UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015 | |
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 as specified in its charter) |
Maryland | 35-2085640 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
110 E. Charles Street, Muncie, Indiana | 47305-2419 | |
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (765) 747-2800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered |
Common Stock, par value $.01 per share | Nasdaq Global Market |
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Act.
Large accelerated filer ¨ | Accelerated filer x | Non-accelerated filer ¨ | Smaller reporting company ¨ |
(Do not check if smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date. As of July 30, 2015, there were 7,394,061 shares of the registrant’s common stock outstanding.
MutualFirst Financial, Inc.
Form 10-Q Quarterly Report for the Period Ended June 30, 2015
Table of Contents
Page | ||
Number | ||
PART I – FINANCIAL INFORMATION | ||
Item 1. | Financial Statements | |
Consolidated Condensed Balance Sheets | 1 | |
Consolidated Condensed Statements of Income | 2 | |
Consolidated Condensed Statements of Comprehensive Income | 3 | |
Consolidated Condensed Statement of Stockholders’ Equity | 4 | |
Consolidated Condensed Statements of Cash Flows | 5 | |
Notes to Unaudited Consolidated Condensed Financial Statements | 6 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 38 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 53 |
Item 4. | Controls and Procedures | 56 |
PART II – OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 57 |
Item 1A. | Risk Factors | 57 |
Item 2. | Unregistered Sales of Equity Changes in Securities and Use of Proceeds | 57 |
Item 3. | Defaults Upon Senior Securities | 57 |
Item 4. | Mine Safety Disclosure | 57 |
Item 5. | Other Information | 57 |
Item 6. | Exhibits | 58 |
Signature Page | 61 | |
Exhibits | 62 |
Consolidated Condensed Balance Sheets
(In Thousands, Except Share and Per Share Data)
June 30, | December 31, | |||||||
2015 | 2014 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 6,745 | $ | 7,475 | ||||
Interest-bearing demand deposits | 17,524 | 22,100 | ||||||
Cash and cash equivalents | 24,269 | 29,575 | ||||||
Investment securities available for sale | 261,506 | 260,806 | ||||||
Loans held for sale | 12,486 | 6,140 | ||||||
Loans, net of allowance for loan losses of $12,906 and $13,168, at June 30, 2015 and December 31, 2014, respectively | 1,026,717 | 1,003,518 | ||||||
Premises and equipment, net | 30,818 | 30,939 | ||||||
Federal Home Loan Bank stock | 9,810 | 11,964 | ||||||
Investment in limited partnerships | 477 | 527 | ||||||
Deferred tax asset | 13,750 | 13,575 | ||||||
Cash value of life insurance | 51,602 | 51,002 | ||||||
Goodwill | 1,800 | 1,800 | ||||||
Core deposit and other intangibles | 825 | 1,105 | ||||||
Other assets | 11,374 | 12,472 | ||||||
Total assets | $ | 1,445,434 | $ | 1,423,423 | ||||
Liabilities and Stockholders' Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Noninterest-bearing | $ | 160,967 | $ | 154,178 | ||||
Interest-bearing | 917,320 | 925,142 | ||||||
Total deposits | 1,078,287 | 1,079,320 | ||||||
Federal Home Loan Bank advances | 212,042 | 192,442 | ||||||
Other borrowings | 9,816 | 10,174 | ||||||
Other liabilities | 14,337 | 14,735 | ||||||
Total liabilities | 1,314,482 | 1,296,671 | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity | ||||||||
Common stock, $.01 par value | ||||||||
Authorized - 20,000,000 shares | ||||||||
Issued and outstanding - 7,394,061 and 7,236,002 shares at June 30, 2015 and December 31, 2014, respectively | 74 | 72 | ||||||
Additional paid-in capital | 76,792 | 74,916 | ||||||
Retained earnings | 53,312 | 49,386 | ||||||
Accumulated other comprehensive income | 774 | 2,378 | ||||||
Total stockholders' equity | 130,952 | 126,752 | ||||||
Total liabilities and stockholders' equity | $ | 1,445,434 | $ | 1,423,423 |
See notes to consolidated condensed financial statements
1 |
Consolidated Condensed Statements of Income
(Unaudited)
(In Thousands, Except Share and Per Share Data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Interest and Dividend Income | ||||||||||||||||
Loans receivable | $ | 10,919 | $ | 10,817 | $ | 21,784 | $ | 21,584 | ||||||||
Investment securities | 1,692 | 1,793 | 3,362 | 3,560 | ||||||||||||
Federal Home Loan Bank stock | 118 | 131 | 259 | 331 | ||||||||||||
Deposits with financial institutions | 2 | 3 | 9 | 7 | ||||||||||||
Total interest and dividend income | 12,731 | 12,744 | 25,414 | 25,482 | ||||||||||||
Interest Expense | ||||||||||||||||
Deposits | 1,334 | 1,527 | 2,706 | 3,227 | ||||||||||||
Federal Home Loan Bank advances | 724 | 516 | 1,390 | 990 | ||||||||||||
Other | 133 | 143 | 261 | 288 | ||||||||||||
Total interest expense | 2,191 | 2,186 | 4,357 | 4,505 | ||||||||||||
Net Interest Income | 10,540 | 10,558 | 21,057 | 20,977 | ||||||||||||
Provision for loan losses | - | 500 | - | 850 | ||||||||||||
Net Interest Income After Provision for Loan Losses | 10,540 | 10,058 | 21,057 | 20,127 | ||||||||||||
Non-interest Income | ||||||||||||||||
Service fee income | 1,464 | 1,538 | 2,822 | 2,879 | ||||||||||||
Net realized gain on sales of available-for-sale securities | 126 | 211 | 366 | 362 | ||||||||||||
Commissions | 1,142 | 1,178 | 2,263 | 2,260 | ||||||||||||
Net gains on sales of loans | 1,121 | 382 | 2,027 | 486 | ||||||||||||
Net servicing fees (expense) | 70 | 3 | 138 | (22 | ) | |||||||||||
Increase in cash value of life insurance | 313 | 304 | 601 | 571 | ||||||||||||
Gain (loss) on sale of other real estate and repossessed assets | 32 | (178 | ) | (50 | ) | (240 | ) | |||||||||
Other income | 98 | 104 | 216 | 246 | ||||||||||||
Total non-interest income | 4,366 | 3,542 | 8,383 | 6,542 | ||||||||||||
Non-interest Expenses | ||||||||||||||||
Salaries and employee benefits | 6,084 | 5,500 | 12,614 | 11,372 | ||||||||||||
Net occupancy expenses | 515 | 600 | 1,118 | 1,269 | ||||||||||||
Equipment expenses | 410 | 435 | 863 | 894 | ||||||||||||
Data processing fees | 428 | 402 | 872 | 807 | ||||||||||||
Advertising and promotion | 378 | 306 | 711 | 607 | ||||||||||||
ATM and debit card expenses | 347 | 316 | 682 | 606 | ||||||||||||
Deposit insurance | 212 | 270 | 444 | 540 | ||||||||||||
Professional fees | 383 | 439 | 913 | 878 | ||||||||||||
Software subscriptions and maintenance | 433 | 386 | 860 | 802 | ||||||||||||
Other real estate and repossessed assets | 87 | 151 | 214 | 286 | ||||||||||||
Other expenses | 1,096 | 1,048 | 2,100 | 2,038 | ||||||||||||
Total non-interest expenses | 10,373 | 9,853 | 21,391 | 20,099 | ||||||||||||
Income Before Income Tax | 4,533 | 3,747 | 8,049 | 6,570 | ||||||||||||
Income tax expense | 1,315 | 1,133 | 2,351 | 1,936 | ||||||||||||
Net Income Available to Common Shareholders | $ | 3,218 | $ | 2,614 | $ | 5,698 | $ | 4,634 | ||||||||
Earnings Per Share | ||||||||||||||||
Basic | $ | 0.44 | $ | 0.37 | $ | 0.78 | $ | 0.65 | ||||||||
Diluted | $ | 0.43 | $ | 0.36 | $ | 0.76 | $ | 0.63 | ||||||||
Dividends Per Share | $ | 0.12 | $ | 0.08 | $ | 0.24 | $ | 0.14 |
See notes to consolidated condensed financial statements
2 |
Consolidated Condensed Statements of Comprehensive Income
(Unaudited)
(In Thousands)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net Income | $ | 3,218 | $ | 2,614 | $ | 5,698 | $ | 4,634 | ||||||||
Other Comprehensive Income (Loss) | ||||||||||||||||
Net unrealized holding gain (loss) on securities available-for-sale | (3,179 | ) | 3,164 | (2,139 | ) | 5,846 | ||||||||||
Net unrealized gain on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income | - | 205 | - | 839 | ||||||||||||
Reclassification adjustment for realized gains included in net income | (126 | ) | (211 | ) | (366 | ) | (362 | ) | ||||||||
Net unrealized gain on derivative used for cash flow hedges | 42 | 17 | 57 | 49 | ||||||||||||
(3,263 | ) | 3,175 | (2,448 | ) | 6,372 | |||||||||||
Income tax (expense) benefit related to other comprehensive income | 1,124 | (1,100 | ) | 844 | (2,199 | ) | ||||||||||
Other comprehensive income (loss), net of tax | (2,139 | ) | 2,075 | (1,604 | ) | 4,173 | ||||||||||
Comprehensive Income | $ | 1,079 | $ | 4,689 | $ | 4,094 | $ | 8,807 |
See notes to consolidated condensed financial statements
3 |
Consolidated
Condensed Statement of Stockholders’ Equity
For the Period Ended June 30, 2015
(Unaudited)
(In Thousands, Except Share and Per Share Data)
Common Stock | Additional Paid-in Capital Common | Retained Earnings | Accumulated
Other Comprehensive Income (Loss) | Total | ||||||||||||||||
Balances December 31, 2014 | 72 | 74,916 | 50,171 | 2,378 | 127,537 | |||||||||||||||
Cumulative effect of change in accounting principle for low income housing tax credits, net of tax of $270 | (785 | ) | (785 | ) | ||||||||||||||||
Balance, beginning of period - as adjusted | 72 | 74,916 | 49,386 | 2,378 | 126,752 | |||||||||||||||
Net income | 5,698 | 5,698 | ||||||||||||||||||
Other comprehensive loss, net of taxes | (1,604 | ) | (1,604 | ) | ||||||||||||||||
Stock options, exercised | 2 | 1,591 | 1,593 | |||||||||||||||||
Tax benefit on stock options | 285 | 285 | ||||||||||||||||||
Cash dividends, common stock ($.24 per share) | (1,772 | ) | (1,772 | ) | ||||||||||||||||
Balances June 30, 2015 | $ | 74 | $ | 76,792 | $ | 53,312 | $ | 774 | $ | 130,952 |
See notes to consolidated condensed financial statements
4 |
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(In Thousands, Except Share and Per Share Data)
Six Months Ended | ||||||||
June 30, | ||||||||
2015 | 2014 | |||||||
Operating Activities | ||||||||
Net income | $ | 5,698 | $ | 4,634 | ||||
Items not requiring cash | ||||||||
Provision for loan losses | - | 850 | ||||||
Depreciation and amortization | 2,257 | 962 | ||||||
Deferred income tax | 670 | 1,260 | ||||||
Loans originated for sale | (72,303 | ) | (18,990 | ) | ||||
Proceeds from sales of loans held for sale | 67,785 | 15,770 | ||||||
Gain on sale of loans held for sale | (2,027 | ) | (486 | ) | ||||
Gain on sale of securities, available for sale | (366 | ) | (362 | ) | ||||
Loss on sale of other real estate and repossessed assets | 50 | 240 | ||||||
Change in | ||||||||
Interest receivable and other assets | 72 | 774 | ||||||
Interest payable and other liabilities | (30 | ) | 1,045 | |||||
Cash value of life insurance | (601 | ) | (571 | ) | ||||
Other adjustments | 71 | 170 | ||||||
Net cash provided by operating activities | 1,276 | 5,296 | ||||||
Investing Activities | ||||||||
Purchases of securities, available for sale | (35,886 | ) | (34,623 | ) | ||||
Proceeds from maturities and paydowns of securities, available for sale | 19,173 | 14,800 | ||||||
Proceeds from sales of securities, available for sale | 13,383 | 23,226 | ||||||
Redemption of Federal Home Loan Bank stock | 2,154 | - | ||||||
Net change in loans | (24,297 | ) | (16,589 | ) | ||||
Purchases of premises and equipment | (704 | ) | (481 | ) | ||||
Proceeds from real estate owned sales | 1,585 | 2,414 | ||||||
Net cash used in investing activities | (24,592 | ) | (11,253 | ) | ||||
Financing Activities | ||||||||
Net change in | ||||||||
Noninterest-bearing, interest-bearing demand and savings deposits | 33,087 | 16,512 | ||||||
Certificates of deposit | (34,119 | ) | (50,296 | ) | ||||
Proceeds from FHLB advances | 193,700 | 320,200 | ||||||
Repayments of FHLB advances | (174,100 | ) | (276,082 | ) | ||||
Repayments of other borrowings | (379 | ) | (379 | ) | ||||
Cash dividends | (1,772 | ) | (999 | ) | ||||
Stock options exercised | 1,593 | 450 | ||||||
Net cash provided by financing activities | 18,010 | 9,406 | ||||||
Net Change in Cash and Cash Equivalents | (5,306 | ) | 3,449 | |||||
Cash and Cash Equivalents, Beginning of Period | 29,575 | 25,285 | ||||||
Cash and Cash Equivalents, End of Period | $ | 24,269 | $ | 28,734 | ||||
Additional Cash Flows Information | ||||||||
Interest paid | $ | 4,332 | $ | 4,432 | ||||
Income tax paid | 1,300 | 500 | ||||||
Transfers from loans to foreclosed real estate | 436 | 1,148 | ||||||
Mortgage servicing rights capitalized | 200 | 113 |
See notes to consolidated condensed financial statements
5 |
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In Thousands, Except Share and Per Share Data)
Note 1: Basis of Presentation
The consolidated condensed financial statements include the accounts of MutualFirst Financial, Inc. (MutualFirst or the “Company”), its wholly owned subsidiary MutualBank, an Indiana commercial bank (“Mutual” or the “Bank”), Mutual’s wholly owned subsidiaries, First MFSB Corporation, Mishawaka Financial Services, Summit Service Corp. and the wholly owned subsidiary of Summit Service Corp., Summit Mortgage Inc. (“Summit”), Mutual Federal Investment Company (“MFIC”), and MFIC majority owned subsidiary, Mutual Federal REIT, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation.
Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for the year ended December 31, 2014, filed with the Securities and Exchange Commission on March 13, 2015.
The interim consolidated condensed financial statements at and for the three and six months ended June 30, 2015 and 2014, 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 results of operations for the period are not necessarily indicative of the results to be expected for the full year.
The Consolidated Condensed Balance Sheet of the Company as of December 31, 2014 has been derived from the Audited Consolidated Balance Sheet of the Company as of that date.
