10-Q

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, 2017
	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)	Emerging growth company  ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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 August 7, 2017, there were 7,381,394 shares of the registrant’s common stock outstanding. 

MutualFirst Financial, Inc.

Form 10-Q Quarterly Report for the Period Ended June 30, 2017

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	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44
Item 4.	Controls and Procedures	45
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosure	46
Item 5.	Other Information	46
Item 6.	Exhibits	47
Signature Page		49
Exhibits		50

MutualFirst Financial, Inc.

Consolidated Condensed Balance Sheets
(In Thousands, Except Share and Per Share Data)

	June 30,		December 31,
	2017		2016
	(Unaudited)
Assets
Cash and due from banks	$	6,998	$	8,503
Interest-bearing demand deposits		18,170		18,357
Cash and cash equivalents		25,168		26,860
Interest-bearing time deposits		2,046		993
Investment securities available for sale (carried at fair value)		256,642		249,913
Loans held for sale		8,796		4,063
Loans, net of allowance for loan losses of $12,426 and $12,382, at June 30, 2017 and December 31, 2016, respectively		1,171,927		1,157,120
Premises and equipment, net		20,886		21,200
Federal Home Loan Bank stock		11,183		10,925
Deferred tax asset, net		10,800		12,037
Cash value of life insurance		52,155		51,594
Goodwill		1,800		1,800
Other real estate owned and repossessed assets		709		1,199
Other assets		13,837		15,429
Total assets	$	1,575,949	$	1,553,133
Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest-bearing	$	187,173	$	178,046
Interest-bearing		985,812		975,336
Total deposits		1,172,985		1,153,382
Federal Home Loan Bank advances		235,991		240,591
Other borrowings		4,211		4,189
Other liabilities		16,436		14,933
Total liabilities		1,429,623		1,413,095
Commitments and Contingencies
Stockholders' Equity
Common stock, $.01 par value
Authorized - 20,000,000 shares
Issued and outstanding - 7,344,233 and 7,324,233 shares at June 30, 2017 and December 31, 2016, respectively		73		73
Additional paid-in capital		74,303		74,164
Retained earnings		71,809		67,055
Accumulated other comprehensive income (loss)		141		(1,254	)
Total stockholders' equity		146,326		140,038
Total liabilities and stockholders' equity	$	1,575,949	$	1,553,133

See notes to consolidated condensed financial statements

1

MutualFirst Financial, Inc.

Consolidated Condensed Statements of Income
(Unaudited)

(In Thousands, Except Share and Per Share Data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Interest and Dividend Income
Loans receivable	$	12,753		$	11,515		$	25,002		$	22,735
Investment securities		1,745			1,610			3,466			3,299
Federal Home Loan Bank stock		117			111			231			216
Deposits with financial institutions		37			22			62			42
Total interest and dividend income		14,652			13,258			28,761			26,292
Interest Expense
Deposits		1,634			1,283			3,100			2,568
Federal Home Loan Bank advances		883			897			1,769			1,792
Other		48			91			92			183
Total interest expense		2,565			2,271			4,961			4,543
Net Interest Income		12,087			10,987			23,800			21,749
Provision for loan losses		300			150			500			350
Net Interest Income After Provision for Loan Losses		11,787			10,837			23,300			21,399
Non-interest Income
Service fee income		1,714			1,528			3,114			2,902
Net realized gain on sales of available for sale securities		279			652			408			770
Commissions		1,318			1,404			2,514			2,503
Net gains on sales of loans		945			1,407			1,715			2,347
Net servicing fees		96			78			197			148
Increase in cash value of life insurance		288			306			560			590
Loss on sale of other real estate and repossessed assets		(75	)		(188	)		(21	)		(217	)
Other income		105			706			307			847
Total non-interest income		4,670			5,893			8,794			9,890
Non-interest Expenses
Salaries and employee benefits		6,534			6,660			13,260			13,151
Net occupancy expenses		763			601			1,572			1,247
Equipment expenses		438			484			865			971
Data processing fees		541			492			1,095			981
ATM and debit card expenses		410			356			828			736
Deposit insurance		168			225			381			459
Professional fees		408			380			804			850
Advertising and promotion		303			269			614			696
Software subscriptions and maintenance		567			549			1,136			1,029
Other real estate and repossessed assets		33			14			80			86
Other expenses		1,052			1,210			1,988			2,450
Total non-interest expenses		11,217			11,240			22,623			22,656
Income Before Income Tax		5,240			5,490			9,471			8,633
Income tax expense		1,342			1,333			2,367			2,111
Net Income Available to Common Shareholders	$	3,898		$	4,157		$	7,104		$	6,522
Earnings Per Common Share
Basic	$	0.53		$	0.56		$	0.97		$	0.87
Diluted	$	0.52		$	0.55		$	0.95		$	0.86
Dividends Per Common Share	$	0.16		$	0.14		$	0.32		$	0.28

See notes to consolidated condensed financial statements

2

MutualFirst Financial, Inc.

Consolidated Condensed Statements of Comprehensive Income
(Unaudited)

(In Thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2017			2016			2017			2016
Net Income	$	3,898		$	4,157		$	7,104		$	6,522
Other Comprehensive Income
Net unrealized holding gain on securities available for sale		1,802			2,452			2,517			5,866
Reclassification adjustment for realized gains included in net income		(279	)		(652	)		(408	)		(770	)
Net unrealized loss on derivative used for cash flow hedges		-			(3	)		-			(28	)
		1,523			1,797			2,109			5,068
Income tax expense related to other comprehensive income		(519	)		(610	)		(714	)		(1,729	)
Other comprehensive income, net of tax		1,004			1,187			1,395			3,339
Comprehensive Income	$	4,902		$	5,344		$	8,499		$	9,861

See notes to consolidated condensed financial statements

3

MutualFirst Financial, Inc.

Consolidated Condensed Statement of Changes in Stockholders’ Equity
For the Period Ended June 30, 2017

(Unaudited)

(In Thousands, Except Share and Per Share Data)

	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balances December 31, 2016	$	73	$	74,164	$	67,055		$	(1,254	)	$	140,038
Net income						7,104						7,104
Other comprehensive income, net of taxes									1,395			1,395
Stock options, exercised				139								139
Cash dividends, common stock ($.32 per share)						(2,350	)					(2,350	)
Balances June 30, 2017	$	73	$	74,303	$	71,809		$	141		$	146,326

See notes to consolidated condensed financial statements

4

MutualFirst Financial, Inc.

Consolidated Condensed Statements of Cash Flows
(Unaudited)

(In Thousands, Except Share and Per Share Data)

	Six Months Ended June 30,
	2017			2016
Operating Activities
Net income	$	7,104		$	6,522
Items not requiring cash
Provision for loan losses		500			350
Depreciation and amortization		2,290			2,543
Deferred income tax		524			158
Increase in cash value of life insurance		(560	)		(590	)
Loans originated for sale		(54,702	)		(64,176	)
Proceeds from sales of loans held for sale		51,538			63,724
Net gain on sale of loans		(1,715	)		(2,347	)
Net gain on sale of securities, available for sale		(408	)		(770	)
Loss on sale of other real estate and repossessed assets		21			217
Change in
Interest receivable and other assets		1,009			(551	)
Interest payable and other liabilities		(377	)		293
Other adjustments		(8	)		70
Net cash provided by operating activities		5,216			5,443
Investing Activities
Net change in interest-bearing time deposits		(1,053	)		(980	)
Purchases of securities, available for sale		(34,401	)		(28,801	)
Proceeds from maturities and paydowns of securities, available for sale		13,326			17,741
Proceeds from sales of securities, available for sale		18,365			29,901
Purchase of Federal Home Loan Bank stock		(258	)		(158	)
Net change in loans		(16,415	)		(28,628	)
Purchases of premises and equipment		(415	)		(1,690	)
Proceeds from real estate owned sales		649			1,471
Proceeds from sale of real estate held for investment		502			-
Proceeds from bank owned life insurance		-			1,121
Gain on bank owned life insurance		-			(346	)
Proceeds from sale of premises and equipment		-			65
Net cash used in investing activities		(19,700	)		(10,304	)
Financing Activities
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits		13,511			14,714
Certificates of deposit		6,092			(9,595	)
Proceeds from FHLB advances		164,200			129,900
Repayments of FHLB advances		(168,800	)		(111,700	)
Net repayments other borrowings		-			(379	)
Cash dividends		(2,350	)		(2,093	)
Stock options exercised		139			976
Stock repurchased		-			(4,354	)
Net cash provided by financing activities		12,792			17,469
Net Change in Cash and Cash Equivalents		(1,692	)		12,608
Cash and Cash Equivalents, Beginning of Period		26,860			20,915
Cash and Cash Equivalents, End of Period	$	25,168		$	33,523
Additional Cash Flows Information
Interest paid	$	4,802		$	4,492
Income tax paid		1,000			400
Transfers from loans to foreclosed assets		168			816
Mortgage servicing rights capitalized		146			204
Purchase of securities, due to broker		1,970			3,766

See notes to consolidated condensed financial statements

5

MutualFirst Financial, Inc.

Notes to Consolidated 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 subsidiaries, MFBC Statutory Trust, MutualFirst Risk Management, Inc., Mutual Risk Advisors, Inc., and 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. These companies conform to accounting principles generally accepted in the United States of America and reporting practices followed by the banking industry. The more significant of the policies are described below.

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 Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 16, 2017.

The interim consolidated condensed financial statements at and for the three and six months ended June 30, 2017 and 2016, 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, 2016 has been derived from the Audited Consolidated Balance Sheet of the Company as of that date.

Note 2: Earnings Per Share

Earnings per share were computed as follows:

	Three Months Ended June 30,
	2017						2016
	Net Income		Weighted- Average Shares		Per-Share Amount		Net Income		Weighted- Average Shares		Per-Share Amount
Basic Earnings Per Share
Net income	$	3,898		7,344,233	$	0.53	$	4,157		7,453,333	$	0.56
Effect of Dilutive Securities
Stock options				143,256						142,955
Diluted Earnings Per Share
Net income available and assumed conversions	$	3,898		7,487,489	$	0.52	$	4,157		7,596,288	$	0.55

	Six Months Ended June 30,
	2017						2016
	Net Income		Weighted- Average Shares		Per-Share Amount		Net Income		Weighted- Average Shares		Per-Share Amount
Basic Earnings Per Share
Net income	$	7,104		7,338,377	$	0.97	$	6,522		7,459,871	$	0.87
Effect of Dilutive Securities
Stock options				145,641						146,213
Diluted Earnings Per Share
Net income available and assumed conversions	$	7,104		7,484,018	$	0.95	$	6,522		7,606,084	$	0.86

6

As of June 30, 2017 and 2016, the exercise price for all options was lower than the average market price of the common shares.

Note 3: Impact of Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The ASU shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date. However, the amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments are effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. Early adoption is permitted. The Company early adopted this ASU in the first quarter of 2017 and it did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350)-Simplifying the Test for Goodwill Impairment. These amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. The Company has assessed ASU 2017-04 and does not expect it to have a material impact on its accounting and disclosures.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805)-Clarifying the Definition of a Business. ASU 2017-01 provides amendments to clarify the definition of a business and affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied prospectively as of the beginning of the period of adoption. Early adoption is permitted under certain circumstances. The Company has assessed ASU 2017-01 and does not expect it to have a material impact on its accounting and disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The ASU is intended to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows by specifically addressing eight specific areas. The amendments are effective for the Company for annual and interim periods beginning in the first quarter of 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the effects that this ASU will have on its financial statements, specifically the Statement of Cash Flows, and does not expect these effects to be material.

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements. Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. The ASU is intended to provide financial statement users with useful information about the expected credit losses on financial instruments and other commitments to extend credit.

· The ASU requires financial assets measured at amortized cost (primarily loans) be presented at the amount net of a valuation allowance for credit losses, and that the income statement include the measurement of credit losses for newly recognized financial assets as well as changes in expected losses on previously recognized financial assets. The provisions of this ASU does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. The new model will be based on relevant information including past events, historical experience, current conditions, and reasonable and supportive forecasts that affect the collectability of the asset. The provisions of this ASU differ from current U.S. generally accepted accounting principles (“GAAP”) in that current U.S. GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.

· This ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down.

This ASU will be effective for the Company for interim and annual periods beginning in the first quarter of 2020. Earlier adoption is permitted beginning in the first quarter of 2019. The Company is in the evaluation stage for this ASU in order to determine the most appropriate method of implementation and all resources and data (both current and historical) needed.

In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. This Update includes amendments that currently apply, or may apply in the future, to the Company related to the following: (1) accounting for the difference between the deduction for tax purposes and the amount of compensation cost recognized for financial reporting purposes; (2) classification of excess tax benefits on the statement of cash flows; (3) accounting for forfeitures; (4) accounting for awards partially settled in cash in excess of the employer’s minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The amendments in this Update were effective for the Company for annual and interim periods beginning in the first quarter 2017. The ASU provides separate transition provisions for each of the amendments. Initial adoption of this ASU in 2017 did not have a material impact on the Company.

7

In February 2016, the FASB issued ASU 2016-02, Leases. The objective of the amendment is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. These changes will increase transparency among companies by recognizing lease assets and liabilities on the balance sheet and disclosing additional information about lease arrangements. The amendments in this update are effective for annual and interim periods beginning in the first quarter of 2019. The Company has operating leases in place for some locations as well as equipment and is in the early stages of evaluating the potential impact of adopting this amendment.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update require: (1) all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee); (2) an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; and (3) eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The new guidance is effective for the Company for annual and interim periods beginning in the first quarter of 2018. Current evaluation would indicate that the primary area impacted by the amendments of this ASU will be our investment in Federal Home Loan Bank stock, which is an equity security and does not have a readily determinable fair value. See Note 1 - Significant Accounting Policies, “Federal Home Loan Bank Stock” for information regarding the Company’s investment. The adoption of ASU 2016-01 is not anticipated to have a material effect on the Company’s consolidated financial statements.

Note 4: Investment Securities

The amortized costs and approximate fair values, together with gross unrealized gains and losses on securities, are in the tables below. All mortgage-backed securities and collateralized mortgage obligations held as of June 30, 2017 and December 31, 2016 were guaranteed by government sponsored entities, government corporations or federal agencies.

	June 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale Securities
Mortgage-backed securities	$	77,050	$	508	$	(862	)	$	76,696
Collateralized mortgage obligations		76,717		246		(704	)		76,259
Municipal obligations		85,246		2,779		(556	)		87,469
Corporate obligations		17,395		71		(1,248	)		16,218
Total investment securities	$	256,408	$	3,604	$	(3,370	)	$	256,642

	December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for Sale Securities
Mortgage-backed securities	$	92,871	$	802	$	(1,156	)	$	92,517
Collateralized mortgage obligations		68,621		269		(843	)		68,047
Municipal obligations		77,474		1,716		(1,508	)		77,682
Corporate obligations		12,822		78		(1,233	)		11,667
Total investment securities	$	251,788	$	2,865	$	(4,740	)	$	249,913

8

The amortized cost and fair value of securities available for sale at June 30, 2017, 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	$	160	$	160
One to five years		5,057		5,086
Five to ten years		23,978		24,774
After ten years		73,446		73,667
		102,641		103,687
Mortgage-backed securities		77,050		76,696
Collateralized mortgage obligations		76,717		76,259
Totals	$	256,408	$	256,642

Proceeds from sales of securities available for sale for the three and six months ended June 30, 2017 were $12.7 million and $18.4 million, respectively. For the three and six months ended June 30, 2016, proceeds from sales of securities available for sale were $26.0 million and $29.9 million, respectively. Gross gains were recognized on the sales for the three and six months ended June 30, 2017 of $279,000 and $408,000, respectively. Gross gains of $701,000 and $819,000 were recognized, for the three and six months ended June 30, 2016. There were no gross losses recognized on the sales of securities for the three and six months ended June 30, 2017, respectively. Gross losses of $49,000 for the three and six months ended June 30, 2016, were also recognized on those sales.

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, 2017 and December 31, 2016 was $115.9 million and $143.8 million, respectively, which was approximately 45.2 percent and 57.6 percent, respectively, 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 fair value for the securities at less than historical cost for the periods presented, are temporary.

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 six months of 2017 and 2016, the Bank determined that its security holdings had no other-than-temporary impairment.

9

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, 2017 and December 31, 2016:

	June 30, 2017
	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	$	50,104	$	(862	)	$	-	$	-		$	50,104	$	(862	)
Collateralized mortgage obligations		35,441		(558	)		4,326		(146	)		39,767		(704	)
Municipal obligations		18,752		(555	)		159		(1	)		18,911		(556	)
Corporate obligations		4,548		(2	)		2,588		(1,246	)		7,136		(1,248	)
Total temporarily impaired securities	$	108,845	$	(1,977	)	$	7,073	$	(1,393	)	$	115,918	$	(3,370	)

	December 31, 2016
	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	$	58,056	$	(1,156	)	$	-	$	-		$	58,056	$	(1,156	)
Collateralized mortgage obligations		41,769		(683	)		4,688		(160	)	$	46,457	$	(843	)
Municipal obligations		31,907		(1,507	)		337		(1	)		32,244		(1,508	)
Corporate obligations		-		-			7,076		(1,233	)		7,076		(1,233	)
Total temporarily impaired securities	$	131,732	$	(3,346	)	$	12,101	$	(1,394	)	$	143,833	$	(4,740	)

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, 2017.

Municipals

The 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 par value of the investments.  The Company does not intend to sell these investments and it is more likely than not that the Company will not be required to sell these investments. The Company does not consider any of these investment securities to be other-than-temporarily impaired at June 30, 2017.

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 industry analysts.

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 that are not a beneficial interest in securitized financial assets, the Company uses debt and equity securities impairment accounting model.

10

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.

11

Pooled Trust Preferred Securities. The Company has invested in pooled trust preferred securities. At June 30, 2017, 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. All pooled trust preferred securities owned were performing as agreed in the first six months of 2017. All pooled trust preferred securities owned by the Company are exempt from the Volcker Rule.

The following table provides additional information related to the Company’s investment in pooled trust preferred securities as of June 30, 2017:

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	Aa3	$	1,000	$	920	$	563	$	(357	)	$	-	CCC-		44		49		4.20	%		9.55	%		54.52	%
U.S. Capital Funding I	B3		3,000		2,914		2,025		(889	)		-	Caa1		29		33		7.95	%		6.19	%		12.69	%
		$	4,000	$	3,834	$	2,588	$	(1,246	)	$	-

(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.

12

Note 5: Loans and Allowance

Classes of loans at June 30, 2017 and December 31, 2016 include:

	June 30,			December 31,
	2017			2016
Real estate
Commercial	$	298,801		$	302,577
Commercial construction and development		29,008			22,453
Consumer closed end first mortgage		467,802			478,848
Consumer open end and junior liens		70,572			71,222
Total real estate loans		866,183			875,100
Other loans
Consumer loans
Auto		18,675			18,939
Boat/RVs		158,556			141,602
Other		5,605			5,892
Commercial and industrial		139,145			131,103
Total other loans		321,981			297,536
Total loans		1,188,164			1,172,636
Undisbursed loans in process		(9,753	)		(8,691	)
Unamortized deferred loan costs, net		5,942			5,557
Allowance for loan losses		(12,426	)		(12,382	)
Net loans	$	1,171,927		$	1,157,120

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 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.

13

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 management’s 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.

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 status. 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, 2017 and December 31, 2016 are as follows:

	June 30,		December 31,
	2017		2016
Real estate
Commercial	$	1,199	$	912
Commercial construction and development		-		-
Consumer closed end first mortgage		1,679		3,626
Consumer open end and junior liens		238		335
Consumer loans
Auto		4		5
Boat/RVs		342		224
Other		10		24
Commercial and industrial		39		18
Total nonaccrual loans	$	3,511	$	5,144

14

An age analysis of the Company’s past due loans, segregated by class of loans, as of June 30, 2017 and December 31, 2016 are as follows:

	June 30, 2017
	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 Past Due and Accruing
Real estate
Commercial	$	614	$	11	$	1,081	$	1,706	$	297,095	$	298,801	$	-
Commercial construction and development		157		-		-		157		28,851		29,008		-
Consumer closed end first mortgage		3,603		380		1,500		5,483		462,319		467,802		24
Consumer open end and junior liens		243		76		200		519		70,053		70,572		-
Consumer loans
Auto		48		19		2		69		18,606		18,675		-
Boat/RVs		805		336		156		1,297		157,259		158,556		-
Other		55		15		13		83		5,522		5,605		3
Commercial and industrial		230		4		37		271		138,874		139,145		-
Total	$	5,755	$	841	$	2,989	$	9,585	$	1,178,579	$	1,188,164	$	27

	December 31, 2016
	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 Past Due and Accruing
Real estate
Commercial	$	854	$	142	$	785	$	1,781	$	300,796	$	302,577	$	-
Commercial construction and development		-		-		-		-		22,453		22,453		-
Consumer closed end first mortgage		6,789		1,554		3,675		12,018		466,830		478,848		237
Consumer open end and junior liens		512		166		304		982		70,240		71,222		-
Consumer loans
Auto		103		25		5		133		18,806		18,939		-
Boat/RVs		1,376		305		213		1,894		139,708		141,602		-
Other		89		26		13		128		5,764		5,892		-
Commercial and industrial		497		32		8		537		130,566		131,103		-
Total	$	10,220	$	2,250	$	5,003	$	17,473	$	1,155,163	$	1,172,636	$	237

15

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 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, 2017 and 2016 and as of and for the year ended December 31, 2016.

