UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 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 | 47305-2400 | |
(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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer x | Non-accelerated filer ¨ | Smaller reporting company ¨ | Emerging growth company ¨ |
(Do not check if smaller
reporting 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
The aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the last sale price of such stock on the Nasdaq Global Market as of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $189.0 million. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date. As of March 15, 2018, there were 8,574,922 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PART III of Form 10-K-Portions of registrant’s Proxy Statement for its 2018 Annual Meeting of Stockholders.
MutualFirst Financial, Inc.
Form 10-K Annual Report for the Year Ended December 31, 2017
Table of Contents
Item 1. | Business |
General
MutualFirst Financial, Inc., a Maryland corporation (“MutualFirst” or the “Company”), is the sole owner of MutualBank (“MutualBank” or the “Bank”). The Bank is an Indiana commercial bank regulated by the Indiana Department of Financial Institutions (“IDFI”) and the Federal Deposit Insurance Corporation (“FDIC”). MutualFirst is a bank holding company subject to regulation by the Board of Governors of the Federal Reserve System (“FRB”). The words “we,” “our” and “us” in this Form 10-K refer to MutualFirst and MutualBank on a consolidated basis, unless indicated otherwise herein.
At December 31, 2017, we had total assets of $1.6 billion, loans of $1.2 billion, deposits of $1.2 billion and stockholders’ equity of $150.3 million. Our executive offices are located at 110 E. Charles Street, Muncie, Indiana 47305-2400. Our common stock is traded on the Nasdaq Global Market under the symbol “MFSF.” For more general information about our business, and other 2017 material transactions and results, see “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation - Overview and Significant Events in 2017.”
Forward-Looking Statements
This Form 10-K 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:
· | statements of our goals, intentions and expectations; |
· | statements regarding our business plans, prospects, growth and operating strategies; |
· | statements regarding the asset quality of our loan and investment portfolios; and |
· | 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 following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
· | 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; |
· | changes in general economic conditions, either nationally or in our market areas; |
· | changes in the monetary and fiscal policies of the U.S. Government, including policies of the Treasury and the FRB; |
· | 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; |
· | 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; |
3 |
· | expected cost savings, synergies and other benefits from our merger and acquisition activities, including the merger with Universal, might not be realized within the anticipated time frames or at all, and costs or difficulties relating to integration matters, including but not limited to customer and employee retention, might be greater than expected; |
· | decreases in the secondary market for the sale of loans that we originate; |
· | 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 allowance 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; |
· | 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, changes in regulatory capital requirements or the interpretation of regulatory capital or other rules; |
· | our ability to attract and retain deposits; |
· | increases in premiums for deposit insurance; |
· | management’s assumptions in determining the adequacy of the allowance for loan losses; |
· | our ability to control operating costs and expenses; |
· | the use of estimates in determining fair value of certain assets, which estimates may prove to be incorrect and result in significant losses due to declines in valuation; |
· | difficulties in reducing risks associated with the loans on our balance sheet; |
· | staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; |
· | a failure or security breach in the computer systems (or the third-party vendors who provide such services) on which we depend; |
· | our ability to retain members of our senior management team; |
· | costs and effects of litigation, including settlements and judgments; |
· | increased competitive pressures among financial services companies; |
· | changes in consumer spending, borrowing and savings habits; |
· | the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; |
· | adverse changes in the securities markets; |
· | changes in our ability and the cost to access the capital markets; |
· | inability of key third-party providers to perform their obligations to us; |
· | changes in tax legislation and 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 |
· | other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this Form 10-K. |
Some of these and other factors are discussed in “Item 1A-Risk Factors” and elsewhere in this Form 10-K. Certain of these developments could have an adverse impact on our financial position and results of operations.
4 |
Any of these forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included in this Form 10-K or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this Form 10-K might not occur, and you should not put undue reliance on any forward-looking statements.
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.
Market Area
We are a community-oriented bank offering a variety of financial services to meet the needs of the communities we serve. We are headquartered in Muncie, Indiana and offer our financial services through 27 full service retail financial center offices in Allen, Delaware, Elkhart, Grant, Kosciusko, Randolph, St. Joseph and Wabash counties in Indiana. MutualBank also has wealth management offices in Fishers and Crawfordsville, Indiana and a loan origination office in New Buffalo, Michigan. The Bank has a subsidiary, Summit Mortgage, Inc., that operates a mortgage brokerage firm in Fort Wayne, Indiana. In addition, we originate residential mortgage and commercial loans in the counties contiguous to those counties. We also originate indirect consumer loans throughout Indiana and contiguous states as described in “Lending Activities - Other Consumer Lending.”
The market areas where MutualBank operates in Indiana have historically experienced an unemployment rate that exceeded the federal and state unemployment rates, however in last two years the rate in our market areas was reduced to below the state and federal rates. At the end of 2017, the unemployment rate (not seasonally adjusted) was 3.9% at the federal level and 3.1% at the state level, compared to 4.5% and 4.0% at the end of 2016 at the federal and state level, respectively. Our footprint had an unemployment rate of 2.9% and 3.9% at year-end 2017 and 2016, respectively.
As of February 28, 2018, we will be providing services in Greene, Hamilton, Jackson, Johnson, Knox, Lawrence and Monroe counties in Indiana with the acquisition of Universal Bancorp.
Competition
We face strong competition from other banks, credit unions, mortgage bankers and finance companies in originating commercial, real estate and other loans and in attracting deposits. Our wealth management division faces strong competition from other banks, brokerage firms, financial advisers and trust companies. We attract deposits primarily through our financial center network. Competition for deposits comes principally from local banks and credit unions, but also comes from the availability of other investment opportunities, including mutual funds. We compete for deposits by offering superior service and a variety of deposit accounts at competitive rates. We also offer alternative investment products through a broker/dealer.
Internet Website and Information
The Company maintains a website at www.bankwithmutual.com - “About Us – Investor Relations.” The information contained on that website is not included as part of or incorporated by reference into this Form 10-K. The Company’s filings with the SEC are available on that website and also are available on the SEC website at sec.gov - “Search for Company Filings.”
5 |
Lending Activities
General. Our loans carry either a fixed- or an adjustable-rate of interest. At December 31, 2017, our net loan portfolio totaled $1.2 billion, which constituted 73.5% of our total assets. Our net loan portfolio, excluding loans held for sale, increased by 1.0% in 2017, primarily due to increased commercial and non- real estate consumer loans; however, that increase was partially reduced by a decrease in consumer mortgage loans aided by the selling of $18.5 million of consumer residential mortgage loans in the fourth quarter of 2017.
Aggregate credit exposures to borrowers of up to $1.0 million may be approved by certain individual commercial loan officers. Aggregate exposures in excess of $1.0 million, but not in excess of $2.0 million, may be approved by the combined authority of two officers that have loan authority up to $1.0 million individually. Aggregate exposures between $2.0 million, but no more than $5.0 million, may be approved by a majority vote of the Loan Committee. All aggregate exposures in excess of $5.0 million must be approved by the Board of Directors. Commercial Banking Officers may advance additional credit exposure for a commercial loan relationship requiring Board approval up to the lesser of: 10% of the existing previously approved credit exposure to the client, or $100,000. Any additional exposure approved under the 10% Rule must be approved by the Senior Vice President of Commercial Banking, or his designee, and reported to the appropriate Loan Committee during the next meeting.
Major Loan Customers . At December 31, 2017, the maximum amount that we could lend to any one borrower and the borrower’s related entities was approximately $21.9 million. At December 31, 2017, our five largest lending relationships were with commercial borrowers and constituted an aggregate of $73.4 million in loans and commitments issued, or 6.3% of our $1.2 billion gross loan portfolio, with $67.4 million in loans outstanding. As of December 31, 2017, our largest lending relationship to a single borrower or group of related borrowers consisted of five loans with a total commitment of $18.9 million, with a $16.0 million outstanding balance at year-end. These loans are secured primarily by commercial real estate and were in compliance with loan terms as of December 31, 2017.
Our next four largest relationships consist of $15.6 million in loans and commitments secured primarily by commercial real estate with $13.3 million outstanding; $13.2 million in loans and commitments issued and outstanding which is secured by commercial real estate; $13.1 million in loans and commitments issued secured by commercial real estate with $12.3 million outstanding; and $12.6 million in loans and commitments issued and outstanding which is secured primarily by commercial real estate. As of December 31, 2017, all loans within these relationships were performing as agreed.
6 |
The following table presents information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated.