6 |
Note 2: Earnings Per Share
Earnings per share were computed as follows:
Three Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
Income | Weighted- Average Shares | Per- Share Amount | Income | Weighted- Average Shares | Per- Share Amount | |||||||||||||||||||
Basic Earnings Per Share | ||||||||||||||||||||||||
Net income | $ | 3,218 | 7,383,435 | $ | 0.44 | $ | 2,614 | 7,133,233 | $ | 0.37 | ||||||||||||||
Effect of Dilutive Securities | ||||||||||||||||||||||||
Stock options | - | 164,299 | - | 227,167 | ||||||||||||||||||||
Diluted Earnings Per Share | ||||||||||||||||||||||||
Net income available and assumed conversions | $ | 3,218 | 7,547,734 | $ | 0.43 | $ | 2,614 | 7,360,400 | $ | 0.36 |
Six Months Ended June 30, | ||||||||||||||||||||||||
2015 | 2014 | |||||||||||||||||||||||
Income | Weighted- Average Shares | Per- Share Amount | Income | Weighted- Average Shares | Per- Share Amount | |||||||||||||||||||
Basic Earnings Per Share | ||||||||||||||||||||||||
Net income | $ | 5,698 | 7,348,773 | $ | 0.78 | $ | 4,634 | 7,126,082 | $ | 0.65 | ||||||||||||||
Effect of Dilutive Securities | ||||||||||||||||||||||||
Stock options | - | 179,633 | - | 230,680 | ||||||||||||||||||||
Diluted Earnings Per Share | ||||||||||||||||||||||||
Income available to common stockholders and assumed conversions | $ | 5,698 | 7,528,406 | $ | 0.76 | $ | 4,634 | 7,356,762 | $ | 0.63 |
Options to purchase 37,161 and 44,161 shares of common stock were outstanding at June 30, 2015 and 2014, respectively, but were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares.
Note 3: Impact of Accounting Pronouncements
In May 2015, Financial Accounting Standards Board (FASB), issued Accounting Standards Update (ASU) 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). This Update addresses the diversity in practice related to how certain investments measured at net asset value with future redemption dates are categorized; the amendments in this Update remove the requirement to categorize investments for which fair values are measured using the net asset value per share practical expedient. It also limits disclosures to investments for which the entity has elected to measure the fair value using the practical expedient. The amendments in this Update are effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company does not anticipate that the ASU will have a material effect on its financial position or results of operations.
7 |
In April 2015, FASB issued ASU 2015-05, Intangibles – Goodwill and Other – Internal-Use Software. The objective of the amendments in this update was to address the concerns of stakeholders that the lack of guidance about a customer’s accounting for fees in a cloud computing arrangement leads to unnecessary cost and complexity when evaluating the accounting for those fees, as well as some diversity in practice. The amendments in this update will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement by providing guidance as to whether an arrangement includes the sale or license of software. The Company does not anticipate that the ASU will have a material effect on its financial position or results of operations.
In February 2015, FASB issued Accounting Standards Update (ASU) 2015-01, Income Statement – Extraordinary and Unusual Items. The objective of the update was to simplify the income statement presentation requirements by eliminating the concept of extraordinary items.
The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity may also apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. An entity that prospectively applies this ASU should disclose both the nature and the amount of an item included in income from continuing operations after adoption that adjusts an extraordinary item previously classified and presented before the date of adoption, if applicable. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
In August 2014, FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The update provides U.S. Generally Accepted Accounting Principles (GAAP) guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued.
The amendments in this update are effective for annual reporting periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
In August 2014, FASB, issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The objective of this Update is to reduce diversity in practice by addressing the classification of foreclosed mortgage loans that are fully or partially guaranteed under government programs. Currently, some creditors reclassify those loans to real estate as with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The amendments affect creditors that hold government-guaranteed mortgage loans, including those guaranteed by the FHA and the VA.
8 |
The amendments in this update are effective for annual reporting periods ending after December 15, 2015 and interim periods beginning after December 15, 2015. An entity should adopt the amendments in this Update using either a prospective transition method or a modified retrospective transition method. For prospective transition, an entity should apply the amendments in this Update to foreclosures that occur after the date of adoption. For the modified retrospective transition, an entity should apply the amendments in the Update by means of a cumulative-effect adjustment (through a reclassification to a separate other receivable) as of the beginning of the annual period of adoption. Prior periods should not be adjusted. However, a reporting entity must apply the same method of transition as elected under ASU No. 2014-04. Early adoption, including adoption in an interim period, is permitted if the entity already has adopted Update 2014-04. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
In June 2014, FASB issued ASU 2014-12 “Compensation – Stock Compensation.” This update defines the accounting treatment for share-based payments and “resolves the diverse accounting treatment of those awards in practice.” The new requirement mandates that “a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.” Compensation cost will now be recognized in the period in which it becomes likely that the performance target will be met.
The amendments in this update are effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
In June 2014, FASB, issued ASU 2014-11 “Transfers and Servicing.” This update addresses the concerns of stakeholders’ by changing the accounting practices surrounding repurchase agreements. The new guidance changes the “accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements.”
The amendments in this update are effective for annual reporting periods beginning after December 15, 2015. Early adoption is prohibited. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
In May 2014, FASB, in joint cooperation with IASB, issued ASU 2014-09 “Revenue from Contracts with Customers.” The topic of Revenue Recognition had become broad, with several other regulatory agencies issuing standards which lacked cohesion. The new guidance establishes a “common framework” and “reduces the number of requirements to which an entity must consider in recognizing revenue” and yet provides improved disclosures to assist stakeholders reviewing financial statements.
The amendments in this update are effective for annual reporting periods beginning after December 15, 2017. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.
The FASB and the Internal Accounting Standards Board (IASB) (together, the Boards) published for public comment revised Exposure Drafts outlining proposed changes to the accounting for leases. The proposals aim to improve the quality and comparability of financial reporting by providing greater transparency about leverage, the assets an organization uses in its operations and the risks to which it is exposed from entering into leasing transactions. Under existing accounting standards, a majority of leases are not reported on a lessee’s balance sheet. The amounts involved can be substantial. Additionally, the existing accounting models for leases require lessees and lessors to classify their leases as either capital leases (e.g., a lease of equipment for nearly all of its economic life) or operating leases (e.g., a lease of office space for 10 years) and to account for those leases differently.
9 |
For capital leases, a lessee recognizes lease assets and liabilities on the balance sheet. For operating leases, a lessee does not recognize lease assets or liabilities on the balance sheet. The existing standards have been criticized for failing to meet the needs of users of financial statements because they do not always provide a complete representation of leasing transactions. In response to this criticism, in 2006 the Boards initiated a joint project to improve the financial reporting of leasing activities under International Financial Reporting Standards (IFRSs) and U.S. GAAP. The Boards have developed an approach to lease accounting that would require a lessee to recognize assets and liabilities for the rights and obligations created by leases. A lessee would recognize assets and liabilities for leases of more than 12 months.
Stakeholders have informed the Boards that there are a wide variety of lease transactions with different economics. To better reflect those differing economics, the revised Exposure Drafts propose a dual approach to the recognition, measurement, and presentation of expenses and cash flows arising from a lease. For most real estate leases, a lessee would report a straight-line lease expense in its income statement. For most other leases, such as equipment or vehicles, a lessee would report amortization of the asset separately from interest on the lease liability. The Boards are also proposing disclosures that should enable investors and other users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases.
The leases project is a converged effort between the Boards. The revised Exposure Drafts for both organizations are nearly identical. The differences between the two proposals are primarily related to existing differences between U.S. GAAP and IFRS and decisions the FASB made related to nonpublic entities.
The Boards are also proposing changes to how equipment and vehicle lessors would account for leases that are off balance sheet. Those changes would provide greater transparency about such lessors’ exposure to credit risk and asset risk.
As of July 2015, FASB was working on drafting the final standard.
Note 4: Investment Securities
The amortized costs and approximate fair values, together with gross unrealized gains and losses on securities, are as follows:
June 30, 2015 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Available for Sale Securities | ||||||||||||||||
Mortgage-backed securities | ||||||||||||||||
Government-sponsored agencies | $ | 109,031 | $ | 2,073 | $ | (509 | ) | $ | 110,595 | |||||||
Collateralized mortgage obligations | ||||||||||||||||
Government-sponsored agencies | 85,629 | 884 | (742 | ) | 85,771 | |||||||||||
Municipal obligations | 43,558 | 1,500 | (480 | ) | 44,578 | |||||||||||
Corporate obligations | 21,777 | 65 | (1,280 | ) | 20,562 | |||||||||||
Total investment securities | $ | 259,995 | $ | 4,522 | $ | (3,011 | ) | $ | 261,506 |
10 |
December 31, 2014 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Available for Sale Securities | ||||||||||||||||
Mortgage-backed securities | ||||||||||||||||
Government-sponsored agencies | $ | 110,452 | $ | 2,927 | $ | (89 | ) | $ | 113,290 | |||||||
Collateralized mortgage obligations | ||||||||||||||||
Government-sponsored agencies | 97,325 | 1,270 | (836 | ) | 97,759 | |||||||||||
Federal agencies | 4 | - | - | 4 | ||||||||||||
Municipal obligations | 27,246 | 2,013 | (7 | ) | 29,252 | |||||||||||
Corporate obligations | 21,763 | 44 | (1,306 | ) | 20,501 | |||||||||||
Total investment securities | $ | 256,790 | $ | 6,254 | $ | (2,238 | ) | $ | 260,806 |
The amortized cost and fair value of securities available for sale at June 30, 2015, 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.
Available for Sale | ||||||||
Description Securities | Amortized Cost | Fair Value | ||||||
Security obligations due | ||||||||
Within one year | 4,488 | 4,509 | ||||||
One to five years | $ | 14,491 | $ | 14,577 | ||||
Five to ten years | 2,214 | 2,373 | ||||||
After ten years | 44,142 | 43,681 | ||||||
65,335 | 65,140 | |||||||
Mortgage-backed securities | ||||||||
Government-sponsored agencies | 109,031 | 110,595 | ||||||
Collateralized mortgage obligations | ||||||||
Government-sponsored agencies | 85,629 | 85,771 | ||||||
Totals | $ | 259,995 | $ | 261,506 |
Proceeds from sales of securities available for sale for the three and six months ended June 30, 2015 and 2014 were $5.8 million and $13.4 million compared to $7.7 million and $23.2 million, respectively. Gross gains of $126,000 and $366,000 compared to $253,000 and $569,000 for the three and six months ended June 30, 2015 and 2014, respectively, were recognized on those sales. Gross losses of $42,000 and $207,000 for the three and six months ended June 30, 2014 were recognized on those sales. There were no gross losses recognized on the sales of securities for the three and six months ended June 30, 2015.
All mortgage-backed securities and collateralized-mortgage obligations held by the Company as of June 30, 2015 were in government-sponsored or federal agency securities.
Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at June 30, 2015 and December 31, 2014 was $109.7 million and $67.5 million, which is approximately 41.9 percent and 25.9 percent of the Company’s investment portfolio at those dates.
Based on our evaluation of available evidence, including recent changes in market interest rates, management believes the declines in fair value for these securities, for the periods presented, are temporary.
11 |
Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.
During the first half of 2015 and 2014, the Bank determined that its security holdings had no other-than-temporary impairment.
The following tables show the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2015 and December 31, 2014:
June 30, 2015 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
Available for Sale | ||||||||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||
Government-sponsored agencies | $ | 44,845 | $ | (509 | ) | $ | - | $ | - | $ | 44,845 | $ | (509 | ) | ||||||||||
Collateralized mortgage obligations | ||||||||||||||||||||||||
Government-sponsored agencies | 23,968 | (211 | ) | 23,215 | (531 | ) | 47,183 | (742 | ) | |||||||||||||||
Municipal obligations | 14,646 | (477 | ) | 490 | (3 | ) | 15,136 | (480 | ) | |||||||||||||||
Corporate obligations | - | - | 2,522 | (1,280 | ) | 2,522 | (1,280 | ) | ||||||||||||||||
Total temporarily impaired securities | $ | 83,459 | $ | (1,197 | ) | $ | 26,227 | $ | (1,814 | ) | $ | 109,686 | $ | (3,011 | ) |
December 31, 2014 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||
Available for Sale | ||||||||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||
Government-sponsored agencies | $ | 1,069 | $ | (9 | ) | $ | 19,580 | $ | (80 | ) | $ | 20,649 | $ | (89 | ) | |||||||||
Collateralized mortgage obligations | ||||||||||||||||||||||||
Government-sponsored agencies | 5,075 | (40 | ) | 34,159 | (796 | ) | $ | 39,234 | $ | (836 | ) | |||||||||||||
Federal agencies | - | - | ||||||||||||||||||||||
Municipal obligations | - | - | 631 | (7 | ) | 631 | (7 | ) | ||||||||||||||||
Corporate obligations | - | - | 6,995 | (1,306 | ) | 6,995 | (1,306 | ) | ||||||||||||||||
Total temporarily impaired securities | $ | 6,144 | $ | (49 | ) | $ | 61,365 | $ | (2,189 | ) | $ | 67,509 | $ | (2,238 | ) |
Mortgage-Backed Securities (MBS) and Collateralized Mortgage Obligations (CMO)
The unrealized losses on the Company’s investment in MBSs and CMOs were caused by interest rate changes. The Company expects to recover the amortized cost basis over the term of the securities. Because (1) the decline in market value is attributable to changes in interest rates and not credit quality, (2) the Company does not intend to sell the investments and (3) it is more likely than not the Company will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company does not consider any of these investments to be other-than-temporarily impaired at June 30, 2015.
12 |
Municipals
The decrease in unrealized losses on the Company’s investments in securities of state and political subdivisions were caused by changes in interest rates. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company does not intend to sell the investment and it is more likely than not that the Company will not be required to sell these investments before recovery of its new, lower amortized cost basis, which may be at maturity. The Corporation does not consider these investment securities to be other-than-temporarily impaired at June 30, 2015.
Corporate Obligations
The Company’s unrealized losses on investments in corporate obligations primarily relates to two investments in pooled trust preferred securities. The unrealized losses were primarily caused by (1) a decrease in performance and regulatory capital resulting from exposure to subprime mortgages and (2) a sector downgrade by several industry analysts. The Company recognized a loss equal to the credit loss for these securities, establishing a new, lower amortized cost basis. The credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. Because the Company does not intend to sell these investments and it is likely that the Company will not be required to sell the investments before recovery of its new, lower amortized cost basis, which may be at maturity, it does not consider the remainder of these investments to be other-than-temporarily impaired at June 30, 2015.
Other-Than-Temporary Impairment (OTTI)
Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or whether it will be evaluated for impairment under the accounting guidance for investments in debt and equity securities.
The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt securities within the scope of the guidance for investments in debt and equity securities. For securities that are a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model. For securities where the security is not a beneficial interest in securitized financial assets, the Company uses debt and equity securities impairment accounting model.
The Company conducts periodic reviews to identify and evaluate each investment security to determine whether an other-than-temporary impairment has occurred. Economic models are used to determine whether an other-than-temporary impairment has occurred on these securities. While all securities are considered, the securities primarily impacted by other-than-temporary impairment testing are private-label mortgage-backed securities and trust preferred securities.
MutualFirst Financial uses market-based yield indicators as a baseline for determining appropriate discount rates, and then adjusts the resulting discount rates on the basis of its credit and structural analysis of specific trust preferred securities. The primary focus is on the returns a fixed income investor would require in order to allocate capital on a risk adjusted basis. There is currently little demand for pooled trust preferred securities; however, the Company looks principally to market yields for stand-alone trust preferred securities issued by banks, thrifts and insurance companies for which there is an active and liquid market. The next step is to make a series of adjustments to reflect the differences that exist between these products (both credit and structural) and, most importantly, to reflect idiosyncratic credit performance differences (both actual and projected) between these products and the underlying collateral in the specific trust preferred security. Importantly, as part of the analysis described above, MutualFirst considers the fact that structured instruments frequently exhibit leverage not present in stand-alone instruments, and makes adjustments as necessary to reflect this additional risk.
13 |
Credit Losses Recognized on Investments
Certain debt securities have experienced fair value deterioration due to credit losses, as well as due to other market factors, but are not otherwise other-than-temporarily impaired.
The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income.
