,296,433)
 3,025,680
Financing Activities
Net change in
Noninterest-bearing, interest bearing demand and savings deposits 2,314,064 3,782,711
Certificates of deposits 1,289,665 20,844,796
Repayment of note payable (30,679) 15,769
Proceeds from FHLB advances 3,280,000 79,017,667
Repayment of FHLB advances (8,000,000) (95,200,000)
Net change in advances by borrowers for taxes and insurance 1,052,119 1,086,779
Stock repurchased (5,657,471) (12,236,578)
Proceeds from exercise of stock options 5,000 46,050
Dividends Paid (555,410)
 (571,242)
Net cash provided by financing activities (6,302,712)
 (3,214,048)
Net Change in Cash and Cash Equivalents (9,286,429) (1,967,192)
Cash and Cash Equivalents, Beginning of Year 30,557,673
 21,046,057
Cash and Cash Equivalents, End of Period $21,271,244
 $19,078,865
Additional Cash Flows Information
Interest paid $ 5,591,955 $ 5,296,813
Income tax paid 880,000 200,000
Transfers from loans to foreclosed real estate 423,848 104,647
Loans held for sale transferred to loans 11,559,158 -
Mortgage servicing rights capitalized - 64,800


See notes to consolidated condensed financial statements.








3
Next Page




MUTUALFIRST FINANCIAL, INC. AND SUBSIDIARY
Consolidated Condensed Statements of Stockholders' Equity
For the Three Months Ended March 31, 2002
(Unaudited)

Common Stock
 Comprehensive
Income
 Retained
Earnings
 Accumulated
Other
Comprehensive
Income
 Unearned
ESOP
shares
 Unearned
RRP
shares
 Total
Shares
Outstanding
 Amount
 Additional
paid-incapital
Balances, December 31, 2001 6,693,841 $66,938 $59,575,884 $55,195,694 $356,009 ($3,813,946) ($1,636,401) $109,744,178
Comprehensive income
Net income for the period $1,884,130 $1,884,130 1,884,130
Other comprehensive income, net of tax
Unrealized gains on securities (87,261)
 (87,261) (87,261)
Comprehensive income $1,796,869
ESOP shares earned 50,314 79,460 129,774
Cash dividends ($.09 per share) (555,410) (555,410)
RRP shares earned 202,750 202,750
Stock repurchased (369,694) (3,697) (5,653,774) (5,657,471)
Stock options exercised 931
 9
 4,991
  
  
  
  
 5,000
Balances, March 31, 2002 6,325,078
 $63,250
 $53,977,415
 $56,524,414
 $268,748
 ($3,734,486)
 ($1,433,651)
 $105,665,690


See notes to consolidated condensed financial statements.














4
Next Page




MutualFirst Financial, Inc. and Subsidiaries
Notes to Unaudited Consolidated Condensed Financial Statements


NOTE 1: Basis of Presentation

The consolidated financial statements include the accounts of MutualFirst Financial, Inc. (the "Company"), its wholly owned subsidiary, Mutual Federal Savings Bank, a federally chartered savings bank ("Mutual Federal"), and Mutual Federal's two wholly owned subsidiaries, First MFSB Corporation and Third MFSB Corporation. A summary of significant accounting policies is set forth in Note 1 of the Notes to Consolidated Financial Statements included in the December 31, 2001 Annual Report to Shareholders. All significant inter-company accounts and transactions have been eliminated in consolidation.

The interim consolidated financial statements have been prepared in accordance with instructions to Form 10-Q, and therefore do not include all information and footnotes required by generally accepted accounting principles necessary for complete financial statements.

The interim consolidated financial statements at March 31, 2002, and for the three month period ended March 31, 2002 have not been audited by independent accountants, but in the opinion of management, reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for such periods.

The consolidated condensed balance sheet of the Company as of December 31, 2001 has been derived from the audited consolidated balance sheet of the Company as of that date.