December 31, | ||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 318,684 | 26.75 | % | $ | 302,577 | 25.71 | % | $ | 236,895 | 21.75 | % | $ | 198,019 | 19.25 | % | $ | 200,817 | 20.24 | % | ||||||||||||||||||||
Commercial construction and development | 28,164 | 2.36 | 22,453 | 1.91 | 15,744 | 1.45 | 33,102 | 3.22 | 13,321 | 1.34 | ||||||||||||||||||||||||||||||
Consumer closed end first mortgage | 448,820 | (1) | 37.68 | 482,911 | (2) | 41.04 | 497,442 | (3) | 45.66 | 523,203 | (4) | 50.87 | 533,160 | (5) | 53.74 | |||||||||||||||||||||||||
Consumer open end and junior liens | 69,477 | 5.83 | 71,222 | 6.05 | 70,990 | 6.52 | 71,073 | 6.91 | 69,354 | 6.99 | ||||||||||||||||||||||||||||||
Total real estate loans | 865,145 | 72.62 | 879,163 | 74.71 | 821,071 | 75.38 | 825,397 | 80.25 | 816,652 | 82.31 | ||||||||||||||||||||||||||||||
Other loans | ||||||||||||||||||||||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||||||||||||||||||
Auto | 19,640 | 1.65 | 18,939 | 1.61 | 15,480 | 1.42 | 14,712 | 1.43 | 14,856 | 1.50 | ||||||||||||||||||||||||||||||
Boat/RV | 169,238 | 14.21 | 141,602 | 12.03 | 123,621 | 11.35 | 94,761 | 9.21 | 79,419 | 8.01 | ||||||||||||||||||||||||||||||
Other | 6,188 | 0.52 | 5,892 | 0.51 | 6,171 | 0.56 | 5,184 | 0.51 | 5,766 | 0.58 | ||||||||||||||||||||||||||||||
Total consumer other | 195,066 | 16.38 | 166,433 | 14.15 | 145,272 | 13.33 | 114,657 | 11.15 | 100,041 | 10.09 | ||||||||||||||||||||||||||||||
Commercial and industrial | 131,079 | 11.00 | 131,103 | 11.14 | 123,043 | 11.29 | 88,474 | 8.60 | 75,402 | 7.60 | ||||||||||||||||||||||||||||||
Total other loans | 326,145 | 27.38 | 297,536 | 25.29 | 268,315 | 24.62 | 203,131 | 19.75 | 175,443 | 17.69 | ||||||||||||||||||||||||||||||
Total loans receivable, gross | 1,191,290 | 100.00 | % | 1,176,699 | 100.00 | % | 1,089,386 | 100.00 | % | 1,028,528 | 100.00 | % | 992,095 | 100.00 | % | |||||||||||||||||||||||||
Undisbursed loans in process | (13,071 | ) | (8,691 | ) | (7,432 | ) | (9,285 | ) | (13,346 | ) | ||||||||||||||||||||||||||||||
Unamortized deferred loan costs, net | 6,503 | 5,557 | 4,882 | 3,583 | 2,517 | |||||||||||||||||||||||||||||||||||
Allowance for loan losses | (12,387 | ) | (12,382 | ) | (12,641 | ) | (13,168 | ) | (13,412 | ) | ||||||||||||||||||||||||||||||
Total loans receivable, net | $ | 1,172,335 | $ | 1,161,183 | $ | 1,074,195 | $ | 1,009,658 | $ | 967,854 |
(1) Includes loans held for sale of $4.6 million.
(2) Includes loans held for sale of $4.1 million.
(3) Includes loans held for sale of $6.0 million.
(4) Includes loans held for sale of $6.1 million.
(5) Includes loans held for sale of $1.9 million.
7 |
The following table shows the composition of our loan portfolio by fixed- and adjustable-rate at the dates indicated.
December 31, | ||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||
Fixed-Rate Loans | ||||||||||||||||||||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||||||||||||||
Commercial | $ | 44,896 | 3.77 | % | $ | 66,898 | 5.69 | % | $ | 72,263 | 6.63 | % | $ | 85,230 | 8.29 | % | $ | 88,031 | 8.87 | % | ||||||||||||||||||||
Commercial construction and development | 1,709 | 0.14 | 1,962 | 0.17 | 4,732 | 0.43 | 3,941 | 0.38 | 2,833 | 0.29 | ||||||||||||||||||||||||||||||
Consumer closed end first mortgage | 347,514 | (1) | 29.17 | 371,111 | (2) | 31.54 | 381,372 | (3) | 35.01 | 392,441 | (4) | 38.16 | 398,541 | (5) | 40.17 | |||||||||||||||||||||||||
Consumer open end and junior liens | 19,939 | 1.67 | 22,116 | 1.88 | 17,106 | 1.57 | 19,479 | 1.89 | 22,990 | 2.32 | ||||||||||||||||||||||||||||||
Total real estate loans | 414,058 | 34.75 | 462,087 | 39.28 | 475,473 | 43.64 | 501,091 | 48.72 | 512,395 | 51.65 | ||||||||||||||||||||||||||||||
Consumer | 193,281 | 16.23 | 164,483 | 13.98 | 143,171 | 13.14 | 112,295 | 10.92 | 97,422 | 9.82 | ||||||||||||||||||||||||||||||
Commercial and industrial | 48,253 | 4.05 | 52,932 | 4.50 | 61,702 | 5.66 | 43,378 | 4.22 | 32,369 | 3.26 | ||||||||||||||||||||||||||||||
Total fixed-rate loans | 655,592 | 55.03 | 679,502 | 57.76 | 680,346 | 62.44 | 656,764 | 63.86 | 642,186 | 64.73 | ||||||||||||||||||||||||||||||
Adjustable-Rate Loans | ||||||||||||||||||||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||||||||||||||
Commercial | 273,788 | 22.98 | 235,679 | 20.03 | 164,632 | 15.12 | 112,789 | 10.97 | 112,786 | 11.37 | ||||||||||||||||||||||||||||||
Commercial construction and development | 26,455 | 2.22 | 20,491 | 1.73 | 11,012 | 1.02 | 29,161 | 2.83 | 10,488 | 1.06 | ||||||||||||||||||||||||||||||
Consumer closed end first mortgage | 101,306 | 8.51 | 111,800 | 9.50 | 116,070 | 10.65 | 130,762 | 12.71 | 134,619 | 13.57 | ||||||||||||||||||||||||||||||
Consumer open end and junior liens | 49,538 | 4.16 | 49,106 | 4.17 | 53,884 | 4.95 | 51,594 | 5.02 | 46,364 | 4.67 | ||||||||||||||||||||||||||||||
Total real estate loans | 451,087 | 37.87 | 417,076 | 35.43 | 345,598 | 31.74 | 324,306 | 31.53 | 304,257 | 30.67 | ||||||||||||||||||||||||||||||
Consumer | 1,785 | 0.15 | 1,950 | 0.17 | 2,101 | 0.19 | 2,362 | 0.23 | 2,619 | 0.26 | ||||||||||||||||||||||||||||||
Commercial and industrial | 82,826 | 6.95 | 78,171 | 6.64 | 61,341 | 5.63 | 45,096 | 4.38 | 43,033 | 4.34 | ||||||||||||||||||||||||||||||
Total adjustable-rate loans | 535,698 | 44.97 | 497,197 | 42.24 | 409,040 | 37.56 | 371,764 | 36.14 | 349,909 | 35.27 | ||||||||||||||||||||||||||||||
Total loans receivable, gross | 1,191,290 | 100.00 | % | 1,176,699 | 100.00 | % | 1,089,386 | 100.00 | % | 1,028,528 | 100.00 | % | 992,095 | 100.00 | % | |||||||||||||||||||||||||
Undisbursed loans in process | (13,071 | ) | (8,691 | ) | (7,432 | ) | (9,285 | ) | (13,346 | ) | ||||||||||||||||||||||||||||||
Unamortized deferred loan costs, net | 6,503 | 5,557 | 4,882 | 3,583 | 2,517 | |||||||||||||||||||||||||||||||||||
Allowance for loan losses | (12,387 | ) | (12,382 | ) | (12,641 | ) | (13,168 | ) | (13,412 | ) | ||||||||||||||||||||||||||||||
Total loans receivable, net | $ | 1,172,335 | $ | 1,161,183 | $ | 1,074,195 | $ | 1,009,658 | $ | 967,854 |
(1) Includes loans held for sale of $4.6 million.
(2) Includes loans held for sale of $4.1 million.
(3) Includes loans held for sale of $6.0 million.
(4) Includes loans held for sale of $6.1 million.
(5) Includes loans held for sale of $1.9 million.
8 |
The following schedule illustrates the contractual maturity of our loan portfolio at December 31, 2017. Mortgages that have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The total amount of loans due after December 31, 2018 that have predetermined interest rates is $621.2 million, and the total amount of loans due after such date which have floating or adjustable interest rates is $439.6 million. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
Real Estate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Consumer
Closed
End First Mortgage (1) |
Consumer
Open
End and Junior Liens |
Commercial |
Construction
and Development |
Consumer |
Commercial
Business |
Total | ||||||||||||||||||||||||||||||||||||||||||||||||||
Amount | WAR (3) | Amount | WAR (3) | Amount | WAR (3) | Amount | WAR (3) | Amount | WAR (3) | Amount | WAR (3) | Amount | WAR (3) | |||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Due During Years Ending December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018 (2) | $ | 4,848 | 4.13 | % | $ | 232 | 6.45 | % | $ | 39,127 | 5.09 | % | $ | 12,039 | 5.06 | % | $ | 2,457 | 7.03 | % | $ | 67,170 | 4.88 | % | $ | 125,873 | 4.98 | % | ||||||||||||||||||||||||||||
2019 | 1,091 | 4.59 | 408 | 6.61 | 11,050 | 4.58 | 989 | 4.50 | 2,509 | 6.31 | 14,873 | 4.45 | 30,920 | 4.68 | ||||||||||||||||||||||||||||||||||||||||||
2020 | 3,311 | 3.87 | 298 | 7.23 | 3,964 | 4.85 | 12,700 | 4.31 | 5,387 | 5.47 | 8,628 | 4.14 | 34,288 | 4.49 | ||||||||||||||||||||||||||||||||||||||||||
2021 & 2022 | 11,698 | 3.54 | 2,857 | 6.02 | 17,519 | 4.53 | 417 | 4.45 | 21,609 | 5.29 | 20,140 | 4.90 | 74,240 | 4.75 | ||||||||||||||||||||||||||||||||||||||||||
2023 & 2024 | 11,541 | 3.47 | 3,246 | 5.49 | 11,674 | 4.76 | - | - | 12,204 | 6.20 | 5,567 | 4.72 | 44,232 | 4.87 | ||||||||||||||||||||||||||||||||||||||||||
2025 to 2039 | 261,381 | 3.74 | 62,436 | 4.80 | 205,349 | 4.48 | 2,019 | 5.24 | 150,900 | 5.72 | 14,201 | 4.86 | 696,286 | 4.51 | ||||||||||||||||||||||||||||||||||||||||||
2040 & after | 150,373 | 3.98 | - | - | 30,001 | 4.31 | - | - | - | - | 500 | 5.90 | 180,874 | 4.04 | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 444,243 | 3.82 | % | $ | 69,477 | 4.91 | % | $ | 318,684 | 4.56 | % | $ | 28,164 | 4.71 | % | $ | 195,066 | 5.72 | % | $ | 131,079 | 4.78 | % | $ | 1,186,713 | 4.52 | % |
(1) Does not include mortgage loans held for sale.