Accumulated Credit Losses | ||||||||
Three Months Ended | ||||||||
June 30, | ||||||||
2015 | 2014 | |||||||
Credit losses on debt securities held | ||||||||
Beginning of period | $ | 109 | $ | 1,205 | ||||
Reductions related to actual losses incurred | - | (500 | ) | |||||
As of June 30, | $ | 109 | $ | 705 |
Accumulated Credit Losses | ||||||||
Six Months Ended | ||||||||
June 30, | ||||||||
2015 | 2014 | |||||||
Credit losses on debt securities held | ||||||||
Beginning of year | $ | 109 | $ | 1,205 | ||||
Reductions related to actual losses incurred | - | (500 | ) | |||||
As of June 30, | $ | 109 | $ | 705 |
14 |
Pooled Trust Preferred Securities. The Company has invested in pooled trust preferred securities. At June 30, 2015, the current book balance of our pooled trust preferred securities was $3.8 million. The original par value of these securities was $4.0 million prior to the OTTI write-downs in 2011 and earlier. OTTI taken on trust preferred securities previously was the result of deterioration in the performance of the underlying collateral. The deterioration was the result of increased defaults and deferrals of dividend payments in that year, creating credit impairment along with weakening financial performance of performing collateral, increasing the risk of future deferrals of dividends and defaults. No additional OTTI was determined in the first half of 2015. All pooled trust preferred securities owned by the Bank are exempt from the Volcker Rule.
The following table provides additional information related to the Bank’s investment in pooled trust preferred securities as of June 30, 2015:
Deal Name | Class | Original Par | Book Value | Fair Value | Unrealized loss | Realized Losses YTD | Lowest Current Rating | Number
of Banks / Insurance Cos. Currently Performing | Total Number of Banks and Insurance Cos. In Issuance (Unique) | Actual Deferrals/ Defaults (as a % of original collateral) | Total Projected Defaults (as a % of performing collateral) (1) | Excess subordination (after taking into account best estimate of future deferrals/ defaults) (2) | ||||||||||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||||||||||||
Alesco Preferred Funding IX | A2A | 1,000 | 911 | 548 | (363 | ) | - | BB+ | 42 | 51 | 10.04 | % | 12.95 | % | 55.14 | % | ||||||||||||||||||||||||||||
U.S. Capital Funding I | B1 | 3,000 | 2,891 | 1,974 | (917 | ) | - | B3 | 28 | 33 | 9.44 | % | 7.02 | % | 10.33 | % | ||||||||||||||||||||||||||||
$ | 4,000 | $ | 3,802 | $ | 2,522 | $ | (1,280 | ) | $ | - |
(1) | A 10% recovery is applied to all projected defaults by depository institutions. A 15% recovery is applied to all projected defaults by insurance companies. No recovery is applied to current defaults. |
(2) | Excess subordination represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences any credit impairment. Excess subordinated percentage is calculated by (a) determining what percentage of defaults a deal can experience before the bond has credit impairment, and (b) subtracting from this default breakage percentage both total current and expected future default percentages. |
15 |
Note 5: Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:
June 30, | December 31, | |||||||
2015 | 2014 | |||||||
Net unrealized gain on securities available-for-sale | $ | 2,428 | $ | 4,933 | ||||
Net unrealized loss on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income | (917 | ) | (917 | ) | ||||
Net unrealized loss on derivative used for cash flow hedges | (52 | ) | (109 | ) | ||||
Net unrealized loss relating to defined benefit plan liability | (109 | ) | (109 | ) | ||||
1,350 | 3,798 | |||||||
Tax expense | 576 | 1,420 | ||||||
Net of tax amount | $ | 774 | $ | 2,378 |
The following table presents the reclassification adjustments out of accumulated other comprehensive income that were included in net income in the Consolidated Statements of Income for the three and six months ended June 30, 2015 and 2014.
Amount
Reclassified from Accumulated Other Comprehensive Income For the Three Months Ended June 30, | ||||||||||
Details about Accumulated
Other Comprehensive Income Components | 2015 | 2014 | Affected Line Item in the Statements of Income | |||||||
Unrealized gains on available-for-sale securities | ||||||||||
Realized securities gains reclassified into income | $ | 126 | $ | 211 | Other income - net realized gains on sale of available-for-sale securities | |||||
Related income tax expense | (43 | ) | (72 | ) | Income tax expense | |||||
Total reclassifications for the period, net of tax | $ | 83 | $ | 139 |
Amount
Reclassified from Accumulated Other Comprehensive Income For the Six Months Ended June 30, | ||||||||||
Details about Accumulated
Other Comprehensive Income Components | 2015 | 2014 | Affected Line Item in the Statements of Income | |||||||
Unrealized gains on available-for-sale securities | ||||||||||
Realized securities gains reclassified into income | $ | 366 | $ | 362 | Other income - net realized gains on sale of available-for-sale securities | |||||
Related income tax expense | (124 | ) | (123 | ) | Income tax expense | |||||
Total reclassifications for the period, net of tax | $ | 242 | $ | 239 |
16 |
Note 6: Fair Values of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1 | Quoted prices in active markets for identical assets or liabilities |
Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities |
Level 3 | Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities |
Items Measured at Fair Value on a Recurring Basis
Following is a description of the valuation methodologies and inputs used for instruments measured at fair value on a recurring basis and recognized in the accompanying comparative balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Available-for-Sale Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The Company uses a third-party provider to provide market prices on its securities. Pooled trust preferred securities prices are evaluated by a third party. Level 1 securities include marketable equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include mortgage-backed, collateralized mortgage obligations, small business administration, marketable equity, municipal, federal agency and certain corporate obligation securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include certain corporate obligation securities.
Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on investment securities relationship to other benchmark quoted investment securities. Any investment security not valued based upon the methods above are considered Level 3.
17 |
The following table presents the fair value measurements of assets measured at fair value on a recurring basis and level within the ASC 820 fair value hierarchy in which the fair value measurements fall:
Fair Value Measurements Using | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
June 30, 2015 | ||||||||||||||||
Mortgage-backed securities | ||||||||||||||||
Government sponsored agencies | $ | 110,595 | $ | - | $ | 110,595 | $ | - | ||||||||
Collateralized mortgage obligations | ||||||||||||||||
Government sponsored agencies | 85,771 | - | 85,771 | - | ||||||||||||
Municipal obligations | 44,578 | - | 44,578 | - | ||||||||||||
Corporate obligations | 20,562 | - | 18,040 | 2,522 | ||||||||||||
Available-for-sale securities | $ | 261,506 | $ | - | $ | 258,984 | $ | 2,522 |
Fair Value Measurements Using | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
December 31, 2014 | ||||||||||||||||
Mortgage-backed securities | ||||||||||||||||
Government sponsored agencies | $ | 113,290 | $ | - | $ | 113,290 | $ | - | ||||||||
Collateralized mortgage obligations | ||||||||||||||||
Government sponsored agencies | 97,759 | - | 97,759 | - | ||||||||||||
Federal agencies | 4 | - | 4 | - | ||||||||||||
Municipal obligations | 29,252 | - | 29,252 | - | ||||||||||||
Corporate obligations | 20,501 | - | 17,979 | 2,522 | ||||||||||||
Available-for-sale securities | $ | 260,806 | $ | - | $ | 258,284 | $ | 2,522 |
The following is a reconciliation of the beginning and ending balances for the three and six months ended June 30, 2015 and 2014 of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:
Three Months Ended | ||||||||
June 30, | ||||||||
2015 | 2014 | |||||||
Beginning balance | $ | 2,522 | $ | 4,043 | ||||
Total realized and unrealized gains (losses) | ||||||||
Included in net income | - | 56 | ||||||
Included in other comprehensive income (loss) | - | 205 | ||||||
Purchases, sales, issuances and settlements | - | (566 | ) | |||||
Ending balance | $ | 2,522 | $ | 3,738 | ||||
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date | $ | 0 | $ | 0 |
18 |
Six Months Ended | ||||||||
June 30, | ||||||||
2015 | 2014 | |||||||
Beginning balance | $ | 2,522 | $ | 3,336 | ||||
Total realized and unrealized gains (losses) | ||||||||
Included in net income | - | 56 | ||||||
Included in other comprehensive income (loss) | - | 920 | ||||||
Purchases, issuances and settlements | - | (574 | ) | |||||
Ending balance | $ | 2,522 | $ | 3,738 | ||||
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date | $ | 0 | $ | 0 |
Items Measured at Fair Value on a Non-Recurring Basis
From time to time, certain assets may be recorded at fair value on a non-recurring basis. These non-recurring fair value adjustments typically are a result of the application of lower of cost or fair value accounting or a write-down occurring during the period. The following is a description of the valuation methodologies used for certain assets that are recorded at fair value.
Other Real Estate Owned
The fair value of real estate is generally determined based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis.
Other real estate owned is classified within Level 3 of the fair value hierarchy.
The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall.
Fair Value Measurements Using | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
June 30, 2015 | ||||||||||||||||
Other real estate owned | $ | 57 | $ | - | $ | - | $ | 57 |
Fair Value Measurements Using | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
December 31, 2014 | ||||||||||||||||
Other real estate owned | 1,280 | - | - | 1,280 |
19 |
The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements:
June 30, 2015 | Fair Value |
Valuation Technique | Unobservable Inputs | Range | ||||||
Trust Preferred Securities | $ | 2,522 | Discounted cash flow | Discount rate | 8.0 | % | ||||
Constant prepayment rate | 2.0 | % | ||||||||
Cumulative projected prepayments | 40.0 | % | ||||||||
Probability of default | 1.7 - 1.8 | % | ||||||||
Projected cures given deferral | 0 - 15.0 | % | ||||||||
Loss severity | 34.2 - 39.8 | % | ||||||||
Other real estate owned | $ | 57 | Third party valuations | Discount to reflect realizable value less estimated selling costs | 29.8 - 93.0 | % |
December 31, 2014 | Fair Value |
Valuation Technique | Unobservable Inputs | Range | ||||||
Trust Preferred Securities | $ | 2,522 | Discounted cash flow | Discount rate | 8.0 | % | ||||
Constant prepayment rate | 2.0 | % | ||||||||
Cumulative projected prepayments | 40.0 | % | ||||||||
Probability of default | 1.7 - 1.8 | % | ||||||||
Projected cures given deferral | 0 - 15.0 | % | ||||||||
Loss severity | 34.2 - 39.8 | % | ||||||||
Other real estate owned | $ | 1,280 | Third party valuations | Discount to reflect realizable value less estimated selling costs | 24.4 - 36.7 | % |
The following methods and assumptions were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value:
Cash and Cash Equivalents - The fair value of cash and cash-equivalents approximates carrying value.
Loans Held For Sale - Fair values are based on quoted market prices.
Loans - The fair value for loans is 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.
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.
20 |
FHLB Advances - The fair value of these borrowings is 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.
Other Borrowings - The fair value of these borrowings is estimated using discounted cash flow analyses using interest rates for similar financial instruments.
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 fair value of these instruments is insignificant.
The estimated fair values of the Company’s financial instruments not carried at fair value in the consolidated balance sheets as of the dates noted below are as follows:
Fair Value Measurements Using | ||||||||||||||||||||
June 30, 2015 | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 24,269 | $ | 24,269 | $ | 24,269 | $ | - | $ | - | ||||||||||
Loans held for sale | 12,486 | 12,541 | - | 12,541 | - | |||||||||||||||
Loans, net | 1,026,717 | 1,019,952 | - | - | 1,019,952 | |||||||||||||||
FHLB stock | 9,810 | 9,810 | - | 9,810 | - | |||||||||||||||
Interest receivable | 4,054 | 4,054 | - | 4,054 | - | |||||||||||||||
Liabilities | ||||||||||||||||||||
Deposits | 1,078,287 | 1,078,926 | 711,204 | - | 367,722 | |||||||||||||||
FHLB advances | 212,042 | 211,706 | - | 211,706 | - | |||||||||||||||
Other borrowings | 9,816 | 9,868 | - | 9,868 | - | |||||||||||||||
Interest payable | 248 | 248 | - | 248 | - |
21 |
Fair Value Measurements Using | ||||||||||||||||||||
December 31, 2014 | Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 29,575 | $ | 29,575 | $ | 29,575 | $ | - | $ | - | ||||||||||
Loans held for sale | 6,140 | 6,220 | - | 6,220 | - | |||||||||||||||
Loans, net | 1,003,518 | 1,006,233 | - | - | 1,006,233 | |||||||||||||||
FHLB stock | 11,964 | 11,964 | - | 11,964 | - | |||||||||||||||
Interest receivable | 3,730 | 3,730 | - | 3,730 | - | |||||||||||||||
Liabilities | ||||||||||||||||||||
Deposits | 1,079,320 | 1,050,295 | 648,314 | - | 401,981 | |||||||||||||||
FHLB advances | 192,442 | 191,995 | - | 191,995 | - | |||||||||||||||
Other borrowings | 10,174 | 10,283 | - | 10,283 | - | |||||||||||||||
Interest payable | 223 | 223 | - | 223 | - |
Note 7: Loans and Allowance
Classes of loans at June 30, 2015 and December 31, 2014 include:
June 30, | December 31, | |||||||
2015 | 2014 | |||||||
Real estate | ||||||||
Commercial | $ | 203,767 | $ | 198,019 | ||||
Commercial construction and development | 29,940 | 33,102 | ||||||
Consumer closed end first mortgage | 505,189 | 517,063 | ||||||
Consumer open end and junior liens | 69,640 | 71,073 | ||||||
808,536 | 819,257 | |||||||
Other loans | ||||||||
Consumer loans | ||||||||
Auto | 15,072 | 14,712 | ||||||
Boat/RVs | 112,583 | 94,761 | ||||||
Other | 5,134 | 5,184 | ||||||
Commercial and industrial | 101,640 | 88,474 | ||||||
234,429 | 203,131 | |||||||
Total loans | 1,042,965 | 1,022,388 | ||||||
Undisbursed loans in process | (7,359 | ) | (9,285 | ) | ||||
Unamortized deferred loan costs, net | 4,017 | 3,583 | ||||||
Allowance for loan losses | (12,906 | ) | (13,168 | ) | ||||
Net loans | $ | 1,026,717 | $ | 1,003,518 |
22 |
The risk characteristics of each loan portfolio segment are as follows:
Commercial
Real estate
These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.
Construction and Development
Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates and financial analyses of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
Commercial and Industrial
Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Consumer Real Estate and Other Consumer Loans
With respect to residential loans that are secured by consumer closed end first mortgages and are primarily owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires PMI if that ratio is exceeded. Consumer open end and junior lien loans are typically secured by a subordinate interest in 1-4 family residences, and other consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Nonaccrual Loans and Past Due Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in managements’ opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions, but never greater than 90 days past due.
23 |
All interest accrued but not collected for loans that are placed on nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured and generally only after six months of satisfactory performance.