	June 30, 2017
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans - QTD		Average Investment in Impaired Loans - YTD		Interest Income Recognized - QTD		Interest Income Recognized - YTD
Loans without a specific valuation allowance
Real estate
Commercial	$	809	$	809	$	-	$	811	$	763	$	-	$	-
Commercial construction and development		761		761		-		776		792		8		17
Consumer closed end first mortgage		781		781		-		1,315		1,499		-		-
Commercial and industrial		172		172		-		176		179		1		3
Loans with a specific valuation allowance
Real estate
Commercial		214		214		100		214		214		-		-
Total
Real estate
Commercial	$	1,023	$	1,023	$	100	$	1,025	$	977	$	-	$	-
Commercial construction and development	$	761	$	761	$	-	$	776	$	792	$	8	$	17
Consumer closed end first mortgage	$	781	$	781	$	-	$	1,315	$	1,499	$	-	$	-
Commercial and industrial	$	172	$	172	$	-	$	176	$	179	$	1	$	3
Total	$	2,737	$	2,737	$	100	$	3,292	$	3,447	$	9	$	20

16

	December 31, 2016
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance
Real estate
Commercial	$	665	$	665	$	-	$	2,207	$	68
Commercial construction and development		822		822		-		874		40
Consumer closed end first mortgage		1,869		1,869		-		1,328		-
Consumer open end and junior liens		-		-		-		193		-
Commercial and industrial		187		187		-		204		1
Loans with a specific valuation allowance
Real estate
Commercial		214		214		100		416		-
Total
Real estate
Commercial	$	879	$	879	$	100	$	2,623	$	68
Commercial construction and development	$	822	$	822	$	-	$	874	$	40
Consumer closed end first mortgage	$	1,869	$	1,869	$	-	$	1,328	$	-
Consumer open end and junior liens	$	-	$	-	$	-	$	193	$	-
Commercial and industrial	$	187	$	187	$	-	$	204	$	1
Total	$	3,757	$	3,757	$	100	$	5,222	$	109

17

	June 30, 2016
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans - QTD		Average Investment in Impaired Loans - YTD		Interest Income Recognized - QTD		Interest Income Recognized - YTD
Loans without a specific valuation allowance
Real estate
Commercial	$	2,896	$	2,896	$	-	$	3,022	$	3,080	$	24	$	48
Commercial construction and development		853		853		-		856		907		9		21
Consumer closed end first mortgage		1,126		1,126		-		1,126		1,126		-		-
Consumer open end and junior liens		-		-		-		243		322		-		-
Commercial and industrial		200		200		-		205		208		-		-
Loans with a specific valuation allowance
Real estate
Commercial		410		410		100		464		534		-		-
Total
Real estate
Commercial	$	3,306	$	3,306	$	100	$	3,486	$	3,614	$	24	$	48
Commercial construction and development	$	853	$	853	$	-	$	856	$	907	$	9	$	21
Consumer closed end first mortgage	$	1,126	$	1,126	$	-	$	1,126	$	1,126	$	-	$	-
Consumer open end and junior liens	$	-	$	-	$	-	$	243	$	322	$	-	$	-
Commercial and industrial	$	200	$	200	$	-	$	205	$	208	$	-	$	-
Total	$	5,485	$	5,485	$	100	$	5,916	$	6,177	$	33	$	69

18

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, 2017.

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.

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 if 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.

As of June 30, 2017, special mention commercial loans increased as management determined that a few credits had potential weaknesses deserving management’s close attention. All of these credits were performing as agreed as of June 30, 2017.

19

	June 30, 2017
	Commercial								Consumer
	Pass		Special Mention		Substandard		Doubtful		Pass		Special Mention		Substandard		Total
Real estate
Commercial	$	288,365	$	7,285	$	3,128	$	23							$	298,801
Commercial construction and development		27,841		406		761		-								29,008
Consumer closed end first mortgage									$	464,234	$	-	$	3,568		467,802
Consumer open end and junior liens										70,286		-		286		70,572
Other loans
Consumer loans
Auto										18,668		-		7		18,675
Boat/RVs										158,160		-		396		158,556
Other										5,565		-		40		5,605
Commercial and industrial		130,745		8,313		87		-								139,145
	$	446,951	$	16,004	$	3,976	$	23	$	716,913	$	-	$	4,297	$	1,188,164

	December 31, 2016
	Commercial								Consumer
	Pass		Special Mention		Substandard		Doubtful		Pass		Special Mention		Substandard		Total
Real estate
Commercial	$	295,548	$	3,705	$	3,297	$	27							$	302,577
Commercial construction and development		21,782		254		417		-								22,453
Consumer closed end first mortgage									$	473,329	$	-	$	5,519		478,848
Consumer open end and junior liens										70,769		-		453		71,222
Other loans
Consumer loans
Auto										18,931		-		8		18,939
Boat/RVs										141,294		-		308		141,602
Other										5,859		-		33		5,892
Commercial and industrial		128,436		2,513		154		-								131,103
	$	445,766	$	6,472	$	3,868	$	27	$	710,182	$	-	$	6,321	$	1,172,636

20

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, 2017 and 2016, respectively. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other segments.

	Three Months Ended June 30, 2017
	Commercial			Mortgage			Consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	7,397		$	2,279		$	2,706		$	12,382
Provision charged to expense		144			24			132			300
Losses charged off		(12	)		(84	)		(206	)		(302	)
Recoveries		6			4			36			46
Balance, end of period	$	7,535		$	2,223		$	2,668		$	12,426

	Six Months Ended June 30, 2017
	Commercial			Mortgage			Consumer			Total
Allowance for loan losses:
Balance, beginning of year	$	7,358		$	2,303		$	2,721		$	12,382
Provision charged to expense		176			41			283			500
Losses charged off		(12	)		(129	)		(410	)		(551	)
Recoveries		13			8			74			95
Balance, end of period	$	7,535		$	2,223		$	2,668		$	12,426

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	Three Months Ended June 30, 2016
	Commercial			Mortgage			Consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	7,208		$	2,629		$	2,833		$	12,670
Provision charged to expense		(49	)		23			176			150
Losses charged off		(29	)		(64	)		(200	)		(293	)
Recoveries		2			1			74			77
Balance, end of period	$	7,132		$	2,589		$	2,883		$	12,604

	Six Months Ended June 30, 2016
	Commercial			Mortgage			Consumer			Total
Allowance for loan losses:
Balance, beginning of year	$	7,090		$	2,683		$	2,868		$	12,641
Provision charged (credited) to expense		71			85			194			350
Losses charged off		(33	)		(184	)		(338	)		(555	)
Recoveries		4			5			159			168
Balance, end of period	$	7,132		$	2,589		$	2,883		$	12,604

The following tables provide a breakdown of the allowance for loan losses and loan portfolio balances by segment as of June 30, 2017 and 2016, and December 31, 2016.

	June 30, 2017
	Commercial		Mortgage		Consumer		Total
Allowance balances
Individually evaluated for impairment	$	100	$	-	$	-	$	100
Collectively evaluated for impairment		7,435		2,223		2,668		12,326
Total allowance for loan losses	$	7,535	$	2,223	$	2,668	$	12,426
Loan balances
Individually evaluated for impairment	$	1,956	$	781	$	-	$	2,737
Collectively evaluated for impairment		464,998		467,021		253,408		1,185,427
Gross loans	$	466,954	$	467,802	$	253,408	$	1,188,164

	June 30, 2016
	Commercial		Mortgage		Consumer		Total
Allowance balances
Individually evaluated for impairment	$	100	$	-	$	-	$	100
Collectively evaluated for impairment		7,032		2,589		2,883		12,504
Total allowance for loan losses	$	7,132	$	2,589	$	2,883	$	12,604
Loan balances
Individually evaluated for impairment	$	4,359	$	1,126	$	-	$	5,485
Collectively evaluated for impairment		396,225		484,122		227,973		1,108,320
Gross loans	$	400,584	$	485,248	$	227,973	$	1,113,805

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	December 31, 2016
	Commercial		Mortgage		Consumer		Total
Allowance balances
Individually evaluated for impairment	$	100	$	-	$	-	$	100
Collectively evaluated for impairment		7,258		2,303		2,721		12,282
Total allowance for loan losses	$	7,358	$	2,303	$	2,721	$	12,382
Loan balances
Individually evaluated for impairment	$	1,888	$	1,869	$	-	$	3,757
Collectively evaluated for impairment		454,245		476,979		237,655		1,168,879
Gross loans	$	456,133	$	478,848	$	237,655	$	1,172,636

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral.

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.

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 if the collection of principal and interest is reasonably assured and generally stays on accrual.

At June 30, 2017, the Company had 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 or a reduction of the stated interest rate.

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The following tables describe troubled debts restructured during the three and six month periods ended June 30, 2017 and 2016:

	Three Months Ended
	June 30, 2017						June 30, 2016
	No. of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance		No. of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance
Real estate
Consumer closed end first mortgage		3	$	119	$	121		4	$	134	$	141
Consumer open end and junior liens		1		3		3		-		-		-
Other loans
Consumer loans
Boat/RVs		-		-		-		1		8		8

	Six Months Ended
	June 30, 2017						June 30, 2016
	No. of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance		No. of Loans		Pre- Modification Recorded Balance		Post- Modification Recorded Balance
Real estate
Consumer closed end first mortgage		4		184		188		9		554		569
Consumer open end and junior liens		1		3		3		-		-		-
Other loans
Consumer loans
Auto		-		-		-		1		4		4
Boat/RVs		-		-		-		3		56		56
Commercial and industrial		1		72		72		1		83		83

The impact on the allowance for loan losses was insignificant as a result of these modifications.

24

Newly restructured loans by type for the three and six months ended June 30, 2017 and 2016 are as follows:

	Three Months Ended June 30, 2017
	Rate		Term		Combination		Total Modification
Real estate
Consumer closed end first mortgage	$	-	$	-	$	121	$	121
Consumer open end and junior liens		-		3		-		3

	Three Months Ended June 30, 2016
	Rate		Term		Combination		Total Modification
Real estate
Consumer closed end first mortgage	$	-	$	47	$	94	$	141
Other loans
Consumer loans
Boat/RVs		-		-		8		8

	Six Months Ended June 30, 2017
	Rate		Term		Combination		Total Modification
Real Estate
Consumer closed end first mortgage	$	-	$	-	$	188	$	188
Consumer open end and junior liens		-		3		-		3
Commercial and industrial		-		72		-		72

	Six Months Ended June 30, 2016
	Rate		Term		Combination		Total Modification
Real Estate
Consumer closed end first mortgage	$	-	$	47	$	522	$	569
Other loans
Consumer loans
Auto		-		-		4		4
Boat/RVs		-		48		8		56
Commercial and industrial		-		83		-		83

There were no defaults on loans modified as troubled debt restructurings made in the three and six months ended June 30, 2017 and 2016. Defaults are defined as any loans that become 90 days past due.

At June 30, 2017, the Company had residential real estate held for sale as a result of foreclosure totaling $326,000 and real estate in the process of foreclosure of $1.2 million. As of June 30, 2017, the Company also held $383,000 in other repossessed assets, such as autos, boats, RVs and horse trailers.

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Note 6: Derivative Financial Instruments

The Company has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Balance Sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Company agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Company’s Consolidated Statements of Income. The notional amount of customer-facing swaps as of June 30, 2017 and December 31, 2016 was approximately $14.4 million and $14.6 million, respectively.

The following table shows the amounts of derivative financial instruments at June 30, 2017 and December 31, 2016.

	Asset Derivatives
		Fair Value					Fair Value
	Balance Sheet	June 30,		December 31,		Balance Sheet	June 30,		December 31,
	Location	2017		2016		Location	2017		2016
Derivatives not designated as hedging instruments:
Interest rate contracts	Other assets	$	461	$	553	Other liabilities	$	461	$	553

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Note 7: Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows:

	June 30,			December 31,
	2017			2016
Net unrealized gain (loss) on securities available-for-sale	$	234		$	(1,875	)
Net unrealized gain relating to defined benefit plan liability		30			30
		264			(1,845	)
Tax benefit (expense)		(123	)		591
Net of tax amount	$	141		$	(1,254	)

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, 2017 and 2016.

	Amount Reclassified from Accumulated Other Comprehensive Income For the Three Months Ended
	June 30,
Details about Accumulated Other Comprehensive Income Components	2017			2016			Affected Line Item in the Statements of Income
Realized gains on available-for-sale securities
Realized securities gains reclassified into income	$	279		$	652		Total non-interest income - net realized gains on sale of available-for-sale securities
Related income tax expense		(95	)		(222	)	Income tax expense
Total reclassifications for the period, net of tax	$	184		$	430

	Amount Reclassified from Accumulated Other Comprehensive Income For the Six Months Ended
	June 30,
Details about Accumulated Other Comprehensive Income Components	2017			2016			Affected Line Item in the Statements of Income
Realized gains on available-for-sale securities
Realized securities gains reclassified into income	$	408		$	770		Total non-interest income - net realized gains on sale of available-for-sale securities
Related income tax expense		(139	)		(262	)	Income tax expense
Total reclassifications for the period, net of tax	$	269		$	508

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Note 8: 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.

The following table presents the fair value measurements of assets measured on a recurring basis and level within the ASC 820 fair value hierarchy.

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
June 30, 2017
Mortgage-backed securities	$	76,696	$	-	$	76,696	$	-
Collateralized mortgage obligations		76,259		-		76,259		-
Municipal obligations		87,469		-		87,469		-
Corporate obligations		16,218		-		13,630		2,588
Available-for-sale securities	$	256,642	$	-	$	254,054	$	2,588

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
December 31, 2016
Mortgage-backed securities	$	92,517	$	-	$	92,517	$	-
Collateralized mortgage obligations		68,047		-		68,047		-
Municipal obligations		77,682		-		77,682		-
Corporate obligations		11,667		-		9,079		2,588
Available-for-sale securities	$	249,913	$	-	$	247,325	$	2,588

The following is a reconciliation of the beginning and ending balances for the three and six months ended June 30, 2017 and 2016 of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:

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	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2017		2016		2017		2016
Beginning balance	$	2,588	$	2,534	$	2,588	$	2,534
Total realized and unrealized gains (losses)
Included in net income		-		-		-		-
Included in other comprehensive income (loss)		-		-		-		-
Purchases, issuances and settlements		-		-		-		-
Ending balance	$	2,588	$	2,534	$	2,588	$	2,534
Total gains 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	$	-	$	-	$	-	$	-

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.

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements:

June 30, 2017	Fair Value		Valuation Technique	Unobservable Inputs	Range
Trust Preferred Securities	$	2,588	Discounted cash flow	Discount rate		7.0 - 8.0	%
				Constant prepayment rate		2.0	%
				Cumulative projected prepayments		40.0	%
				Probability of default		1.7 - 2.2	%
				Projected cures given deferral		0 - 15.0	%
				Loss severity		32.5 - 38.7	%

December 31, 2016	Fair Value		Valuation Technique	Unobservable Inputs	Range
Trust Preferred Securities	$	2,588	Discounted cash flow	Discount rate		7.0 - 8.0	%
				Constant prepayment rate		2.0	%
				Cumulative projected prepayments		40.0	%
				Probability of default		1.7 - 2.2	%
				Projected cures given deferral		0 - 15.0	%
				Loss severity		32.5 - 38.7	%

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.

Interest Bearing Time Deposits – The fair value of interest bearing time deposits approximates carrying value.

Loans Held For Sale - Fair values are based on quoted market prices.

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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.

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, 2017	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	25,168	$	25,168	$	25,168	$	-	$	-
Interest-bearing time deposits		2,046		2,046		2,046		-		-
Loans held for sale		8,796		8,905		-		8,905		-
Loans, net		1,171,927		1,160,935		-		-		1,160,935
FHLB stock		11,183		11,183		-		11,183		-
Interest receivable		4,664		4,664		-		4,664		-
Liabilities
Deposits		1,172,985		1,172,919		794,153		-		378,766
FHLB advances		235,991		235,705		-		235,705		-
Other borrowings		4,211		4,363		-		4,363		-
Interest payable		510		510		-		510		-

					Fair Value Measurements Using
December 31, 2016	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	26,860	$	26,860	$	26,860	$	-	$	-
Interest-bearing time deposits		993		993		993		-		-
Loans held for sale		4,063		4,094		-		4,094		-
Loans, net		1,157,120		1,139,450		-		-		1,139,450
FHLB stock		10,925		10,925		-		10,925		-
Interest receivable		4,629		4,629		-		4,629		-
Liabilities
Deposits		1,153,382		1,152,030		779,577		-		372,453
FHLB advances		240,591		239,866		-		239,866		-
Other borrowings		4,189		4,189		-		4,189		-
Interest payable		350		350		-		350		-

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Item 2. 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, 2016, which was filed with the SEC on March 16, 2017.

MutualFirst is a Maryland corporation and a bank holding company headquartered in Muncie, Indiana, with banking operations in Allen, Delaware, Elkhart, Grant, Kosciusko, Randolph, St. Joseph and Wabash counties in Indiana. It owns MutualBank, an Indiana commercial bank with 27 full-service branches in Indiana, trust offices in Fishers 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 Federal Reserve Board (FRB), and the Bank is subject to regulation, supervision and examination by the Indiana Department of Financial Institutions (IDFI) and the Federal Deposit Insurance Corporation (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, and municipal. 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 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 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, 2017, we had $1.6 billion in assets, $1.2 billion in net loans, $1.2 billion in deposits and $146.3 million in stockholders’ equity. The Company’s total risk-based capital ratio at June 30, 2017 was 13.3%, exceeding the 10.0% requirement for a well-capitalized institution. Tangible common equity, as a percentage of tangible assets, increased to 9.2% as of June 30, 2017 compared to 8.9% and 9.2% at both December 31, 2016 and June 30, 2016, respectively. For the quarter ended June 30, 2017, net income was $3.9 million, or $0.52 diluted earnings per common share, compared with net income of $4.2 million, or $0.55 diluted earnings per common share for the quarter ended June 30, 2016.

Financial highlights as of and for the three and the six months ended June 30, 2017 included:

· Commercial loan balances increased $10.5 million, or 9.2% on an annualized basis in the second quarter of 2017.

· Non-real estate consumer loan balances increased $13.1 million, or 30.8% on an annualized basis, in the second quarter of 2017.

· Tangible common equity to total assets was 9.17% and tangible book value per common share was $19.65 as of June 30, 2017 compared to tangible common equity to total assets of 8.89% and tangible book value per common share of $18.82 as of December 31, 2016.

· Net interest income for the second quarter of 2017 increased by $374,000 on a linked quarter basis and increased by $1.1 million compared to the second quarter of 2016.

· Provision for loan losses increased $100,000 in the second quarter of 2017 compared to the linked quarter and increased $150,000 compared to the second quarter of 2016.

· Net interest margin was 3.29% for the second quarter of 2017 compared to 3.21% in the first quarter of 2017 and 3.16% in the second quarter of 2016. Tax equivalent net interest margin was 3.39% for the second quarter of 2017 compared to 3.32% in the first quarter of 2017 and 3.25% in the second quarter of 2016.

· Non-interest income in the second quarter of 2017 increased by $546,000 on a linked quarter basis and decreased by $1.2 million when compared to the second quarter of 2016.

· Non-interest expense decreased in the second quarter of 2017 by $189,000 on a linked quarter basis and decreased by $23,000 when compared to the second quarter of 2016.

· The efficiency ratio was 66.9% in the second quarter 2017 compared to 66.6% in the second quarter of 2016.

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, 2016, contains a summary of our management’s strategic plan for 2015-2019. The financial highlights of our strategic progress during the quarter include:

· Commercial and non-real estate consumer lending was 54.7% of the lending portfolio as of June 30, 2017 compared to 53.1% at December 31, 2016.

· Core deposits were 67.7% of total deposits as of June 30, 2017 the same as December 31, 2016.

· Commission income from wealth and investment services decreased $86,000 during the second quarter 2017 compared to the same period in 2016 and increased $11,000 during the first six months of 2017 compared to the same period in 2016.

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Critical Accounting Policies

Note 1 to the Consolidated Financial Statements in Item 8 of the Form 10-K for the year ended December 31, 2016 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.

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. 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. 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.

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.

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.

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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, 2016, the Company will more likely than not be able to utilize the remaining deferred tax asset. As of year-end 2016, the Company had generated average annual positive pre-tax pre-provision earnings of $16.4 million, or 1.1% of pre-tax pre-provision ROA over the previous five years. This level of earnings, if maintained in the future, 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, 2017, supports no additional valuation reserve is needed.

The valuation allowances established is the result of net operating losses for state franchise tax purposes totaling $23.0 million. See Note 15 to the Consolidated Financial Statements in Item 8 of the Form 10-K for the year ended December 31, 2016.

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.

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 into our operations any assets, liabilities, customers, systems, and management personnel we may in the future acquire and our ability to realize related revenue synergies and cost savings within expected time frames or at all 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, 2017 were $1.6 billion, reflecting a $22.8 million increase since December 31, 2016, primarily as a result of a $14.8 million increase in net loans. Total liabilities as of June 30, 2017 were $1.4 billion, an increase of $16.5 million compared to December 31, 2016, primarily due to a $19.6 million increase in deposits. Total stockholders’ equity increased to $146.3 million, an increase of $6.3 million compared to December 31, 2016 primarily due to an increase in retained earnings of $4.8 million.