(2) Includes demand loans, loans having no stated maturity and overdraft loans.
(3) Weighted Average Rate
9 |
Consumer Closed End First Mortgages. We originate loans secured by first mortgages on owner-occupied, one- to four-family residences in our market areas for purchase, refinance, home equity and construction purposes. At December 31, 2017, these loans totaled $448.8 million, or 37.7% of our gross loan portfolio.
We generally underwrite and document our one- to four-family loans based on the loan applicant’s employment and credit history and the appraised value of the subject property, consistent with secondary market standards or other prudent underwriting guidelines. For loans with a loan-to-value ratio in excess of 80%, we generally require private mortgage insurance to reduce our exposure to 80%. Properties securing our one- to four-family loans are appraised or evaluated consistent with regulatory requirements and prudent lending principles. Origination and servicing practices include perfection of our lien position and appropriate monitoring of insurance and tax payments.
We generally underwrite and document our one- to four-family first lien position home equity loans based on the loan applicant's employment, credit history and the appraised value of the subject property, consistent with prudent underwriting guidelines. Nearly all first lien home equity loans have a maximum loan-to-value of 80% at origination. Exceptions would be limited to work-out loan circumstances. Properties securing our one- to four-family loans are appraised or evaluated consistent with regulatory requirements and prudent lending principles.
We originate consumer first mortgage one- to four-family loans on either a fixed- or adjustable-rate basis, and generally maintain a tax or insurance escrow account for these loans. Our pricing strategy for mortgage loans includes setting interest rates that are competitive with the secondary market and other local financial institutions and are consistent with our internal needs. Adjustable-rate mortgage or ARM loans are offered with initial fixed rate terms between one and 10 years. After the initial period, the interest rate for each ARM loan adjusts annually for the remainder of the term of the loan using a margin over the standard one-year treasury index. During fiscal 2017, we originated $10.8 million of one- to four-family ARM loans and $176.4 million of one- to four-family fixed-rate mortgage loans. By way of comparison, during fiscal 2016, we originated $14.8 million of one- to four-family ARM loans and $219.7 million of one- to four-family fixed-rate mortgage loans.
Fixed-rate loans secured by one- to four-family residences have contractual maturities of up to 30 years and are generally fully amortizing, with payments due monthly. A majority of loans with fixed-rate maturities in excess of 15 years are sold on the secondary market. Some loans are retained if their terms meet current portfolio needs consistent with balance sheet objectives. These retained loans normally remain outstanding, however, for a substantially shorter period of time because of home sales, refinancing and other prepayments. A significant change in interest rates could alter considerably the average life of a residential loan in our portfolio. Our one- to four-family loans are generally not assumable, do not contain prepayment penalties and do not permit negative amortization of principal. Most are written using underwriting guidelines that make them readily saleable in the secondary market. At December 31, 2017, our fixed-rate one- to four-family mortgage loan portfolio totaled $347.5 million, or 29.2% of our gross loan portfolio.
Our one- to four-family residential ARM loans are fully amortizing loans with contractual maturities of up to 30 years, with payments due monthly. Our ARM loans generally provide for specific minimum and maximum interest rates, with a lifetime cap and floor, and a periodic adjustment on the interest rate over the rate in effect on the date of origination. As a consequence of using caps, the interest rates on these loans may not be as rate sensitive as our cost of funds. In order to remain competitive in our market areas, we sometimes originate ARM loans at initial rates below the fully indexed rate. ARM loans generally pose different credit risks than fixed-rate loans, primarily because as interest rates rise, the borrower’s required payments increase, which may increase the potential for default. Our payment history for ARM loans has not been substantially different from fixed rate loans. See “Asset Quality - Non-performing Assets” and “Classified Assets.” At December 31, 2017, our one- to four-family ARM loan portfolio totaled $101.3 million, or 8.5% of our gross loan portfolio.
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Construction-permanent loans on one- to four-family residential properties are obtained through referral business with builders, from walk-in customers and through referrals from realtors and architects. The applicant must submit complete plans, specifications and costs of the project to be constructed, which, along with an independent appraisal, are used to determine the value of the subject property. Loans are based on the lesser of the current appraised value and/or the cost of construction, including the land and the building. We generally conduct regular inspections of the construction project being financed. Residential construction loans are done with one closing for both the construction period and the long-term financing. Loans are generally granted with a construction period between six and 12 months. During the construction phase, the borrower generally pays interest only on a monthly basis, and the loan is automatically converted to amortizing payments upon completion of the construction. Single family construction loans with loan-to-value ratios over 80% usually require private mortgage insurance.
Consumer Open End and Junior Liens. At December 31, 2017, our consumer loans on residential properties, including home equity lines of credit and subordinate home improvement loans, totaled $69.5 million, or 5.8% of our gross loan portfolio. Unused home equity lines of credit totaled $87.1 million at December 31, 2017. These loans may be originated in amounts, together with the amount of the existing first mortgage, of up to 100% of the value of the property securing the loan. The term to maturity on our home equity and home improvement loans may be up to 15 years. Most home equity lines of credit have a maximum term to maturity of 20 years and require a minimum monthly payment based on the outstanding loan balance per month, which amount may be re-borrowed at any time. A limited number of home equity lines of credit are approved with monthly payments of accrued interest only. Other consumer loan terms vary according to the type of collateral, length of contract and creditworthiness of the borrower.
Commercial Real Estate Lending . We offer a variety of commercial real estate (CRE) loans for acquisition and renovation. These loans are secured by the real estate and improvements financed, and the collateral ranges from industrial and commercial buildings to churches, office buildings and multi-family housing complexes. We also have a limited amount of farm loans. At December 31, 2017, commercial real estate loans, including multi-family, totaled $318.7 million, or 26.8% of our gross loan portfolio.
Our loans secured by commercial real estate are originated with either a fixed or adjustable interest rate. The interest rate on adjustable-rate loans is based on a variety of indices, generally determined through negotiation with the borrower. Loan-to-value ratios on our commercial real estate loans typically do not exceed 80% of the appraised value, as of origination, of the property securing the loan. These loans typically require monthly payments, may not be fully amortizing and generally have maximum amortizations of 20 years. Loans with amortizations over 20 years require a loan-to-value ratio of 75% or less.
Loans secured by commercial real estate are underwritten based on the income-producing potential of the property and the financial strength of the borrower. For income-producing properties, net operating income must be sufficient to cover the payments related to the outstanding debt. Owner-occupied CRE loans are underwritten based on the borrower’s ability to generate cash flow sufficient to repay the loan. We may require personal guarantees of the borrowers in addition to the real estate as collateral for such loans. We also generally require an assignment of rents or leases in order to be assured that the cash flow from the real estate can be used to repay the debt. Appraisals on properties securing commercial real estate loans are performed by qualified independent appraisers approved by MutualBank’s Board of Directors, consistent with regulatory requirements. See “Loan Originations, Purchases, Sales and Repayments” in this Item 1. In order to monitor the adequacy of cash flows on CRE loans, the borrower is required to provide periodic financial information for loans in excess of $250,000.
Loans secured by commercial real estate are generally larger and involve a greater degree of credit risk than one- to four-family residential mortgage loans. Commercial real estate loans typically involve large balances to single borrowers or groups of related borrowers. Because payments on loans secured by commercial real estate are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. If the cash flow from the project is reduced, or if leases are not obtained or renewed, the borrower’s ability to repay the loan may be impaired. See “Asset Quality - Non-performing Assets” in this Item 1.
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Construction and Development Lending . MutualBank makes a variety of commercial loans for the purpose of construction or development of commercial real estate.
Existing residential development loans are typically provided on property located within our market areas and are granted to developers and builders with previous borrowing experience with MutualBank. Financing of a development may include funding of land acquisition and development costs for lots as well as individual construction loans for speculative or pre-sold homes. New activity in residential development and construction lending has been limited by economic conditions for the past several years. We also provide construction-permanent financing for owner-occupied commercial properties for our business customers in our market areas as well as some income-producing property to established borrowers. We have a limited number of commercial real estate development loans. At December 31, 2017, we had $28.2 million in construction and development loans outstanding, representing 2.4% of our gross loan portfolio.
Loans financing land development may include funding the acquisition of the land, the infrastructure and lot sales. Development loans are secured by real estate and repaid through proceeds from the sale of lots. The maximum loan amount should not exceed 75% of the appraised value and projected lot sales should show full payout within 24-36 months of each phase being financed. Where the development loan is to be repaid through lot sales to third parties, the loan should be paid in full when no more than 80% of the lots in the phase or development are sold. Release payments should not be less than 85% of the net sales proceeds, or 125% of the original committed amount per lot, whichever is greater.
Construction financing must be supported by prints and specs, and an appraisal by an approved appraiser. Construction draws must be supported by a detailed list of work completed, and where appropriate, lien waivers from all contractors. All construction loans should have a maturity date with a written end financing commitment. We also provide end financing to qualified borrowers. Our maximum advance on residential pre-sold and owner occupied commercial loans is 80% of appraised value.