Nonaccrual loans, segregated by class of loans, as of June 30, 2015 and December 31, 2014 are as follows:
June 30, | December 31, | |||||||
2015 | 2014 | |||||||
Real estate | ||||||||
Commercial | $ | 2,049 | $ | 2,023 | ||||
Commercial construction and development | - | 209 | ||||||
Consumer closed end first mortgage | 3,111 | 3,499 | ||||||
Consumer open end and junior liens | 939 | 658 | ||||||
Consumer loans | ||||||||
Auto | 2 | - | ||||||
Boat/RVs | 139 | 191 | ||||||
Other | 18 | 27 | ||||||
Commercial and industrial | 58 | 605 | ||||||
$ | 6,316 | $ | 7,212 |
An age analysis of the Company’s past due loans, segregated by class of loans, as of June 30, 2015 and December 31, 2014 are as follows:
June 30, 2015 | ||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | 90 Days or More Past Due | Total Past Due | Current | Total Loans Receivable | Total Loans 90 Days or More and Accruing | ||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||
Commercial | $ | 1,894 | $ | 206 | $ | 799 | $ | 2,899 | $ | 200,868 | $ | 203,767 | $ | - | ||||||||||||||
Commercial construction and development | - | - | - | - | 29,940 | 29,940 | - | |||||||||||||||||||||
Consumer closed end first mortgage | 6,541 | 611 | 2,418 | 9,570 | 495,619 | 505,189 | 207 | |||||||||||||||||||||
Consumer open end and junior liens | 986 | 68 | 398 | 1,452 | 68,188 | 69,640 | - | |||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||||||
Auto | 41 | 2 | 2 | 45 | 15,027 | 15,072 | - | |||||||||||||||||||||
Boat/RVs | 390 | 100 | 132 | 622 | 111,961 | 112,583 | - | |||||||||||||||||||||
Other | 39 | 20 | 12 | 71 | 5,063 | 5,134 | - | |||||||||||||||||||||
Commercial and industrial | 569 | 44 | 24 | 637 | 101,003 | 101,640 | - | |||||||||||||||||||||
$ | 10,460 | $ | 1,051 | $ | 3,785 | $ | 15,296 | $ | 1,027,669 | $ | 1,042,965 | $ | 207 |
24 |
December 31, 2014 | ||||||||||||||||||||||||||||
30-59 Days Past Due | 60-89 Days Past Due | 90
Days or More Past Due | Total
Past Due | Current | Total Loans Receivable | Total Loans 90 Days or More and Accruing | ||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||
Commercial | $ | 1,308 | $ | 848 | $ | 325 | $ | 2,481 | $ | 195,538 | $ | 198,019 | $ | - | ||||||||||||||
Commercial construction and development | - | - | 209 | 209 | 32,893 | 33,102 | - | |||||||||||||||||||||
Consumer closed end first mortgage | 8,144 | 1,220 | 2,160 | 11,524 | 505,539 | 517,063 | 226 | |||||||||||||||||||||
Consumer open end and junior liens | 969 | 130 | 27 | 1,126 | 69,947 | 71,073 | - | |||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||||||
Auto | 65 | - | - | 65 | 14,647 | 14,712 | - | |||||||||||||||||||||
Boat/RVs | 775 | 158 | 115 | 1,048 | 93,713 | 94,761 | - | |||||||||||||||||||||
Other | 92 | 27 | 14 | 133 | 5,051 | 5,184 | - | |||||||||||||||||||||
Commercial and industrial | 1,066 | 176 | 441 | 1,683 | 86,791 | 88,474 | - | |||||||||||||||||||||
$ | 12,419 | $ | 2,559 | $ | 3,291 | $ | 18,269 | $ | 1,004,119 | $ | 1,022,388 | $ | 226 |
Impaired Loans
Loans are considered impaired in accordance with the impairment accounting guidance (ASC 310-10-35-16), when, based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
Interest on impaired loans is recorded based on the performance of the loan. All interest received on impaired loans that are on nonaccrual status is accounted for on the cash-basis method until qualifying for return to accrual status. Interest is accrued per the contract for impaired loans that are performing.
The following tables present impaired loans as of and for the three and six month periods ended June 30, 2015 and 2014 and the year ended December 31, 2014. There were no loans with a specific valuation allowance as of June 30, 2015 and 2014, respectively, and December 31, 2014.
June 30, 2015 | ||||||||||||||||||||||||||||
Recorded Balance | Unpaid Principal Balance | Specific Allowance | Average Investment in Impaired Loans - Quarter | Average Investment in Impaired Loans - YTD | Interest Income Recognized - Quarter | Interest Income Recognized - YTD | ||||||||||||||||||||||
Loans without a specific valuation allowance | ||||||||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||
Commercial | $ | 5,169 | $ | 5,169 | $ | - | $ | 5,197 | $ | 5,109 | $ | 60 | $ | 116 | ||||||||||||||
Commercial construction and development | 649 | 1,155 | - | 750 | 810 | 8 | 15 | |||||||||||||||||||||
Consumer closed end first mortgage | 1,603 | 1,603 | - | 1,609 | 1,452 | - | - | |||||||||||||||||||||
Commercial and industrial | 224 | 255 | - | 463 | 561 | 1 | 2 | |||||||||||||||||||||
Total | $ | 7,645 | $ | 8,182 | $ | - | $ | 8,019 | $ | 7,932 | $ | 69 | $ | 133 |
25 |
December 31, 2014 | ||||||||||||||||||||
Recorded Balance | Unpaid Principal Balance | Specific Allowance | Average Investment in Impaired Loans | Interest Income Recognized | ||||||||||||||||
Loans without a specific valuation allowance | ||||||||||||||||||||
Real estate | ||||||||||||||||||||
Commercial | $ | 4,933 | $ | 4,933 | $ | - | $ | 3,776 | $ | 161 | ||||||||||
Commercial construction and development | 931 | 1,860 | - | 1,323 | 30 | |||||||||||||||
Consumer closed end first mortgage | 1,138 | 1,138 | - | 1,142 | 8 | |||||||||||||||
Consumer open end and junior liens | - | - | - | 100 | 3 | |||||||||||||||
Commercial and industrial | 758 | 789 | - | 923 | 12 | |||||||||||||||
Total | $ | 7,760 | $ | 8,720 | $ | - | $ | 7,264 | $ | 214 |
June 30, 2014 | ||||||||||||||||||||||||||||
Recorded Balance | Unpaid Principal Balance | Specific Allowance | Average Investment in Impaired Loans - Quarter | Average Investment in Impaired Loans - YTD | Interest Income Recognized - Quarter | Interest Income Recognized - YTD | ||||||||||||||||||||||
Loans without a specific valuation allowance | ||||||||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||
Commercial | $ | 2,863 | $ | 2,863 | $ | - | $ | 2,907 | $ | 2,988 | $ | 33 | $ | 65 | ||||||||||||||
Commercial construction and development | 1,272 | 2,643 | - | 1,424 | 1,495 | 8 | 15 | |||||||||||||||||||||
Consumer closed end first mortgage | 847 | 847 | - | 851 | 978 | 3 | 5 | |||||||||||||||||||||
Consumer open end and junior liens | - | - | - | 125 | 167 | 1 | 3 | |||||||||||||||||||||
Commercial and industrial | 748 | 922 | - | 954 | 1,032 | 5 | 11 | |||||||||||||||||||||
Total | $ | 5,730 | $ | 7,275 | $ | - | $ | 6,261 | $ | 6,660 | $ | 50 | $ | 99 |
The following information presents the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of June 30, 2015.
Commercial Loan Grades
Definition of Loan Grades. Loan grades are numbered 1 through 8. Grades 1-4 are "pass" credits, grade 5 [Special Mention] loans are "criticized" assets, and grades 6 [Substandard], 7 [Doubtful] and 8 [Loss] are "classified" assets. The use and application of these grades by the Bank conform to the Bank's policy and regulatory definitions.
Pass. Pass credits are loans in grades prime through fair. These are at least considered to be credits with acceptable risks and would be granted in the normal course of lending operations.
Special Mention. Special mention credits have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credits or in the Bank’s credit position at some future date. If weaknesses cannot be identified, classifying as special mention is not appropriate. Special mention credits are not adversely classified and do not expose the Bank to sufficient risk to warrant an adverse classification. No apparent loss of principal or interest is expected.
26 |
Substandard. Substandard credits are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Credits so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss of the deficiencies are not corrected.
Doubtful. A doubtful extension of credit has all the weaknesses inherent in a substandard asset with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. Doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded Substandard.
Retail Loan Grades
Pass. Pass credits are loans that are currently performing as agreed and are not troubled debt restructurings.
Special Mention. Special mention credits have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credits or in the Bank’s credit position at some future date. If weaknesses cannot be identified, classifying as special mention is not appropriate. Special mention credits are not adversely classified and do not expose the Bank to sufficient risk to warrant an adverse classification. No apparent loss of principal or interest is expected.
Substandard. Substandard credits are loans that have reason to be considered to have a weakness and placed on non-accrual. This would include all retail loans over 90 days and troubled debt restructurings.
27 |
June 30, 2015 | ||||||||||||
Commercial Credit Exposure Credit Risk Profile | ||||||||||||
Internal Rating | Real Estate | Construction and Development | Commercial and Industrial | |||||||||
Pass | $ | 193,341 | $ | 27,596 | $ | 99,725 | ||||||
Special Mention | 3,265 | 1,490 | 1,468 | |||||||||
Substandard | 7,161 | 854 | 447 | |||||||||
Doubtful | - | - | - | |||||||||
Total | $ | 203,767 | $ | 29,940 | $ | 101,640 |
Consumer Credit Exposure Credit Risk Profile | ||||||||||||||||||||
Internal Rating | Closed End First Mortgage | Real Estate Open End and Junior Liens | Auto | Boat/RV | Other | |||||||||||||||
Pass | $ | 498,753 | $ | 68,624 | $ | 15,063 | $ | 112,337 | $ | 5,109 | ||||||||||
Special Mention | - | - | - | - | - | |||||||||||||||
Substandard | 6,436 | 1,016 | 9 | 246 | 25 | |||||||||||||||
Total | $ | 505,189 | $ | 69,640 | $ | 15,072 | $ | 112,583 | $ | 5,134 |
December 31, 2014 | ||||||||||||
Commercial Credit Exposure Credit Risk Profile | ||||||||||||
Internal Rating | Real Estate | Construction and Development | Commercial and Industrial | |||||||||
Pass | $ | 187,436 | $ | 30,422 | $ | 84,746 | ||||||
Special Mention | 3,316 | 1,721 | 439 | |||||||||
Substandard | 7,267 | 959 | 2,848 | |||||||||
Doubtful | - | - | 441 | |||||||||
Total | $ | 198,019 | $ | 33,102 | $ | 88,474 |
Consumer Credit Exposure Credit Risk Profile | ||||||||||||||||||||
Internal Rating | Closed End First Mortgage | Real Estate Open End and Junior Liens | Auto | Boat/RV | Other | |||||||||||||||
Pass | $ | 509,765 | $ | 70,299 | $ | 14,704 | $ | 94,377 | $ | 5,125 | ||||||||||
Special Mention | - | - | - | - | - | |||||||||||||||
Substandard | 7,298 | 774 | 8 | 384 | 59 | |||||||||||||||
Total | $ | 517,063 | $ | 71,073 | $ | 14,712 | $ | 94,761 | $ | 5,184 |
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Allowance for Loan Losses.
We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated losses inherent in the loan portfolio. Our methodology for assessing the appropriateness of the allowance consists of several key elements, including the general allowance and specific allowances for identified problem loans and portfolio segments. In addition, the allowance incorporates the results of measuring impaired loans as provided in FASB ASC 310, Receivables. These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. The general allowance is calculated by applying loss factors to outstanding loans based on the internal risk evaluation of such loans or pools of loans. Changes in risk evaluations of both performing and nonperforming loans affect the amount of the general allowance. Loss factors are based on our historical loss experience as well as on significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date.
The appropriateness of the allowance is reviewed by management based upon its evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as credit quality trends (including trends in non-performing loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments and recent loss experience in particular segments of the portfolio that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectability of the loan. Senior management reviews these conditions quarterly in discussions with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the loss related to this condition is reflected in the general allowance for loan losses. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments.
The allowance for loan losses is based on estimates of losses inherent in the loan portfolio. Actual losses can vary significantly from the estimated amounts. Our methodology as described permits adjustments to any loss factor used in the computation of the general allowance in the event that, in management’s judgment, significant factors which affect the collectability of the portfolio as of the evaluation date are not reflected in the loss factors. By assessing the probable incurred losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon any more recent information that has become available.
The following table details activity in the allowance for loan losses by portfolio segment for the three and six month periods ended June 30, 2015 and 2014 and year ended December 31, 2014. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other segments.
29 |
Three Months Ended June 30, 2015 | ||||||||||||||||
Commercial | Mortgage | Consumer | Total | |||||||||||||
Allowance for loan losses: | ||||||||||||||||
Balance, beginning of period | $ | 6,894 | $ | 3,567 | $ | 2,756 | $ | 13,217 | ||||||||
Provision charged (credited) to expense | (201 | ) | 48 | 153 | - | |||||||||||
Losses charged off | - | (297 | ) | (205 | ) | (502 | ) | |||||||||
Recoveries | 132 | - | 59 | 191 | ||||||||||||
Balance, end of period | $ | 6,825 | $ | 3,318 | $ | 2,763 | $ | 12,906 |
Six Months Ended June 30, 2015 | ||||||||||||||||
Commercial | Mortgage | Consumer | Total | |||||||||||||
Allowance for loan losses: | ||||||||||||||||
Balance, beginning of year | $ | 7,085 | $ | 3,471 | $ | 2,612 | $ | 13,168 | ||||||||
Provision charged (credited) to expense | (597 | ) | 236 | 361 | - | |||||||||||
Losses charged off | - | (390 | ) | (322 | ) | (712 | ) | |||||||||
Recoveries | 337 | 1 | 112 | 450 | ||||||||||||
Balance, end of period | $ | 6,825 | $ | 3,318 | $ | 2,763 | $ | 12,906 | ||||||||
Ending balance: | ||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | ||||||||
Collectively evaluated for impairment | 6,825 | 3,318 | 2,763 | 12,906 | ||||||||||||
Total allowance for loan losses | $ | 6,825 | $ | 3,318 | $ | 2,763 | $ | 12,906 | ||||||||
Loans: | ||||||||||||||||
Ending balance | ||||||||||||||||
Individually evaluated for impairment | $ | 6,042 | $ | 1,603 | $ | - | $ | 7,645 | ||||||||
Collectively evaluated for impairment | 329,305 | 503,586 | 202,429 | 1,035,320 | ||||||||||||
Total Loans | $ | 335,347 | $ | 505,189 | $ | 202,429 | $ | 1,042,965 |
30 |
Year Ended December 31, 2014 | ||||||||||||||||
Commercial | Mortgage | Consumer | Total | |||||||||||||
Allowance for loan losses: | ||||||||||||||||
Balance, beginning of year | $ | 8,148 | $ | 3,124 | $ | 2,140 | $ | 13,412 | ||||||||
Provision charged (credited) to expense | (1,273 | ) | 888 | 1,235 | 850 | |||||||||||
Losses charged off | (289 | ) | (572 | ) | (1,021 | ) | (1,882 | ) | ||||||||
Recoveries | 499 | 31 | 258 | 788 | ||||||||||||
Balance, end of period | $ | 7,085 | $ | 3,471 | $ | 2,612 | $ | 13,168 | ||||||||
Ending balance: | ||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | ||||||||
Collectively evaluated for impairment | 7,085 | 3,471 | 2,612 | 13,168 | ||||||||||||
Total allowance for loan losses | $ | 7,085 | $ | 3,471 | $ | 2,612 | $ | 13,168 |
Three Months Ended June 30, 2014 | ||||||||||||||||
Commercial | Mortgage | Consumer | Total | |||||||||||||
Allowance for loan losses: | ||||||||||||||||
Balance, beginning of period | $ | 7,899 | $ | 3,305 | $ | 2,166 | $ | 13,370 | ||||||||
Provision charged to expense | 78 | 208 | 214 | 500 | ||||||||||||
Losses charged off | (244 | ) | (170 | ) | (351 | ) | (765 | ) | ||||||||
Recoveries | 30 | 1 | 107 | 138 | ||||||||||||
Balance, end of period | $ | 7,763 | $ | 3,344 | $ | 2,136 | $ | 13,243 |
Six Months Ended June 30, 2014 | ||||||||||||||||
Commercial | Mortgage | Consumer | Total | |||||||||||||
Allowance for loan losses: | ||||||||||||||||
Balance, beginning of year | $ | 8,148 | $ | 3,124 | $ | 2,140 | $ | 13,412 | ||||||||
Provision charged (credited) to expense | (187 | ) | 465 | 572 | 850 | |||||||||||
Losses charged off | (244 | ) | (250 | ) | (718 | ) | (1,212 | ) | ||||||||
Recoveries | 46 | 5 | 142 | 193 | ||||||||||||
Balance, end of period | $ | 7,763 | $ | 3,344 | $ | 2,136 | $ | 13,243 | ||||||||
Ending balance: | ||||||||||||||||
Individually evaluated for impairment | $ | - | $ | - | $ | - | $ | - | ||||||||
Collectively evaluated for impairment | 7,763 | 3,344 | 2,136 | 13,243 | ||||||||||||
Total allowance for loan losses | $ | 7,763 | $ | 3,344 | $ | 2,136 | $ | 13,243 |
Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral.