Loans. Our gross loan portfolio, excluding loans held for sale, increased $15.5 million at June 30, 2017 to $1.2 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:

	June 30,		December 31,		Amount			Percent
	2017		2016		Change			Change
Real estate
Commercial	$	298,801	$	302,577	$	(3,776	)		(1.25	)%
Commercial construction and development		29,008		22,453		6,555			29.19
Consumer closed end first mortgage		467,802		478,848		(11,046	)		(2.31	)
Consumer open end and junior liens		70,572		71,222		(650	)		(0.91	)
Total real estate loans		866,183		875,100		(8,917	)		(1.02	)
Consumer loans
Auto		18,675		18,939		(264	)		(1.39	)
Boat/RV		158,556		141,602		16,954			11.97
Other		5,605		5,892		(287	)		(4.87	)
Total consumer other		182,836		166,433		16,403			9.86
Commercial and industrial		139,145		131,103		8,042			6.13
Total other loans		321,981		297,536		24,445			8.22
Total Gross Loans	$	1,188,164	$	1,172,636	$	15,528			1.32	%

The Company’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 2017 as commercial and non-real estate consumer loans grew by $27.2 million. We continue to seek 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 an $11.7 million decrease in the consumer real estate portfolios during the period. The Company continues to sell longer term fixed-rate mortgage loans to reduce related interest rate risk.

Delinquencies and Non-performing Assets. As of June 30, 2017, our total loans delinquent 30-to-89 days were $6.6 million or 0.6% of total loans, down from $12.5 million or 1.1% of total loans at the year-end of 2016. This was primarily due to a decrease in delinquency on consumer mortgage and other consumer loans.

At June 30, 2017, our non-performing assets totaled $4.2 million or 0.27% of total assets, compared to $6.6 million or 0.42% of total assets at December 31, 2016. This $2.3 million, or 35.5% decrease was primarily due to a reduction in consumer mortgage loans and foreclosed assets.

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The table below sets forth the amounts and categories of non-performing assets at the dates indicated.

	June 30,		December 31,		Amount			Percent
	2017		2016		Change			Change
Non-accruing loans	$	3,511	$	5,144	$	(1,633	)		(31.75	)%
Accruing loans delinquent 90 days		27		237		(210	)		(88.61	)
Foreclosed assets		709		1,199		(490	)		(40.87	)
Total	$	4,247	$	6,580	$	(2,333	)		(35.46	)%

The Company continues to diligently monitor and write down loans that appear to have irreversible weakness. The Company 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 six months of 2017 in total classified assets. Total classified assets decreased by 20.6% from $11.4 million at December 31, 2016 to $9.1 million at June 30, 2017 due to improvements in the economy in the local communities we serve and the sales of foreclosed assets.

At June 30, 2017, foreclosed real estate totaled $326,000 compared to $718,000 at December 31, 2016. The Company has seen a decrease in this area as overall real estate owned sales volumes are up and the number of foreclosures is down. At June 30, 2017, all foreclosed real estate owned was in consumer real estate. As of June 30, 2017, the Company also held $383,000 in other repossessed assets, such as autos, boats, RVs and horse trailers.

Allowance for Loan Losses. Allowance for loan losses was constant at $12.4 million as of June 30, 2017 compared to December 31, 2016. Net charge-offs in the first six months of 2017 were $456,000, or 0.08% of total loans on an annualized basis, compared to $387,000, or 0.07% of total loans on an annualized basis in the first six months of 2016. The allowance for loan losses to non-performing loans as of June 30, 2017 was 351.2% compared to 230.1% as of December 31, 2016. The allowance for loan losses to total loans as of June 30, 2017 was 1.05% compared to 1.06% as of December 31, 2016. Non-performing loans to total loans at June 30, 2017 were 0.30% compared to 0.46% at December 31, 2016. Non-performing assets to total assets were 0.27% at June 30, 2017 compared to 0.42% at December 31, 2016.

Deposits. Deposits increased by $19.6 million in the first six months of 2017. The increase in deposits was a result of an increase in core deposits of $13.5 million and $6.1 million in certificates of deposit. Core deposits are currently 67.7% of the Bank’s total deposits as of June 30, 2017.

	June 30, 2017					December 31, 2016
	Amount		Weighted Average Rate			Amount		Weighted Average Rate
Type of Account:
Non-interest Checking	$	187,173		0.00	%	$	178,046		0.00	%
Interest-bearing NOW		300,341		0.42			292,977		0.27
Savings		138,207		0.01			136,314		0.01
Money Market		168,432		0.31			173,305		0.26
Certificates of Deposit		378,832		1.28			372,740		1.19
Total	$	1,172,985		0.57	%	$	1,153,382		0.49	%

Borrowings. Total borrowings decreased to $240.2 million at June 30, 2017, down $4.6 million, or 1.9%, since year-end 2016 primarily due to a $4.6 million decrease in FHLB advances. Other borrowings, a subordinated debenture, remained constant at $4.2 million at June 30, 2017.

The Company acquired $5.0 million of issuer trust preferred securities in the 2008 acquisition of MFB Corp., which had a net balance of $4.2 million at June 30, 2017 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 bear a rate of interest of the prevailing three-month LIBOR rate plus 170 basis points. The Company has the right to redeem the trust preferred securities, in whole or in part, without penalty.

Stockholders’ Equity. Stockholders’ equity was $146.3 million at June 30, 2017, an increase of $6.3 million from December 31, 2016. The increase was primarily due to net income available to common shareholders of $7.1 million, an increase in accumulated other comprehensive income of $1.4 million and an increase of $139,000 due to exercises of stock options. These increases were partially offset by cash dividends on common stock of $2.4 million for the first six months of 2017. The Company’s tangible book value per common share as of June 30, 2017 increased to $19.65 compared to $18.82 as of December 31, 2016 and the tangible common equity ratio increased to 9.17% as of June 30, 2017 compared to 8.89% as of December 31, 2016. 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, 2017.

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Comparison of Results of Operations for the Three Months Ended June 30, 2017 and 2016.

General. Net income for the three months ended June 30, 2017 was $3.9 million, or $0.52 diluted earnings per common share compared to net income of $4.2 million, or $0.55 diluted earnings per common share for the three months ended June 30, 2016. Annualized return on average assets was 0.99% and annualized return on average tangible common equity was 10.92% for the second quarter of 2017 compared to 1.10% and 12.01% respectively, for the same period of last year. 

Net Interest Margin and Average Balance Sheet. The following table presents the Company’s average balance sheet, interest income/interest expense, and the average rate as a percent of average earning assets for the periods indicated. All average balances are daily average balances. Non-accruing loans have been included in the table as loans carrying a zero yield.

	Three Months Ended
	June 30, 2017								June 30, 2016
	Average Outstanding Balance			Interest Earned/Paid		Average Yield/Rate			Average Outstanding Balance			Interest Earned/Paid		Average Yield/Rate
Interest-Earning Assets:
Interest -bearing deposits	$	24,059		$	37		0.62	%	$	28,136		$	22		0.31	%
Investment securities, available for sale (1):
MBS/CMO		159,559			977		2.45			176,550			1,029		2.33
Other		93,956			768		3.27			73,245			581		3.17
Loans receivable		1,182,502			12,753		4.31			1,103,832			11,515		4.17
Stock in FHLB of Indianapolis		11,183			117		4.18			10,492			111		4.23
Total interest-earning assets (1)		1,471,259			14,652		3.98			1,392,255			13,258		3.81
Non-interest earning assets, net of allowance for loan losses and unrealized gain/loss		98,254								113,340
Total assets	$	1,569,513							$	1,505,595
Interest-Bearing Liabilities:
Demand and NOW accounts	$	308,047			298		0.39		$	278,588			169		0.24
Savings deposits		139,766			4		0.01			137,029			4		0.01
Money market accounts		166,272			126		0.30			169,114			110		0.26
Certificate accounts		387,138			1,206		1.25			343,554			1,000		1.16
Total deposits		1,001,223			1,634		0.65			928,285			1,283		0.55
Borrowings		220,004			931		1.69			233,592			988		1.69
Total interest-bearing liabilities		1,221,227			2,565		0.84			1,161,877			2,271		0.78
Non-interest bearing deposit accounts		187,791								187,223
Other liabilities		15,664								15,610
Total liabilities		1,424,682								1,364,710
Stockholders' equity		144,831								140,885
Total liabilities and stockholders' equity	$	1,569,513							$	1,505,595
Net earning assets	$	250,032							$	230,378
Net interest income				$	12,087							$	10,987
Net interest rate spread (3)							3.14	%							3.03	%
Net interest margin (3)							3.29	%							3.16	%
Net interest margin, tax equivalent (2) (3)							3.39	%							3.25	%
Average interest-earning assets to average interest-bearing liabilities		120.47	%							119.83	%

⁽¹⁾ Average balance of securities is computed based on the average of the historical amortized cost balances without the effects of the fair value adjustments.

⁽²⁾ Tax equivalent margin is calculated by taking non-taxable interest and grossing up by 34% applicable tax rate.

⁽³⁾ Ratios for the three month periods have been annualized.

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Interest Income. Total interest income increased $1.4 million, or 10.5%, to $14.7 million during the three months ended June 30, 2017 from $13.3 million during the same period in 2016. The increase was a result of an increase of $79.0 million in average interest-earning assets due to an increase in the average loan portfolio of $78.7 million and an increase of seventeen basis points in the average interest rate on average interest-earning assets for the quarter ended June 30, 2017 compared to the same period in 2016.

Interest Expense. Interest expense increased $294,000, or 12.9%, to $2.6 million during the three months ended June 30, 2017. The primary reason for this increase was an increase of $59.4 million in average interest-bearing liabilities. This was due to an increase in average interest-bearing deposits of $72.9 million partially offset by a decrease in borrowings of $13.6 million. The average rate paid for interest-bearing liabilities increased by six basis points for the three months ended June 30, 2017 compared to the same period in 2016.

Net Interest Income and Net Interest Margin. Net interest income before the provision for loan losses increased $1.1 million for the quarter ended June 30, 2017 compared to the same period in 2016. The increase in net interest income was primarily a result of an increase of $79.0 million in average interest earning assets, due to an increase of $78.7 million in average loans. This increase was also aided by a thirteen basis point increase in net interest margin to 3.29%, while the tax equivalent margin increased fourteen basis points. The increase in the margin was the result of average interest earning assets, primarily loans, repricing upward faster than average interest bearing liabilities due to increases in the federal funds rate. 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 the Form 10-K for the year ended December 31, 2016.

Provision for Loan Losses. Provision for loan losses in the second quarter of 2017 was $300,000 compared to $150,000 during last year’s comparable period. The increase was due to management’s ongoing evaluation of the adequacy of the allowance for loan losses, which was partially attributable to an increasing loan portfolio and a consistently low level in net charge offs of $256,000, or 0.09% of loans on an annualized basis, in the second quarter of 2017 compared to net charge offs of $216,000, or 0.08% of loans on an annualized basis, in the second quarter of 2016.

Non-Interest Income. Non-interest income for the second quarter of 2017 was $4.7 million, a decrease of $1.2 million compared to the second quarter of 2016.

	Three Months Ended June 30,						Amount			Percent
	2017			2016			Change			Change
Service fee income	$	1,714		$	1,528		$	186			12.17	%
Net realized gain on sale of securities		279			652			(373	)		(57.21	)
Commissions		1,318			1,404			(86	)		(6.13	)
Net gains on sales of loans		945			1,407			(462	)		(32.84	)
Net servicing fees		96			78			18			23.08
Increase in cash surrender value of life insurance		288			306			(18	)		(5.88	)
Loss on sale of other real estate and repossessed assets		(75	)		(188	)		113			(60.11	)
Other income		105			706			(601	)		(85.13	)
Total	$	4,670		$	5,893		$	(1,223	)		(20.75	)%

Decreases in non-interest income included a decrease of $601,000 in other income primarily due to a gain on bank owned life insurance of $346,000 due to a death and a $200,000 gain on sale of an interest in a low income housing property in the second quarter of 2016 that was not repeated in 2017. Net gain on sale of loans decreased $462,000 as mortgage originations slowed compared to the second quarter of 2016. Gain on sale of investments decreased $373,000 as the Company took advantage of a decline in longer term interest rates in the second quarter of 2016 to reposition approximately $16.9 million of the investment portfolio which was not fully repeated in 2017. These decreases were partially offset by an increase of $186,000 on deposit service fee income as interchange income has increased due to increased debit card activity.

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Non-Interest Expense. Non-interest expenses decreased $23,000, to $11.2 million, for the second quarter of 2017.

	Three Months Ended June 30,				Amount			Percent
	2017		2016		Change			Change
Salaries and employee benefits	$	6,534	$	6,660	$	(126	)		(1.89	)%
Net occupancy expenses		763		601		162			26.96
Equipment expenses		438		484		(46	)		(9.50	)
Data processing fees		541		492		49			9.96
ATM and debit card expense		410		356		54			15.17
Deposit insurance		168		225		(57	)		(25.33	)
Professional fees		408		380		28			7.37
Advertising and promotion		303		269		34			12.64
Software subscriptions and maintenance		567		549		18			3.28
Other real estate and repossessed assets		33		14		19			135.71
Other expenses		1,052		1,210		(158	)		(13.06	)
Total	$	11,217	$	11,240	$	(23	)		(0.20	)%

The decrease was primarily due to a decrease of $126,000 in salaries and benefits due to lower health insurance costs, lower mortgage originator commissions, and savings from branch closures compared to the second quarter of 2016. Other expenses also declined by $158,000 primarily due to a decline in intangible amortization and savings from branch closures in the first quarter of 2017. The decreases were offset by an increase of $162,000 in occupancy expense due to a loss of rental income from an office building sold in the fourth quarter of 2016 and an increase of $54,000 in ATM/debit card expense due to EMV card issuances and increased transaction charges.

Income Tax Expense. The effective tax rate for the second quarter of 2017 was 25.6% compared to 24.3% in the same quarter of 2016. The slight increase was due to increased taxable income as a percentage of total income.

Comparison of Results of Operations for the Six Months Ended June 30, 2017 and 2016.

General. Net income available to common shareholders for the six months ended June 30, 2017 was $7.1 million, or $0.95 diluted earnings per common share compared to net income available to common shareholders of $6.5 million, or $0.86 diluted earnings per common share for the six months ended June 30, 2016. Annualized return on average assets was 0.91% and annualized return on average tangible common equity was 10.09% for the first six months of 2017 compared to 0.87% and 9.48% respectively, for the same period of last year.

38

Net Interest Margin and Average Balance Sheet. The following table presents the Company’s average balance sheet, interest income/interest expense, and the average rate as a percent of average earning assets for the periods indicated. All average balances are daily average balances. Non-accruing loans have been included in the table as loans carrying a zero yield.

	Six Months Ended
	June 30, 2017								June 30, 2016
	Average Outstanding Balance			Interest Earned/Paid		Average Yield/Rate			Average Outstanding Balance			Interest Earned/Paid		Average Yield/Rate
Interest-Earning Assets:
Interest -bearing deposits	$	22,742		$	62		0.55	%	$	26,175		$	42		0.32	%
Investment securities, available for sale (1):
MBS/CMO		160,364			1,976		2.46			182,119			2,165		2.38
Other		92,767			1,490		3.21			71,223			1,134		3.18
Loans receivable		1,177,526			25,002		4.25			1,094,047			22,735		4.16
Stock in FHLB of Indianapolis		11,150			231		4.14			10,487			216		4.12
Total interest-earning assets (1)		1,464,549			28,761		3.93			1,384,051			26,292		3.80
Non-interest earning assets, net of allowance for loan losses and unrealized gain/loss		97,819								114,650
Total assets	$	1,562,368							$	1,498,701
Interest-Bearing Liabilities:
Demand and NOW accounts	$	298,956			498		0.33		$	271,455			318		0.23
Savings deposits		139,600			7		0.01			135,539			7		0.01
Money market accounts		170,660			251		0.29			166,615			218		0.26
Certificate accounts		386,147			2,344		1.21			349,389			2,025		1.16
Total deposits		995,363			3,100		0.62			922,998			2,568		0.56
Borrowings		224,961			1,861		1.65			235,756			1,975		1.68
Total interest-bearing liabilities		1,220,324			4,961		0.81			1,158,754			4,543		0.78
Non-interest bearing deposit accounts		183,511								184,536
Other liabilities		15,577								15,383
Total liabilities		1,419,412								1,358,673
Stockholders' equity		142,956								140,028
Total liabilities and stockholders' equity	$	1,562,368							$	1,498,701
Net earning assets	$	244,225							$	225,297
Net interest income				$	23,800							$	21,749
Net interest rate spread (3)							3.11	%							3.02	%
Net interest margin (3)							3.25	%							3.14	%
Net interest margin, tax equivalent (2) (3)							3.36	%							3.24	%
Average interest-earning assets to average interest-bearing liabilities		120.01	%							119.44	%

⁽¹⁾ Average balance of securities is computed based on the average of the historical amortized cost balances without the effects of the fair value adjustments.

⁽²⁾ Tax equivalent margin is calculated by taking non-taxable interest and grossing up by 34% applicable tax rate.

⁽³⁾ Ratios for the six month periods have been annualized.

Interest Income. Total interest income increased $2.5 million, or 9.4%, to $28.8 million during the six months ended June 30, 2017 from $26.3 million during the same period in 2016. The increase was a result of an increase of $80.5 million in average interest-earning assets due to an increase in the average loan portfolio of $83.5 million along with an increase of thirteen basis points in the average interest rate on average interest-earning assets for the six months ended June 30, 2017 compared to the same period in 2016.

Interest Expense. Interest expense increased $418,000, or 9.2%, to $5.0 million during the six months ended June 30, 2017. The primary reason for this increase was an increase of $61.6 million in average interest-bearing liabilities. This was primarily due to an increase in average deposits of $72.4 million. The average rate paid for interest-bearing liabilities increased three basis points for the six months ended June 30, 2017 compared to the same period in 2016.

39

Net Interest Income and Net Interest Margin. Net interest income before the provision for loan losses increased $2.1 million for the first six months of 2017 compared to the same period in 2016. The increase was a result of an increase of $80.5 million in average interest earning assets due to an increase in the average loan portfolio of $83.5 million. This increase was aided by the net interest margin increasing to 3.25% in the first six months of 2017 compared to 3.14% in the first six months of 2016, while the tax equivalent net interest margin increased to 3.36% in the first six months of 2017 compared to 3.24% in the comparable period in 2016. 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 the Form 10-K for the year ended December 31, 2016.

Provision for Loan Losses. The provision for loan losses for the first six months of 2017 was $500,000 compared to $350,000 during last year’s comparable period. The increase was primarily due to our loan portfolio growing $77.0 million, or 7.0% over the last year. Net charge-offs for the first six months of 2017 equaled $456,000, or 0.08% of loans on an annualized basis compared to $387,000, or 0.07% in the same period of 2016.

Non-Interest Income. Non-interest income decreased by $1.1 million in the first six months of 2017 compared to same period in 2016.

	Six Months Ended June 30,						Amount			Percent
	2017			2016			Change			Change
Service fee income	$	3,114		$	2,902		$	212			7.31	%
Net realized gain on sale of securities		408			770			(362	)		(47.01	)
Commissions		2,514			2,503			11			0.44
Net gains on sales of loans		1,715			2,347			(632	)		(26.93	)
Net servicing fees		197			148			49			33.11
Increase in cash surrender value of life insurance		560			590			(30	)		(5.08	)
Loss on sale of other real estate and repossessed assets		(21	)		(217	)		196			(90.32	)
Other income		307			847			(540	)		(63.75	)
Total	$	8,794		$	9,890		$	(1,096	)		(11.08	)%

The reason for the decrease in non-interest income was primarily due to income in the second quarter of 2016 that was not repeated in 2017. This includes a decrease of $362,000 in net gain on sale of securities and a decrease of $540,000 in other income primarily related to one-time income received in the second quarter of 2016 mainly due to an insurance death benefit. A decrease of $632,000 on net gains on sales of loans was due to a reduction in mortgage production in 2017 compared to 2016 primarily as a result of higher mortgage interest rates. These declines were partially offset by an increase of $212,000 in service fee income primarily due to increases in interchange fees.

Non-Interest Expense. Non-interest expenses decreased $33,000, to $22.6 million, for the first six months of 2017.

	Six Months Ended June 30,				Amount			Percent
	2017		2016		Change			Change
Salaries and employee benefits	$	13,260	$	13,151	$	109			0.83	%
Net occupancy expenses		1,572		1,247		325			26.06
Equipment expenses		865		971		(106	)		(10.92	)
Data processing fees		1,095		981		114			11.62
ATM and debit card expense		828		736		92			12.50
Deposit insurance		381		459		(78	)		(16.99	)
Professional fees		804		850		(46	)		(5.41	)
Advertising and promotion		614		696		(82	)		(11.78	)
Software subscriptions and maintenance		1,136		1,029		107			10.40
Other real estate and repossessed assets		80		86		(6	)		(6.98	)
Other expenses		1,988		2,450		(462	)		(18.86	)
Total	$	22,623	$	22,656	$	(33	)		(0.15	)%

Other expenses decreased by $462,000 in the first half of 2017 primarily due to several nonrecurring items in the first half of 2016 that were not repeated in 2017. This decrease was partially offset by an increase of $325,000 in occupancy expense due to a loss of rental income from an office building sold in the fourth quarter of 2016 and an increase of $109,000 in salaries and employee benefits due to normal salary adjustments.

40

Income Tax Expense. The effective tax rate for the first six months of 2017 was 25.0% compared to 24.5% for the same period in 2016. The increase was related to an increase in taxable income as a percentage of total income in the first six months of 2017 over 2016.