Because of the uncertainties inherent in estimating construction and development costs and the market for the project upon completion, there is risk inherent in the accuracy of estimated total loan funds required to complete a project, the related loan-to-value ratios and the likelihood of ultimate success of the project. These loans also involve many of the same risks discussed above regarding commercial real estate loans and tend to be more sensitive to general economic conditions than many other types of loans. Economic conditions in our market could cause borrowers to be unable to repay development loans due to reduced ability to market the properties consistent with original pro-forma estimates. However, we have seen stabilization in our markets which is reflected in the continued decrease in non-performing assets.
Other Consumer Lending . Consumer loans, other than those secured by real estate, generally have shorter terms to maturity and carry higher rates of interest than residential mortgage loans. This reduces our exposure to interest rate risk on these loans. In addition, consumer loan products help to expand and create stronger ties to our customer base by increasing the number of customer relationships and providing cross-marketing opportunities. We offer a variety of secured consumer loans, including auto, boat and recreational vehicle loans, and loans secured by savings deposits. We also offer credit cards and unsecured consumer loans. We originate consumer loans both in our market area through our financial centers and throughout Indiana as well as making consumer loans to customers residing in contiguous states through our indirect lending program. We employ credit scoring models for these types of consumer loan applications. These models evaluate credit and application attributes, with a review of the borrower’s employment and credit history and an assessment of the borrower’s ability to repay the loan. Consumer loans may entail greater risk than one- to four-family residential mortgage loans, especially consumer loans secured by rapidly depreciable assets, such as automobiles, boats and recreational vehicles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability and, thus, are more likely to be adversely affected by economic downturn, job loss, divorce, illness or personal bankruptcy. At December 31, 2017, our consumer loan portfolio, excluding real estate secured loans, totaled $195.1 million, or 16.4% of our gross loan portfolio.
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At December 31, 2017, auto loans totaled $19.6 million, or 1.7% of our gross loan portfolio. Auto loans may be written for up to six years and usually have a fixed rate of interest. Loan-to-value ratios are up to 100% of the MSRP or 120% of invoice for new autos and 110% of value on used cars, based on valuation from official used car guides. Loans for boats and recreational vehicles totaled $169.2 million at December 31, 2017, or 14.2% of our gross loan portfolio. Approximately $162.4 million of other consumer loans at December 31, 2017 had been originated indirectly through dealers and retailers. We generally buy indirect auto, boat and recreational vehicle loans on a rate basis, paying the dealer a cash payment for loans with an interest rate in excess of the rate we require. This premium is amortized over the remaining life of the loan. As specified in written agreements with these dealers, prepayments or delinquencies are charged to future amounts owed to that dealer, with no dealer reserve or other guarantee of payment if the dealer stops doing business with us.
Commercial Business Lending . At December 31, 2017, commercial business loans totaled $131.1 million, or 11.0% of our gross loan portfolio. Most of our commercial business loans have been extended to finance businesses in our market area. Credit accommodations extended include lines of credit for working capital needs, term loans to purchase capital goods and real estate, development lending to foster residential, business and community growth and agricultural lending for inventory and equipment financing.
Our commercial business lending policy includes credit file documentation and analysis of the borrower’s background, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of other conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows also is an important aspect of our credit analysis. We may obtain personal guarantees on our commercial business loans. Nonetheless, these loans are believed to carry higher credit risk than residential loans. Unlike residential mortgage loans, commercial business loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may substantially depend on the success of the business itself (which, in turn, often depends in part upon general economic conditions). Our commercial business loans are usually secured by business assets. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.
The terms of loans extended on the security of machinery and equipment are based on the projected useful life of the machinery and equipment, generally not to exceed seven years. Lines of credit generally are available to borrowers for up to 12 months and may be renewed by us after an annual review of current financial information.
We issue a few financial-based standby letters of credit which are offered at competitive rates and terms and are generally on a secured basis. We continue to expand our volume of commercial business loans.
Loan Originations, Purchases, Sales and Repayments . We originate loans through referrals from real estate brokers and builders, our marketing efforts, our existing and walk-in customers, and through our subsidiary, Summit Mortgage, Inc. Historically, we have originated many of our non-real estate consumer loans through relationships with dealerships in Indiana. While we originate adjustable-rate and fixed-rate loans, our ability to originate loans depends upon customer demand for loans in our market areas. Demand is affected by local competition, interest rate environment and general market conditions. During the last several years, due to low market rates of interest, our dollar volume of fixed-rate, one- to four-family loans has exceeded the dollar volume of the same type of adjustable-rate loans. As part of our interest rate risk management efforts, we typically sell our fixed rate, one- to four-family residential loans, with terms equal to or greater than 15 years, on the secondary market. We have occasionally purchased adjustable rate one- to four-family residential and commercial real estate loans. In periods of economic uncertainty, the ability of financial institutions, including us, to originate or purchase large dollar volumes of loans may be substantially reduced or restricted, with a resultant decrease in interest income.
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The Company originates consumer loans, other than loans secured by real estate, in Indiana and contiguous states through our indirect lending program. The indirect lending consumer portfolio consists of loans for autos, boats and recreational vehicles.
During the year ended December 31, 2017, we sold $134.4 million of one- to four-family mortgage loans on the secondary market to Freddie Mac (“FHLMC”), Federal Home Loan Bank of Indianapolis (“FHLBI”) and other investors. As part of our interest rate risk management, the Company chose to sell these loans and recognized a gain on sale of $3.9 million. Servicing was retained on all loans originated through MutualBank but not through our subsidiary, Summit Mortgage.
The following table shows our loan origination, purchase, sale and repayment activities for the years indicated.
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Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
(Dollars in thousands) | ||||||||||||
Originations by type | ||||||||||||
Adjustable rate | ||||||||||||
Real estate | ||||||||||||
Commercial | $ | 43,783 | $ | 57,026 | $ | 28,565 | ||||||
Commercial construction and development | 1,827 | 190 | 1,505 | |||||||||
Consumer closed end first mortgage | 10,833 | 14,790 | 11,372 | |||||||||
Consumer open end and junior liens | 15,002 | 16,732 | 15,512 | |||||||||
Non-real-estate | ||||||||||||
Consumer | 143 | 266 | 1,047 | |||||||||
Commercial and industrial | 3,629 | 6,609 | 5,767 | |||||||||
Total adjustable-rate | 75,217 | 95,613 | 63,768 | |||||||||
Fixed Rate | ||||||||||||
Real estate | ||||||||||||
Commercial | 3,488 | 13,412 | 3,201 | |||||||||
Commercial construction and development | 171 | 10 | 1,000 | |||||||||
Consumer closed end first mortgage | 176,414 | 219,714 | 204,393 | |||||||||
Consumer open end and junior liens | 3,536 | 3,263 | 3,891 | |||||||||
Non-real-estate | ||||||||||||
Consumer | 75,750 | 64,446 | 67,117 | |||||||||
Commercial and industrial | 11,413 | 11,163 | 26,870 | |||||||||
Total fixed-rate | 270,772 | 312,008 | 306,472 | |||||||||
Total loans originated | 345,989 | 407,621 | 370,240 | |||||||||
Purchases | ||||||||||||
Real estate | ||||||||||||
Consumer closed end first mortgage | 225 | 183 | 144 | |||||||||
Total loans purchased | 225 | 183 | 144 | |||||||||
Total additions | 346,214 | 407,804 | 370,384 | |||||||||
Sales and Repayments | ||||||||||||
Sales | ||||||||||||
Real estate | ||||||||||||
Consumer closed end first mortgage | 134,367 | 152,067 | 145,437 | |||||||||
Total loans sold | 134,367 | 152,067 | 145,437 | |||||||||
Principal repayments | 195,457 | 168,956 | 162,342 | |||||||||
Total reductions | 329,824 | 321,023 | 307,779 | |||||||||
Increase (decrease) in other items, net | (5,752 | ) | 2,135 | 2,081 | ||||||||
Net increase | $ | 10,638 | $ | 88,916 | $ | 64,686 |
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Asset Quality
Collection Procedures. When a borrower fails to make a payment on a mortgage loan on or before the default date, a late charge and delinquency notice is mailed. All delinquent accounts are reviewed by a loss mitigation counselor, who attempts to cure the delinquency by contacting the borrower once the loan is 30 days past due. If the loan becomes 30 days delinquent, the loss mitigation counselor will generally contact the borrower by phone or send a letter to the borrower in order to identify the reason for the delinquency. Once the loan becomes 60 days delinquent, the borrower is asked to pay the delinquent amount in full or establish an acceptable repayment plan to bring the loan current. Prior to foreclosure, a drive-by inspection is made to determine the condition of the property. If the account becomes 120 days delinquent, and an acceptable repayment plan has not been agreed upon, a collection officer will generally refer the account to legal counsel, with instructions to prepare a notice of intent to foreclose. The notice of intent to foreclose allows the borrower up to 30 days to bring the account current. During this 30-day period, the loss mitigation counselor may accept a repayment plan from the borrower that would bring the account current prior to foreclosure.
For consumer loans, a similar collection process is followed, with the initial written contact being made once the loan is 20 days past due.
Commercial loan relationships exceeding $250,000 are reviewed on a regular basis by the commercial credit department. Larger relationships are monitored through a system of internal and external loan review. All relationships that are deemed to warrant special attention are monitored at least quarterly. Individual commercial officers maintain communication with borrowers and recommend action plans to a Loan Quality Review committee which meets monthly to discuss credits graded Special Mention or worse. The Asset Classification committee meets quarterly and establishes specific allocations, based on appraisals or discounted cash flow analysis, for relationships that are deemed to be under-collateralized and at risk of non-payment. Collection and loss mitigation efforts are a cooperative effort between the Commercial Loan Department and the Risk Management Division.
Delinquent Loans. The following table sets forth, as of December 31, 2017, the amounts and categories of delinquent loans that were still accruing interest.