31 |
For all loan portfolio segments except consumer real estate and other consumer loans, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.
The Company charges-off consumer real estate and other consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge-down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged-off.
Information on non-performing assets, excluding performing restructured loans, is provided below:
June 30, | ||||||||
2015 | 2014 | |||||||
Non-performing assets | ||||||||
Non-accrual loans | $ | 6,316 | $ | 5,762 | ||||
Accruing loans delinquent 90 days or more and past due | 207 | 348 | ||||||
Total non-performing loans | 6,523 | 6,110 | ||||||
Foreclosed real estate | 1,726 | 6,719 | ||||||
Other repossessed assets | 455 | 379 | ||||||
Total non-performing assets | $ | 8,704 | $ | 13,208 |
Troubled Debt Restructurings
Certain categories of impaired loans include loans that have been modified in a troubled debt restructuring, that involves granting economic concessions to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances.
When we modify loans in a troubled debt restructuring, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or we use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a specific reserve or a charge-off to the allowance.
Loans retain their accrual status at the time of their modification. As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual until a period of satisfactory performance, generally six months, is obtained. If a loan is on accrual at the time of the modification, the loan is evaluated to determine the collection of principal and interest is reasonably assured and generally stays on accrual.
32 |
At June 30, 2015, the Company had a number of loans that were modified in troubled debt restructurings. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.
The following tables describe troubled debts restructured during the three and six month periods ended June 30, 2015 and 2014:
Three Months Ended June 30, 2015 | ||||||||||||
No. of Loans | Pre-Modification Outstanding Recorded Balance | Post-Modification Outstanding Recorded Balance | ||||||||||
Real estate | ||||||||||||
Commercial | 1 | $ | 820 | $ | 820 | |||||||
Consumer closed end first mortgage | 2 | 86 | 85 |
Three Months Ended June 30, 2014 | ||||||||||||
No. of Loans | Pre-Modification Outstanding Recorded Balance | Post-Modification Outstanding Recorded Balance | ||||||||||
Real estate | ||||||||||||
Commercial | 1 | $ | 250 | $ | 250 | |||||||
Consumer closed end first mortgage | 7 | 367 | 380 | |||||||||
Commercial and industrial | 2 | 193 | 223 |
Six Months Ended June 30, 2015 | ||||||||||||
No. of Loans | Pre-Modification Outstanding Recorded Balance | Post-Modification Outstanding Recorded Balance | ||||||||||
Real estate | ||||||||||||
Commercial | 3 | $ | 1,992 | $ | 1,990 | |||||||
Construction and development | 1 | 155 | 134 | |||||||||
Consumer closed end first mortgage | 5 | 242 | 239 | |||||||||
Commercial and industrial | 1 | 88 | 83 |
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Six Months Ended June 30, 2014 | ||||||||||||
No. of Loans | Pre-Modification Outstanding Recorded Balance | Post-Modification Outstanding Recorded Balance | ||||||||||
Real estate | ||||||||||||
Commercial | 1 | $ | 250 | $ | 250 | |||||||
Consumer closed end first mortgage | 10 | 748 | 774 | |||||||||
Commercial and industrial | 2 | 193 | 223 |
The impact on the allowance for loan losses was insignificant as a result of these modifications.
Newly restructured loans by type for the three and six months ended June 30, 2015 and 2014 are as follows:
Three Months Ended June 30, 2015 | ||||||||||||||||
Interest Only | Term | Combination | Total Modification | |||||||||||||
Real Estate | ||||||||||||||||
Commercial | $ | - | $ | 820 | $ | - | $ | 820 | ||||||||
Consumer closed end first mortgage | - | - | 85 | 85 |
Three Months Ended June 30, 2014 | ||||||||||||||||
Interest Only | Term | Combination | Total Modification | |||||||||||||
Real Estate | ||||||||||||||||
Commercial | $ | - | $ | - | $ | 250 | $ | 250 | ||||||||
Consumer closed end first mortgage | - | 18 | 362 | 380 | ||||||||||||
Commercial and industrial | - | 223 | - | 223 |
Six Months Ended June 30, 2015 | ||||||||||||||||
Interest Only | Term | Combination | Total Modification | |||||||||||||
Real Estate | ||||||||||||||||
Commercial | $ | - | $ | 1,990 | $ | - | $ | 1,990 | ||||||||
Construction and development | - | - | 134 | 134 | ||||||||||||
Consumer closed end first mortgage | - | - | 239 | 239 | ||||||||||||
Commercial and industrial | - | 83 | - | 83 |
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Six Months Ended June 30, 2014 | ||||||||||||||||
Interest Only | Term | Combination | Total Modification | |||||||||||||
Real Estate | ||||||||||||||||
Commercial | $ | - | $ | - | $ | 250 | $ | 250 | ||||||||
Consumer closed end first mortgage | - | 18 | 756 | 774 | ||||||||||||
Commercial and industrial | - | 223 | - | 223 |
Defaults of any loans modified as troubled debt restructurings made in the three and six months ended June 30, 2014 are listed in the table below. There were no defaults on loans modified as troubled debt restructurings made in the three and six months ended June 30, 2015. Defaults are defined as any loans that become 90 days past due.
Three Months Ended June 30, 2014 | ||||||||
No. of Loans | Post-Modification Outstanding Recorded Balance | |||||||
Real Estate | ||||||||
Consumer closed end first mortgage | 1 | $ | 340 |
Six Months Ended June 30, 2014 | ||||||||
No. of Loans | Post-Modification Outstanding Recorded Balance | |||||||
Real Estate | ||||||||
Consumer closed end first mortgage | 3 | $ | 432 | |||||
Consumer open end and junior liens | 1 | 23 |
Note 8: Change in Accounting Principle
The Company makes certain equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (LIHTC) pursuant to Section 42 of the Internal Revenue Code. Mutual has investments in eight Indiana limited partnerships within Indiana and contiguous states. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity.
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Mutual is a limited partner in each LIHTC Partnership. A separate unrelated third party is the general partner. Each limited partnership is managed by the general partner, who exercises full and exclusive control over the affairs of the limited partnership. Duties entrusted to the general partner of each limited partnership include, but are not limited to: investment in operating companies, company expenditures, investment of excess funds, borrowing funds, employment of agents, disposition of fund property, prepayment and refinancing of liabilities, votes and consents, contract authority, disbursement of funds, accounting methods, tax elections, bank accounts, insurance, litigation, cash reserve, and use of working capital reserve funds. Except for limited rights granted to consent to certain transactions, the limited partner(s) may not participate in the operation, management, or control of the limited partnership’s business, transact any business in the limited partnership’s name or have any power to sign documents for or otherwise bind the limited partnership. In addition, the general partner may only be removed by the limited partner(s) in the event the general partner fails to comply with the terms of the agreement and/or is negligent in performing its duties.
The Company believes the general partner of each limited partnership has the power to direct the activities which most significantly affect the performance of each partnership; therefore, Mutual has determined that it is not the primary beneficiary of any LIHTC partnership. The Company uses the proportional amortization method to account for a majority of its investments in these entities. These investments are included in accrued income and other assets.
During the 2015 first quarter, Mutual adopted ASU 2014-01. The amendments are required to be applied retrospectively to all periods presented. As a result of these changes, the Bank recorded a cumulative-effective adjustment to beginning retained earnings. The Company believes the application of the proportional amortization method aligns the accounting more closely with the economics of the transaction and therefore provides more transparency to the financial reporting.
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The following table summarizes the balance sheet and income statement amounts impacted by the change at the dates or for the periods indicated:
December 31, | ||||
2014 | ||||
Investment in limited partnerships | ||||
As previously reported | $ | 1,582 | ||
As reported under the new guidance | 527 | |||
Deferred tax asset | ||||
As previously reported | 13,305 | |||
As reported under the new guidance | 13,575 | |||
Retained earnings | ||||
As previously reported | 50,171 | |||
As reported under the new guidance | 49,386 |
Three Months Ended | Six Months Ended | |||||||
June 30, | June 30, | |||||||
2014 | 2014 | |||||||
Non-interest income | ||||||||
As previously reported | $ | 3,414 | $ | 6,287 | ||||
As reported under the new guidance | 3,542 | 6,542 | ||||||
Income tax expense | ||||||||
As previously reported | 1,062 | 1,794 | ||||||
As reported under the new guidance | 1,133 | 1,936 | ||||||
Net income | ||||||||
As previously reported | 2,557 | 4,521 | ||||||
As reported under the new guidance | 2,614 | 4,634 | ||||||
Basic Earnings Per Share | ||||||||
As previously reported | 0.36 | 0.63 | ||||||
As reported under the new guidance | 0.37 | 0.65 | ||||||
Diluted Earnings Per Share | ||||||||
As previously reported | 0.35 | 0.61 | ||||||
As reported under the new guidance | 0.36 | 0.63 |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
The following should be read in conjunction with the Management’s Discussion and Analysis in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on March 13, 2015.
MutualFirst is a Maryland corporation and a bank holding company headquartered in Muncie, Indiana, with operations in Allen, Delaware, Elkhart, Grant, Kosciusko, Randolph, St. Joseph and Wabash counties in Indiana. It owns MutualBank, an Indiana commercial bank with 30 bank branches in Indiana, trust offices in Carmel and Crawfordsville, Indiana and a loan origination office in New Buffalo, Michigan. MutualBank’s wholly owned subsidiary, Summit Service Corp, owns Summit Mortgage, a mortgage banking company located in Ft. Wayne, Indiana. The Company is subject to examination, supervision and regulation by the FRB, and the Bank is subject to regulation, supervision and examination by the IDFI and the FDIC.
Our principal business consists of attracting retail and commercial deposits from the general public and businesses, including some brokered deposits, and investing those funds primarily in loans secured by consumer closed end first mortgages and consumer open end and junior liens on owner-occupied, one- to four-family residences, a variety of other consumer loans, loans secured by commercial real estate, commercial construction and development and commercial and industrial loans. Funds not invested in loans generally are invested in investment securities, including mortgage-backed, mortgage-related securities, and municipals. We also obtain funds from FHLB advances and other borrowings.
Our results of operations depend primarily on the level of our net interest income, which is the difference between interest income on interest-earning assets, such as loans, mortgage-backed securities and investment securities, and interest expense on interest-bearing liabilities, primarily deposits and borrowings. The structure of our interest-earning assets versus the structure of interest-bearing liabilities, along with the shape of the yield curve, has a direct impact on our net interest income. Historically, our interest-earning assets have been longer term in nature (i.e., fixed-rate mortgage loans) and interest-bearing liabilities have been shorter term (i.e., certificates of deposit, regular savings accounts, etc.). This structure would impact net interest income favorably in a decreasing rate environment, assuming a normally shaped yield curve, as the rates on interest-bearing liabilities would decrease more rapidly than rates on interest-earning assets. Conversely, in an increasing rate environment, assuming a normally shaped yield curve, net interest income would be impacted unfavorably as rates on interest-earning assets would increase at a slower rate than rates on interest-bearing liabilities.
Second Quarter Highlights. At June 30, 2015, we had $1.4 billion in assets, $1.0 billion in loans, $1.1 billion in deposits and $131.0 million in stockholders’ equity. The Company’s total risk-based capital ratio at June 30, 2015 was 13.7%, exceeding the 10.0% requirement for a well-capitalized institution. Tangible common equity, as a percentage of tangible assets, increased to 8.9% as of June 30, 2015 compared to 8.7% and 8.3% at December 31, 2014 and June 30, 2014, respectively. For the quarter ended June 30, 2015, net income available to common shareholders was $3.2 million, or $0.44 per basic and $0.43 per diluted share, compared with net income available to common shareholders of $2.6 million, or $0.37 per basic and $0.36 per diluted share for the quarter ended June 30, 2014.
Financial highlights for the second quarter ended June 30, 2015 included:
· | Gross loan balances increased by $16.0 million, or 6.3% on an annualized basis in the second quarter of 2015. |
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· | Asset quality improved as non-performing loans to total loans were 0.63% as of June 30, 2015 compared to 0.73% as of March 31, 2015 and non-performing assets to total assets were 0.60% as of June 30, 2015 compared to 0.72% as of March 31, 2015. |
· | Core deposits increased $15.0 million in the second quarter of 2015 while term deposits declined by $22.9 million. |
· | Tangible common equity to total assets is 8.89% and tangible book value per share is $17.36 as of June 30, 2015 compared to tangible common equity to total assets of 8.95% and tangible book value per share of $17.33 as of March 31, 2015. |
· | Net interest income for the second quarter of 2015 increased by $22,000 on a linked quarter basis and decreased by $18,000 compared to the second quarter of 2014. |
· | Asset quality improvement led to no provision for loan losses in the second quarter of 2015. |
· | Net interest margin was 3.18% for the second quarter 2015 compared to 3.28% in the second quarter 2014. |
· | Non-interest income in the second quarter of 2015 increased by $349,000 on a linked quarter basis and by $824,000 when compared to the second quarter of 2014. |
· | Non-interest expense decreased in the second quarter of 2015 by $645,000 on a linked quarter basis and increased by $520,000 when compared to the second quarter of 2014. |
The Management’s Discussion and Analysis in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, contains a summary of our management’s new strategic plan for 2015-2019. The financial highlights of our strategic progress during the quarter include: increasing commercial and non-real estate consumer lending by $20.9 million in the second quarter and $33.9 million since year-end 2014; core deposits to total deposits increased to 66.0%, from 62.8% at year-end 2014, and non-interest income increased $824,000 and $1.8 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014.
Critical Accounting Policies
Note 1 to the Consolidated Financial Statements in Item 8 of the Form 10-K for the year ended December 31, 2014 contains a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include determining the allowance for loan losses, the valuation of foreclosed assets, mortgage servicing rights, valuation of intangible assets and securities, deferred tax asset and income tax accounting.
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. A worsening or protracted economic decline would increase the likelihood of additional losses due to credit and market risk and could create the need for additional loss reserves.
Allowance for Loan Losses. The allowance for loan losses is a significant estimate that can and does change based on management’s assumptions about specific borrowers and current general economic and business conditions, among other factors. Management reviews the adequacy of the allowance for loan losses on at least a quarterly basis. The evaluation by management includes consideration of past loss experience, changes in the composition of the loan portfolio, the current condition and amount of loans outstanding, identified problem loans and the probability of collecting all amounts due.
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Foreclosed Assets. Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. Management estimates the fair value of the properties based on current appraisal information. Fair value estimates are particularly susceptible to significant changes in the economic environment, market conditions, and real estate market. A worsening or protracted economic decline would increase the likelihood of a decline in property values and could create the need to write down the properties through current operations.
Mortgage Servicing Rights. Mortgage servicing rights (“MSRs”) associated with loans originated and sold, where servicing is retained, are capitalized and included in other assets in the consolidated balance sheet. The value of the capitalized servicing rights represents the fair value of the right to service loans in the portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as a reduction in loan servicing fee income.
Goodwill and Intangible Assets. MutualFirst periodically assesses the impairment of its goodwill and the recoverability of its core deposit intangible. Impairment is the condition that exists when the carrying amount exceeds its implied fair value. If actual external conditions and future operating results differ from MutualFirst’s judgments, impairment and/or increased amortization charges may be necessary to reduce the carrying value of these assets to the appropriate value.
Securities. Under FASB Codification Topic 320 (ASC 320), Investments-Debt and Equity Securities, investment securities must be classified as held-to-maturity, available-for-sale or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity. Securities not classified as held-to-maturity are classified as available-for-sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and do not affect earnings until realized.