Reconciliation of Non-GAAP Financial Measures

The report on Form 10-Q contains financial information determined by methods other than in accordance with U.S. GAAP. Non-GAAP financial measures are used by management to measure the strength of its capital and its ability to generate earnings on tangible capital invested by its shareholders. Although the Company believes these non-GAAP measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly compared GAAP financial measures are included in the following table.

	At and for Three Months Ended									At and for the Six Months Ended
	June 30,			December 31,			June 30,			June 30,			June 30,
	2017			2016			2016			2017			2016
Total Stockholders' Equity (GAAP)	$	146,326		$	140,038		$	141,593		$	146,326		$	141,593
Less: Intangible Assets		2,033			2,191			2,372			2,033			2,372
Tangible common equity (non-GAAP)	$	144,293		$	137,847		$	139,221		$	144,293		$	139,221
Total assets (GAAP)	$	1,575,949		$	1,553,133		$	1,510,445		$	1,575,949		$	1,510,445
Less: Intangible Assets		2,033			2,191			2,372			2,033			2,372
Tangible assets (non-GAAP)	$	1,573,916		$	1,550,942		$	1,508,073		$	1,573,916		$	1,508,073
Tangible common equity to tangible assets (non-GAAP)		9.17	%		8.89	%		9.23	%		9.17	%		9.23	%
Book value per common share (GAAP)	$	19.92		$	19.12		$	19.33		$	19.92		$	19.33
Less: Effect of Intangible Assets		0.27			0.30			0.32			0.27			0.32
Tangible book value per common share (non-GAAP)	$	19.65		$	18.82		$	19.01		$	19.65		$	19.01
Return on average stockholders' equity (GAAP)		10.77	%		9.17	%		11.80	%		9.94	%		9.32	%
Add: Effect of Intangible Assets		0.15			0.14			0.21			0.15			0.16
Return on average tangible common equity (non-GAAP)		10.92	%		9.31	%		12.01	%		10.09	%		9.48	%
Total tax free interest income (GAAP)
Loans receivable	$	106		$	110		$	113		$	213		$	225
Investment securities		661			614			522			1,308			1,017
Total tax free interest income	$	767		$	724		$	635		$	1,521		$	1,242
Total tax free interest income, gross (at 34% tax rate)	$	1,162		$	1,097		$	962		$	2,305		$	1,882
Net interest margin (GAAP)		3.29	%		3.21	%		3.16	%		3.25	%		3.14	%
Add: Tax effect tax free interest income at 34% tax rate		0.10			0.09			0.09			0.11			0.10
Net interest margin, tax equivalent		3.39	%		3.30	%		3.25	%		3.36	%		3.24	%
Ratio Summary:
Return on average equity (ROE)		10.77	%		9.17	%		11.80	%		9.94	%		9.32	%
Return on average tangible common equity		10.92	%		9.31	%		12.01	%		10.09	%		9.48	%
Return on average assets (ROA)		0.99	%		0.83	%		1.10	%		0.91	%		0.87	%
Tangible common equity to tangible assets		9.17	%		8.89	%		9.23	%		9.17	%		9.23	%
Net interest margin, tax equivalent		3.39	%		3.30	%		3.25	%		3.36	%		3.24	%

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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.

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.

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, 2017, our ratio was 20.6%. 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, 2017, on a consolidated basis, the Company had $281.8 million in cash and investment securities available for sale and $8.8 million in loans held for sale generally available for its cash needs. We can also generate funds from borrowings, primarily FHLB advances, portfolio loans, and, to a lesser degree, third party loans. At June 30, 2017, the Bank had the ability to borrow an additional $36.2 million in FHLB advances. In addition, we have historically sold 15- and 30-year, 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, 2017, the Company, on an unconsolidated basis, had $1.1 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, 2017, the approved outstanding loan commitments, including unused lines of credit, amounted to $243.6 million. Certificates of deposit scheduled to mature in one year or less as of June 30, 2017, totaled $141.2 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.

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, 2017, 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, 2017, the Bank had $129.2 million in commitments to make loans, $9.8 million in undisbursed portions of closed loans, $101.7 million in unused lines of credit and $2.9 million in standby letters of credit. In addition, on a consolidated basis, at June 30, 2017, the Company had $240.2 million in outstanding borrowings, of which $80.4 million is due in the next twelve months.

42

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, 2016. 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 Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

The Basel III Capital Rules, among other things, (i) introduced a new capital measure called “Common Equity Tier 1” (CET1), (ii) specify that Tier 1 capital consist of CET1 and “Additional Tier 1 Capital” instruments meeting specified requirements, (iii) defined CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expanded the scope of the deductions/adjustments as compared to existing regulations.

Implementation of the deductions and other adjustments to CET1 began on January 1, 2015, and will phase in over a four-year period (beginning at 40% on January 1, 2015, and an additional 20% per year thereafter). Under the new rule, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of CET1 capital above its minimum risk-based capital requirements. The implementation of the capital conservation buffer began on January 1, 2016, at the 0.625% level and will continue to phase in over a four-year period (increasing by that amount on each subsequent January 1 until it reaches 2.5% on January 1, 2019). As of June 30, 2017, the Bank and Company exceeded the minimum buffer requirement.

The Company’s and Bank’s actual capital amounts and ratios as of June 30, 2017, are presented in the table 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	$	144,216		9.2	%	$	62,533		4.0	%		N/A		N/A
MutualBank		140,938		9.0			62,534		4.0		$	78,167		5.0	%
Common Equity Tier 1 Capital Level (2) :
MutualFirst Consolidated	$	140,869		12.0	%	$	52,889		4.5	%		N/A		N/A
MutualBank		140,938		12.0			52,858		4.5		$	76,351		6.5	%
Tier 1 Risk-Based Capital Level (3) :
MutualFirst Consolidated	$	144,216		12.3	%	$	70,518		6.0	%		N/A		N/A
MutualBank		140,938		12.0			70,478		6.0		$	93,970		8.0	%
Total Risk-Based Capital Level (4) :
MutualFirst Consolidated	$	156,642		13.3	%	$	94,024		8.0	%		N/A		N/A
MutualBank		153,364		13.1			93,970		8.0		$	117,463		10.0	%

⁽¹⁾ Tier 1 Capital to Assets for Leverage Ratio of $1.6 billion for the Bank and Company at June 30, 2017.

⁽²⁾ Common Equity Tier 1 Capital to Risk-Weighted Assets of $1.2 billion for the Bank and Company at June 30, 2017.

⁽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.

43

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, 2016, filed with the SEC on March 16, 2017.

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.

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 six months of 2017 we sold in the secondary market $50.0 million of primarily fixed rate, one- to four-family mortgage loans with a term to maturity of 15 years or greater.

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 net portfolio value (NPV) assuming an instantaneous parallel rate shock in a range from down 100 basis points to up 400 basis points as of June 30, 2017.

	Percentage Change in
	Net Interest Income			NPV
Rate Shock:
Up 400 basis points		(11.5	)%		(22.4	)%
Up 300 basis points		(8.1	)%		(16.3	)%
Up 200 basis points		(5.1	)%		(10.3	)%
Up 100 basis points		(2.3	)%		(4.9	)%
Down 100 basis points		(4.3	)%		(9.8	)%

44

The following chart indicates the Company’s percentage change in net interest income and NPV assuming rate movements that are not instantaneous, but change gradually over one year.

	Percentage Change in
	Net Interest Income			NPV
Rate Shock:
Up 400 basis points		(3.8	)%		(19.5	)%
Up 300 basis points		(3.7	)%		(14.9	)%
Up 200 basis points		(3.1	)%		(9.7	)%
Up 100 basis points		(2.0	)%		(4.7	)%
Down 100 basis points		(4.3	)%		(9.8	)%

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.

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, 2017, 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, 2017, 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.

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, 2017, 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, 2016.

45

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.

46

Item 6. Exhibits.

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 2015	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
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, 2012, 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

47

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-Q for the three and six months ended June 30, 2017 and 2016 and year ended December 31, 2016, formatted in Extensive Business Reporting Language (XBRL); (i) Consolidated Condensed Balance Sheets as of June 30, 2017 and December 31, 2016; (ii) Consolidated Condensed Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016; (iii) Consolidated Condensed Statement of Stockholders’ Equity for the Period Ended June 30, 2017; (iv) Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016; and (vi) Notes to Consolidated Financial Statements for the Three and Six Months Ended June 30, 2017 and 2016, 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.
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 9, 2016 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

48

SIGNATURES

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

Date: August 9, 2017	By:	/s/David W. Heeter
		David W. Heeter
		President and Chief Executive Officer
Date:  August 9, 2017	By:	/s/Christopher D. Cook
		Christopher D. Cook
		Senior Vice President, Treasurer and Chief Financial Officer

49

INDEX TO EXHIBITS

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 and six months ended June 30, 2017 and 2016 and year ended December 31, 2016, formatted in Extensive Business Reporting Language (XBRL); (i) Consolidated Condensed Balance Sheets as of June 30, 2017  and December 31, 2016; (ii) Consolidated Condensed Statements of Income for the Three and Six Months Ended June 30, 2017 and 2016; (iii) Consolidated Condensed Statement of Stockholders’ Equity for the Period Ended June 30, 2017; (iv) Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016; and (vi) Notes to Consolidated Financial Statements for the Three and Six Months Ended June 30, 2017 and 2016, 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

50

EX-31.1

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 9, 2017	By:	/s/ David W. Heeter
		David W. Heeter
		President and Chief Executive Officer

EX-31.2

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 9, 2017	By:	/s/ Christopher D. Cook
		Christopher D. Cook
		Senior Vice President, Treasurer and    Chief Financial Officer
		(Principal Financial and Accounting Officer)

EX-32

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, 2017 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 9, 2017	By:	/s/ David W. Heeter
		David W. Heeter
		President and Chief Executive Officer
Date: August 9, 2017	By:	/s/ Christopher D. Cook
		Christopher D. Cook
		Senior Vice President, Treasurer and   Chief Financial Officer

XML

Document and Entity Information - shares	6 Months Ended
	Jun. 30, 2017	Aug. 07, 2017
Document Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2017
Document Fiscal Year Focus	2017
Document Fiscal Period Focus	Q2
Trading Symbol	mfsf
Entity Registrant Name	MUTUALFIRST FINANCIAL INC
Entity Central Index Key	0001094810
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		7,381,394

XML

Consolidated Condensed Balance Sheets - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Assets
Cash and due from banks	$ 6,998	$ 8,503
Interest-bearing demand deposits	18,170	18,357
Cash and cash equivalents	25,168	26,860
Interest-bearing time deposits	2,046	993
Investment securities available for sale (carried at fair value)	256,642	249,913
Loans held for sale	8,796	4,063
Loans, net of allowance for loan losses of $12,426 and $12,382, at June 30, 2017 and December 31, 2016, respectively	1,171,927	1,157,120
Premises and equipment, net	20,886	21,200
Federal Home Loan Bank stock	11,183	10,925
Deferred tax asset, net	10,800	12,037
Cash value of life insurance	52,155	51,594
Goodwill	1,800	1,800
Other real estate owned and repossessed assets	709	1,199
Other assets	13,837	15,429
Total assets	1,575,949	1,553,133
Deposits
Noninterest-bearing	187,173	178,046
Interest-bearing	985,812	975,336
Total deposits	1,172,985	1,153,382
Federal Home Loan Bank advances	235,991	240,591
Other borrowings	4,211	4,189
Other liabilities	16,436	14,933
Total liabilities	1,429,623	1,413,095
Commitments and Contingencies
Stockholders' Equity
Common stock, $.01 par value Authorized - 20,000,000 shares Issued and outstanding - 7,344,233 and 7,324,233 shares at June 30, 2017 and December 31, 2016, respectively	73	73
Additional paid-in capital	74,303	74,164
Retained earnings	71,809	67,055
Accumulated other comprehensive income (loss)	141	(1,254)
Total stockholders' equity	146,326	140,038
Total liabilities and stockholders' equity	$ 1,575,949	$ 1,553,133

XML

Consolidated Condensed Balance Sheets (Parenthetical) - USD ($)	Jun. 30, 2017	Dec. 31, 2016
Statement Of Financial Position [Abstract]
Allowance for loan losses	$ 12,426,000	$ 12,382,000
Common stock, par value	$ 0.01	$ 0.01
Common stock, Authorized	20,000,000	20,000,000
Common stock, shares Issued	7,344,233	7,324,233
Common stock, shares outstanding	7,344,233	7,324,233

XML

Consolidated Condensed Statements of Income - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Interest and Dividend Income
Loans receivable	$ 12,753,000	$ 11,515,000	$ 25,002,000	$ 22,735,000
Investment securities	1,745,000	1,610,000	3,466,000	3,299,000
Federal Home Loan Bank stock	117,000	111,000	231,000	216,000
Deposits with financial institutions	37,000	22,000	62,000	42,000
Total interest and dividend income	14,652,000	13,258,000	28,761,000	26,292,000
Interest Expense
Deposits	1,634,000	1,283,000	3,100,000	2,568,000
Federal Home Loan Bank advances	883,000	897,000	1,769,000	1,792,000
Other	48,000	91,000	92,000	183,000
Total interest expense	2,565,000	2,271,000	4,961,000	4,543,000
Net Interest Income	12,087,000	10,987,000	23,800,000	21,749,000
Provision for loan losses	300,000	150,000	500,000	350,000
Net Interest Income After Provision for Loan Losses	11,787,000	10,837,000	23,300,000	21,399,000
Non-interest Income
Service fee income	1,714,000	1,528,000	3,114,000	2,902,000
Net realized gain on sales of available for sale securities	279,000	652,000	408,000	770,000
Commissions	1,318,000	1,404,000	2,514,000	2,503,000
Net gains on sales of loans	945,000	1,407,000	1,715,000	2,347,000
Net servicing fees	96,000	78,000	197,000	148,000
Increase in cash value of life insurance	288,000	306,000	560,000	590,000
Loss on sale of other real estate and repossessed assets	(75,000)	(188,000)	(21,000)	(217,000)
Other income	105,000	706,000	307,000	847,000
Total non-interest income	4,670,000	5,893,000	8,794,000	9,890,000
Non-interest Expenses
Salaries and employee benefits	6,534,000	6,660,000	13,260,000	13,151,000
Net occupancy expenses	763,000	601,000	1,572,000	1,247,000
Equipment expenses	438,000	484,000	865,000	971,000
Data processing fees	541,000	492,000	1,095,000	981,000
ATM and debit card expenses	410,000	356,000	828,000	736,000
Deposit insurance	168,000	225,000	381,000	459,000
Professional fees	408,000	380,000	804,000	850,000
Advertising and promotion	303,000	269,000	614,000	696,000
Software subscriptions and maintenance	567,000	549,000	1,136,000	1,029,000
Other real estate and repossessed assets	33,000	14,000	80,000	86,000
Other expenses	1,052,000	1,210,000	1,988,000	2,450,000
Total non-interest expenses	11,217,000	11,240,000	22,623,000	22,656,000
Income Before Income Tax	5,240,000	5,490,000	9,471,000	8,633,000
Income tax expense	1,342,000	1,333,000	2,367,000	2,111,000
Net Income Available to Common Shareholders	$ 3,898,000	$ 4,157,000	$ 7,104,000	$ 6,522,000
Earnings Per Common Share
Basic	$ 0.53	$ 0.56	$ 0.97	$ 0.87
Diluted	0.52	0.55	0.95	0.86
Dividends Per Common Share	$ 0.16	$ 0.14	$ 0.32	$ 0.28

XML

Consolidated Condensed Statements of Comprehensive Income - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Statement Of Income And Comprehensive Income [Abstract]
Net income	$ 3,898	$ 4,157	$ 7,104	$ 6,522
Other Comprehensive Income (Loss)
Net unrealized holding gain on securities available for sale	1,802	2,452	2,517	5,866
Reclassification adjustment for realized gains included in net income	(279)	(652)	(408)	(770)
Net unrealized loss on derivative used for cash flow hedges		(3)		(28)
Other comprehensive income, before tax, total	1,523	1,797	2,109	5,068
Income tax expense related to other comprehensive income	(519)	(610)	(714)	(1,729)
Other comprehensive income, net of tax	1,004	1,187	1,395	3,339
Comprehensive Income	$ 4,902	$ 5,344	$ 8,499	$ 9,861

XML

Consolidated Condensed Statement of Changes in Stockholders' Equity - 6 months ended Jun. 30, 2017 - USD ($) $ in Thousands	Common Stock	Additional paid-in capital	Retained Earnings	Accumulated Other Comprehensive Income (Loss)	Total
Beginning Balance at Dec. 31, 2016	$ 73	$ 74,164	$ 67,055	$ (1,254)	$ 140,038
Net income			7,104		7,104
Other comprehensive income, net of taxes				1,395	1,395
Stock options, exercised		139			139
Cash dividends, common stock			(2,350)		(2,350)
Ending Balance at Jun. 30, 2017	$ 73	$ 74,303	$ 71,809	$ 141	$ 146,326

XML

Consolidated Condensed Statement of Changes in Stockholders' Equity (Parenthetical) - $ / shares	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Consolidated Condensed Statement of Changes in Stockholders' Equity [Abstract]
Cash dividends, common stock, per share	$ 0.16	$ 0.14	$ 0.32	$ 0.28

XML

Consolidated Condensed Statements of Cash Flows - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016
Operating Activities
Net income	$ 7,104	$ 6,522
Items not requiring cash
Provision for loan losses	500	350
Depreciation and amortization	2,290	2,543
Deferred income tax	524	158
Increase in cash value of life insurance	(560)	(590)
Loans originated for sale	(54,702)	(64,176)
Proceeds from sales of loans held for sale	51,538	63,724
Net gain on sale of loans	(1,715)	(2,347)
Net gain on sale of securities, available for sale	(408)	(770)
Loss on sale of other real estate and repossessed assets	21	217
Change in
Interest receivable and other assets	1,009	(551)
Interest payable and other liabilities	(377)	293
Other adjustments	(8)	70
Net cash provided by operating activities	5,216	5,443
Investing Activities
Net change in interest-bearing time deposits	(1,053)	(980)
Purchases of securities
Available for sale	(34,401)	(28,801)
Proceeds from maturities and paydowns of securities
Available for sale	13,326	17,741
Proceeds from sales of securities, available for sale	18,365	29,901
Purchase of Federal Home Loan Bank stock	(258)	(158)
Net change in loans	(16,415)	(28,628)
Purchases of premises and equipment	(415)	(1,690)
Proceeds from real estate owned sales	649	1,471
Proceeds from sale of real estate held for investment	502
Proceeds from bank owned life insurance		1,121
Gain on bank owned life insurance		(346)
Proceeds from sale of premises and equipment		65
Net cash provided by (used in) investing activities	(19,700)	(10,304)
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits	13,511	14,714
Certificates of deposit	6,092	(9,595)
Proceeds from FHLB advances	164,200	129,900
Repayments of FHLB advances	(168,800)	(111,700)
Net repayments other borrowings		(379)
Cash dividends	(2,350)	(2,093)
Stock options exercised	139	976
Stock repurchased		(4,354)
Net cash provided by financing activities	12,792	17,469
Net Change in Cash and Cash Equivalents	(1,692)	12,608
Cash and Cash Equivalents, Beginning of Period	26,860	20,915
Cash and Cash Equivalents, End of Period	25,168	33,523
Additional Cash Flows Information
Interest paid	4,802	4,492
Income tax paid	1,000	400
Transfers from loans to foreclosed real estate	168	816
Mortgage servicing rights capitalized	146	204
Purchase of securities, due to broker	$ 1,970	$ 3,766

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Basis of Presentation

6 Months Ended

Jun. 30, 2017

Basis of Presentation [Abstract]

Basis of Presentation

Note 1:Basis of Presentation

The consolidated condensed financial statements include the accounts ofMutualFirst Financial, Inc. (MutualFirst or the “Company”), its wholly owned subsidiaries, MFBC Statutory Trust, MutualFirst Risk Management, Inc., Mutual Risk Advisors, Inc., and 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.  These companies conform to accounting principles generally accepted in the United States of America and reporting practices followed by the banking industry. The more significant of the policies are described below.

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 Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 16, 2017.

The interim consolidated condensed financial statements at and for the three and six months ended June 30, 2017 and 2016, 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, 2016 has been derived from the Audited Consolidated Balance Sheet of the Company as of that date.

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Earnings Per Share

6 Months Ended

Jun. 30, 2017

Earnings Per Share [Abstract]

Earnings Per Share

Note 2:Earnings Per Share

Earnings per share were computed as follows:

	Three Months Ended June 30,
	2017					2016
		Net Income	Weighted- Average Shares		Per-Share Amount		Net Income	Weighted- Average Shares		Per-Share Amount
Basic Earnings Per Share
Net income	$	3,898	7,344,233	$	0.53	$	4,157	7,453,333	$	0.56
Effect of Dilutive Securities
Stock options			143,256					142,955
Diluted Earnings Per Share
Net income available and assumed conversions	$	3,898	7,487,489	$	0.52	$	4,157	7,596,288	$	0.55

	Six Months Ended June 30,
	2017					2016
		Net Income	Weighted- Average Shares		Per-Share Amount		Net Income	Weighted- Average Shares		Per-Share Amount
Basic Earnings Per Share
Net income	$	7,104	7,338,377	$	0.97	$	6,522	7,459,871	$	0.87
Effect of Dilutive Securities
Stock options			145,641					146,213
Diluted Earnings Per Share
Net income available and assumed conversions	$	7,104	7,484,018	$	0.95	$	6,522	7,606,084	$	0.86

As of June 30, 2017 and 2016, the exercise price for all options was lower than the average market price of the common shares. 