Accruing Loans Delinquent For | ||||||||
30 to 59 Days | 60 to 89 Days | |||||||
(Dollars in thousands) | ||||||||
Real estate | ||||||||
Commercial | $ | 2,171 | $ | 3,311 | ||||
Commercial construction and development | - | - | ||||||
Consumer closed end first mortgage | 5,914 | 1,198 | ||||||
Consumer open end and junior liens | 517 | 119 | ||||||
Consumer loans | 1,695 | 356 | ||||||
Commercial and industrial | 276 | 10 | ||||||
Total | $ | 10,573 | $ | 4,994 | ||||
Total as a percent of total loans | 0.9 | % | 0.4 | % |
As of December 31, 2016, total delinquent loans that were still accruing interest 30 to 59 days and 60 to 89 days were $10.1 million, or 0.9% of our gross loan portfolio, and $2.2 million, or 0.2% of our gross loan portfolio, respectively. See Note 5 of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information about our past due loans.
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Non-performing Assets. The table below sets forth the amounts and categories of non-performing assets at the dates indicated. Generally, loans are placed on non-accrual status when the loan becomes more than 90 days delinquent or sooner when collection of interest becomes doubtful. At December 31, 2017, we had troubled debt restructurings totaling $2.4 million, $1.0 million of which were included in non-accruing loans. Troubled debt restructurings involve forgiving a portion of interest or principal or making other adjustments to assist a borrower who is unable to meet the original terms of the loan. These restructurings are included in non-accruing loans until they perform according to the modified terms for six months. Then, if continued payments under the modified terms are deemed probable, and it is anticipated all principal will be recovered, they are removed from non-accrual status. Foreclosed assets include assets acquired in settlement of loans.
December 31, | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Non-accruing loans (1) : | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Commercial real estate | $ | 1,107 | $ | 912 | $ | 2,356 | $ | 2,023 | $ | 1,349 | ||||||||||
Commercial construction and development | - | - | - | 209 | 1,103 | |||||||||||||||
Consumer closed end first mortgage | 3,409 | 3,626 | 3,592 | 3,499 | 4,057 | |||||||||||||||
Consumer open end and junior liens | 309 | 335 | 783 | 658 | 421 | |||||||||||||||
Total real estate loans | 4,825 | 4,873 | 6,731 | 6,389 | 6,930 | |||||||||||||||
Other loans: | ||||||||||||||||||||
Consumer | 236 | 253 | 148 | 218 | 361 | |||||||||||||||
Commercial and industrial | 159 | 18 | 25 | 605 | 1,109 | |||||||||||||||
Total other loans | 395 | 271 | 173 | 823 | 1,470 | |||||||||||||||
Total non-accruing loans | 5,220 | 5,144 | 6,904 | 7,212 | 8,400 | |||||||||||||||
Accruing loans delinquent 90 days or more: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Consumer closed end first mortgage | 31 | 237 | 267 | 226 | 175 | |||||||||||||||
Consumer open end and junior liens | - | - | - | - | 13 | |||||||||||||||
Total | 31 | 237 | 267 | 226 | 188 | |||||||||||||||
Total nonperforming loans | 5,251 | 5,381 | 7,171 | 7,438 | 8,588 | |||||||||||||||
Other real estate owned and repossessed assets: | ||||||||||||||||||||
Real estate: | ||||||||||||||||||||
Commercial real estate | - | 215 | 62 | 1,366 | 2,477 | |||||||||||||||
Construction and development | - | 974 | 34 | 1,699 | ||||||||||||||||
Consumer closed end first mortgage | 251 | 502 | 906 | 1,429 | 3,974 | |||||||||||||||
Other loans: | ||||||||||||||||||||
Consumer | 331 | 481 | 513 | 476 | 283 | |||||||||||||||
Commercial business | 151 | - | - | - | - | |||||||||||||||
Total | 733 | 1,198 | 2,455 | 3,305 | 8,433 | |||||||||||||||
Total non-performing assets | $ | 5,984 | $ | 6,579 | $ | 9,626 | $ | 10,743 | $ | 17,021 | ||||||||||
Total as a percentage of total assets | 0.38 | % | 0.42 | % | 0.65 | % | 0.75 | % | 1.22 | % |
(1) Includes non-performing troubled debt restructurings.
For the year ended December 31, 2017, gross interest income that would have been recorded had these non-accruing loans been current in accordance with their original terms amounted to $242,000. The amount included in interest income on these loans for the year ended December 31, 2017, was $148,000.
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See Item 7 –“ Management’s Discussion and Analysis of Financial Condition and Results of Operation - Financial Condition at December 31, 2017 Compared to December 31, 2016 - Delinquencies and Non-performing Assets” for more information on our nonperforming assets.
Classified Assets. Our regulators require that we classify loans and other assets, such as debt and equity securities considered to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management and approved by the board of directors. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as “loss,” it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. Our determination as to the classification of our assets and the amount of our valuation allowances is subject to review by our regulators, which may order the establishment of additional general or specific loss allowances.
In connection with the filing of the Bank’s periodic reports in accordance with our classification of assets policy, we regularly review the problem assets in our portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management’s review, at December 31, 2017, we had classified $17.3 million of the Bank’s assets as substandard or doubtful; $733,000 in other real estate owned and repossessed assets and $16.6 million in substandard loans. The total amount classified represented 11.5% of our stockholders’ equity and 1.1% of our assets at December 31, 2017, compared to 8.1% and 0.7%, respectively, at December 31, 2016. See Note 5 of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information about our classified assets and credit risk profile of our loan portfolio.
Provision for Loan Losses . We recorded a provision for loan losses during the year ended December 31, 2017 of $1.2 million, compared to $850,000 for the year ended December 31, 2016 and $125,000 for the year ended December 31, 2015. The provision for loan losses increased in 2017 primarily due to an increase in the loan portfolio, excluding loans held for sale, of $10.6 million, or 0.9% over the last year, in combination with an increase in net charge-offs. The loan mix has contributed to the increase in provision with commercial and non-real estate consumer loans making up 57.0% of the loan portfolio at the end of 2017 compared to 53.2% as of the end of 2016. Net charge-offs for 2017 equaled $1.2 million, or 0.10% of total average loans compared to $1.1 million, or 0.10% of total average loans in 2016. The provision for loan losses is charged to income to bring our allowance for loan losses to a level deemed appropriate by management based on the factors discussed below under “Allowance for Loan Losses.”
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. See Note 5 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
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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. Although the economy is stabilizing in the communities we serve and unemployment rates have improved compared to recent years, management has concluded that our allowance for loan losses should be greater than historical loss experience and specifically identified losses might otherwise indicate. This is while we continue to wait for the market to fully recover and partially due to the increase in higher risk loans like consumer and commercial, as a percentage of total loans.
At December 31, 2017, our allowance for loan losses was $12.4 million, or 1.05% of the total loan portfolio, and approximately 235.9% of total non-performing loans. Our allowance for loan losses balance increased 0.04% from December 31, 2016. Assessing the adequacy of the allowance for loan losses is inherently subjective as it requires making material estimates, including the amount and timing of future cash flows expected to be received on impaired loans that are susceptible to significant change. In the opinion of management, the allowance, when taken as a whole, is adequate to absorb reasonable estimated loan losses inherent in our loan portfolio.
19 |
The following table sets forth an analysis of our allowance for loan losses.
December 31, | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Balance at beginning of period | $ | 12,382 | $ | 12,641 | $ | 13,168 | $ | 13,412 | $ | 16,038 | ||||||||||
Charge-offs: | ||||||||||||||||||||
Commercial | 161 | 274 | 104 | 289 | 2,713 | |||||||||||||||
Mortgage | 284 | 420 | 643 | 572 | 886 | |||||||||||||||
Consumer | 967 | 788 | 640 | 1,021 | 940 | |||||||||||||||
Total charge-offs | 1,412 | 1,482 | 1,387 | 1,882 | 4,539 | |||||||||||||||
Recoveries: | ||||||||||||||||||||
Commercial | 24 | 85 | 498 | 499 | 69 | |||||||||||||||
Mortgage | 13 | 25 | 34 | 31 | 273 | |||||||||||||||
Consumer | 160 | 263 | 203 | 258 | 271 | |||||||||||||||
Total recoveries | 197 | 373 | 735 | 788 | 613 | |||||||||||||||
Net charge-offs | 1,215 | 1,109 | 652 | 1,094 | 3,926 | |||||||||||||||
Provisions charged to operations | 1,220 | 850 | 125 | 850 | 1,300 | |||||||||||||||
Balance at end of period | $ | 12,387 | $ | 12,382 | $ | 12,641 | $ | 13,168 | $ | 13,412 | ||||||||||
Ratio of net charge-offs during the period to average loans outstanding during the period | 0.10 | % | 0.10 | % | 0.06 | % | 0.11 | % | 0.40 | % | ||||||||||
Allowance as a percentage of non-performing loans | 235.90 | % | 230.99 | % | 176.28 | % | 177.04 | % | 156.15 | % | ||||||||||
Allowance as a percentage of total loans (end of period) | 1.05 | % | 1.06 | % | 1.17 | % | 1.30 | % | 1.37 | % |
Investment Activities
MutualBank may invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, including callable agency securities, securities of state and political subdivisions, certain certificates of deposit of insured banks and savings institutions, certain bankers’ acceptances, repurchase agreements and federal funds. It also may invest in investment grade commercial paper and corporate debt securities and certain mutual funds.
The Chief Financial Officer is responsible for the management of our investment portfolio, subject to the direction and guidance of the Asset and Liability Management Committee and the Board of Directors. The Chief Financial Officer considers various factors when making decisions, including the marketability, maturity and tax consequences of the proposed investment. The maturity structure of investments will be affected by various market conditions, including the current and anticipated slope of the yield curve, the level of interest rates, the trend of new deposit inflows, and the anticipated demand for funds via deposit withdrawals and loan originations and purchases.