The fair values of the Company’s securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of the Company’s fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities.
The Company evaluates all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if an other-than-temporary impairment (“OTTI”) exists pursuant to guidelines established in ASC 320. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the ability and intent of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.
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If management determines that an investment experienced an OTTI, management must then determine the amount of the OTTI to be recognized in earnings. If management does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment. If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Any subsequent recoveries related to the value of these securities are recorded as an unrealized gain (as other comprehensive income (loss) in stockholders’ equity) and not recognized in income until the security is ultimately sold.
The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.
Deferred Tax Asset. The Company has evaluated its deferred tax asset to determine if it is more likely than not that the asset will be utilized in the future. The Company’s most recent evaluation has determined that, except for the amounts represented by the valuation allowance in Note 15 to the Consolidated Financial Statements in Item 8 of the Form 10-K for the year ended December 31, 2014, the Company will more likely than not be able to utilize the remaining deferred tax asset. As of year-end 2014, the Company had generated average positive pre-tax pre-provision earnings of $15.5 million, or 1.1% of pre-tax pre-provision ROA over the previous five years. This level of earnings would be sufficient to utilize portions of the operating losses, tax credit carryforwards and temporary tax differences over the allowable periods. The analysis as of June 30, 2015, supports no additional valuation reserve is needed.
The valuation allowances established are the result of net operating losses for state franchise tax purposes totaling $33.6 million and capital losses realized on the sale of investment securities as well as the recognition of other than temporary impairment on investment securities where the loss, while recognized for financial statement purposes, has not yet been realized.
At the end of 2014, the Company had $144,000 in capital losses, a decrease from $404,000 in capital losses in 2013 as capital gains from the sale of available for sale securities were generated. The Company has avoided and will continue to avoid taking any book tax benefit on future capital losses without capital gains to offset the current capital losses. See Note 15 to the Consolidated Financial Statements in Item 8 of the Form 10-K for the year ended December 31, 2014.
Income Tax Accounting. We file a consolidated federal income tax return. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.
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Forward-Looking Statements
This Form 10-Q contains and our future filings with the SEC, Company press releases, other public pronouncements, stockholder communications and oral statements made by or with the approval of an authorized executive officer, will contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements include, but are not limited to: (i) statements of our goals, intentions and expectations; (ii) statements regarding our business plans, prospects, growth and operating strategies; (iii) statements regarding the asset quality of our loan and investment portfolios; and (iv) estimates of our risks and future costs and benefits. These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The Company does not undertake and specifically declines any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of unanticipated events.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (i) the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; (ii) changes in general economic conditions, either nationally or in our market areas; (iii) changes in the levels of general interest rates and the relative differences between short- and long-term interest rates, deposit interest rates, our net interest margin and funding sources; (v) fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; (vi) decreases in the secondary market for the sale of loans that we originate; (vii) results of examinations of us by the IDFI, FDIC, FRB or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; (viii) legislative or regulatory changes that adversely affect our business including the effect of Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act”), changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including changes that increase our capital requirements; (ix) our ability to attract and retain deposits; (x) increases in premiums for deposit insurance; (xi) management’s assumptions in determining the adequacy of the allowance for loan losses; (xii) our ability to control operating costs and expenses; (xiii) the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; (xiv) difficulties in reducing risks associated with the loans on our balance sheet; (xv) staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; (xvi) a failure or security breach in the computer systems on which we depend; (xvii) our ability to retain key members of our senior management team; (xviii) costs and effects of litigation, including settlements and judgments; (xix) our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; (xx) increased competitive pressures among financial services companies; (xxi) changes in consumer spending, borrowing and savings habits; (xxii) the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; (xxiii) adverse changes in the securities markets; (xxiv) inability of key third-party providers to perform their obligations to us; (xv) changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board; and (xvi) other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this report.
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The Company wishes to advise readers that these factors could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
Financial Condition
General. Total assets at June 30, 2015 were $1.4 billion, reflecting a $22.0 million increase since December 31, 2014, primarily as a result of a $23.2 million increase in net loans and a $6.3 million increase in loans held for sale, partially offset by a $5.3 million decrease in cash and cash equivalents. Interest-earning assets increased $25.8 million, or 2.0%, to $1.34 billion at June 30, 2015 compared to December 31, 2014, reflecting an increase in the loan portfolio. Interest-bearing liabilities increased by $11.4 million, or 1.0% to $1.14 billion at June 30, 2015 reflecting an increase in borrowings partially offset by a decrease in term deposits. Stockholders’ equity increased by $4.2 million or 3.3% at June 30, 2015 compared to year-end 2014.
Loans. Our gross loan portfolio, excluding loans held for sale, increased $20.6 million at June 30, 2015 to $1.0 billion. The following table reflects the changes in the gross amount of loans, excluding loans held for sale, by type during the six month period:
At | ||||||||||||||||
June 30, | December 31, | Amount | Percent | |||||||||||||
2015 | 2014 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Real estate | ||||||||||||||||
Commercial | $ | 203,767 | $ | 198,019 | $ | 5,748 | 2.90 | % | ||||||||
Commercial construction and development | 29,940 | 33,102 | (3,162 | ) | (9.55 | ) | ||||||||||
Consumer closed end first mortgage | 505,189 | 517,063 | (11,874 | ) | (2.30 | ) | ||||||||||
Consumer open end and junior liens | 69,640 | 71,073 | (1,433 | ) | (2.02 | ) | ||||||||||
Total real estate loans | 808,536 | 819,257 | (10,721 | ) | (1.31 | ) | ||||||||||
Consumer loans | ||||||||||||||||
Auto | 15,072 | 14,712 | 360 | 2.45 | ||||||||||||
Boat/RV | 112,583 | 94,761 | 17,822 | 18.81 | ||||||||||||
Other | 5,134 | 5,184 | (50 | ) | (0.96 | ) | ||||||||||
Total consumer other | 132,789 | 114,657 | 18,132 | 15.81 | ||||||||||||
Commercial and industrial | 101,640 | 88,474 | 13,166 | 14.88 | ||||||||||||
Total other loans | 234,429 | 203,131 | 31,298 | 15.41 | ||||||||||||
Total Loans | $ | 1,042,965 | $ | 1,022,388 | $ | 20,577 | 2.01 | % |
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The Bank’s strategy to increase commercial and consumer loans remains a primary focus as we continued to see growth in these areas during the first six months of 2015 as commercial and non-real estate consumer loans grew by $33.9 million. We continue to seek opportunities to provide sound commercial borrowers opportunities for new loans to meet their growing demands, refinance loans currently served by other financial institutions and build relationships with commercial clients in our footprint. The increase in the commercial and other consumer portfolios was partially offset by a $13.3 million decrease in the consumer real estate portfolios during the period. Lower rates have allowed consumers to refinance their mortgage loans. The Bank has seen an increase in mortgage lending volume during the quarter which also led to an increase in loans held for sale of $6.3 million. The Bank continues to sell longer term fixed-rate mortgage loans to reduce related interest rate risk.
Delinquencies and Non-performing Assets. As of June 30, 2015, our total loans delinquent 30-to-89 days were $11.5 million or 1.1% of total loans, compared to $14.9 million or 1.5% of total loans at the end of 2014.
At June 30, 2015, our non-performing assets totaled $8.7 million or 0.60% of total assets, compared to $10.7 million or 0.75% of total assets at December 31, 2014. This $2.0 million, or 19.0% decrease was primarily due to a reduction in foreclosed assets and non-performing commercial and industrial loans. The table below sets forth the amounts and categories of non-performing assets at the dates indicated.
At | ||||||||||||||||
June 30, | December 31, | Amount | Percent | |||||||||||||
2015 | 2014 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Non-accruing loans | $ | 6,316 | $ | 7,212 | $ | (896 | ) | (12.42 | )% | |||||||
Accruing loans delinquent 90 days | 207 | 226 | (19 | ) | (8.41 | ) | ||||||||||
Foreclosed assets | 2,181 | 3,305 | (1,124 | ) | (34.01 | ) | ||||||||||
Total | $ | 8,704 | $ | 10,743 | $ | (2,039 | ) | (18.98 | )% |
Our non-performing assets continued to decrease in the first half of 2015 as local economic conditions strengthened. The Bank continues to diligently monitor and write down loans that appear to have irreversible weakness. The Bank works to ensure possible problem loans have been identified and steps have been taken to reduce loss by restructuring loans to improve cash flow or by increasing collateral. In addition to the decrease in non-performing assets, the Company has seen improvement during the first half of 2015 in total classified assets. Total classified assets decreased by 18.7% from $26.2 million at December 31, 2014 to $21.3 million at June 30, 2015.
At June 30, 2015, foreclosed real estate totaled $1.7 million. The Bank has seen a decrease in this area as overall real estate owned sales volumes are up. At June 30, 2015, the Bank had 21 residential properties with a book value of $780,000. One commercial construction and development property accounts for $947,000 of the total REO balance. As of June 30, 2015, the Bank also held $455,000 in other repossessed assets, such as autos, boats, RVs and horse trailers.
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Allowance for Loan Losses. Allowance for loan losses decreased $337,000 to $12.9 million at June 30, 2015 compared to June 30, 2014, as reflected below:
At and For the Six Months Ended | ||||||||
June 30, | ||||||||
2015 | 2014 | |||||||
(Dollars in thousands) | ||||||||
Balance at beginning of period | $ | 13,168 | $ | 13,412 | ||||
Charge-offs | 712 | 1,212 | ||||||
Recoveries | 450 | 193 | ||||||
Net charge-offs | 262 | 1,019 | ||||||
Provisions charged to operations | - | 850 | ||||||
Balance at end of period | $ | 12,906 | $ | 13,243 | ||||
Ratio of net charge-offs during the period to average loans outstanding during the period | 0.05 | % | 0.21 | % | ||||
Allowance as a percentage of non-performing loans | 197.85 | % | 216.74 | % | ||||
Allowance as a percentage of total loans (end of period) | 1.24 | % | 1.33 | % |
The allowance for loan losses decreased by $262,000 to $12.9 million as of June 30, 2015 as compared to December 31, 2014. The allowance for loan losses to non-performing loans as of June 30, 2015 was 197.9% compared to 177.0% as of December 31, 2014. The allowance for loan losses to total loans as of June 30, 2015 was 1.24%, compared to 1.30% as of December 31, 2014.
Deposits. Deposits decreased by $1.0 million in the first half of 2015. This decrease was primarily due to decreases in certificates of deposit of $34.1 million, partially offset by an increase in core accounts of $33.1 million. Core deposits increased to 66% of the Bank’s total deposits as of June 30, 2015 compared to 63% as of December 31, 2014 and 61% as of June 30, 2014.
At | ||||||||||||||||
June 30, 2015 | December 31, 2014 | |||||||||||||||
Amount | Weighted Average Rate | Amount | Weighted Average Rate | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Type of Account: | ||||||||||||||||
Non-interest Checking | $ | 160,967 | 0.00 | % | $ | 154,178 | 0.00 | % | ||||||||
Interest-bearing NOW | 255,247 | 0.28 | 253,042 | 0.23 | ||||||||||||
Savings | 128,804 | 0.01 | 124,051 | 0.01 | ||||||||||||
Money Market | 166,186 | 0.21 | 146,847 | 0.23 | ||||||||||||
Certificates of Deposit | 367,083 | 1.13 | 401,202 | 1.17 | ||||||||||||
Total | $ | 1,078,287 | 0.47 | % | $ | 1,079,320 | 0.52 | % |
Borrowings. Total borrowings increased to $221.9 million at June 30, 2015, up $19.2 million, or 9.5%, since year-end 2014 primarily due to a $19.6 million increase in FHLB advances. This increase was primarily to fund loan growth. Other borrowings, consisting of a bank loan and subordinated debenture, decreased $358,000 to $9.8 million at June 30, 2015 due to regular loan payments.
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In 2013, the Company borrowed $7.6 million from First Tennessee Bank, N.A. to refinance existing long-term debt. The loan was originated at a variable rate of LIBOR plus 2.80%; however the Company entered into an interest rate swap that fixed the rate of the note at 3.915% for the term of the note. The balance of the loan at June 30, 2015 was $5.7 million and it matures in December 2017.
The Company acquired $5.0 million of issuer trust preferred securities in a 2008 acquisition of MFB Corp., which had a net balance of $4.1 million at June 30, 2015 due to the purchase accounting adjustment in the acquisition. These securities mature 30 years from the date of issuance, or September 15, 2035. The securities bore a fixed rate of interest of 6.22% through July 2010 and thereafter were to reset quarterly at the prevailing three-month LIBOR rate plus 170 basis points. In December 2009, the Company entered into a cash flow hedge with FTN Financial to fix the floating portion of the issued trust preferred security at 5.15% for the next five years starting on September 15, 2010. The cash flow hedge expires September 15, 2015. The Company has had the right to redeem the trust preferred securities, in whole or in part, without penalty, since establishing the cash flow hedge.
Stockholders’ Equity. Stockholders’ equity was $131.0 million at June 30, 2015, an increase of $4.2 million from December 31, 2014. The increase was a result of net income of $5.7 million and an increase of $1.6 million due to exercising of stock options. These increases were partially offset by dividend payments of $1.8 million to common shareholders and an unrealized loss on investments of $1.6 million. The Company’s tangible book value per share as of June 30, 2015 increased to $17.36 compared to $17.03 as of December 31, 2014 and the tangible common equity ratio was 8.89% as of June 30, 2015 compared to 8.68% as of December 31, 2014. The Company’s and the Bank’s risk-based capital ratios were well in excess of “well-capitalized” levels as defined by all regulatory standards as of June 30, 2015.
Comparison of Results of Operations for the Three Months Ended June 30, 2015 and 2014.
General. Net income available to common shareholders for the three months ended June 30, 2015 was $3.2 million, or $0.44 basic and $0.43 diluted earnings per common share compared to net income available to common shareholders of $2.6 million, or $0.37 basic and $0.36 diluted earnings per common share for the three months ended June 30, 2014. Annualized return on average assets was 0.90% and return on average tangible common equity was 10.04% for the second quarter of 2015 compared to 0.75% and 9.00% respectively, for the same period of last year.
Interest Income. Total interest income decreased $13,000, or 0.1%, to $12.73 million during the three months ended June 30, 2015 from $12.74 million during the same period in 2014, reflecting a 12 basis point decrease in the average yield on interest-earning assets during the quarter ended June 30, 2015. This decrease was primarily due to the decrease in rates in our loan portfolio.
Interest Expense. Interest expense increased $5,000, or 0.2%, to $2.2 million during the three months ended June 30, 2015. The primary reason for this increase was an increase of 23 basis points in the average rate paid on borrowings and a $22.5 million increase in average borrowings. This was partially offset by a decline of seven basis points in the average rate paid for interest-bearing deposits for the three months ended June 30, 2015, which was primarily due to continued re-pricing of deposit accounts and a changing mix of the deposits to a larger amount of transaction accounts as a percentage of interest-bearing liabilities.
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Net Interest Income. Net interest income before the provision for loan losses decreased $18,000 for the quarter ended June 30, 2015 compared to the same period in 2014. The decrease in net interest income was as a result of a 10 basis point decrease in net interest margin to 3.18%. The decrease in the margin was the result of interest earning assets, primarily loans, repricing downward faster than interest bearing liabilities. Average earning assets increased $37.3 million primarily due to an increase of $47.5 million in the loan portfolio. On a linked quarter basis, net interest income before the provision for loan losses increased $22,000 as net interest margin decreased by 2 basis points, offset by an increase in average earning assets of $12.7 million primarily due to increases in the loan portfolio. For more information on our asset/liability management especially as it relates to interest rate risk, see “Item 7A - Quantitative and Qualitative Disclosures About Market Risk” in this Form 10-K.