NOTE 2: Benefit Plans

On December 1, 2000, the stockholders of the Company approved a Stock Option Plan and a Recognition and Retention Plan (RRP). These plans allow for the purchase in the open market or through the issuance of authorized and unissued shares of up to 581,961 shares of common stock for the Stock Option Plan and 232,784 shares of common stock for the RRP. Under the Stock Option Plan, stock option rights covering 581,961 shares of stock may be granted to officers, key employees and directors of the Company and its subsidiaries. Options for 507,000 of such shares were granted effective January 12, 2001. The options have an option price per share equal to the market value at date of grant. Of the options granted, 247,248 have a 15-year term and 259,752 have a 10-year term. 212,000 of these options become exercisable at the rate of 33.3% per year and 295,000 become exercisable at a rate of 20% per year. Under the RRP plan, stock awards covering 232,784 shares of common stock may be awarded to the directors and key employees of the Company and its subsidiaries. Grants of 209,000 of such shares have been awarded effective January 12, 2001. Beginning March 20, 2001, 122,000 of these shares vest at a rate of 20% per year and 77,500 vest at a rate of 33.3% per year and 9,500 shares were fully vested as of March 20, 2002. Expense under the RRP plan was $203,000 for the three-month period ended March 31, 2002.









5
Next Page




Note 3 -- Earnings per share

Earnings per share were computed as follows:

Three Months Ended March 31,
2002
 2001
Income
 Weighted-
Average
Shares
 Per-Share
Amount
 Income
 Weighted-
Average
Shares
 Per-Share
Amount
(000's) (000's)
Basic Earnings Per Share
Income available to common shareholders $1,884 5,848,967 $0.32 $1,739 7,721,715 $0.23
Effect of Dilutive securities
Stock options and RRP grants  
 66,723
  
  
 11,840
  
Diluted Earnings Per Share
 
Income available to common stockholders
and assumed conversions $1,884
 5,915,690
 $0.32
 $1,739
 7,733,555
 $0.22











6
Next Page




Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.

General

MutualFirst Financial, Inc., a Maryland corporation (the "Company"), was organized in September 1999. On December 29, 1999, it acquired the common stock of Mutual Federal Savings Bank ("Mutual Federal") upon the conversion of Mutual Federal from a federal mutual savings bank to a federal stock savings bank.

Mutual Federal was originally organized in 1889 and currently conducts its business from seventeen full service offices located in Delaware, Randolph, Grant, and Kosciusko counties, Indiana, with its main office located in Muncie. Mutual Federal's principal business consists of attracting deposits from the general public and originating fixed rate and adjustable rate loans secured primarily by first mortgage liens on one-to-four family residential real estate as well as commercial real estate and consumer goods. Mutual Federal's deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund (SAIF) of the FDIC.

Mutual Federal currently owns two subsidiaries, First MFSB Corporation and Third MFSB Corporation. The assets of First MFSB Corporation consist of an investment in Family Financial Life Insurance Company. Family Financial is an Indiana stock insurance company that primarily engages in retail sales of mortgage and credit life insurance products in connection with loans originated by it's shareholder financial institutions. Third MFSB, which does business as Mutual Financial Services, offers tax deferred annuities, long term health and life insurance products. All securities related products and services made available through Mutual Financial Services are offered by a third party independent broker-dealer.

The Company's results of operations depend primarily on the level of net interest income, which is the difference between the interest income earned on interest earning assets, such as loans and investments, and costs incurred with respect to interest bearing liabilities, primarily deposits and borrowings. Results of operations also depend upon the level of the Company's non-interest income, including fee income and service charges, and the level of its non-interest expense, including general and administrative expenses.

Forward Looking Statements

This quarterly report on Form 10-Q (Form 10-Q") contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may appear in a number of places in this Form 10-Q and include statements regarding the intent, belief, outlook, estimate or expectations of the company, its directors or its officers primarily with respect to future events and the future financial performance of the company. Readers of this Form 10-Q are cautioned that any such forward looking statements are not guarantees of future events or performance and involve risk and uncertainties, and that actual results may differ materially from those in the forward looking statements as a result of various factors. The accompanying information contained in this Form 10-Q identifies important factors that could cause such differences. These factors include changes in interest rate; the loss of deposits and loan demand to other financial institutions; substantial changes in financial markets; changes in real estate values and the real estate market; or regulatory changes.