The objectives of our investment portfolio are to provide liquidity when loan demand is high, to assist in maintaining earnings when loan demand is low and to maximize earnings while satisfactorily managing risk, including credit risk, reinvestment risk, liquidity risk and interest rate risk. See “Item 7A - Quantitative and Qualitative Disclosures About Market Risk”.
Our investment securities currently consist of U.S. Agency securities, mortgage-backed securities, collateralized mortgage obligations, municipal securities and corporate obligations. Our mortgage-backed securities portfolio currently consists of securities issued under government-sponsored agency programs. See Note 4 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
20 |
While mortgage-backed securities carry a reduced credit risk as compared to whole loans, these securities remain subject to the risk that a fluctuating interest rate environment, along with other factors like the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of the mortgage loans and affect both the prepayment speed and value of the securities.
Although the Bank has not had a trading portfolio in recent history, we are permitted by the Board of Directors to have a trading portfolio of up to $5.0 million and to trade up to $2.0 million in these securities at any one time. At December 31, 2017, however, we did not have a trading portfolio. See Note 4 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
A majority of MutualBank’s investment portfolio is under the management of its wholly owned subsidiary, Mutual Federal Investment Company. Mutual Federal Investment Company, a Nevada corporation, holds, services, manages and invests that portion of the Bank’s investment portfolio as may be transferred from time to time by the Bank to Mutual Federal Investment Company. Mutual Federal Investment Company’s investment policy, for the most part, mirrors that of the Bank’s. Mutual Federal Investment Company has hired a third-party investment advisor to manage its securities portfolio, subject to the oversight of its Board of Directors. At December 31, 2017, MutualBank had $277.4 million in consolidated investment securities carried at fair value. The portfolio is comprised of available for sale securities. At that date, Mutual Federal Investment Company managed $261.3 million of the total available for sale portfolio.
The following table sets forth the composition of our investment and mortgage-related securities portfolio and our other investments at the dates indicated. As of December 31, 2017, our investment securities portfolio did not contain securities of any issuer with an aggregate book value in excess of 10% of our equity capital, excluding those issued by the United States Government, its agencies or government sponsored entities.
December 31, | ||||||||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||||||
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
Amortized
Cost |
Fair
Value |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Investment securities available for sale: | ||||||||||||||||||||||||
Mortgage-backed securities | $ | 68,335 | $ | 67,798 | $ | 92,871 | $ | 92,517 | $ | 106,524 | $ | 107,838 | ||||||||||||
Collateralized mortgage obligations | 88,488 | 87,250 | 68,621 | 68,047 | 84,976 | 84,652 | ||||||||||||||||||
Municipal obligations | 107,060 | 110,495 | 77,474 | 77,682 | 54,427 | 57,188 | ||||||||||||||||||
Corporate obligations | 12,966 | 11,835 | 12,822 | 11,667 | 12,805 | 11,460 | ||||||||||||||||||
Total securities available for sale | 276,849 | 277,378 | 251,788 | 249,913 | 258,732 | 261,138 | ||||||||||||||||||
Investment in limited partnerships | 227 | N/A | 327 | N/A | 427 | N/A | ||||||||||||||||||
Federal Home Loan Bank stock | 11,183 | N/A | 10,925 | N/A | 10,482 | N/A | ||||||||||||||||||
Total investments | $ | 288,259 | $ | 277,378 | $ | 263,040 | $ | 249,913 | $ | 269,641 | $ | 261,138 |
21 |
The following table indicates, as of December 31, 2017, the composition and contractual maturities of our investment securities, excluding Federal Home Loan Bank (“FHLB”) stock.
Due In | ||||||||||||||||||||||||
Less Than
1 year |
1 to 5
Years |
5 to 10
Years |
Over
10 Years |
Total
Investment Securities |
||||||||||||||||||||
Amortized | Amortized | Amortized | Amortized | Amortized | Fair | |||||||||||||||||||
Cost | Cost | Cost | Cost | Cost | Value | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Available for sale: | ||||||||||||||||||||||||
Mortgage-backed securities | $ | - | $ | 1,419 | $ | 7,050 | $ | 59,866 | $ | 68,335 | $ | 67,798 | ||||||||||||
Collateralized mortgage obligations | - | - | - | 88,488 | 88,488 | 87,250 | ||||||||||||||||||
Municipal obligations | 160 | 501 | 19,500 | 86,899 | 107,060 | 110,495 | ||||||||||||||||||
Corporate obligations | - | 4,500 | 4,544 | 3,922 | 12,966 | 11,835 | ||||||||||||||||||
$ | 160 | $ | 6,420 | $ | 31,094 | $ | 239,175 | $ | 276,849 | $ | 277,378 | |||||||||||||
Weighted average yield | 7.00 | % | 2.95 | % | 3.21 | % | 2.70 | % | 2.77 | % |
MutualBank conducts periodic reviews to identify and evaluate each investment security to determine whether an other-than-temporary impairment (“OTTI”) 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. During the years ended December 31, 2017, 2016 and 2015 we did not recognize any OTTI on our investments. No securities in the portfolio were non-performing as of December 31, 2017. The remaining two trust preferred securities were priced using a discounted cash flow analysis as of December 31, 2017.
The Bank’s trust preferred securities valuation was prepared by an independent third party. Their approach for determining fair value involved several steps including: (1) a detailed credit and structural evaluation of each piece of collateral in the trust preferred securities; (2) collateral performance projections for each piece of collateral in the trust preferred security; (3) terms of the trust preferred structure, as laid out in the indenture; and (4) discounted cash flow modeling.
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.
The default and recovery probabilities for each piece of collateral were formed based on the evaluation of the collateral credit and a review of historical industry default data and current/near-term operating conditions. For collateral that has already defaulted, the Company assumed no recovery. For collateral that was in deferral, the Company assumed a recovery of 10% of par for banks, thrifts or other depository institutions, and 15% of par for insurance companies. Although the Company conservatively assumed that the majority of the deferring collateral continues to defer and eventually defaults, we also recognize there is a possibility that some deferring collateral may become current at some point in the future.
22 |
Pooled Trust Preferred Securities . The Bank has invested in pooled trust preferred securities. At December 31, 2017, the current book balance of our pooled trust preferred securities was $3.9 million. The original par value of these securities was $4.0 million. All pooled trust preferred securities owned were performing as agreed during 2017. As of May 2017, current Moody’s rated these bonds as Aa3 for Alesco Preferred Funding IX and Ba2 for U.S. Capital Funding I. All pooled trust preferred securities owned by the Bank are exempt from the Volcker Rule.
The following table provides additional information related to the Bank’s investment in trust preferred securities as of December 31, 2017.
Deal Name | Class |
Original
Par |
Book
Value |
Fair Value |
Unrealized
Loss |
Realized
Losses 2017 |
Lowest
Ratings |
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 | $ | 922 | $ | 599 | $ | (322 | ) | $ | - | CCC- | 45 | 48 | 2.85 | % | 8.23 | % | 53.61 | % | |||||||||||||||||||||||
U.S. Capital Funding I | B3 | 3,000 | 3,000 | 2,122 | (878 | ) | - | Caa1 | 26 | 30 | 7.95 | % | 5.92 | % | 12.29 | % | ||||||||||||||||||||||||||||
$ | 4,000 | $ | 3,922 | $ | 2,721 | $ | (1,200 | ) | $ | - |
(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 pool can experience before the bond has credit impairment, and (b) subtracting from this default breakage percentage both total current and expected future default percentages. |
23 |
Sources of Funds
General. Our sources of funds are deposits, borrowings, payment of principal and interest on loans, interest earned on or maturation of other investment securities and funds provided from operations.
Deposits . We offer deposit accounts to consumers and businesses having a wide range of interest rates and terms. Our deposits consist of savings deposit accounts, NOW and demand accounts and certificates of deposit. We solicit deposits in our market areas as well as online through our internet banking product. The Bank participates in services through the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweep (“ICS”) deposit services. All ICS and CDARs deposit accounts are classified as brokered deposits. The Bank both purchases CDARS and ICS deposits and participates in reciprocal CDARS and ICS deposit services for our customers. We primarily rely on competitive pricing policies, marketing and customer service to attract and retain these deposits. Occasionally we will accept brokered deposits from a deposit broker. At December 31, 2017, our brokered deposits totaled $92.8 million, or 7.7% of total deposits, with an average interest rate of 1.34% and a 0.65 year weighted-average maturity.
The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. The variety of our deposit accounts has allowed us to be competitive in obtaining funds and to respond to changes in consumer demand. We have become more susceptible to short-term fluctuations in deposit flows, as customers have continued to deposit in short-term products while rates remain low. We try to manage the pricing of our deposits in keeping with our asset/liability management, liquidity and profitability objectives, subject to competitive factors. Based on our experience, we believe that our deposits are relatively stable sources of funds. Our ability to attract and maintain these deposits and the rates paid on those deposits has been and will continue to be affected significantly by economic and market conditions.
The FRB requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts, primarily checking, NOW and Super NOW checking accounts. At December 31, 2017, we were in compliance with these reserve requirements.
24 |
The following table sets forth the dollar amount of deposits in the various types of deposit programs we offered at the dates indicated.