Provision for Loan Losses. There was no provision for loan losses in the second quarter of 2015 compared to $500,000 during last year’s comparable period. The decrease was due to management’s ongoing evaluation of the adequacy of the allowance for loan losses, which was partially attributable to net charge offs of $311,000, or 0.12% of loans on an annualized basis in the second quarter of 2015 compared to net charge offs of $627,000, or .25% of loans on an annualized basis in the second quarter of 2014. Non-performing loans to total loans at June 30, 2015 was 0.63% compared to 0.61% at June 30, 2014. Non-performing assets to total assets were 0.60% at June 30, 2015 compared to 0.94% at June 30, 2014.
Non-Interest Income. Non-interest income increased by $824,000 to $4.4 million in the second quarter of 2015 compared to $3.5 million in the second quarter of 2014.
Three Months Ended | Amount | Percent | ||||||||||||||
6/30/2015 | 6/30/2014 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Non-Interest Income: | ||||||||||||||||
Service fee income | $ | 1,464 | $ | 1,538 | $ | (74 | ) | (4.81 | )% | |||||||
Net realized gain on sale of available-for-sale securities | 126 | 211 | (85 | ) | (40.28 | ) | ||||||||||
Commissions | 1,142 | 1,178 | (36 | ) | (3.06 | ) | ||||||||||
Net gains on sales of loans | 1,121 | 382 | 739 | 193.46 | ||||||||||||
Net servicing fees | 70 | 3 | 67 | 2233.33 | ||||||||||||
Increase in cash value of life insurance | 313 | 304 | 9 | 2.96 | ||||||||||||
Gain (loss) on sale of other real estate and repossessed assets | 32 | (178 | ) | 210 | (117.98 | ) | ||||||||||
Other income | 98 | 104 | (6 | ) | (5.77 | ) | ||||||||||
Total | $ | 4,366 | $ | 3,542 | $ | 824 | 23.26 | % |
Increases in non-interest income were primarily due to an increase of $739,000 in gain on sale of loans due to increased production and the acquisition of Summit Mortgage in the third quarter of 2014. Another increase was $210,000 on gain on sale of real estate and repossessed assets primarily due to the gain on the sale of one residential property in combination with decreased losses and subsequent charge-offs. On a linked quarter basis, non-interest income increased $349,000, due to increases in gain on sale of mortgage loans primarily due to an increase in mortgage activity, increases in fees and service charges on deposit accounts primarily due to seasonality in fee income, and increases in gain on sale of real estate and repossessed assets.
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Non-Interest Expense. Non-interest expenses increased $520,000 to $10.4 million for the second quarter 2015.
Three Months Ended | Amount | Percent | ||||||||||||||
6/30/2015 | 6/30/2014 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Non-Interest Expense: | ||||||||||||||||
Salaries and employee benefits | $ | 6,084 | $ | 5,500 | $ | 584 | 10.62 | % | ||||||||
Net occupancy expenses | 515 | 600 | (85 | ) | (14.17 | ) | ||||||||||
Equipment expenses | 410 | 435 | (25 | ) | (5.75 | ) | ||||||||||
Data processing fees | 428 | 402 | 26 | 6.47 | ||||||||||||
Advertising and promotion | 378 | 306 | 72 | 23.53 | ||||||||||||
ATM and debit card expenses | 347 | 316 | 31 | 9.81 | ||||||||||||
Deposit insurance | 212 | 270 | (58 | ) | (21.48 | ) | ||||||||||
Professional fees | 383 | 439 | (56 | ) | (12.76 | ) | ||||||||||
Software subscriptions and maintenance | 433 | 386 | 47 | 12.18 | ||||||||||||
Other real estate and repossessed assets | 87 | 151 | (64 | ) | (42.38 | ) | ||||||||||
Other expenses | 1,096 | 1,048 | 48 | 4.58 | ||||||||||||
Total | $ | 10,373 | $ | 9,853 | $ | 520 | 5.28 | % |
The increase in non-interest expense was primarily due to the acquisition of Summit Mortgage in the third quarter of 2014 which increased non-interest expenses $692,000, primarily in salaries and compensation. On a linked quarter basis, non-interest expense decreased $645,000 primarily due to decreases in salaries and benefit expenses of $446,000 and a decrease in professional fees of $147,000.
Income Tax Expense. Income tax expense for the second quarter 2015 increased by $182,000 compared to the same period in 2014 primarily due to the increase in taxable income. The Company’s effective tax rate decreased to 29.0% for the three months ended June 30, 2015 compared to 30.2% for the three months ended June 30, 2014 due to an increase in non-taxable income.
Comparison of Results of Operations for the Six Months Ended June 30, 2015 and 2014.
General. Net income available to common shareholders for the six months ended June 30, 2015 was $5.7 million, or $0.78 basic and $0.76 diluted earnings per common share compared to net income available to common shareholders of $4.6 million, or $0.65 basic and $0.63 diluted earnings per common share for the six months ended June 30, 2014. Annualized return on average assets was 0.80% and return on average tangible common equity was 8.98% for the first half of 2015 compared to 0.67% and 8.10% respectively, for the same period of last year.
Interest Income. Total interest income decreased $68,000, or 0.3%, to $25.4 million during the six months ended June 30, 2015 from $25.5 million during the same period in 2014, reflecting a 12 basis point decrease in the average yield on interest-earning assets during the six months ended June 30, 2015. This decrease was primarily due to the decrease in rates in our loan portfolio in combination with a decrease in dividends on FHLB stock due to a one-time supplemental dividend paid in the first half of 2014 that was not repeated.
Interest Expense. Interest expense decreased $148,000, or 3.3%, to $4.4 million during the six months ended June 30, 2015 compared to $4.5 million during the six months ended June 30, 2014. The primary reason for this decrease was a decline of ten basis points in the average rate paid on interest-bearing accounts from 0.68% for the six months ended June 30, 2014 to 0.58% for the six months ended June 30, 2015.
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Net Interest Income. Net interest income before the provision for loan losses increased $80,000 for the first half of 2015 compared to the same period in 2014. The increase was a result of an increase of $36.4 million in average earning assets due to an increase in the average loan portfolio of $46.1 million. This increase was partially offset by the net interest margin decreasing to 3.19% in the first half of 2015 compared to 3.27% in the first half of 2014. For more information on our asset/liability management especially as it relates to interest rate risk, see “Item 7A - Quantitative and Qualitative Disclosures About Market Risk” in this Form 10-K.
Provision for Loan Losses. The provision for loan losses for the first half of 2015 was zero compared to $850,000 during last year’s comparable period. The decrease was primarily due to a decline in net charge offs and improving asset quality. Net charge offs for the first half of 2015 equaled $262,000, or 0.05% of loans on an annualized basis compared to $1.0 million, or 0.21% in the same period of 2014.
Non-Interest Income. Non-interest income increased by $1.8 million to $8.4 million in the first half of 2015 compared to $6.5 million in the first half of 2014.
Six Months Ended | Amount | Percent | ||||||||||||||
6/30/2015 | 6/30/2014 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Non-Interest Income: | ||||||||||||||||
Service fee income | $ | 2,822 | $ | 2,879 | $ | (57 | ) | (1.98 | )% | |||||||
Net realized gain on sale of available-for-sale securities | 366 | 362 | 4 | 1.10 | ||||||||||||
Commissions | 2,263 | 2,260 | 3 | 0.13 | ||||||||||||
Net gains on sales of loans | 2,027 | 486 | 1,541 | 317.08 | ||||||||||||
Net servicing fees (costs) | 138 | (22 | ) | 160 | (727.27 | ) | ||||||||||
Increase in cash value of life insurance | 601 | 571 | 30 | 5.25 | ||||||||||||
Loss on sale of other real estate and repossessed assets | (50 | ) | (240 | ) | 190 | (79.17 | ) | |||||||||
Other income | 216 | 246 | (30 | ) | (12.20 | ) | ||||||||||
Total | $ | 8,383 | $ | 6,542 | $ | 1,841 | 28.14 | % |
The increase in non-interest income for the first half of 2015 was primarily due to a $1.5 million increase in gain on sale of loans due to increased production and the acquisition of Summit Mortgage in the third quarter of 2014. The Bank also experienced a decline in loss on sale of real estate and other repossessed assets of $190,000.
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Non-Interest Expense. Non-interest expenses increased $1.3 million to $21.4 million for the first half of 2015.
Six Months Ended | Amount | Percent | ||||||||||||||
6/30/2015 | 6/30/2014 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Non-Interest Expense: | ||||||||||||||||
Salaries and employee benefits | $ | 12,614 | $ | 11,372 | $ | 1,242 | 10.92 | % | ||||||||
Net occupancy expenses | 1,118 | 1,269 | (151 | ) | (11.90 | ) | ||||||||||
Equipment expenses | 863 | 894 | (31 | ) | (3.47 | ) | ||||||||||
Data processing fees | 872 | 807 | 65 | 8.05 | ||||||||||||
Advertising and promotion | 711 | 607 | 104 | 17.13 | ||||||||||||
ATM and debit card expenses | 682 | 606 | 76 | 12.54 | ||||||||||||
Deposit insurance | 444 | 540 | (96 | ) | (17.78 | ) | ||||||||||
Professional fees | 913 | 878 | 35 | 3.99 | ||||||||||||
Software subscriptions and maintenance | 860 | 802 | 58 | 7.23 | ||||||||||||
Other real estate and repossessed assets | 214 | 286 | (72 | ) | (25.17 | ) | ||||||||||
Other expenses | 2,100 | 2,038 | 62 | 3.04 | ||||||||||||
Total | $ | 21,391 | $ | 20,099 | $ | 1,292 | 6.43 | % |
The increases in non-interest expense were primarily a result of the acquisition of Summit Mortgage in the third quarter of 2014, which increased expense by $1.2 million in the first half of 2015.
Income Tax Expense. Income tax expense for the first half of 2015 increased by $415,000 compared to the same period in 2014 primarily due to the increase in taxable income. The Company’s effective tax rate decreased to 29.2% for the six months ended June 30, 2015 compared to 29.5% for the six months ended June 30, 2014 due to an increase in non-taxable income.
Liquidity
We are required to have enough cash and investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound operation. 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 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 assure that adequate liquidity is maintained. We are starting to see the liquidity levels decrease as we continue to diligently work to grow our loan portfolio.
Liquidity management involves the matching of cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs and the ability of the Company to manage those requirements. The Company strives to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance it has in short-term investments at any given time will cover adequately any reasonably anticipated, immediate need for funds. Additionally, the Bank maintains relationships with correspondent banks, which could provide funds on short-term notice if needed. Our liquidity, represented by cash and cash-equivalents and investment securities, is a product of our operating, investing and financing activities.
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Liquidity management is both a daily and long-term function of the management of the Company and the Bank. It is overseen by the Asset and Liability Management Committee. The Board of Directors required the Bank to maintain a minimum liquidity ratio of 10% of deposits. At June 30, 2015, our ratio was 26.5%. The Company is currently in excess of the minimum liquidity ratio set by the Board due to a larger investment portfolio. Management continues to seek to utilize liquidity off of the investment portfolio to fund loan growth over the next few years as demand for loans increases. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed securities. The Bank uses its sources of funds primarily to meet its ongoing commitments, pay maturing deposits, fund deposit withdrawals and fund loan commitments.
We hold cash and investments that qualify as liquid assets to maintain adequate liquidity to ensure safe and sound operation and meet demands for funds (particularly withdrawals of deposits). At June 30, 2015, on a consolidated basis, the Company had $285.8 million in cash and investment securities available for sale and $12.5 million in loans held for sale generally available for its cash needs. We can also generate funds from borrowings, primarily FHLB advances, and, to a lesser degree, third party loans. At June 30, 2015, the Bank had the ability to borrow an additional $91.0 million in FHLB advances. In addition, we have historically sold 15- and 30-year long-term, fixed-rate mortgage loans in the secondary market in order to reduce interest rate risk and to create another source of liquidity. The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its own operating expenses (many of which are paid to the Bank), the Company is responsible for paying amounts owed on its trust preferred securities, any dividends declared to its common stockholders, and interest and principal on outstanding debt. The Company’s primary source of funds is Bank dividends, the payment of which is subject to regulatory limits. At June 30, 2015, the Company, on an unconsolidated basis, had $3.2 million in cash, interest-bearing deposits and liquid investments generally available for its cash needs.
Our liquidity, represented by cash and cash equivalents and investment securities, 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 FHLB advances to leverage our capital base and provide funds for our lending and investment activities, and to enhance our interest rate risk management.
We use our sources of funds primarily to meet ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. At June 30, 2015, the approved outstanding loan commitments, including unused lines of credit, amounted to $273.3 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2015, totaled $162.3 million. It is management’s policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with the Bank.
Except as set forth above, management is not aware of any trends, events, or uncertainties that will have, or that are reasonably likely to have a material impact on liquidity, capital resources or operations. Further, management is not aware of any current recommendations by regulatory agencies, which, if they were to be implemented, would have this effect.
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Off-Balance Sheet Activities
In the normal course of operations, the Bank engages in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. We also have off-balance sheet obligations to repay borrowings and deposits. For the quarter ended June 30, 2015, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows. At June 30, 2015, the Bank had $117.0 million in commitments to make loans, $7.4 million in undisbursed portions of closed loans, $146.2 million in unused lines of credit and $2.7 million in standby letters of credit. In addition, on a consolidated basis, at June 30, 2015, the Company had $221.9 million in outstanding non-deposit borrowings, of which $25.2 million is due in the next twelve months.
Capital Resources
The Bank is subject to minimum capital requirements imposed by the FDIC. See ‘Item 1 - Business- How We Are Regulated - Regulatory Capital Requirements’ of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The FDIC may require the Bank to have additional capital above the specific regulatory levels if it believes the Bank is subject to increased risk due to asset problems, high interest rate risk and other risks. The Company is subject to minimum capital requirements imposed by the FRB, which are substantially similar to those imposed on the Bank, including guidelines for bank holding companies to be considered well-capitalized. The FDIC and FRB have issued revisions to these capital requirements, which would increase the levels required, particularly if the Bank and the Company want to continue paying dividends or executive bonuses. These new rules started being phased in January.
At June 30, 2015, the Bank’s regulatory capital exceeded the FDIC regulatory requirements, and the Bank was well-capitalized under regulatory prompt corrective action standards. In addition, at June 30, 2015, the Company’s capital levels exceeded the FRB’s requirements, and the Company was considered well-capitalized under FRB guidelines. Consistent with our goals to operate a sound and profitable organization, our policy is for the Bank to maintain well-capitalized status.
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Our regulatory capital ratios at June 30, 2015 are reflected below:
Actual Capital Levels | Minimum Regulatory Capital Levels | Minimum Required To be Considered Well- Capitalized | ||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Leverage Capital Level(1): | ||||||||||||||||||||||||
MutualFirst Consolidated | $ | 126,207 | 8.9 | % | $ | 57,047 | 4.0 | % | $ | N/A | N/A | % | ||||||||||||
MutualBank | 128,014 | 9.0 | 57,064 | 4.0 | 71,330 | 5.0 | ||||||||||||||||||
Common Equity Tier 1 CapitalLevel (2) : | ||||||||||||||||||||||||
MutualFirst Consolidated | $ | 125,710 | 12.4 | % | $ | 45,577 | 4.5 | % | $ | 65,834 | 6.5 | % | ||||||||||||
MutualBank | 128,014 | 12.7 | 45,513 | 4.5 | 65,741 | 6.5 | ||||||||||||||||||
Tier 1 Risk-Based Capital Level (3) : | ||||||||||||||||||||||||
MutualFirst Consolidated | $ | 126,207 | 12.5 | % | $ | 60,770 | 6.0 | % | $ | 81,026 | 8.0 | % | ||||||||||||
MutualBank | 128,014 | 12.7 | 60,684 | 6.0 | 80,912 | 8.0 | ||||||||||||||||||
Total Risk-Based Capital Level (4) : | ||||||||||||||||||||||||
MutualFirst Consolidated | $ | 138,897 | 13.7 | % | $ | 81,026 | 8.0 | % | $ | 101,283 | 10.0 | % | ||||||||||||
MutualBank | 140,704 | 13.9 | 80,912 | 8.0 | 101,140 | 10.0 |
(1) Tier 1 Capital to Assets for Leverage Ratio of $1.4 billion for the Bank and Company at March 31, 2015.