7
Next Page






Financial Condition

Assets totaled $765.6 million at March 31, 2002, a decrease of $3.7 million from $769.3 million at December 31, 2001. The primary reason for the decrease was the use of cash and cash equivalents for stock repurchases of $5.7 million during the quarter. Net loans, before allowance for loan losses, increased $19.4 million, which included $11.6 million transferred from the loans held for sale category early in the quarter to maintain loan growth objectives. Excluding the transferred loans, the real estate mortgage loan portfolio increased $4.1 million during the period. Consumer loans increased $1.6 million and commercial business loans increased $2.1 million.

Allowance for loan losses increased $396,000, from $5.4 million at December 31, 2001, to $5.8 million at March 31, 2002. This increase was primarily due to an increase in classified commercial and one- to four- family real estate loans. Net charge offs for the quarter were $193,000, or .12% of average loans on an annualized basis.

Total deposits were $542.5 million at March 31, 2002, an increase of $3.6 million, or .7% from December 31, 2001. Retail deposits increased $10.6 million during the quarter, with public funds down $7.0 million. Total borrowings decreased $4.7 million to $106.0 million at March 31, 2002, from $110.7 million at December 31, 2001.

Stockholders' equity decreased $4.0 million from $109.7 million at December 31, 2001 to $105.7 million at March 31, 2002. The decrease was due primarily to the repurchase of 369,694 shares for $5.7 million and dividend payments of $555,000. These decreases were partially offset by net income of $1.9 million, Employee Stock Ownership Plan (ESOP) shares earned of $130,000, Recognition and Retention Plan (RRP) shares earned of $203,000, and proceeds from the exercise of stock options of $5,000. Also, unrealized gain on securities available for sale decreased $87,000.

Comparison of the Operating Results Ended March 31, 2002 and 2001

Net income for the quarter ended March 31, 2002 was $1.9 million, or $.32 for both basic and diluted earnings per share. This compared to net income for the comparable period in 2001 of $1.7 million, or $.23 for basic and $.22 for diluted earnings per share. Annualized return on average assets was .98% and return on average equity was 7.04% for the first quarter of 2002, compared to .91% and 5.51%, respectively, for the same period last year.

Interest income decreased $1.3 million, or 9.3%, from $14.1 million for the three months ended March 31, 2001 to $12.8 million for the three months ended March 31, 2002. Interest expense decreased $1.6 million, or 20.8%, from $7.7 million for the three months ended March 31, 2001, to $6.1 million for the three months ended March 31, 2002. As a result, net interest income for the three-month period ended March 31, 2002, increased $307,000, or 4.9%, compared to the same period in 2001. The average interest rate spread increased from 3.06% for the three-month period ended March 31, 2001, to 3.47% for the comparable period in 2002 as yields on interest earning assets decreased at a slower rate than the decrease in the cost of interest bearing liabilities.

The provision for loan losses for the first quarter of 2002 was $587,000 compared to $189,000 for the same period in 2001. Non-performing loans to total loans at March 31, 2002, were 1.03% compared to .56% at March 31, 2001. Non-performing assets to total assets were 1.07% at March 31, 2002, compared to .64% at March 31, 2001. The increase was due to higher non-performing 1-4 family and commercial mortgage


8
Next Page




loan balances brought about by the continued slow economy. The non-performing commercial properties are made up primarily of two nursing home loans totaling $1.8 million and three other loans totaling $972,000. Specific reserves of $290,000 have been established on these loans. Negotiations are in progress with the owners and possible buyers to satisfy these obligations.