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Impact of Accounting Pronouncements

6 Months Ended

Jun. 30, 2017

Impact of Accounting Pronouncements [Abstract]

Impact of Accounting Pronouncements

Note 3:Impact of Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.  The ASU shortens the amortization period for certain callable debt securities held at a premium and requires the premium to be amortized to the earliest call date.  However, the amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments are effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods.  Early adoption is permitted.  The Company early adopted this ASU in the first quarter of 2017 and it did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350)-Simplifying the Test for Goodwill Impairment. These amendments eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. The Company has assessed ASU 2017-04 and does not expect it to have a material impact on its accounting and disclosures.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805)-Clarifying the Definition of a Business. ASU 2017-01 provides amendments to clarify the definition of a business and affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied prospectively as of the beginning of the period of adoption. Early adoption is permitted under certain circumstances. The Company has assessed ASU 2017-01 and does not expect it to have a material impact on its accounting and disclosures.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The ASU is intended to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows by specifically addressing eight specific areas. The amendments are effective for the Company for annual and interim periods beginning in the first quarter of 2018. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the effects that this ASU will have on its financial statements, specifically the Statement of Cash Flows, and does not expect these effects to be material.

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements. Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. The ASU is intended to provide financial statement users with useful information about the expected credit losses on financial instruments and other commitments to extend credit.

· The ASU requires financial assets measured at amortized cost (primarily loans) be presented at the amount net of a valuation allowance for credit losses, and that the income statement include the measurement of credit losses for newly recognized financial assets as well as changes in expected losses on previously recognized financial assets. The provisions of this ASU does not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. The new model will be based on relevant information including past events, historical experience, current conditions, and reasonable and supportive forecasts that affect the collectability of the asset. The provisions of this ASU differ from current U.S. generally accepted accounting principles (“GAAP”) in that current U.S. GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.

· This ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down.

This ASU will be effective for the Company for interim and annual periods beginning in the first quarter of 2020. Earlier adoption is permitted beginning in the first quarter of 2019. The Company is in the evaluation stage for this ASU in order to determine the most appropriate method of implementation and all resources and data (both current and historical) needed.

In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. This Update includes amendments that currently apply, or may apply in the future, to the Company related to the following: (1) accounting for the difference between the deduction for tax purposes and the amount of compensation cost recognized for financial reporting purposes; (2) classification of excess tax benefits on the statement of cash flows; (3) accounting for forfeitures; (4) accounting for awards partially settled in cash in excess of the employer’s minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The amendments in this Update were effective for the Company for annual and interim periods beginning in the first quarter 2017. The ASU provides separate transition provisions for each of the amendments. Initial adoption of this ASU in 2017 did not have a material impact on the Company.

In February 2016, the FASB issued ASU 2016-02, Leases. The objective of the amendment is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. These changes will increase transparency among companies by recognizing lease assets and liabilities on the balance sheet and disclosing additional information about lease arrangements. The amendments in this update are effective for annual and interim periods beginning in the first quarter of 2019. The Company has operating leases in place for some locations as well as equipment and is in the early stages of evaluating the potential impact of adopting this amendment.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update require: (1) all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee); (2) an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; and (3) eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The new guidance is effective for the Company for annual and interim periods beginning in the first quarter of 2018. Current evaluation would indicate that the primary area impacted by the amendments of this ASU will be our investment in Federal Home Loan Bank stock, which is an equity security and does not have a readily determinable fair value. See Note 1 - Significant Accounting Policies, “Federal Home Loan Bank Stock” for information regarding the Company’s investment. The adoption of ASU 2016-01 is not anticipated to have a material effect on the Company’s consolidated financial statements.

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Investment Securities

6 Months Ended

Jun. 30, 2017

Investment Securities [Abstract]

Investment Securities

Note 4: Investment Securities

The amortized costs and approximate fair values, together with gross unrealized gains and losses on securities, are in the tables below.  All mortgage-backed securities and collateralized mortgage obligations held as of June 30, 2017 and December 31, 2016 were guaranteed by government sponsored entities, government corporations or federal agencies.

	June 30, 2017
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for Sale Securities
Mortgage-backed securities	$	77,050	$	508	$	(862)	$	76,696
Collateralized mortgage obligations		76,717		246		(704)		76,259
Municipal obligations		85,246		2,779		(556)		87,469
Corporate obligations		17,395		71		(1,248)		16,218
Total investment securities	$	256,408	$	3,604	$	(3,370)	$	256,642

	December 31, 2016
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for Sale Securities
Mortgage-backed securities	$	92,871	$	802	$	(1,156)	$	92,517
Collateralized mortgage obligations		68,621		269		(843)		68,047
Municipal obligations		77,474		1,716		(1,508)		77,682
Corporate obligations		12,822		78		(1,233)		11,667
Total investment securities	$	251,788	$	2,865	$	(4,740)	$	249,913

The amortized cost and fair value of securities available for sale at June 30, 2017, 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	$	160	$	160
One to five years		5,057		5,086
Five to ten years		23,978		24,774
After ten years		73,446		73,667
		102,641		103,687
Mortgage-backed securities		77,050		76,696
Collateralized mortgage obligations		76,717		76,259
Totals	$	256,408	$	256,642

Proceeds from sales of securities available for sale for the three and six months ended June 30, 2017 were $12.7 million and $18.4 million, respectively.For the three and six months ended June 30, 2016, proceeds from sales of securities available for sale were $26.0 million and $29.9 million, respectively.  Gross gains were recognized on the sales for the three and six months ended June 30, 2017 of $279,000 and $408,000, respectively. Gross gains of $701,000 and $819,000were recognized,for the three and six months ended June 30, 2016. There were no gross losses recognized on the sales of securities for the three and six months ended June 30, 2017, respectively.Gross losses of $49,000 for the three and six months ended June 30, 2016, were also recognized on those sales. 

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, 2017 and December 31, 2016 was $115.9 million and $143.8 million, respectively, which was approximately 45.2 percent and 57.6 percent, respectively, 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 fair value for the securities at less than historical cost for the periods presented, are temporary.

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 six months of 2017 and 2016, 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, 2017 and December 31, 2016:

	June 30, 2017
	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	$	50,104	$	(862)	$	-	$	-	$	50,104	$	(862)
Collateralized mortgage obligations		35,441		(558)		4,326		(146)		39,767		(704)
Municipal obligations		18,752		(555)		159		(1)		18,911		(556)
Corporate obligations		4,548		(2)		2,588		(1,246)		7,136		(1,248)
Total temporarily impaired securities	$	108,845	$	(1,977)	$	7,073	$	(1,393)	$	115,918	$	(3,370)

	December 31, 2016
	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	$	58,056	$	(1,156)	$	-	$	-	$	58,056	$	(1,156)
Collateralized mortgage obligations		41,769		(683)		4,688		(160)	$	46,457	$	(843)
Municipal obligations		31,907		(1,507)		337		(1)		32,244		(1,508)
Corporate obligations		-		-		7,076		(1,233)		7,076		(1,233)
Total temporarily impaired securities	$	131,732	$	(3,346)	$	12,101	$	(1,394)	$	143,833	$	(4,740)

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, 2017.

Municipals

The 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 par value of the investments.  The Company does not intend to sell these investments and it is more likely than not that the Company will not be required to sell these investments.  The Company does not consider any of these investment securities to be other-than-temporarily impaired at June 30, 2017.

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 industry analysts.

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 securitizedfinancial asset impairment model.  For securities that are 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.

Pooled Trust Preferred Securities.  The Company has invested in pooled trust preferred securities.  At June 30, 2017, 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.All pooled trust preferred securities owned were performing as agreed in the first six months of 2017.  All pooled trust preferred securities owned by the Company are exempt from the Volcker Rule.

The following table provides additional information related to the Company’s investment in pooled trust preferred securities as of June 30, 2017:

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	Aa3	$	1,000	$	920	$	563	$	(357)	$	-	CCC-	44	49	4.20	%	9.55	%	54.52	%
U.S. Capital Funding I	B3		3,000		2,914		2,025		(889)		-	Caa1	29	33	7.95	%	6.19	%	12.69	%
		$	4,000	$	3,834	$	2,588	$	(1,246)	$	-

(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.

Note 1:

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Loans and Allowance

6 Months Ended

Jun. 30, 2017

Loans and Allowance [Abstract]

Loans and Allowance

Note 5: Loans and Allowance

Classes of loans at June 30, 2017 and December 31, 2016include:

	June 30,		December 31,
	2017		2016
Real estate
Commercial	$	298,801	$	302,577
Commercial construction and development		29,008		22,453
Consumer closed end first mortgage		467,802		478,848
Consumer open end and junior liens		70,572		71,222
Total real estate loans		866,183		875,100
Other loans
Consumer loans
Auto		18,675		18,939
Boat/RVs		158,556		141,602
Other		5,605		5,892
Commercial and industrial		139,145		131,103
Total other loans		321,981		297,536
Total loans		1,188,164		1,172,636
Undisbursed loans in process		(9,753)		(8,691)
Unamortized deferred loan costs, net		5,942		5,557
Allowance for loan losses		(12,426)		(12,382)
Net loans	$	1,171,927	$	1,157,120

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 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 management’s 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. 

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 status.  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, 2017 and December 31, 2016 are as follows:

	June 30,		December 31,
	2017		2016
Real estate
Commercial	$	1,199	$	912
Commercial construction and development		-		-
Consumer closed end first mortgage		1,679		3,626
Consumer open end and junior liens		238		335
Consumer loans
Auto		4		5
Boat/RVs		342		224
Other		10		24
Commercial and industrial		39		18
Total nonaccrual loans	$	3,511	$	5,144

An age analysis of the Company’s past due loans, segregated by class of loans, as of June 30, 2017 and December 31, 2016 are as follows:

	June 30, 2017
		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 Past Due and Accruing
Real estate
Commercial	$	614	$	11	$	1,081	$	1,706	$	297,095	$	298,801	$	-
Commercial construction and development		157		-		-		157		28,851		29,008		-
Consumer closed end first mortgage		3,603		380		1,500		5,483		462,319		467,802		24
Consumer open end and junior liens		243		76		200		519		70,053		70,572		-
Consumer loans
Auto		48		19		2		69		18,606		18,675		-
Boat/RVs		805		336		156		1,297		157,259		158,556		-
Other		55		15		13		83		5,522		5,605		3
Commercial and industrial		230		4		37		271		138,874		139,145		-
Total	$	5,755	$	841	$	2,989	$	9,585	$	1,178,579	$	1,188,164	$	27

	December 31, 2016
		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 Past Due and Accruing
Real estate
Commercial	$	854	$	142	$	785	$	1,781	$	300,796	$	302,577	$	-
Commercial construction and development		-		-		-		-		22,453		22,453		-
Consumer closed end first mortgage		6,789		1,554		3,675		12,018		466,830		478,848		237
Consumer open end and junior liens		512		166		304		982		70,240		71,222		-
Consumer loans
Auto		103		25		5		133		18,806		18,939		-
Boat/RVs		1,376		305		213		1,894		139,708		141,602		-
Other		89		26		13		128		5,764		5,892		-
Commercial and industrial		497		32		8		537		130,566		131,103		-
Total	$	10,220	$	2,250	$	5,003	$	17,473	$	1,155,163	$	1,172,636	$	237

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 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, 2017 and 2016 and as of and for the year ended December 31, 2016. 

	June 30, 2017
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans - QTD		Average Investment in Impaired Loans - YTD		Interest Income Recognized - QTD		Interest Income Recognized - YTD
Loans without a specific valuation allowance
Real estate
Commercial	$	809	$	809	$	-	$	811	$	763	$	-	$	-
Commercial construction and development		761		761		-		776		792		8		17
Consumer closed end first mortgage		781		781		-		1,315		1,499		-		-
Commercial and industrial		172		172		-		176		179		1		3
Loans with a specific valuation allowance
Real estate
Commercial		214		214		100		214		214		-		-
Total
Real estate
Commercial	$	1,023	$	1,023	$	100	$	1,025	$	977	$	-	$	-
Commercial construction and development	$	761	$	761	$	-	$	776	$	792	$	8	$	17
Consumer closed end first mortgage	$	781	$	781	$	-	$	1,315	$	1,499	$	-	$	-
Commercial and industrial	$	172	$	172	$	-	$	176	$	179	$	1	$	3
Total	$	2,737	$	2,737	$	100	$	3,292	$	3,447	$	9	$	20

	December 31, 2016
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance
Real estate
Commercial	$	665	$	665	$	-	$	2,207	$	68
Commercial construction and development		822		822		-		874		40
Consumer closed end first mortgage		1,869		1,869		-		1,328		-
Consumer open end and junior liens		-		-		-		193		-
Commercial and industrial		187		187		-		204		1
Loans with a specific valuation allowance
Real estate
Commercial		214		214		100		416		-
Total
Real estate
Commercial	$	879	$	879	$	100	$	2,623	$	68
Commercial construction and development	$	822	$	822	$	-	$	874	$	40
Consumer closed end first mortgage	$	1,869	$	1,869	$	-	$	1,328	$	-
Consumer open end and junior liens	$	-	$	-	$	-	$	193	$	-
Commercial and industrial	$	187	$	187	$	-	$	204	$	1
Total	$	3,757	$	3,757	$	100	$	5,222	$	109

	June 30, 2016
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans - QTD		Average Investment in Impaired Loans - YTD		Interest Income Recognized - QTD		Interest Income Recognized - YTD
Loans without a specific valuation allowance
Real estate
Commercial	$	2,896	$	2,896	$	-	$	3,022	$	3,080	$	24	$	48
Commercial construction and development		853		853		-		856		907		9		21
Consumer closed end first mortgage		1,126		1,126		-		1,126		1,126		-		-
Consumer open end and junior liens		-		-		-		243		322		-		-
Commercial and industrial		200		200		-		205		208		-		-
Loans with a specific valuation allowance
Real estate
Commercial		410		410		100		464		534		-		-
Total
Real estate
Commercial	$	3,306	$	3,306	$	100	$	3,486	$	3,614	$	24	$	48
Commercial construction and development	$	853	$	853	$	-	$	856	$	907	$	9	$	21
Consumer closed end first mortgage	$	1,126	$	1,126	$	-	$	1,126	$	1,126	$	-	$	-
Consumer open end and junior liens	$	-	$	-	$	-	$	243	$	322	$	-	$	-
Commercial and industrial	$	200	$	200	$	-	$	205	$	208	$	-	$	-
Total	$	5,485	$	5,485	$	100	$	5,916	$	6,177	$	33	$	69

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, 2017.

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. 

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 if 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.

As of June 30, 2017, special mention commercial loans increased as management determined that a few credits had potential weaknesses deserving management’s close attention. All of these credits were performing as agreed as of June 30, 2017.

	June 30, 2017
		Commercial								Consumer
		Pass		Special Mention		Substandard		Doubtful		Pass		Special Mention		Substandard		Total
Real estate
Commercial		$	288,365	$	7,285	$	3,128	$	23							$	298,801
Commercial construction and development			27,841		406		761		-								29,008
Consumer closed end first mortgage										$	464,234	$	-	$	3,568		467,802
Consumer open end and junior liens											70,286		-		286		70,572
Other loans
Consumer loans
Auto											18,668		-		7		18,675
Boat/RVs											158,160		-		396		158,556
Other											5,565		-		40		5,605
Commercial and industrial			130,745		8,313		87		-								139,145
		$	446,951	$	16,004	$	3,976	$	23	$	716,913	$	-	$	4,297	$	1,188,164

	December 31, 2016
		Commercial								Consumer
		Pass		Special Mention		Substandard		Doubtful		Pass		Special Mention		Substandard		Total
Real estate
Commercial		$	295,548	$	3,705	$	3,297	$	27							$	302,577
Commercial construction and development			21,782		254		417		-								22,453
Consumer closed end first mortgage										$	473,329	$	-	$	5,519		478,848
Consumer open end and junior liens											70,769		-		453		71,222
Other loans
Consumer loans
Auto											18,931		-		8		18,939
Boat/RVs											141,294		-		308		141,602
Other											5,859		-		33		5,892
Commercial and industrial			128,436		2,513		154		-								131,103
		$	445,766	$	6,472	$	3,868	$	27	$	710,182	$	-	$	6,321	$	1,172,636

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, 2017 and 2016, respectively.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other segments.

	Three Months Ended June 30, 2017
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of period	$	7,397	$	2,279	$	2,706	$	12,382
Provision charged to expense		144		24		132		300
Losses charged off		(12)		(84)		(206)		(302)
Recoveries		6		4		36		46
Balance, end of period	$	7,535	$	2,223	$	2,668	$	12,426

	Six Months Ended June 30, 2017
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of year	$	7,358	$	2,303	$	2,721	$	12,382
Provision charged to expense		176		41		283		500
Losses charged off		(12)		(129)		(410)		(551)
Recoveries		13		8		74		95
Balance, end of period	$	7,535	$	2,223	$	2,668	$	12,426

	Three Months Ended June 30, 2016
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of period	$	7,208	$	2,629	$	2,833	$	12,670
Provision charged to expense		(49)		23		176		150
Losses charged off		(29)		(64)		(200)		(293)
Recoveries		2		1		74		77
Balance, end of period	$	7,132	$	2,589	$	2,883	$	12,604

	Six Months Ended June 30, 2016
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of year	$	7,090	$	2,683	$	2,868	$	12,641
Provision charged (credited) to expense		71		85		194		350
Losses charged off		(33)		(184)		(338)		(555)
Recoveries		4		5		159		168
Balance, end of period	$	7,132	$	2,589	$	2,883	$	12,604

The following tables provide a breakdown of the allowance for loan losses and loan portfolio balances by segment as of June 30, 2017 and 2016, and December 31, 2016.

	June 30, 2017
	Commercial		Mortgage		Consumer		Total
Allowance balances
Individually evaluated for impairment	$	100	$	-	$	-	$	100
Collectively evaluated for impairment		7,435		2,223		2,668		12,326
Total allowance for loan losses	$	7,535	$	2,223	$	2,668	$	12,426
Loan balances
Individually evaluated for impairment	$	1,956	$	781	$	-	$	2,737
Collectively evaluated for impairment		464,998		467,021		253,408		1,185,427
Gross loans	$	466,954	$	467,802	$	253,408	$	1,188,164

	June 30, 2016
	Commercial		Mortgage		Consumer		Total
Allowance balances
Individually evaluated for impairment	$	100	$	-	$	-	$	100
Collectively evaluated for impairment		7,032		2,589		2,883		12,504
Total allowance for loan losses	$	7,132	$	2,589	$	2,883	$	12,604
Loan balances
Individually evaluated for impairment	$	4,359	$	1,126	$	-	$	5,485
Collectively evaluated for impairment		396,225		484,122		227,973		1,108,320
Gross loans	$	400,584	$	485,248	$	227,973	$	1,113,805

	December 31, 2016
	Commercial		Mortgage		Consumer		Total
Allowance balances
Individually evaluated for impairment	$	100	$	-	$	-	$	100
Collectively evaluated for impairment		7,258		2,303		2,721		12,282
Total allowance for loan losses	$	7,358	$	2,303	$	2,721	$	12,382
Loan balances
Individually evaluated for impairment	$	1,888	$	1,869	$	-	$	3,757
Collectively evaluated for impairment		454,245		476,979		237,655		1,168,879
Gross loans	$	456,133	$	478,848	$	237,655	$	1,172,636

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value of the underlying collateral.

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.

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 if the collection of principal and interest is reasonably assured and generally stays on accrual.

At June 30, 2017, the Company had 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 or a reduction of the stated interest rate.  

The following tables describe troubled debts restructured during the three and six month periods ended June 30, 2017 and 2016:

	Three Months Ended
	June 30, 2017					June 30, 2016
	No. of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance		No. of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance
Real estate
Consumer closed end first mortgage	3	$	119	$	121	4	$	134	$	141
Consumer open end and junior liens	1		3		3	-		-		-
Other loans
Consumer loans
Boat/RVs	-		-		-	1		8		8

	Six Months Ended
	June 30, 2017					June 30, 2016
	No. of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance		No. of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance
Real estate
Consumer closed end first mortgage	4		184		188	9		554		569
Consumer open end and junior liens	1		3		3	-		-		-
Other loans
Consumer loans
Auto	-		-		-	1		4		4
Boat/RVs	-		-		-	3		56		56
Commercial and industrial	1		72		72	1		83		83

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, 2017 and 2016 are as follows:

	Three Months Ended June 30, 2017
		Rate		Term		Combination		Total Modification
Real estate
Consumer closed end first mortgage	$	-	$	-	$	121	$	121
Consumer open end and junior liens		-		3		-		3

	Three Months Ended June 30, 2016
		Rate		Term		Combination		Total Modification
Real estate
Consumer closed end first mortgage	$	-	$	47	$	94	$	141
Other loans
Consumer loans
Boat/RVs		-		-		8		8

	Six Months Ended June 30, 2017
		Rate		Term		Combination		Total Modification
Real Estate
Consumer closed end first mortgage	$	-	$	-	$	188	$	188
Consumer open end and junior liens		-		3		-		3
Commercial and industrial		-		72		-		72

	Six Months Ended June 30, 2016
		Rate		Term		Combination		Total Modification
Real Estate
Consumer closed end first mortgage	$	-	$	47	$	522	$	569
Other loans
Consumer loans
Auto		-		-		4		4
Boat/RVs		-		48		8		56
Commercial and industrial		-		83		-		83

There were no defaults on loans modified as troubled debt restructurings made in the three and six months ended June 30, 2017 and 2016.  Defaults are defined as any loans that become 90 days past due.