(2) Common Equity Tier 1 Capital to Risk-Weighted Assets of $1.0 billion for the Bank and Company at March 31, 2015.
(3) Tier 1 Capital to Risk-Weighted Assets.
(4) Total Capital to Risk-Weighted Assets.
Impact of Inflation
The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the economic value of total assets, it believes that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of the inflationary changes in the consumer price index (“CPI”) coincides with changes in interest rates. For example, the price of one or more of the components of the CPI may fluctuate considerably and thereby influence the overall CPI without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by us. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans. In addition, higher short-term interest rates caused by inflation tend to increase the cost of funds. In other years, the opposite may occur.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
Information about the Company’s asset and liability management and market and interest-rate risks is included in Item 7A of the Form 10-K for the year ended December 31, 2014, filed with the SEC on March 13, 2015.
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 is 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 one of our most significant market risks.
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Management continues to evaluate options to mitigate interest rate risk in an increasing interest rate environment during this cycle of extremely low interest rates. This includes shortening assets and lengthening liabilities when possible.
How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest rates, 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 changes in interest rates on our results of operations, the Bank’s board of directors establishes asset and liability management policies to better match the maturities and repricing terms of our interest-earning assets and interest-bearing liabilities.
These asset and liability policies are implemented by the Asset and Liability Management Committee, which is chaired by the Chief Financial Officer and is comprised of members of our senior management team. The purpose of the Asset and Liability Management Committee is to communicate, coordinate and control asset/liability management issues consistent with our business plan and board-approved policies. The 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 objective of these actions is 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 a 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.
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:
· | originate and purchase adjustable rate mortgage loans and commercial business loans; |
· | originate shorter-duration consumer loans, |
· | manage our deposits to establish stable deposit relationships, |
· | 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 |
· | limit the percentage of long-term 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 and improve earnings. We will continue to increase our emphasis on the origination of relatively short-term and/or adjustable rate loans. In addition, in an effort to avoid an increase in the percentage of long-term, fixed-rate loans in our portfolio, during the first half of 2015 we sold in the secondary market $65.8 million of primarily fixed rate, one- to four-family mortgage loans with a term to maturity of 15 years or greater.
54 |
If past rate movements are an indication of future changes, they usually are neither instantaneous nor do a majority of core deposits reprice at the same level as rates change. The following chart reflects the Bank’s percentage change in net interest income, over a one year time period, and capital assuming an instantaneous parallel rate shock in a range from down 100 basis points to up 400 basis points as of June 30, 2015.
Percentage Change in | ||||||||
Net Interest Income | Capital | |||||||
Rate Shock: | ||||||||
Up 400 basis points | (9.6 | )% | 4.4 | % | ||||
Up 300 basis points | (6.5 | )% | 4.1 | % | ||||
Up 200 basis points | (3.6 | )% | 4.4 | % | ||||
Up 100 basis points | (1.2 | )% | 3.2 | % | ||||
Down 100 basis points | (4.7 | )% | (14.2 | )% |
The following chart indicates the Company’s percentage change in net interest income and capital assuming rate movements that are not instantaneous, but change over in year.
Percentage Change in | ||||||||
Net Interest Income | Capital | |||||||
Rate Shock: | ||||||||
Up 400 basis points | (3.7 | )% | 7.2 | % | ||||
Up 300 basis points | (3.4 | )% | 5.6 | % | ||||
Up 200 basis points | (2.6 | )% | 4.9 | % | ||||
Up 100 basis points | (1.3 | )% | 3.3 | % | ||||
Down 100 basis points | (5.5 | )% | (14.2 | )% |
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the chart. 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 a 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. Therefore, the Company also considers potential interest rate shocks that are not immediate parallel shocks in various rate scenarios. Management currently believes that interest rate risk is managed appropriately in more practical rate shock scenarios than those in the chart above.
55 |
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and (as defined in sec Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) that is designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported accurately and within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate. An evaluation of the Company’s disclosure controls and procedures as of June 30, 2015, was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management preceding the filing date of this annual report. Our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2015, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including our Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
The Company does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within MutualFirst have been detected. These inherent limitations include the realities that judgment in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
56 |
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting (as defined in SEC Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. | OTHER INFORMATION |
Item 1. | Legal Proceedings |
None.
Item 1A. | Risk Factors |
There are no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | Mine Safety Disclosures. |
Not applicable.
Item 5. | Other Information. |
None.
57 |
Regulation S-K Exhibit Number |
Document | Reference to Prior Filing or Exhibit Number Attached Hereto | ||
3.1 | Articles of Incorporation | b | ||
3.1a | Articles Supplementary to Charter | p | ||
3.2 | Articles Supplementary for the Series A Preferred Stock | c | ||
3.3 | Articles Supplementary for the SBLF Preferred Stock | a | ||
3.4 | Amended Bylaws | k | ||
3.4a | Amended and Restated Bylaws | q | ||
3.5 | Articles Supplementary to the Company’s Charter re: term of appointed directors | l | ||
4.1 | Form of Common Stock Certificate | b | ||
4.2 | Form of Certificate for the Series A Preferred Stock | c | ||
4.3 | Form of Certificate for the SBLF Preferred Stock | a | ||
9 | Voting Trust Agreement | None | ||
10.1 | Employment Agreement with David W. Heeter | e | ||
10.2 | Employment Agreement with Patrick C. Botts | e | ||
10.3 | Form of Supplemental Retirement Plan Income Agreements for Patrick C. Botts and David W. Heeter | f | ||
10.4 | Named Executive Officer Salaries and Bonus Arrangements for 2013 | n | ||
10.5 | Form of Director Shareholder Benefit Program Agreement, as amended, for Jerry D. McVicker | g | ||
10.6 | Form of Agreements for Executive Deferred Compensation Plan for Patrick C. Botts and David W. Heeter | f | ||
10.7 | Registrant’s 2001 Stock Option and Incentive Plan | h | ||
10.8 | Registrant’s 2001 Recognition and Retention Plan | h | ||
10.9 | Director Fee Arrangements for 2013 | 10.9 | ||
10.10 | Director Deferred Compensation Plan | i | ||
10.11 | MutualFirst Financial, Inc. 2008 Stock Option and Incentive Plan | d | ||
10.12 | MFB Corp. 2002 Stock Option Plan | d | ||
10.13 | MFB Corp. 1997 Stock Option Plan | d | ||
10.14 | Employment Agreement with Charles J. Viater | e | ||
10.15 | Salary Continuation Agreement with Charles J. Viater | d | ||
10.16 | Loan Agreement with First Tennessee Bank National Association dated December 21, 2009. | m | ||
10.17 | Form of Incentive Stock Option Agreement for 2008 Stock Option and Incentive Plan | j | ||
10.18 | Form of Non-Qualified Stock Option Agreement for 2008 Stock Option and Incentive Plan | j |
58 |
10.19 | Small Business Lending Fund - Securities Purchase Agreement, dated August 25, 2011, between MutualFirst Financial, Inc. and the Secretary of the Treasury, with respect to the issuance and sale of the SBLF Preferred Stock | a | ||
10.20 | Repurchase Agreement dated August 25, 2011, between MutualFirst Financial, Inc. and the United States Department of the Treasury, with respect to the repurchase and redemption of the TARP Preferred Stock | a | ||
10.21 | Employment Agreement with Christopher D. Cook. | e | ||
10.22 | Agreement with Richard J. Lashley and PL Capital Group | q | ||
11 | Statement re computation of per share earnings | None | ||
12 | Statements re computation of ratios | None | ||
14 | Code of Ethics | o | ||
16 | Letter re change in certifying accountant | None | ||
18 | Letter re change in accounting principles | None | ||
21 | Subsidiaries of the registrant | 21 | ||
22 | Published report regarding matters submitted to vote of security holders | None | ||
23 | Consents of experts and counsel | 23 | ||
24 | Power of Attorney | None | ||
31.1 | Rule 13(a)-14(a) Certification (Chief Executive Officer) | 31.1 | ||
31.2 | Rule 13(a)-14(a) Certification (Chief Financial Officer) | 31.2 | ||
32 | Section 1350 Certification | 32 | ||
101 | Financial Statements from the Company’s Form 10-K for the year ended December 31, 2014, formatted in Extensive Business Reporting Language (XBRL); (i) Consolidated Condensed Balance Sheets as of December 31, 2014 and 2013; (ii) Consolidated Condensed Statements of Income for the Years Ended December 31, 2014, 2013 and 2012; (iii) Consolidated Condensed Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012; (iv) Consolidated Condensed Statement of Stockholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012 (v) Consolidated Condensed Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012; and (vi) Notes to Consolidated Financial Statements, December 31, 2014, 2013 and 2012, as follows: | |||
101.INS XBRL Instance Document | 101.INS | |||
101.SCH XBRL Taxonomy Extension Schema Document | 101.SCH | |||
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document | 101.CAL | |||
101.DEF XBRL Taxonomy Extension Definition Linkbase Document | 101.DEF | |||
101.LAB XBRL Taxonomy Extension Labels Linkbase Document | 101.LAB | |||
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document | 101.PRE |
a | Filed as an exhibit to the Company’s Form 8-K filed on August 26, 2011 and incorporated herein by reference. |
b | Filed as an exhibit to the Company’s Form S-1 registration statement filed on September 16, 1999 and incorporated herein by reference. |
c | Filed as an exhibit to the Company’s Form 8-K filed on December 23, 2008 and incorporated herein by reference. |
59 |
d | Filed as an Exhibit to the Company’s Annual Report on Form 10-K filed on March 23, 2009 and incorporated herein by reference. |
e | Filed as an exhibit to the Company’s Form 10-Q filed on November 14, 2012 and incorporated herein by reference. |
f | Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on March 30, 2001 and incorporated herein by reference. |
g | Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on April 2, 2002 and incorporated herein by reference. |
h | Filed as an Appendix to the Company’s Form S-4/A Registration Statement filed on October 19, 2001 and incorporated herein by reference. |
i | Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on March 16, 2007 and incorporated herein by reference. |
j | Filed as an exhibit to the Company’s Form 10-K filed on March 23, 2010 and incorporated herein by reference. |
k | Filed as an exhibit to the Company’s Form 8-K filed on October 15, 2007 and incorporated herein by reference. |
l | Filed as an exhibit to the Company’s Form 8-K filed on July 15, 2008 and incorporated herein by reference. |
m | Filed as an exhibit to the Company’s Form 8-K filed on December 24, 2009 and incorporated herein by reference. |
n | Filed as an exhibit to the Company’s Form 8-K filed on February 15, 2012 and incorporated herein by reference. |
o | Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on March 15, 2004 and incorporated herein by reference. |
p | Filed as an exhibit to the Company’s Form 8-K filed on July 15, 2008 and incorporated herein by reference. |
q | Filed as an exhibit to the Company’s Form 8-K filed on February 27, 2015 and incorporated herein by reference. |
(b) Exhibits - See list in (a)(3) and the Exhibit Index following the signature page.
(c) Financial Statements Schedules – None
60 |
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.
Date: August 5, 2015 | By: | /s/David W. Heeter |
David W. Heeter | ||
President and Chief Executive Officer | ||
Date: August 5, 2015 | By: | /s/Christopher D. Cook |
Christopher D. Cook | ||
Senior Vice President, Treasurer and Chief Financial Officer |
61 |
Number | Description |
31.1 | Rule 13(a)-14(a) Certification (Chief Executive Officer) |
31.2 | Rule 13(a)-14(a) Certification (Chief Financial Officer) |
32 | Section 1350 Certification |
101 | Financial Statements from the Company’s Form 10-Q for the three months ended June 30, 2015 and year ended December 31, 2014, formatted in Extensive Business Reporting Language (XBRL); (i) Consolidated Condensed Balance Sheets as of June 30, 2015 and 2014; (ii) Consolidated Condensed Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014; (iii) Consolidated Condensed Statement of Stockholders’ Equity for the Period Ended June 30, 2015; (iv) Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014; and (vi) Notes to Consolidated Financial Statements for the Three and Six Months Ended June 30, 2015 and 2014, as follows: |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
62 |
EXHIBIT 31.1
CERTIFICATIONS
I, David W. Heeter, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of MutualFirst Financial, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 5, 2015 | By: | /s/ David W. Heeter |
David W. Heeter | ||
President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATIONS
I, Christopher D. Cook, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of MutualFirst Financial, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: August 5, 2015 | By: | /s/ Christopher D. Cook |
Christopher D. Cook | ||
Senior Vice President, Treasurer and Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |
EXHIBIT 32
SECTION 1350 CERTIFICATION
Each of the undersigned hereby certifies in his capacity as an officer of MutualFirst Financial, Inc. (the “Registrant”) that the Quarterly Report of the Registrant on Form 10-Q for the period ended June 30, 2015 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the consolidated financial condition of the Registrant at the end of such period and the results of operations of the Registrant for such period.
Date: August 5, 2015 | By: | /s/ David W. Heeter |
David W. Heeter | ||
President and Chief Executive Officer | ||
Date: August 5, 2015 | By: | /s/ Christopher D. Cook |
Christopher D. Cook | ||
Senior Vice President, Treasurer and Chief Financial Officer |
Change in Accounting Principle (Schedul of Impact of Accounting Changes) (Details) - USD ($) |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Jun. 30, 2015 |
Jun. 30, 2014 |
Jun. 30, 2015 |
Jun. 30, 2014 |
Dec. 31, 2014 |
|
Investment in limited partnerships | $ 477,000 | $ 477,000 | $ 527,000 | ||
Deferred tax asset | 13,750,000 | 13,750,000 | 13,575,000 | ||
Retained earnings | 53,312,000 | 53,312,000 | 49,386,000 | ||
Noninterest Income | 4,366,000 | $ 3,542,000 | 8,383,000 | $ 6,542,000 | |
Income tax expense | 1,315,000 | 1,133,000 | 2,351,000 | 1,936,000 | |
Income available to common stockholders | $ 3,218,000 | $ 2,614,000 | $ 5,698,000 | $ 4,634,000 | |
Basic | $ 0.44 | $ 0.37 | $ 0.78 | $ 0.65 | |
Diluted | $ 0.43 | $ 0.36 | $ 0.76 | $ 0.63 | |
As Previously Reported [Member] | |||||
Investment in limited partnerships | 1,582,000 | ||||
Deferred tax asset | 13,305,000 | ||||
Retained earnings | 50,171,000 | ||||
Noninterest Income | $ 3,414,000 | $ 6,287,000 | |||
Income tax expense | 1,062,000 | 1,794,000 | |||
Income available to common stockholders | $ 2,557,000 | $ 4,521,000 | |||
Basic | $ 0.36 | $ 0.63 | |||
Diluted | $ 0.35 | $ 0.61 | |||
As Reported Under the New Guidance [Member] | |||||
Investment in limited partnerships | 527,000 | ||||
Deferred tax asset | 13,575,000 | ||||
Retained earnings | $ 49,386,000 | ||||
Noninterest Income | $ 3,542,000 | $ 6,542,000 | |||
Income tax expense | 1,133,000 | 1,936,000 | |||
Income available to common stockholders | $ 2,614,000 | $ 4,634,000 | |||
Basic | $ 0.37 | $ 0.65 | |||
Diluted | $ 0.36 | $ 0.63 |
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