December 31, | ||||||||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||||||
Amount |
Percent
of Total |
Amount |
Percent
of Total |
Amount |
Percent
of Total |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Transactions and savings deposits: | ||||||||||||||||||||||||
Noninterest bearing accounts | $ | 194,134 | 16.15 | % | $ | 178,046 | 15.44 | % | $ | 179,542 | 16.45 | % | ||||||||||||
Savings accounts | 138,348 | 11.51 | 136,314 | 11.82 | 131,578 | 12.06 | ||||||||||||||||||
Interest-bearing NOW and demand accounts | 330,821 | 27.52 | 292,977 | 25.40 | 267,089 | 24.47 | ||||||||||||||||||
Money market accounts | 167,574 | 13.94 | 173,305 | 15.03 | 162,551 | 14.89 | ||||||||||||||||||
Total non-certificates | 830,877 | 69.12 | 780,642 | 67.69 | 740,760 | 67.87 | ||||||||||||||||||
Certificates: | ||||||||||||||||||||||||
0.00 -1.99% | 302,734 | 25.19 | 312,498 | 27.09 | 305,517 | 27.99 | ||||||||||||||||||
2.00 -3.99% | 68,423 | 5.69 | 60,240 | 5.22 | 45,052 | 4.13 | ||||||||||||||||||
4.00 -5.99% | - | 0.00 | 2 | 0.00 | 53 | 0.01 | ||||||||||||||||||
Total certificates | 371,157 | 30.88 | 372,740 | 32.31 | 350,622 | 32.13 | ||||||||||||||||||
Total deposits | $ | 1,202,034 | 100.00 | % | $ | 1,153,382 | 100.00 | % | $ | 1,091,382 | 100.00 | % |
The following table shows rate and maturity information for our certificates of deposit as of December 31, 2017.
0.00 -
1.99% |
2.00 -
3.99% |
4.00 -
5.99% |
Total |
Percent
of Total |
||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Certificate accounts maturing in quarter ending: | ||||||||||||||||||||
March 31, 2018 | $ | 68,499 | $ | 761 | $ | - | $ | 69,260 | 18.65 | % | ||||||||||
June 30, 2018 | 52,500 | 193 | - | 52,693 | 14.20 | |||||||||||||||
September 30, 2018 | 29,831 | 168 | - | 29,999 | 8.08 | |||||||||||||||
December 31, 2018 | 20,184 | 3 | - | 20,187 | 5.44 | |||||||||||||||
March 31, 2019 | 8,939 | 1 | - | 8,940 | 2.41 | |||||||||||||||
June 30, 2019 | 15,359 | - | - | 15,359 | 4.14 | |||||||||||||||
September 30, 2019 | 14,571 | 114 | - | 14,685 | 3.96 | |||||||||||||||
December 31, 2019 | 14,791 | 5,144 | - | 19,935 | 5.37 | |||||||||||||||
March 31, 2020 | 16,236 | 445 | - | 16,681 | 4.49 | |||||||||||||||
June 30, 2020 | 22,742 | 3,296 | - | 26,038 | 7.02 | |||||||||||||||
September 30, 2020 | 7,346 | 4,806 | - | 12,152 | 3.27 | |||||||||||||||
December 31, 2020 | 4,055 | 11,967 | - | 16,022 | 4.32 | |||||||||||||||
Thereafter | 27,681 | 41,525 | - | 69,206 | 18.65 | |||||||||||||||
Total | $ | 302,734 | $ | 68,423 | $ | - | $ | 371,157 | 100.00 | % | ||||||||||
Percent of total | $ | 81.56 | % | 18.44 | % | - | % | 100.00 | % |
25 |
The following table indicates, as of December 31, 2017, the amount of our certificates of deposit and other deposits by time remaining until maturity.
Maturity | ||||||||||||||||||||
3 Months
or Less |
Over 3 to
6 Months |
Over 6 to
12 Months |
Over
12 Months |
Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Certificates of deposit less than $100,000 | $ | 20,561 | $ | 27,251 | $ | 25,442 | $ | 103,584 | $ | 176,838 | ||||||||||
Certificates of deposit of $100,000 or more | 12,347 | 14,711 | 16,543 | 70,089 | 113,690 | |||||||||||||||
Brokered deposits | 32,959 | 9,908 | 7,894 | 20,109 | 70,870 | |||||||||||||||
Public Funds (1) | 3,393 | 823 | 307 | 5,236 | 9,759 | |||||||||||||||
Total Certificates of deposit | $ | 69,260 | $ | 52,693 | $ | 50,186 | $ | 199,018 | $ | 371,157 |
(1) Deposits from governmental and other public entities.
Borrowings . We also utilize borrowings as a source of funds, especially when they are less costly than deposits and can be invested at a positive interest rate spread, when we desire additional capacity to fund loan demand or when they meet our asset/liability management goals. Our borrowings historically have consisted of advances from the FHLB of Indianapolis. See Note 12 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
We may obtain advances from the FHLB of Indianapolis upon the pledging of certain collateral. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features. At December 31, 2017 we had $217.2 million in FHLB advances outstanding. Based on current collateral levels, we could borrow an additional $51.4 million from the FHLB at prevailing interest rates. In order to have access to FHLB advances, we are required to own stock in the FHLB of Indianapolis. At December 31, 2017, we had $11.2 million in that stock.
We also are authorized to borrow from the Federal Reserve Bank of Chicago’s “discount window.” We have never borrowed from the Federal Reserve Bank and currently do not have any assets pledged to them for borrowing.
The Bank also has three fed fund lines totaling $40 million. There was no outstanding balance on any of these lines as of December 31, 2017.
The Company acquired $5.0 million of issuer trust preferred securities in the 2008 acquisition of another financial institution. The net balance of these securities as of December 31, 2017 was $4.2 million due to the purchase accounting adjustment made at the time of the acquisition. The securities bore a fixed rate of interest of 6.22% for the first five years, resetting quarterly thereafter at the prevailing three-month LIBOR rate plus 170 basis points. The Company has had the right to redeem the trust preferred securities, in whole or in part, without penalty, since September 15, 2010. These securities mature on September 15, 2035.
26 |
The following table sets forth, for the years indicated, the maximum month-end balance and average balance of FHLB advances and other borrowings.
Year Ended December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
(Dollars in thousands) | ||||||||||||
Maximum Balance: | ||||||||||||
FHLB advances | $ | 240,591 | $ | 243,817 | $ | 225,617 | ||||||
Other borrowings | 4,232 | 10,312 | 10,181 | |||||||||
Average Balance: | ||||||||||||
FHLB advances | $ | 221,932 | $ | 230,329 | $ | 198,854 | ||||||
Other borrowings | 4,211 | 8,421 | 9,875 |
The following table sets forth certain information as to our borrowings at the dates indicated.
December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
(Dollars in thousands) | ||||||||||||
FHLB advances | $ | 217,163 | $ | 240,591 | $ | 225,617 | ||||||
Other borrowings | 4,232 | 4,189 | 9,458 | |||||||||
Total borrowings | $ | 221,395 | $ | 244,780 | $ | 235,075 | ||||||
Weighted average interest rate of FHLB advances | 1.72 | % | 1.53 | % | 1.52 | % | ||||||
Weighted average interest rate of other borrowings (1) | 3.29 | % | 2.66 | % | 3.17 | % |
(1) | Our other borrowings include subordinated debt as of December 31, 2017. |
Trust and Financial Services
MutualWealth and MutualFinancial are the wealth management and brokerage divisions of the Bank that provide a variety of fee-based financial services, including trust and estate administration, investment management services, life insurance, broker advisory services, retirement plan administration and private banking services, in our market areas. Trust services are provided to both individual and corporate customers, including personal trust and agency accounts, employee benefit plans and corporate bond trustee accounts. These activities provide a significant source of fee income to the Company and in 2017 constituted 27.8% of the Company’s non-interest income.
Subsidiary and Other Activities
The Company, as a bank holding company that has elected to be treated as a financial holding company, is allowed to engage in activities and invest in subsidiaries as authorized by Federal law and the regulations of the FRB. At December 31, 2017, the Company had an active captive insurance company, MutualFirst Risk Management, Inc. and another subsidiary, Mutual Risk Advisors, an information security consulting firm.
As an Indiana commercial bank, MutualBank is allowed to invest in subsidiaries as authorized by Indiana law and the IDFI. Under federal law and FDIC regulations, those subsidiaries generally may engage as principal only in activities that are permissible for national bank subsidiaries, unless the Bank receives FDIC approval to engage in other activities permitted by Indiana law and the IDFI. Activities engaged in as agent, including insurance agency activities, are not subject to this limitation.
27 |
At December 31, 2017, MutualBank had an active investment subsidiary, Mutual Federal Investment Company, which is a Nevada corporation that holds and manages a portion of MutualBank’s investment portfolio. As of December 31, 2017, the market value of securities managed was $261.3 million. Mutual Federal Investment Company has one active subsidiary, Mutual Federal REIT, Inc., which is a Maryland corporation holding approximately $45.6 million in consumer closed end first mortgage loans.
The Bank had one other active subsidiary as of December 31, 2017. Summit Service Corporation which controls the 100% wholly owned active subsidiary, Summit Mortgage, Inc., which is an Indiana corporation that originates and sells consumer closed end first mortgage loans. As of December 31, 2017, Summit Mortgage had $4.2 million in loans held for sale.
Employees
At December 31, 2017, we had a total of 390 full-time and 32 part-time employees. Our employees are not represented by any collective bargaining group. Management considers its employee relations to be good.
How We Are Regulated
MutualFirst Financial is a financial holding company subject to FRB regulation, and MutualBank is an Indiana commercial bank subject to regulation by the IDFI and the FDIC. The Dodd-Frank Act created the Consumer Financial Protection Bureau (“CFPB”), which has authority to promulgate regulations intended to protect consumers with respect to financial products and services, including those provided by the Bank, and to restrict unfair, deceptive or abusive conduct by providers of consumer financial products and services. The FDIC examines the Bank for compliance with these regulations. As a public company, the Company is subject to the regulation and reporting requirements of the SEC.
Set forth below is a brief description of certain laws and regulations that apply to us. This description, as well as other descriptions of laws and regulations contained in this Form 10-K, is not complete and is qualified in its entirety by reference to the applicable laws and regulations.