At June 30, 2017, the Company had residential real estate held for sale as a result of foreclosure totaling $326,000 and real estate in the process of foreclosure of $1.2 million. As of June 30, 2017, the Company also held $383,000 in other repossessed assets, such as autos, boats, RVs and horse trailers.

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Derivative Financial Instruments

6 Months Ended

Jun. 30, 2017

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

Note 6. Derivative FinancialInstruments

The Company has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Balance Sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Company agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Company’s Consolidated Statements of Income. The notional amount of customer-facing swaps as of June 30, 2017 and December 31, 2016 was approximately $14.4 million and $14.6 million, respectively.

The following table shows the amounts of derivative financial instruments at June 30, 2017 and December 31, 2016.

	Asset Derivatives
		Fair Value					Fair Value
	Balance Sheet	June 30,		December 31,		Balance Sheet	June 30,		December 31,
	Location	2017		2016		Location	2017		2016
Derivatives not designated as hedging instruments:
Interest rate contracts	Other assets	$	461	$	553	Other liabilities	$	461	$	553

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Accumulated Other Comprehensive Income (Loss)

6 Months Ended

Jun. 30, 2017

Accumulated Other Comprehensive Income (Loss) [Abstract]

Accumulated Other Comprehensive Income (Loss)

Note 7: Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows:

	June 30,		December 31,
	2017		2016
Net unrealized gain (loss) on securities available-for-sale	$	234	$	(1,875)
Net unrealized gain relating to defined benefit plan liability		30		30
		264		(1,845)
Tax benefit (expense)		(123)		591
Net of tax amount	$	141	$	(1,254)

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, 2017 and 2016.

	Amount Reclassified from Accumulated Other Comprehensive Income For the Three Months Ended
	June 30,
Details about Accumulated Other Comprehensive Income Components	2017		2016		Affected Line Item in the Statements of Income
Realized gains on available-for-sale securities
Realized securities gains reclassified into income	$	279	$	652	Total non-interest income - net realized gains on sale of available-for-sale securities
Related income tax expense		(95)		(222)	Income tax expense
Total reclassifications for the period, net of tax	$	184	$	430

	Amount Reclassified from Accumulated Other Comprehensive Income For the Six Months Ended
	June 30,
Details about Accumulated Other Comprehensive Income Components	2017		2016		Affected Line Item in the Statements of Income
Realized gains on available-for-sale securities
Realized securities gains reclassified into income	$	408	$	770	Total non-interest income - net realized gains on sale of available-for-sale securities
Related income tax expense		(139)		(262)	Income tax expense
Total reclassifications for the period, net of tax	$	269	$	508

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Fair Values of Financial Instruments

6 Months Ended

Jun. 30, 2017

Fair Values of Financial Instruments [Abstract]

Fair Values of Financial Instruments

Note 8: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 1Quoted prices in active markets for identical assets or liabilities

Level 2Observable 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 3Unobservable 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.

The following table presents the fair value measurements of assets measured on a recurring basis and level within the ASC 820 fair value hierarchy.

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
June 30, 2017
Mortgage-backed securities	$	76,696	$	-	$	76,696	$	-
Collateralized mortgage obligations		76,259		-		76,259		-
Municipal obligations		87,469		-		87,469		-
Corporate obligations		16,218		-		13,630		2,588
Available-for-sale securities	$	256,642	$	-	$	254,054	$	2,588

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
December 31, 2016
Mortgage-backed securities	$	92,517	$	-	$	92,517	$	-
Collateralized mortgage obligations		68,047		-		68,047		-
Municipal obligations		77,682		-		77,682		-
Corporate obligations		11,667		-		9,079		2,588
Available-for-sale securities	$	249,913	$	-	$	247,325	$	2,588

The following is a reconciliation of the beginning and ending balances for the three and six months ended June 30, 2017 and 2016 of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
		2017		2016		2017		2016
Beginning balance	$	2,588	$	2,534	$	2,588	$	2,534
Total realized and unrealized gains (losses)
Included in net income		-		-		-		-
Included in other comprehensive income (loss)		-		-		-		-
Purchases, issuances and settlements		-		-		-		-
Ending balance	$	2,588	$	2,534	$	2,588	$	2,534
Total gains 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	$	-	$	-	$	-	$	-

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.

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements:

June 30, 2017	Fair Value		Valuation Technique	Unobservable Inputs	Range
Trust Preferred Securities	$	2,588	Discounted cash flow	Discount rate	7.0 - 8.0	%
				Constant prepayment rate	2.0	%
				Cumulative projected prepayments	40.0	%
				Probability of default	1.7 - 2.2	%
				Projected cures given deferral	0 - 15.0	%
				Loss severity	32.5 - 38.7	%

December 31, 2016	Fair Value		Valuation Technique	Unobservable Inputs	Range
Trust Preferred Securities	$	2,588	Discounted cash flow	Discount rate	7.0 - 8.0	%
				Constant prepayment rate	2.0	%
				Cumulative projected prepayments	40.0	%
				Probability of default	1.7 - 2.2	%
				Projected cures given deferral	0 - 15.0	%
				Loss severity	32.5 - 38.7	%

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.

Interest Bearing Time Deposits – The fair value of interest bearing time deposits 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.

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, 2017		Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	25,168	$	25,168	$	25,168	$	-	$	-
Interest-bearing time deposits		2,046		2,046		2,046		-		-
Loans held for sale		8,796		8,905		-		8,905		-
Loans, net		1,171,927		1,160,935		-		-		1,160,935
FHLB stock		11,183		11,183		-		11,183		-
Interest receivable		4,664		4,664		-		4,664		-
Liabilities
Deposits		1,172,985		1,172,919		794,153		-		378,766
FHLB advances		235,991		235,705		-		235,705		-
Other borrowings		4,211		4,363		-		4,363		-
Interest payable		510		510		-		510		-

					Fair Value Measurements Using
December 31, 2016		Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	26,860	$	26,860	$	26,860	$	-	$	-
Interest-bearing time deposits		993		993		993		-		-
Loans held for sale		4,063		4,094		-		4,094		-
Loans, net		1,157,120		1,139,450		-		-		1,139,450
FHLB stock		10,925		10,925		-		10,925		-
Interest receivable		4,629		4,629		-		4,629		-
Liabilities
Deposits		1,153,382		1,152,030		779,577		-		372,453
FHLB advances		240,591		239,866		-		239,866		-
Other borrowings		4,189		4,189		-		4,189		-
Interest payable		350		350		-		350		-

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Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2017

Earnings Per Share [Abstract]

Schedule of Earnings Per Share

Earnings per share were computed as follows:

	Three Months Ended June 30,
	2017					2016
		Net Income	Weighted- Average Shares		Per-Share Amount		Net Income	Weighted- Average Shares		Per-Share Amount
Basic Earnings Per Share
Net income	$	3,898	7,344,233	$	0.53	$	4,157	7,453,333	$	0.56
Effect of Dilutive Securities
Stock options			143,256					142,955
Diluted Earnings Per Share
Net income available and assumed conversions	$	3,898	7,487,489	$	0.52	$	4,157	7,596,288	$	0.55

	Six Months Ended June 30,
	2017					2016
		Net Income	Weighted- Average Shares		Per-Share Amount		Net Income	Weighted- Average Shares		Per-Share Amount
Basic Earnings Per Share
Net income	$	7,104	7,338,377	$	0.97	$	6,522	7,459,871	$	0.87
Effect of Dilutive Securities
Stock options			145,641					146,213
Diluted Earnings Per Share
Net income available and assumed conversions	$	7,104	7,484,018	$	0.95	$	6,522	7,606,084	$	0.86

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Investment Securities (Tables)

6 Months Ended

Jun. 30, 2017

Investment Securities [Abstract]

Amortized Cost and Fair Values of Securities

The amortized costs and approximate fair values, together with gross unrealized gains and losses on securities, are in the tables below.  All mortgage-backed securities and collateralized mortgage obligations held as of June 30, 2017 and December 31, 2016 were guaranteed by government sponsored entities, government corporations or federal agencies.

	June 30, 2017
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for Sale Securities
Mortgage-backed securities	$	77,050	$	508	$	(862)	$	76,696
Collateralized mortgage obligations		76,717		246		(704)		76,259
Municipal obligations		85,246		2,779		(556)		87,469
Corporate obligations		17,395		71		(1,248)		16,218
Total investment securities	$	256,408	$	3,604	$	(3,370)	$	256,642

	December 31, 2016
		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for Sale Securities
Mortgage-backed securities	$	92,871	$	802	$	(1,156)	$	92,517
Collateralized mortgage obligations		68,621		269		(843)		68,047
Municipal obligations		77,474		1,716		(1,508)		77,682
Corporate obligations		12,822		78		(1,233)		11,667
Total investment securities	$	251,788	$	2,865	$	(4,740)	$	249,913

Amortized Cost and Fair Value of Available for Sale Securities by Contractual Maturity

	Available for Sale
Description Securities	Amortized Cost		Fair Value
Security obligations due
Within one year	$	160	$	160
One to five years		5,057		5,086
Five to ten years		23,978		24,774
After ten years		73,446		73,667
		102,641		103,687
Mortgage-backed securities		77,050		76,696
Collateralized mortgage obligations		76,717		76,259
Totals	$	256,408	$	256,642

Investments Gross Unrealized Losses and Fair Value in Continuous Unrealized Loss Position

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, 2017 and December 31, 2016:

	June 30, 2017
	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	$	50,104	$	(862)	$	-	$	-	$	50,104	$	(862)
Collateralized mortgage obligations		35,441		(558)		4,326		(146)		39,767		(704)
Municipal obligations		18,752		(555)		159		(1)		18,911		(556)
Corporate obligations		4,548		(2)		2,588		(1,246)		7,136		(1,248)
Total temporarily impaired securities	$	108,845	$	(1,977)	$	7,073	$	(1,393)	$	115,918	$	(3,370)

	December 31, 2016
	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	$	58,056	$	(1,156)	$	-	$	-	$	58,056	$	(1,156)
Collateralized mortgage obligations		41,769		(683)		4,688		(160)	$	46,457	$	(843)
Municipal obligations		31,907		(1,507)		337		(1)		32,244		(1,508)
Corporate obligations		-		-		7,076		(1,233)		7,076		(1,233)
Total temporarily impaired securities	$	131,732	$	(3,346)	$	12,101	$	(1,394)	$	143,833	$	(4,740)

Pooled Trust Preferred Collateralized Debt Obligations

The following table provides additional information related to the Company’s investment in pooled trust preferred securities as of June 30, 2017:

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	Aa3	$	1,000	$	920	$	563	$	(357)	$	-	CCC-	44	49	4.20	%	9.55	%	54.52	%
U.S. Capital Funding I	B3		3,000		2,914		2,025		(889)		-	Caa1	29	33	7.95	%	6.19	%	12.69	%
		$	4,000	$	3,834	$	2,588	$	(1,246)	$	-

(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.

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Loans and Allowance (Tables)

6 Months Ended

Jun. 30, 2017

Loans and Allowance [Abstract]

Schedule of Classes of Loans

Classes of loans at June 30, 2017 and December 31, 2016include:

	June 30,		December 31,
	2017		2016
Real estate
Commercial	$	298,801	$	302,577
Commercial construction and development		29,008		22,453
Consumer closed end first mortgage		467,802		478,848
Consumer open end and junior liens		70,572		71,222
Total real estate loans		866,183		875,100
Other loans
Consumer loans
Auto		18,675		18,939
Boat/RVs		158,556		141,602
Other		5,605		5,892
Commercial and industrial		139,145		131,103
Total other loans		321,981		297,536
Total loans		1,188,164		1,172,636
Undisbursed loans in process		(9,753)		(8,691)
Unamortized deferred loan costs, net		5,942		5,557
Allowance for loan losses		(12,426)		(12,382)
Net loans	$	1,171,927	$	1,157,120

Non-Accrual Loans Segregated by Class of Loans

Nonaccrual loans, segregated by class of loans, as of June 30, 2017 and December 31, 2016 are as follows:

	June 30,		December 31,
	2017		2016
Real estate
Commercial	$	1,199	$	912
Commercial construction and development		-		-
Consumer closed end first mortgage		1,679		3,626
Consumer open end and junior liens		238		335
Consumer loans
Auto		4		5
Boat/RVs		342		224
Other		10		24
Commercial and industrial		39		18
Total nonaccrual loans	$	3,511	$	5,144

Age Analysis of Past Due Loans Segregated by Class of Loans

An age analysis of the Company’s past due loans, segregated by class of loans, as of June 30, 2017 and December 31, 2016 are as follows:

	June 30, 2017
		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 Past Due and Accruing
Real estate
Commercial	$	614	$	11	$	1,081	$	1,706	$	297,095	$	298,801	$	-
Commercial construction and development		157		-		-		157		28,851		29,008		-
Consumer closed end first mortgage		3,603		380		1,500		5,483		462,319		467,802		24
Consumer open end and junior liens		243		76		200		519		70,053		70,572		-
Consumer loans
Auto		48		19		2		69		18,606		18,675		-
Boat/RVs		805		336		156		1,297		157,259		158,556		-
Other		55		15		13		83		5,522		5,605		3
Commercial and industrial		230		4		37		271		138,874		139,145		-
Total	$	5,755	$	841	$	2,989	$	9,585	$	1,178,579	$	1,188,164	$	27

	December 31, 2016
		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 Past Due and Accruing
Real estate
Commercial	$	854	$	142	$	785	$	1,781	$	300,796	$	302,577	$	-
Commercial construction and development		-		-		-		-		22,453		22,453		-
Consumer closed end first mortgage		6,789		1,554		3,675		12,018		466,830		478,848		237
Consumer open end and junior liens		512		166		304		982		70,240		71,222		-
Consumer loans
Auto		103		25		5		133		18,806		18,939		-
Boat/RVs		1,376		305		213		1,894		139,708		141,602		-
Other		89		26		13		128		5,764		5,892		-
Commercial and industrial		497		32		8		537		130,566		131,103		-
Total	$	10,220	$	2,250	$	5,003	$	17,473	$	1,155,163	$	1,172,636	$	237

Impaired Loans

The following tables present impaired loans as of and for the three and six month periods ended June 30, 2017 and 2016 and as of and for the year ended December 31, 2016. 

	June 30, 2017
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans - QTD		Average Investment in Impaired Loans - YTD		Interest Income Recognized - QTD		Interest Income Recognized - YTD
Loans without a specific valuation allowance
Real estate
Commercial	$	809	$	809	$	-	$	811	$	763	$	-	$	-
Commercial construction and development		761		761		-		776		792		8		17
Consumer closed end first mortgage		781		781		-		1,315		1,499		-		-
Commercial and industrial		172		172		-		176		179		1		3
Loans with a specific valuation allowance
Real estate
Commercial		214		214		100		214		214		-		-
Total
Real estate
Commercial	$	1,023	$	1,023	$	100	$	1,025	$	977	$	-	$	-
Commercial construction and development	$	761	$	761	$	-	$	776	$	792	$	8	$	17
Consumer closed end first mortgage	$	781	$	781	$	-	$	1,315	$	1,499	$	-	$	-
Commercial and industrial	$	172	$	172	$	-	$	176	$	179	$	1	$	3
Total	$	2,737	$	2,737	$	100	$	3,292	$	3,447	$	9	$	20

	December 31, 2016
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance
Real estate
Commercial	$	665	$	665	$	-	$	2,207	$	68
Commercial construction and development		822		822		-		874		40
Consumer closed end first mortgage		1,869		1,869		-		1,328		-
Consumer open end and junior liens		-		-		-		193		-
Commercial and industrial		187		187		-		204		1
Loans with a specific valuation allowance
Real estate
Commercial		214		214		100		416		-
Total
Real estate
Commercial	$	879	$	879	$	100	$	2,623	$	68
Commercial construction and development	$	822	$	822	$	-	$	874	$	40
Consumer closed end first mortgage	$	1,869	$	1,869	$	-	$	1,328	$	-
Consumer open end and junior liens	$	-	$	-	$	-	$	193	$	-
Commercial and industrial	$	187	$	187	$	-	$	204	$	1
Total	$	3,757	$	3,757	$	100	$	5,222	$	109

	June 30, 2016
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans - QTD		Average Investment in Impaired Loans - YTD		Interest Income Recognized - QTD		Interest Income Recognized - YTD
Loans without a specific valuation allowance
Real estate
Commercial	$	2,896	$	2,896	$	-	$	3,022	$	3,080	$	24	$	48
Commercial construction and development		853		853		-		856		907		9		21
Consumer closed end first mortgage		1,126		1,126		-		1,126		1,126		-		-
Consumer open end and junior liens		-		-		-		243		322		-		-
Commercial and industrial		200		200		-		205		208		-		-
Loans with a specific valuation allowance
Real estate
Commercial		410		410		100		464		534		-		-
Total
Real estate
Commercial	$	3,306	$	3,306	$	100	$	3,486	$	3,614	$	24	$	48
Commercial construction and development	$	853	$	853	$	-	$	856	$	907	$	9	$	21
Consumer closed end first mortgage	$	1,126	$	1,126	$	-	$	1,126	$	1,126	$	-	$	-
Consumer open end and junior liens	$	-	$	-	$	-	$	243	$	322	$	-	$	-
Commercial and industrial	$	200	$	200	$	-	$	205	$	208	$	-	$	-
Total	$	5,485	$	5,485	$	100	$	5,916	$	6,177	$	33	$	69

Commercial and Retail Credit Exposure Credit Risk Profile by Internal Rating

	June 30, 2017
		Commercial								Consumer
		Pass		Special Mention		Substandard		Doubtful		Pass		Special Mention		Substandard		Total
Real estate
Commercial		$	288,365	$	7,285	$	3,128	$	23							$	298,801
Commercial construction and development			27,841		406		761		-								29,008
Consumer closed end first mortgage										$	464,234	$	-	$	3,568		467,802
Consumer open end and junior liens											70,286		-		286		70,572
Other loans
Consumer loans
Auto											18,668		-		7		18,675
Boat/RVs											158,160		-		396		158,556
Other											5,565		-		40		5,605
Commercial and industrial			130,745		8,313		87		-								139,145
		$	446,951	$	16,004	$	3,976	$	23	$	716,913	$	-	$	4,297	$	1,188,164

	December 31, 2016
		Commercial								Consumer
		Pass		Special Mention		Substandard		Doubtful		Pass		Special Mention		Substandard		Total
Real estate
Commercial		$	295,548	$	3,705	$	3,297	$	27							$	302,577
Commercial construction and development			21,782		254		417		-								22,453
Consumer closed end first mortgage										$	473,329	$	-	$	5,519		478,848
Consumer open end and junior liens											70,769		-		453		71,222
Other loans
Consumer loans
Auto											18,931		-		8		18,939
Boat/RVs											141,294		-		308		141,602
Other											5,859		-		33		5,892
Commercial and industrial			128,436		2,513		154		-								131,103
		$	445,766	$	6,472	$	3,868	$	27	$	710,182	$	-	$	6,321	$	1,172,636

Activity in Allowance for Loan Losses by Portfolio Segment

The following table details activity in the allowance for loan losses by portfolio segment for the three and six month periods ended June 30, 2017 and 2016, respectively.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other segments.

	Three Months Ended June 30, 2017
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of period	$	7,397	$	2,279	$	2,706	$	12,382
Provision charged to expense		144		24		132		300
Losses charged off		(12)		(84)		(206)		(302)
Recoveries		6		4		36		46
Balance, end of period	$	7,535	$	2,223	$	2,668	$	12,426

	Six Months Ended June 30, 2017
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of year	$	7,358	$	2,303	$	2,721	$	12,382
Provision charged to expense		176		41		283		500
Losses charged off		(12)		(129)		(410)		(551)
Recoveries		13		8		74		95
Balance, end of period	$	7,535	$	2,223	$	2,668	$	12,426

	Three Months Ended June 30, 2016
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of period	$	7,208	$	2,629	$	2,833	$	12,670
Provision charged to expense		(49)		23		176		150
Losses charged off		(29)		(64)		(200)		(293)
Recoveries		2		1		74		77
Balance, end of period	$	7,132	$	2,589	$	2,883	$	12,604

	Six Months Ended June 30, 2016
	Commercial		Mortgage		Consumer		Total
Allowance for loan losses:
Balance, beginning of year	$	7,090	$	2,683	$	2,868	$	12,641
Provision charged (credited) to expense		71		85		194		350
Losses charged off		(33)		(184)		(338)		(555)
Recoveries		4		5		159		168
Balance, end of period	$	7,132	$	2,589	$	2,883	$	12,604

The following tables provide a breakdown of the allowance for loan losses and loan portfolio balances by segment as of June 30, 2017 and 2016, and December 31, 2016.