Non-interest income, excluding net gain on loan sales, increased $61,000, or 5.5%, to $1.2 million for the three-months ended March 31, 2002 compared to $1.1 million for the same period in 2001. During the first quarter of 2001, there was a gain of $123,000 on the sale of fixed rate residential mortgage loans. There were no loan sales in the first quarter of 2002.

Non-interest expense decreased $448,000, or 8.8%, to $4.7 million for the three-months ended March 31, 2002, compared to $5.1 million in 2001. Salaries and employee benefits were $3.0 million for the three-months ended March 31, 2002 compared to $3.2 million for the 2001 period, a decrease of $187,000, or 5.9% due to a reduction in RRP costs. Other expenses decreased $260,000, or 13.6%, for the three-month period ended March 31, 2002 compared to the same period in 2001 due primarily to efficiencies realized since the merger with Marian Capital in December of 2000.

Income tax expense increased $149,000 for the three-months ended March 31, 2002, compared to the same period in 2001. The increase resulted from increased taxable income.

Liquidity and Capital Resources

The standard measure of liquidity for savings associations is the ratio of cash and eligible investments to a certain percentage of the net-withdrawable savings accounts and borrowings due within one year. As of March 31, 2002, Mutual Federal had liquid assets of $49.9 million and a liquidity ratio of 7.65%.

ITEM 3 - Quantitative and Quantitative Disclosures about Market Risk

Presented below as of March 31, 2002 and 2001 is an analysis of Mutual Federal's interest rate risk as measured by changes in Mutual Federal's net portfolio value ("NPV") assuming an instantaneous and sustained parallel shifts in the yield curve, in 100 basis point increments, up and down 300 basis points.

March 31, 2002
Net Portfolio Value
Changes
In Rates

$ Amount
$ Change
% Change
 NPV as % of PV of Assets
NPV Ratio
 Change
+300 bp 72,708 -31,150 -30% 10.22% -332 bp
+200 bp 82,838 -21,020 -20% 11.36% -217 bp
+100 bp 94,011 -9,847 -9% 12.57% -96 bp
0 bp 103,858 13.53%
-100 bp 111,961 8,103 8% 14.23% +70 bp
-200 bp 112,537 8,679 8% 14.08% +55 bp
-300 bp 117,960 14,102 14% 14.51% +98 bp





9
Next Page



March 31, 2001
Net Portfolio Value
 
Changes
In Rates
  
 
$ Amount
  
 
$ Change
  
 
% Change
 NPV as % of PV of Assets
NPV Ratio
 Change
+300 bp 84,407 -30,101 -26% 11.65% -309 bp
+200 bp 94,718 -19,791 -17% 12.77% -197 bp
+100 bp 105,183 -9,325 -8% 13.86% -88 bp
0 bp 114,509 14.74%
-100 bp 120,088 5,579 5% 15.17% +43 bp
-200 bp 123,174 8,665 8% 15.30% +56 bp
-300 bp 130,086 15,577 14% 15.83% +109 bp


The analysis at March 31, 2002 indicates that there have been no material changes in market interest rates for Mutual Federal's interest rate sensitivity instruments which would cause a material change in the market risk exposures which effect the quantitative and qualitative risk disclosures as presented in item 7A of the Company's annual report on Form 10-K for the period ended December 31, 2001.


PART II
OTHER INFORMATION


Item 1. Legal Proceedings
 
None.
 
Item 2. Changes in Securities and use of Proceeds
 
None.
 
Item. 3. Defaults Upon Senior Securities
 
None.
 
Item 4. Submission of matters to Vote to Security Holders
 
None.
 
Item 5. Other Information.
 
None.
 
Item 6. Exhibits and Reports on form 8-K.
 
(a) No reports on form 8-K were filed during the quarter ended March 31, 2002.



10
Next Page



SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


MutualFirst Financial, Inc.
Date: May 14, 2002
 By:    /s/ R. Donn Roberts
R. Donn Roberts
President and Chief Executive Officer
 
 
Date: May 14, 2002
 By: /s/ Timothy J. McArdle
Timothy J. McArdle
Senior Vice President and Treasurer














11
End.