	June 30, 2017
	Commercial		Mortgage		Consumer		Total
Allowance balances
Individually evaluated for impairment	$	100	$	-	$	-	$	100
Collectively evaluated for impairment		7,435		2,223		2,668		12,326
Total allowance for loan losses	$	7,535	$	2,223	$	2,668	$	12,426
Loan balances
Individually evaluated for impairment	$	1,956	$	781	$	-	$	2,737
Collectively evaluated for impairment		464,998		467,021		253,408		1,185,427
Gross loans	$	466,954	$	467,802	$	253,408	$	1,188,164

	June 30, 2016
	Commercial		Mortgage		Consumer		Total
Allowance balances
Individually evaluated for impairment	$	100	$	-	$	-	$	100
Collectively evaluated for impairment		7,032		2,589		2,883		12,504
Total allowance for loan losses	$	7,132	$	2,589	$	2,883	$	12,604
Loan balances
Individually evaluated for impairment	$	4,359	$	1,126	$	-	$	5,485
Collectively evaluated for impairment		396,225		484,122		227,973		1,108,320
Gross loans	$	400,584	$	485,248	$	227,973	$	1,113,805

	December 31, 2016
	Commercial		Mortgage		Consumer		Total
Allowance balances
Individually evaluated for impairment	$	100	$	-	$	-	$	100
Collectively evaluated for impairment		7,258		2,303		2,721		12,282
Total allowance for loan losses	$	7,358	$	2,303	$	2,721	$	12,382
Loan balances
Individually evaluated for impairment	$	1,888	$	1,869	$	-	$	3,757
Collectively evaluated for impairment		454,245		476,979		237,655		1,168,879
Gross loans	$	456,133	$	478,848	$	237,655	$	1,172,636

Troubled Debts Restructured

The following tables describe troubled debts restructured during the three and six month periods ended June 30, 2017 and 2016:

	Three Months Ended
	June 30, 2017					June 30, 2016
	No. of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance		No. of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance
Real estate
Consumer closed end first mortgage	3	$	119	$	121	4	$	134	$	141
Consumer open end and junior liens	1		3		3	-		-		-
Other loans
Consumer loans
Boat/RVs	-		-		-	1		8		8

	Six Months Ended
	June 30, 2017					June 30, 2016
	No. of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance		No. of Loans	Pre-Modification Recorded Balance		Post-Modification Recorded Balance
Real estate
Consumer closed end first mortgage	4		184		188	9		554		569
Consumer open end and junior liens	1		3		3	-		-		-
Other loans
Consumer loans
Auto	-		-		-	1		4		4
Boat/RVs	-		-		-	3		56		56
Commercial and industrial	1		72		72	1		83		83

Newly Restructured Loans by Types

Newly restructured loans by type for the three and six months ended June 30, 2017 and 2016 are as follows:

	Three Months Ended June 30, 2017
		Rate		Term		Combination		Total Modification
Real estate
Consumer closed end first mortgage	$	-	$	-	$	121	$	121
Consumer open end and junior liens		-		3		-		3

	Three Months Ended June 30, 2016
		Rate		Term		Combination		Total Modification
Real estate
Consumer closed end first mortgage	$	-	$	47	$	94	$	141
Other loans
Consumer loans
Boat/RVs		-		-		8		8

	Six Months Ended June 30, 2017
		Rate		Term		Combination		Total Modification
Real Estate
Consumer closed end first mortgage	$	-	$	-	$	188	$	188
Consumer open end and junior liens		-		3		-		3
Commercial and industrial		-		72		-		72

	Six Months Ended June 30, 2016
		Rate		Term		Combination		Total Modification
Real Estate
Consumer closed end first mortgage	$	-	$	47	$	522	$	569
Other loans
Consumer loans
Auto		-		-		4		4
Boat/RVs		-		48		8		56
Commercial and industrial		-		83		-		83

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Derivative Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2017

Derivative Financial Instruments [Abstract]

Amounts of Derivative Financial Instruments

The following table shows the amounts of derivative financial instruments at June 30, 2017 and December 31, 2016.

	Asset Derivatives
		Fair Value					Fair Value
	Balance Sheet	June 30,		December 31,		Balance Sheet	June 30,		December 31,
	Location	2017		2016		Location	2017		2016
Derivatives not designated as hedging instruments:
Interest rate contracts	Other assets	$	461	$	553	Other liabilities	$	461	$	553

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Accumulated Other Comprehensive Income (Loss) (Tables)

6 Months Ended

Jun. 30, 2017

Accumulated Other Comprehensive Income (Loss) [Abstract]

Components of Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows:

	June 30,		December 31,
	2017		2016
Net unrealized gain (loss) on securities available-for-sale	$	234	$	(1,875)
Net unrealized gain relating to defined benefit plan liability		30		30
		264		(1,845)
Tax benefit (expense)		(123)		591
Net of tax amount	$	141	$	(1,254)

Reclassification out of Accumulated Other Comprehensive Income (Loss)

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, 2017 and 2016.

	Amount Reclassified from Accumulated Other Comprehensive Income For the Three Months Ended
	June 30,
Details about Accumulated Other Comprehensive Income Components	2017		2016		Affected Line Item in the Statements of Income
Realized gains on available-for-sale securities
Realized securities gains reclassified into income	$	279	$	652	Total non-interest income - net realized gains on sale of available-for-sale securities
Related income tax expense		(95)		(222)	Income tax expense
Total reclassifications for the period, net of tax	$	184	$	430

	Amount Reclassified from Accumulated Other Comprehensive Income For the Six Months Ended
	June 30,
Details about Accumulated Other Comprehensive Income Components	2017		2016		Affected Line Item in the Statements of Income
Realized gains on available-for-sale securities
Realized securities gains reclassified into income	$	408	$	770	Total non-interest income - net realized gains on sale of available-for-sale securities
Related income tax expense		(139)		(262)	Income tax expense
Total reclassifications for the period, net of tax	$	269	$	508

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Fair Values of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2017

Fair Values of Financial Instruments [Abstract]

Fair Value Measurements of Assets Measured at Fair Value on Recurring Basis

The following table presents the fair value measurements of assets measured on a recurring basis and level within the ASC 820 fair value hierarchy.

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
June 30, 2017
Mortgage-backed securities	$	76,696	$	-	$	76,696	$	-
Collateralized mortgage obligations		76,259		-		76,259		-
Municipal obligations		87,469		-		87,469		-
Corporate obligations		16,218		-		13,630		2,588
Available-for-sale securities	$	256,642	$	-	$	254,054	$	2,588

			Fair Value Measurements Using
	Fair Value		Level 1		Level 2		Level 3
December 31, 2016
Mortgage-backed securities	$	92,517	$	-	$	92,517	$	-
Collateralized mortgage obligations		68,047		-		68,047		-
Municipal obligations		77,682		-		77,682		-
Corporate obligations		11,667		-		9,079		2,588
Available-for-sale securities	$	249,913	$	-	$	247,325	$	2,588

Reconciliation of Recurring Fair Value Measurements Recognized in Balance Sheet using Significant Unobservable (Level Three) Inputs

The following is a reconciliation of the beginning and ending balances for the three and six months ended June 30, 2017 and 2016 of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
		2017		2016		2017		2016
Beginning balance	$	2,588	$	2,534	$	2,588	$	2,534
Total realized and unrealized gains (losses)
Included in net income		-		-		-		-
Included in other comprehensive income (loss)		-		-		-		-
Purchases, issuances and settlements		-		-		-		-
Ending balance	$	2,588	$	2,534	$	2,588	$	2,534
Total gains 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	$	-	$	-	$	-	$	-

Quantitative Information about Unobservable Inputs used in Recurring and Nonrecurring Level Three Fair Value Measurements

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements:

June 30, 2017	Fair Value		Valuation Technique	Unobservable Inputs	Range
Trust Preferred Securities	$	2,588	Discounted cash flow	Discount rate	7.0 - 8.0	%
				Constant prepayment rate	2.0	%
				Cumulative projected prepayments	40.0	%
				Probability of default	1.7 - 2.2	%
				Projected cures given deferral	0 - 15.0	%
				Loss severity	32.5 - 38.7	%

December 31, 2016	Fair Value		Valuation Technique	Unobservable Inputs	Range
Trust Preferred Securities	$	2,588	Discounted cash flow	Discount rate	7.0 - 8.0	%
				Constant prepayment rate	2.0	%
				Cumulative projected prepayments	40.0	%
				Probability of default	1.7 - 2.2	%
				Projected cures given deferral	0 - 15.0	%
				Loss severity	32.5 - 38.7	%

Estimated Fair Values of Financial Instruments

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, 2017		Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	25,168	$	25,168	$	25,168	$	-	$	-
Interest-bearing time deposits		2,046		2,046		2,046		-		-
Loans held for sale		8,796		8,905		-		8,905		-
Loans, net		1,171,927		1,160,935		-		-		1,160,935
FHLB stock		11,183		11,183		-		11,183		-
Interest receivable		4,664		4,664		-		4,664		-
Liabilities
Deposits		1,172,985		1,172,919		794,153		-		378,766
FHLB advances		235,991		235,705		-		235,705		-
Other borrowings		4,211		4,363		-		4,363		-
Interest payable		510		510		-		510		-

					Fair Value Measurements Using
December 31, 2016		Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	26,860	$	26,860	$	26,860	$	-	$	-
Interest-bearing time deposits		993		993		993		-		-
Loans held for sale		4,063		4,094		-		4,094		-
Loans, net		1,157,120		1,139,450		-		-		1,139,450
FHLB stock		10,925		10,925		-		10,925		-
Interest receivable		4,629		4,629		-		4,629		-
Liabilities
Deposits		1,153,382		1,152,030		779,577		-		372,453
FHLB advances		240,591		239,866		-		239,866		-
Other borrowings		4,189		4,189		-		4,189		-
Interest payable		350		350		-		350		-

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Earnings Per Share (Schedule of Earnings per Share) (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Basic Earnings Per Share
Net income	$ 3,898	$ 4,157	$ 7,104	$ 6,522
Weighted-Average Shares number of common shares, basic	7,344,233	7,453,333	7,338,377	7,459,871
Earnings per share, basic	$ 0.53	$ 0.56	$ 0.97	$ 0.87
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions	$ 3,898	$ 4,157	$ 7,104	$ 6,522
Weighted-Average Shares, effect of dilutive securities stock option	143,256	142,955	145,641	146,213
Weighted-Average Shares income available to common stockholders and assumed conversions, diluted	7,487,489	7,596,288	7,484,018	7,606,084
Earnings per share, diluted	$ 0.52	$ 0.55	$ 0.95	$ 0.86

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Investment Securities (Narrative) (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016	Dec. 31, 2011
Investment [Line Items]
Fair value of investments reported at less than historical cost	$ 115,918,000		$ 115,918,000		$ 143,833,000
Percentage of Bank portfolio	45.20%		45.20%		57.60%
Proceeds from sales of securities, available for sale	$ 12,700,000	$ 26,000,000	$ 18,365,000	$ 29,901,000
Gross realized gain on sale of securities	279,000	701,000	408,000	819,000
Gross realized losses on sale of securities	0	$ 49,000	$ 0	49,000
Percentage of recovery estimate depository institutions			10.00%
Percentage of recovery estimate insurance companies			15.00%
Other than temporary impairment losses investments available for sale securities			$ 0	$ 0
Pooled Trust Preferred Securities [Member]
Investment [Line Items]
Current par balance	3,800,000		3,800,000
Original Par	$ 4,000,000		$ 4,000,000			$ 4,000,000

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Investment Securities (Amortized Cost and Fair Values of Securities ) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	$ 256,408	$ 251,788
Gross Unrealized Gains	3,604	2,865
Gross Unrealized Losses	(3,370)	(4,740)
Fair Value	256,642	249,913
Mortgage-backed securities, Government sponsored agencies
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	77,050	92,871
Gross Unrealized Gains	508	802
Gross Unrealized Losses	(862)	(1,156)
Fair Value	76,696	92,517
Collateralized mortgage obligations, Government sponsored agencies
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	76,717	68,621
Gross Unrealized Gains	246	269
Gross Unrealized Losses	(704)	(843)
Fair Value	76,259	68,047
Municipals
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	85,246	77,474
Gross Unrealized Gains	2,779	1,716
Gross Unrealized Losses	(556)	(1,508)
Fair Value	87,469	77,682
Corporate obligations
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	17,395	12,822
Gross Unrealized Gains	71	78
Gross Unrealized Losses	(1,248)	(1,233)
Fair Value	$ 16,218	$ 11,667

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Investment Securities (Amortized Cost and Fair Value of Available-for-Sale Securities by Contractual Maturity) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Schedule of Available-for-sale Securities [Line Items]
Security obligations due, amortized cost, within one year	$ 160
Security obligations due, amortized cost, One to five years	5,057
Security obligations due, amortized cost, Five to ten years	23,978
Security obligations due, amortized cost, After ten years	73,446
Total security obligations due, amortized cost	102,641
Available for sale, amortized cost	256,408	$ 251,788
Security obligations due, Fair Value, within one year	160
Security obligations due, Fair value, One to five years	5,086
Security obligations due, Fair value, Five to ten years	24,774
Security obligations due, Fair value, After ten years	73,667
Total Security obligations due, Fair value	103,687
Investment securities available for sale (carried at fair value)	256,642	249,913
Mortgage-backed securities, Government sponsored agencies
Schedule of Available-for-sale Securities [Line Items]
Available for sale, amortized cost	77,050	92,871
Investment securities available for sale (carried at fair value)	76,696	92,517
Collateralized mortgage obligations, Government sponsored agencies
Schedule of Available-for-sale Securities [Line Items]
Available for sale, amortized cost	76,717	68,621
Investment securities available for sale (carried at fair value)	$ 76,259	$ 68,047

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Investment Securities (Investments Gross Unrealized Losses and Fair Value in Continuous Unrealized Loss Position) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Schedule of Available-for-sale Securities [Line Items]
Less than 12 months, Fair Value	$ 108,845	$ 131,732
Less than 12 months, Unrealized Losses	(1,977)	(3,346)
12 months or more, Fair Value	7,073	12,101
12 months or more, Unrealized Losses	(1,393)	(1,394)
Total, Fair Value	115,918	143,833
Total, Unrealized Losses	(3,370)	(4,740)
Mortgage-backed securities, Government sponsored agencies
Schedule of Available-for-sale Securities [Line Items]
Less than 12 months, Fair Value	50,104	58,056
Less than 12 months, Unrealized Losses	(862)	(1,156)
Total, Fair Value	50,104	58,056
Total, Unrealized Losses	(862)	(1,156)
Collateralized mortgage obligations, Government sponsored agencies
Schedule of Available-for-sale Securities [Line Items]
Less than 12 months, Fair Value	35,441	41,769
Less than 12 months, Unrealized Losses	(558)	(683)
12 months or more, Fair Value	4,326	4,688
12 months or more, Unrealized Losses	(146)	(160)
Total, Fair Value	39,767	46,457
Total, Unrealized Losses	(704)	(843)
Municipals
Schedule of Available-for-sale Securities [Line Items]
Less than 12 months, Fair Value	18,752	31,907
Less than 12 months, Unrealized Losses	(555)	(1,507)
12 months or more, Fair Value	159	337
12 months or more, Unrealized Losses	(1)	(1)
Total, Fair Value	18,911	32,244
Total, Unrealized Losses	(556)	(1,508)
Corporate obligations
Schedule of Available-for-sale Securities [Line Items]
Less than 12 months, Fair Value	4,548
Less than 12 months, Unrealized Losses	(2)
12 months or more, Fair Value	2,588	7,076
12 months or more, Unrealized Losses	(1,246)	(1,233)
Total, Fair Value	7,136	7,076
Total, Unrealized Losses	$ (1,248)	$ (1,233)

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Investment Securities (Pooled Trust Preferred Collateralized Debt Obligations) (Details) $ in Thousands		6 Months Ended
		Jun. 30, 2017 USD ($) item	Jun. 30, 2016 USD ($)	Dec. 31, 2016 USD ($)	Dec. 31, 2011 USD ($)
Fair Value		$ 256,642		$ 249,913
Unrealized loss		(3,370)		$ (4,740)
Realized losses YTD		408	$ 770
Pooled Trust Preferred Securities [Member]
Original Par		4,000			$ 4,000
Book Value		3,834
Fair Value		2,588
Unrealized loss		$ (1,246)
Pooled Trust Preferred Securities [Member] | Alesco Preferred Funding IX [Member]
Class		Aa3
Original Par		$ 1,000
Book Value		920
Fair Value		563
Unrealized loss		$ (357)
Number of Banks / Insurance Cos. Currently Performing | item		44
Total Number of Banks and Insurance Cos. In Issuance (Unique) | item		49
Actual Deferrals/Defaults (as a % of original collateral)		4.20%
Total Projected Defaults (as a % of performing collateral)	[1]	9.55%
Excess subordination (after taking into account best estimate of future deferrals/defaults)	[2]	54.52%
Pooled Trust Preferred Securities [Member] | U.S. Capital Funding I [Member]
Class		B3
Original Par		$ 3,000
Book Value		2,914
Fair Value		2,025
Unrealized loss		$ (889)
Number of Banks / Insurance Cos. Currently Performing | item		29
Total Number of Banks and Insurance Cos. In Issuance (Unique) | item		33
Actual Deferrals/Defaults (as a % of original collateral)		7.95%
Total Projected Defaults (as a % of performing collateral)	[1]	6.19%
Excess subordination (after taking into account best estimate of future deferrals/defaults)	[2]	12.69%
Minimum | Pooled Trust Preferred Securities [Member] | Alesco Preferred Funding IX [Member]
Class		CCC-
Minimum | Pooled Trust Preferred Securities [Member] | U.S. Capital Funding I [Member]
Class		Caa1

[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.

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Loans (Narrative) (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Loans [Abstract]
Financing receivable, modifications, subsequent default, recorded investment	$ 0	$ 0	$ 0	$ 0
Real estate held-for-sale	326,000		326,000
Mortgage loans in process of foreclosure, amount	1,200,000		1,200,000
Other repossessed assets	$ 383,000		$ 383,000

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Loans (Categories of Loans) (Details) - USD ($)	Jun. 30, 2017	Mar. 31, 2017	Dec. 31, 2016	Jun. 30, 2016	Mar. 31, 2016	Dec. 31, 2015
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	$ 1,188,164,000		$ 1,172,636,000	$ 1,113,805,000
Undisbursed loans in process	(9,753,000)		(8,691,000)
Unamortized deferred loan costs, net	5,942,000		5,557,000
Allowance for loan losses	(12,426,000)	$ (12,382,000)	(12,382,000)	$ (12,604,000)	$ (12,670,000)	$ (12,641,000)
Net loans	1,171,927,000		1,157,120,000
Commercial Real Estate [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	298,801,000		302,577,000
Construction Loans [Member] | Commercial Segment [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	29,008,000		22,453,000
First Mortgage [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	467,802,000		478,848,000
Second Mortgage [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	70,572,000		71,222,000
Automobile Loan [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	18,675,000		18,939,000
Boat/RVs [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	158,556,000		141,602,000
Other [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	5,605,000		5,892,000
Commercial and Industrial [Member] | Commercial Segment [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	139,145,000		131,103,000
Real estate
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	866,183,000		875,100,000
Real estate | Commercial Real Estate [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	298,801,000		302,577,000
Real estate | Construction Loans [Member] | Commercial Segment [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	29,008,000		22,453,000
Real estate | First Mortgage [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	467,802,000		478,848,000
Real estate | Second Mortgage [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	70,572,000		71,222,000
Other
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	321,981,000		297,536,000
Other | Automobile Loan [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	18,675,000		18,939,000
Other | Boat/RVs [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	158,556,000		141,602,000
Other | Other [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	5,605,000		5,892,000
Other | Commercial and Industrial [Member] | Commercial Segment [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Loans	$ 139,145,000		$ 131,103,000

XML

Loans (Non-Accrual Loan, Segregated by Class of Loans) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Accounts, Notes, Loans and Financing Receivable [Line Items]
Non-accrual loans	$ 3,511	$ 5,144
Commercial Real Estate [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Non-accrual loans	1,199	912
First Mortgage [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Non-accrual loans	1,679	3,626
Second Mortgage [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Non-accrual loans	238	335
Automobile Loan [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Non-accrual loans	4	5
Boat/RVs [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Non-accrual loans	342	224
Other [Member] | Consumer [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Non-accrual loans	10	24
Commercial and Industrial [Member] | Commercial Segment [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Non-accrual loans	$ 39	$ 18

XML

Loans (Age Analysis of Past Due Loans Segregated by Class of Loans) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016	Jun. 30, 2016
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	$ 9,585	$ 17,473
Current	1,178,579	1,155,163
Total loans receivable	1,188,164	1,172,636	$ 1,113,805
Total Loans > 90 Days or More and Accruing	27	237
30 to 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	5,755	10,220
60 to 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	841	2,250
90 Days Past Due or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	2,989	5,003
Commercial Real Estate [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	1,706	1,781
Current	297,095	300,796
Total loans receivable	298,801	302,577
Commercial Real Estate [Member] | 30 to 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	614	854
Commercial Real Estate [Member] | 60 to 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	11	142
Commercial Real Estate [Member] | 90 Days Past Due or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	1,081	785
Commercial Segment [Member] | Construction Loans [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	157
Current	28,851	22,453
Total loans receivable	29,008	22,453
Commercial Segment [Member] | Construction Loans [Member] | 30 to 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	157
Commercial Segment [Member] | Commercial and Industrial [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	271	537
Current	138,874	130,566
Total loans receivable	139,145	131,103
Commercial Segment [Member] | Commercial and Industrial [Member] | 30 to 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	230	497
Commercial Segment [Member] | Commercial and Industrial [Member] | 60 to 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	4	32
Commercial Segment [Member] | Commercial and Industrial [Member] | 90 Days Past Due or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	37	8
Consumer [Member] | First Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	5,483	12,018
Current	462,319	466,830
Total loans receivable	467,802	478,848
Total Loans > 90 Days or More and Accruing	24	237
Consumer [Member] | First Mortgage [Member] | 30 to 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	3,603	6,789
Consumer [Member] | First Mortgage [Member] | 60 to 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	380	1,554
Consumer [Member] | First Mortgage [Member] | 90 Days Past Due or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	1,500	3,675
Consumer [Member] | Second Mortgage [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	519	982
Current	70,053	70,240
Total loans receivable	70,572	71,222
Consumer [Member] | Second Mortgage [Member] | 30 to 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	243	512
Consumer [Member] | Second Mortgage [Member] | 60 to 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	76	166
Consumer [Member] | Second Mortgage [Member] | 90 Days Past Due or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	200	304
Consumer [Member] | Automobile Loan [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	69	133
Current	18,606	18,806
Total loans receivable	18,675	18,939
Consumer [Member] | Automobile Loan [Member] | 30 to 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	48	103
Consumer [Member] | Automobile Loan [Member] | 60 to 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	19	25
Consumer [Member] | Automobile Loan [Member] | 90 Days Past Due or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	2	5
Consumer [Member] | Boat/RVs [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	1,297	1,894
Current	157,259	139,708
Total loans receivable	158,556	141,602
Consumer [Member] | Boat/RVs [Member] | 30 to 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	805	1,376
Consumer [Member] | Boat/RVs [Member] | 60 to 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	336	305
Consumer [Member] | Boat/RVs [Member] | 90 Days Past Due or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	156	213
Consumer [Member] | Other [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	83	128
Current	5,522	5,764
Total loans receivable	5,605	5,892
Total Loans > 90 Days or More and Accruing	3
Consumer [Member] | Other [Member] | 30 to 59 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	55	89
Consumer [Member] | Other [Member] | 60 to 89 Days Past Due [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	15	26
Consumer [Member] | Other [Member] | 90 Days Past Due or More [Member]
Financing Receivable, Recorded Investment, Past Due [Line Items]
Total Past Due	$ 13	$ 13

XML

Loans (Impaired Loans) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended		12 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Dec. 31, 2016
Impaired Financing Receivable With Related Allowance [Abstract]
Specific Allowance	$ 100	$ 100	$ 100	$ 100	$ 100
Impaired Financing Receivables Total [Abstract]
Recorded balance, total	2,737	5,485	2,737	5,485	3,757
Unpaid principal balance, total	2,737	5,485	2,737	5,485	3,757
Average investment in impaired loans, total	3,292	5,916	3,447	6,177	5,222
Interest income recognized, total	9	33	20	69	109
Commercial Real Estate [Member]
Impaired Financing Receivable With No Related Allowance [Abstract]
Recorded balance	809	2,896	809	2,896	665
Unpaid principal balance	809	2,896	809	2,896	665
Average investment in impaired loans	811	3,022	763	3,080	2,207
Interest income recognized		24		48	68
Impaired Financing Receivable With Related Allowance [Abstract]
Recorded balance	214	410	214	410	214
Unpaid principal balance	214	410	214	410	214
Specific Allowance	100	100	100	100	100
Average investment in impaired loans	214	464	214	534	416
Impaired Financing Receivables Total [Abstract]
Recorded balance, total	1,023	3,306	1,023	3,306	879
Unpaid principal balance, total	1,023	3,306	1,023	3,306	879
Average investment in impaired loans, total	1,025	3,486	977	3,614	2,623
Interest income recognized, total		24		48	68
Commercial Real Estate [Member] | Construction Loans [Member]
Impaired Financing Receivable With No Related Allowance [Abstract]
Recorded balance		853		853
Unpaid principal balance		853		853
Average investment in impaired loans		856		907
Interest income recognized		9		21
Impaired Financing Receivables Total [Abstract]
Recorded balance, total		853		853
Unpaid principal balance, total		853		853
Average investment in impaired loans, total		856		907
Interest income recognized, total		9		21
Commercial Segment [Member] | Construction Loans [Member]
Impaired Financing Receivable With No Related Allowance [Abstract]
Recorded balance	761		761		822
Unpaid principal balance	761		761		822
Average investment in impaired loans	776		792		874
Interest income recognized	8		17		40
Impaired Financing Receivables Total [Abstract]
Recorded balance, total	761		761		822
Unpaid principal balance, total	761		761		822
Average investment in impaired loans, total	776		792		874
Interest income recognized, total	8		17		40
Commercial Segment [Member] | Commercial and Industrial [Member]
Impaired Financing Receivable With No Related Allowance [Abstract]
Recorded balance	172	200	172	200	187
Unpaid principal balance	172	200	172	200	187
Average investment in impaired loans	176	205	179	208	204
Interest income recognized	1		3		1
Impaired Financing Receivables Total [Abstract]
Recorded balance, total	172	200	172	200	187
Unpaid principal balance, total	172	200	172	200	187
Average investment in impaired loans, total	176	205	179	208	204
Interest income recognized, total	1		3		1
Consumer [Member] | First Mortgage [Member]
Impaired Financing Receivable With No Related Allowance [Abstract]
Recorded balance	781	1,126	781	1,126	1,869
Unpaid principal balance	781	1,126	781	1,126	1,869
Average investment in impaired loans	1,315	1,126	1,499	1,126	1,328
Impaired Financing Receivables Total [Abstract]
Recorded balance, total	781	1,126	781	1,126	1,869
Unpaid principal balance, total	781	1,126	781	1,126	1,869
Average investment in impaired loans, total	$ 1,315	1,126	$ 1,499	1,126	1,328
Consumer [Member] | Second Mortgage [Member]
Impaired Financing Receivable With No Related Allowance [Abstract]
Average investment in impaired loans		243		322	193
Impaired Financing Receivables Total [Abstract]
Average investment in impaired loans, total		$ 243		$ 322	$ 193

XML

Loans (Commercial and Retail Credit Exposure Credit Risk Profile by Internal Rating) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016	Jun. 30, 2016
Financing Receivable, Recorded Investment [Line Items]
Loans	$ 1,188,164	$ 1,172,636	$ 1,113,805
Commercial Real Estate [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	298,801	302,577
Commercial Real Estate [Member] | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans	288,365	295,548
Commercial Real Estate [Member] | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans	7,285	3,705
Commercial Real Estate [Member] | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans	3,128	3,297
Commercial Real Estate [Member] | Doubtful
Financing Receivable, Recorded Investment [Line Items]
Loans	23	27
Commercial Segment [Member] | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans	446,951	445,766
Commercial Segment [Member] | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans	16,004	6,472
Commercial Segment [Member] | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans	3,976	3,868
Commercial Segment [Member] | Doubtful
Financing Receivable, Recorded Investment [Line Items]
Loans	23	27
Commercial Segment [Member] | Construction Loans [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	29,008	22,453
Commercial Segment [Member] | Construction Loans [Member] | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans	27,841	21,782
Commercial Segment [Member] | Construction Loans [Member] | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans	406	254
Commercial Segment [Member] | Construction Loans [Member] | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans	761	417
Commercial Segment [Member] | Commercial and Industrial [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	139,145	131,103
Commercial Segment [Member] | Commercial and Industrial [Member] | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans	130,745	128,436
Commercial Segment [Member] | Commercial and Industrial [Member] | Special Mention
Financing Receivable, Recorded Investment [Line Items]
Loans	8,313	2,513
Commercial Segment [Member] | Commercial and Industrial [Member] | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans	87	154
Consumer [Member] | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans	716,913	710,182
Consumer [Member] | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans	4,297	6,321
Consumer [Member] | First Mortgage [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	467,802	478,848
Consumer [Member] | First Mortgage [Member] | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans	464,234	473,329
Consumer [Member] | First Mortgage [Member] | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans	3,568	5,519
Consumer [Member] | Second Mortgage [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	70,572	71,222
Consumer [Member] | Second Mortgage [Member] | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans	70,286	70,769
Consumer [Member] | Second Mortgage [Member] | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans	286	453
Consumer [Member] | Automobile Loan [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	18,675	18,939
Consumer [Member] | Automobile Loan [Member] | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans	18,668	18,931
Consumer [Member] | Automobile Loan [Member] | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans	7	8
Consumer [Member] | Boat/RVs [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	158,556	141,602
Consumer [Member] | Boat/RVs [Member] | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans	158,160	141,294
Consumer [Member] | Boat/RVs [Member] | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans	396	308
Consumer [Member] | Other [Member]
Financing Receivable, Recorded Investment [Line Items]
Loans	5,605	5,892
Consumer [Member] | Other [Member] | Pass
Financing Receivable, Recorded Investment [Line Items]
Loans	5,565	5,859
Consumer [Member] | Other [Member] | Substandard
Financing Receivable, Recorded Investment [Line Items]
Loans	$ 40	$ 33

XML

Loans (Activity in Allowance for Loan Losses by Portfolio Segment) (Details) - USD ($)	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Dec. 31, 2016	Jun. 30, 2016
Accounts, Notes, Loans and Financing Receivable [Line Items]
Allowance for loan losses, Beginning of period	$ 12,382,000	$ 12,670,000	$ 12,382,000	$ 12,641,000
Provision charged to expense	300,000	150,000	500,000	350,000
Losses charged off	(302,000)	(293,000)	(551,000)	(555,000)
Recoveries	46,000	77,000	95,000	168,000
Allowance for loan losses, End of period	12,426,000	12,604,000	12,426,000	12,604,000
Allowance for loan losses, individually evaluated for impairment, Ending balance					$ 100,000	$ 100,000	$ 100,000
Allowance for loan losses, collectively evaluated for impairment, Ending balance					12,326,000	12,282,000	12,504,000
Total allowance for loan losses	12,382,000	12,670,000	12,382,000	12,641,000	12,426,000	12,382,000	12,604,000
Loans, individually evaluated for impairment, Ending balance					2,737,000	3,757,000	5,485,000
Loans, collectively evaluated for impairment, Ending balance					1,185,427,000	1,168,879,000	1,108,320,000
Total loans receivable					1,188,164,000	1,172,636,000	1,113,805,000
Commercial
Accounts, Notes, Loans and Financing Receivable [Line Items]
Allowance for loan losses, Beginning of period	7,397,000	7,208,000	7,358,000	7,090,000
Provision charged to expense	144,000	(49,000)	176,000	71,000
Losses charged off	(12,000)	(29,000)	(12,000)	(33,000)
Recoveries	6,000	2,000	13,000	4,000
Allowance for loan losses, End of period	7,535,000	7,132,000	7,535,000	7,132,000
Allowance for loan losses, individually evaluated for impairment, Ending balance					100,000	100,000	100,000
Allowance for loan losses, collectively evaluated for impairment, Ending balance					7,435,000	7,258,000	7,032,000
Total allowance for loan losses	7,397,000	7,208,000	7,358,000	7,090,000	7,535,000	7,358,000	7,132,000
Loans, individually evaluated for impairment, Ending balance					1,956,000	1,888,000	4,359,000
Loans, collectively evaluated for impairment, Ending balance					464,998,000	454,245,000	396,225,000
Total loans receivable					466,954,000	456,133,000	400,584,000
Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Allowance for loan losses, Beginning of period	2,279,000	2,629,000	2,303,000	2,683,000
Provision charged to expense	24,000	23,000	41,000	85,000
Losses charged off	(84,000)	(64,000)	(129,000)	(184,000)
Recoveries	4,000	1,000	8,000	5,000
Allowance for loan losses, End of period	2,223,000	2,589,000	2,223,000	2,589,000
Allowance for loan losses, individually evaluated for impairment, Ending balance
Allowance for loan losses, collectively evaluated for impairment, Ending balance					2,223,000	2,303,000	2,589,000
Total allowance for loan losses	2,279,000	2,629,000	2,303,000	2,683,000	2,223,000	2,303,000	2,589,000
Loans, individually evaluated for impairment, Ending balance					781,000	1,869,000	1,126,000
Loans, collectively evaluated for impairment, Ending balance					467,021,000	476,979,000	484,122,000
Total loans receivable					467,802,000	478,848,000	485,248,000
Consumer Loan [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Allowance for loan losses, Beginning of period	2,706,000	2,833,000	2,721,000	2,868,000
Provision charged to expense	132,000	176,000	283,000	194,000
Losses charged off	(206,000)	(200,000)	(410,000)	(338,000)
Recoveries	36,000	74,000	74,000	159,000
Allowance for loan losses, End of period	2,668,000	2,883,000	2,668,000	2,883,000
Allowance for loan losses, individually evaluated for impairment, Ending balance
Allowance for loan losses, collectively evaluated for impairment, Ending balance					2,668,000	2,721,000	2,883,000
Total allowance for loan losses	$ 2,706,000	$ 2,833,000	$ 2,721,000	$ 2,868,000	2,668,000	2,721,000	2,883,000
Loans, collectively evaluated for impairment, Ending balance					253,408,000	237,655,000	227,973,000
Total loans receivable					$ 253,408,000	$ 237,655,000	$ 227,973,000

XML

Loans (Troubled Debts Restructured) (Details) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017 USD ($) loan	Jun. 30, 2016 USD ($) loan	Jun. 30, 2017 USD ($) loan	Jun. 30, 2016 USD ($) loan
Commercial Segment [Member] | Commercial and Industrial [Member]
Financing Receivable, Modifications [Line Items]
No. of Loans | loan			1	1
Pre-Modification Outstanding Recorded Balance			$ 72	$ 83
Post-Modification Outstanding Recorded Balance			$ 72	$ 83
Consumer [Member] | First Mortgage [Member]
Financing Receivable, Modifications [Line Items]
No. of Loans | loan	3	4	4	9
Pre-Modification Outstanding Recorded Balance	$ 119	$ 134	$ 184	$ 554
Post-Modification Outstanding Recorded Balance	$ 121	$ 141	$ 188	$ 569
Consumer [Member] | Second Mortgage [Member]
Financing Receivable, Modifications [Line Items]
No. of Loans | loan	1		1
Pre-Modification Outstanding Recorded Balance	$ 3		$ 3
Post-Modification Outstanding Recorded Balance	$ 3		$ 3
Consumer [Member] | Automobile Loan [Member]
Financing Receivable, Modifications [Line Items]
No. of Loans | loan				1
Pre-Modification Outstanding Recorded Balance				$ 4
Post-Modification Outstanding Recorded Balance				$ 4
Consumer [Member] | Boat/RVs [Member]
Financing Receivable, Modifications [Line Items]
No. of Loans | loan		1		3
Pre-Modification Outstanding Recorded Balance		$ 8		$ 56
Post-Modification Outstanding Recorded Balance		$ 8		$ 56

XML

Loans (Newly Restructured Loans by Type) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Commercial and Industrial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Rate
Commercial Segment [Member] | Commercial and Industrial [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Rate
Term			72	83
Total modification			72	83
Consumer [Member] | First Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Rate
Term		47		47
Combination	$ 121	94	188	522
Total modification	121	141	188	569
Consumer [Member] | Second Mortgage [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Rate
Term	3		3
Total modification	$ 3		$ 3
Consumer [Member] | Automobile Loan [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Rate
Combination				4
Total modification				4
Consumer [Member] | Boat/RVs [Member]
Accounts, Notes, Loans and Financing Receivable [Line Items]
Rate
Term				48
Combination		8		8
Total modification		$ 8		$ 56

XML

Derivative Financial Instruments (Narrative) (Details) - USD ($) $ in Millions	Jun. 30, 2017	Dec. 31, 2016
Derivative Financial Instruments [Abstract]
Notional amount of customer-facing swaps	$ 14.4	$ 14.6

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Derivative Financial Instruments (Amounts of Derivative Financial Instruments) (Details) - Not Designated as Hedging Instrument [Member] - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Other Assets [Member]
Derivatives, Fair Value [Line Items]
Derviative asset	$ 461	$ 553
Other Liabilities [Member]
Derivatives, Fair Value [Line Items]
Derivative liability	$ 461	$ 553

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Accumulated Other Comprehensive Income (Loss) (Components of Accumulated Other Comprehensive Income (Loss)) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Accumulated Other Comprehensive Income (Loss) [Abstract]
Net unrealized gain on securities available-for-sale	$ 234	$ (1,875)
Net unrealized gain relating to defined benefit plan liability	30	30
Accumulated other comprehensive income before tax	264	(1,845)
Tax benefit (expense)	(123)	591
Net of tax amount	$ 141	$ (1,254)

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Accumulated Other Comprehensive Income (Loss) (Reclassification out of Accumulated Other Comprehensive Income (Loss) Alternate) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Related income tax expense	$ (1,342)	$ (1,333)	$ (2,367)	$ (2,111)
Reclassification out of AOCI [Member] | Accumulated Net Unrealized Investment Gain (Loss) [Member]
Total Non-interest income	279	652	408	770
Related income tax expense	(95)	(222)	(139)	(262)
Net Income	$ 184	$ 430	$ 269	$ 508

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Fair Values of Financial Instruments (Fair Value Measurement of Assets Measured at Fair Value on Recurring Basis) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	$ 256,642	$ 249,913
Mortgage-backed securities, Government sponsored agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	76,696	92,517
Collateralized mortgage obligations, Government sponsored agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	76,259	68,047
Municipals
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	87,469	77,682
Corporate obligations
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	16,218	11,667
Fair Value, Inputs, Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value
Fair Value, Inputs, Level 1 | Mortgage-backed securities, Government sponsored agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value
Fair Value, Inputs, Level 1 | Collateralized mortgage obligations, Government sponsored agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value
Fair Value, Inputs, Level 1 | Municipals
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value
Fair Value, Inputs, Level 1 | Corporate obligations
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value
Fair Value, Inputs, Level 2
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	254,054	247,325
Fair Value, Inputs, Level 2 | Mortgage-backed securities, Government sponsored agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	76,696	92,517
Fair Value, Inputs, Level 2 | Collateralized mortgage obligations, Government sponsored agencies
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	76,259	68,047
Fair Value, Inputs, Level 2 | Municipals
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	87,469	77,682
Fair Value, Inputs, Level 2 | Corporate obligations
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	13,630	9,079
Fair Value, Inputs, Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	2,588	2,588
Fair Value, Inputs, Level 3 | Corporate obligations
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	$ 2,588	$ 2,588

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Fair Values of Financial Instruments (Reconciliation of Recurring Fair Value Measurements Recognized in Balance Sheet using Significant Unobservable (Level Three) Inputs) (Details) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2017	Jun. 30, 2016	Jun. 30, 2017	Jun. 30, 2016
Fair Values of Financial Instruments [Abstract]
Beginning balance	$ 2,588	$ 2,534	$ 2,588	$ 2,534
Total realized and unrealized gains (losses)
Included in net income
Included in other comprehensive income (loss)
Purchases, sales, issuances and settlements
Ending balance	$ 2,588	$ 2,534	$ 2,588	$ 2,534

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Fair Values of Financial Instruments (Quantitative Information about Unobservable Inputs used in Recurring and Nonrecurring Level Three Fair Value Measurements) (Details) - Pooled Trust Preferred Securities - USD ($) $ in Thousands	6 Months Ended	12 Months Ended
	Jun. 30, 2017	Dec. 31, 2016
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Fair Value	$ 2,588	$ 2,588
Valuation Technique	Discounted cash flow	Discounted cash flow
Constant prepayment rate	2.00%	2.00%
Cumulative projected prepayments	40.00%	40.00%
Minimum
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Discount rate	7.00%	7.00%
Probability of default	1.70%	1.70%
Projected cures given deferral	0.00%	0.00%
Loss severity	32.50%	32.50%
Maximum
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Discount rate	8.00%	8.00%
Probability of default	2.20%	2.20%
Projected cures given deferral	15.00%	15.00%
Loss severity	38.70%	38.70%

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Fair Values of Financial Instruments (Estimated Fair Values of Financial Instruments) (Details) - USD ($) $ in Thousands	Jun. 30, 2017	Dec. 31, 2016
Carrying Amount [Member]
Assets
Cash and cash equivalents	$ 25,168	$ 26,860
Interest-bearing deposits	2,046	993
Loans held for sale	8,796	4,063
Loans	1,171,927	1,157,120
FHLB stock	11,183	10,925
Interest receivable	4,664	4,629
Liabilities
Deposits	1,172,985	1,153,382
FHLB advances	235,991	240,591
Other borrowings	4,211	4,189
Interest payable	510	350
Portion at Fair Value Measurement [Member]
Assets
Cash and cash equivalents	25,168	26,860
Interest-bearing deposits	2,046	993
Loans held for sale	8,905	4,094
Loans	1,160,935	1,139,450
FHLB stock	11,183	10,925
Interest receivable	4,664	4,629
Liabilities
Deposits	1,172,919	1,152,030
FHLB advances	235,705	239,866
Other borrowings	4,363	4,189
Interest payable	510	350
Fair Value, Inputs, Level 1 | Portion at Fair Value Measurement [Member]
Assets
Cash and cash equivalents	25,168	26,860
Interest-bearing deposits	2,046	993
Liabilities
Deposits	794,153	779,577
Fair Value, Inputs, Level 2 | Portion at Fair Value Measurement [Member]
Assets
Loans held for sale	8,905	4,094
FHLB stock	11,183	10,925
Interest receivable	4,664	4,629
Liabilities
FHLB advances	235,705	239,866
Other borrowings	4,363	4,189
Interest payable	510	350
Fair Value, Inputs, Level 3 | Portion at Fair Value Measurement [Member]
Assets
Loans	1,160,935	1,139,450
Liabilities
Deposits	$ 378,766	$ 372,453