Legislation is introduced from time to time in the United States Congress and the Indiana General Assembly that may affect our operations. In addition, the regulations governing the Company and the Bank may be amended from time to time by the IDFI, FDIC, CFPB, FRB or SEC, as appropriate. Any legislative or regulatory changes in the future, including those resulting from the Dodd-Frank Act, could adversely affect our operations and financial condition.
MutualFirst Financial . MutualFirst Financial is a bank holding company that has elected to be treated as a financial holding company. MutualFirst is required to register and file reports with the FRB and is subject to regulation and examination by the FRB, including requirements that the Company serve as a source of financial and managerial strength for the Bank, particularly if the Bank is in financial distress. In addition, the FRB has enforcement authority over the Company and any of its non-bank subsidiaries. The Company’s direct activities and those of its non-bank subsidiaries are subject to FRB regulation and must be activities permissible for a bank holding company, or for a financial holding company (generally securities and insurance activities). The Company must obtain FRB approval to acquire substantially all the assets of another bank or bank holding company or to merge with another bank holding company. In addition, the Company must obtain FRB authorization to control more than 5% of the shares of any other bank or bank holding company and may not own more than 5% of any other entity engaged in activities not permitted for the Company. The IDFI also has certain oversight authority over the Company, including acquisitions of banks and bank holding companies. The FRB imposes consolidated capital requirements on the Company. See “- Regulatory Capital Requirements.”
MutualBank . As an Indiana commercial bank, MutualBank is subject to regulation, examination and supervision by the IDFI. Indiana and Federal laws regulate many aspects of the Bank’s operations including branching, dividends, interest and fees collected, anti-money laundering activities, confidentiality of customer information, credit card operations, corporate governance, mergers and purchase and assumption transactions, insurance activities, securities investments, real estate investments, trust operations, lending activities, subsidiary operations and required capital levels. Under Indiana law, Indiana banks may have parity authority with national banks.
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To fund its operations, the IDFI has established a schedule for the assessment of supervisory fees for all Indiana financial institutions. These supervisory fees are computed based on the Bank’s total assets and trust assets and increase if the Bank experiences financial distress. The IDFI also charges fees for certain applications and other filings.
FDIC Regulation and Insurance of Accounts . As a state-chartered, non-member bank, MutualBank is subject to regulation, examination and supervision by the FDIC. The FDIC does not assess fees for its examination and supervision of the Bank. The FDIC oversees the Bank’s operations under federal law, regulations and policies, including consumer compliance laws, and ensures that the Bank operates in a safe and sound manner. It regulates the Bank’s branching, transactions with affiliates (including the Company) and loans to insiders. Under FDIC regulations, the Bank generally is prohibited from acquiring or owning any equity investments impermissible for national banks and from engaging as principal in activities that are not permitted for national banks without FDIC approval. During examinations, the FDIC may require the Bank to establish additional reserves for loan losses, which would decrease the Company’s net income. The FDIC has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution that fails to comply with these standards must submit a compliance plan.
The Bank’s deposits are insured up to the applicable limits by the FDIC, and such insurance is backed by the full faith and credit of the United States Government. The basic deposit insurance level is $250,000 per each separately insured depositor, as defined in FDIC regulations. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. Our deposit insurance premiums for the year ended December 31, 2017 were $724,000. The FDIC’s premium rates may increase due to strains on the FDIC deposit insurance fund resulting from the cost of bank failures. Also, if the Bank’s regulatory capital or supervisory ratings deteriorate, these deposit insurance premiums may increase.
In accordance with the Dodd-Frank Act, the FDIC has issued regulations setting insurance premium assessments based on an institution's total assets minus its Tier 1 capital instead of its deposits. The Bank’s FDIC premiums are based on its supervisory ratings and certain financial ratios. Federal law requires that the reserve ratio of the FDIC deposit insurance fund be at least 1.35% by September 2020, and the FDIC has established a plan to meet that requirement.
The FDIC may prohibit the Bank from engaging in any activity that it determines by regulation or order to pose a serious risk to the deposit insurance fund and may terminate our deposit insurance if it determines that we have engaged in unsafe or unsound practices or are in an unsafe or unsound condition.
Regulatory Capital Requirements . Both MutualFirst and MutualBank are required to maintain a minimum level of regulatory capital. The FRB and the FDIC have established capital standards for the Company and the Bank. The FRB and the FDIC also may impose capital requirements in excess of these standards on individual institutions on a case-by-case basis. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation - Capital Resources” for information on the Company’s and the Bank’s compliance with these capital requirements.
The current capital regulations of the FRB and FDIC became effective at the beginning of 2015 (with some changes phased in over several years). The capital regulations establish required minimum ratio for common equity Tier 1 (“CET1”) capital, Tier 1 capital and total capital and the minimum leverage ratio; establish risk-weightings for assets and certain off-balance sheet items for purposes of the risk-based capital ratios; require an additional capital conservation buffer over the minimum risk-based capital ratios; and define what qualifies as capital for purposes of meeting the capital requirements.
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The minimum capital ratios are: (1) a CET1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (3) a total capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio (the ratio of Tier 1 capital to average total adjusted assets) of 4.0%. CET1 generally consists of common stock; retained earnings; accumulated other comprehensive income (“AOCI”) except in the case of banking organizations that have elected to exclude AOCI from regulatory capital, as discussed below; and certain minority interests; all subject to applicable regulatory adjustments and deductions.
There are a number of changes in what constitutes regulatory capital compared to earlier regulations, subject to transition periods. These changes include the phasing-out of certain instruments as qualifying capital. Mortgage servicing and deferred tax assets over designated percentages of CET1 are deducted from capital. In addition, Tier 1 capital includes AOCI, which includes all unrealized gains and losses on available for sale debt and equity securities. Because of our asset size, we had the one-time option of deciding in the first quarter of 2015 whether to permanently opt-out of the inclusion of unrealized gains and losses on available for sale debt and equity securities in our capital calculations. We made the decision to opt out.
The capital regulations changed in the risk-weighting of certain assets to better reflect credit risk and other risk exposure compared to earlier regulations. These changes include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (set at 0%); and a 250% risk weight (up from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital.
In addition to the minimum CET1, Tier 1 and total capital ratios, the capital regulations require a capital conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required minimum risk-based in order to avoid limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses. The phase-in of the capital conservation buffer requirement began on January 1, 2016, when a buffer greater than 0.625% of risk-weighted assets was required, which amount increases each year until the buffer requirement is fully implemented on January 1, 2019.
Under the FDIC’s prompt corrective action standards, in order to be considered well-capitalized, the Bank must have a ratio of CET1 capital to risk-weighted assets of 6.5%, a ratio of Tier 1 capital to risk-weighted assets of 8%, a ratio of total capital to risk-weighted assets of 10%, and a leverage ratio of 5%; and in order to be considered adequately capitalized, it must have the minimum capital ratios described above. To be considered well-capitalized a bank holding company must have, on a consolidated basis, at least a Tier 1 risk-based capital ratio of 8% and a total risk-based capital ratio of 10% and not be subject to a higher enforceable individualized capital requirement.
Limitations on Dividends and Other Capital Distributions . The Company’s major source of funds consists of dividends from the Bank. The ability of the Bank to pay dividends depends on its earnings and capital levels and may be limited by FDIC or IDFI regulations, directives or orders, or by the capital conservation buffer requirements. In addition, under Indiana law, the Bank may pay dividends from undivided profits; however, in some circumstances it may be required to obtain IDFI approval of a dividend if the total dividends declared during the current year, including the proposed dividend, exceeds net income for the current year and retained net income for the prior two years, which excludes dividends paid during those years. The approval from IDFI is not required if the Bank meets exemption guidelines that mandate minimums for examination ratings and the Tier 1 leverage capital ratio, and the Bank is not subject to corrective action or supervisory order agreements. Since the Bank became regulated by the IDFI, it has been exempt from the pre-approval requirements. It is the Bank’s policy to maintain a strong capital position, so, in times of financial or economic distress, the Bank will be less likely to pay dividends to the Company.
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The ability of the Company to pay dividends to its stockholders is primarily dependent on the receipt of dividends from the Bank. Under Maryland law, the Company cannot pay cash dividends if it would render the Company unable to pay its debts or would be insolvent (unless they are paid from recent earnings).
The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB’s view that a bank holding company should pay cash dividends only to the extent that its net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The FRB also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, a bank holding company may be prohibited from paying any dividends if the holding company’s bank subsidiary is not adequately capitalized. The payment of dividends by a bank or a bank holding company can also be restricted under the capital conversation buffer requirements in the capital regulations.
A bank holding company is required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by, or written agreement with, the FRB. This notification requirement does not apply to any company that meets the well-capitalized standard for bank holding companies, is well-managed, and is not subject to any unresolved supervisory issues.
Federal Securities Laws . The common stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Therefore, the Company is subject to the reporting, information disclosure, proxy solicitation, insider trading limits and other requirements imposed on public companies by the SEC under the Exchange Act. This includes limits on sales of stock by certain insiders and the filing of insider ownership reports with the SEC. The SEC and Nasdaq have adopted regulations under the Sarbanes-Oxley Act of 2002 that apply to the Company as a Nasdaq-traded, public company, which seek to improve corporate governance, provide enhanced penalties for financial reporting improprieties and improve the reliability of disclosures in SEC filings.
Federal Taxation
General. We are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to us. MutualFirst’s federal income tax returns have been closed without audit by the IRS through its year ended December 31, 2013. MutualFirst and MutualBank will file a consolidated federal income tax return for fiscal year 2017.
Tax Cuts and Jobs Act (“Tax Act”). The Tax Act was enacted on December 22, 2017 reducing the Company’s federal corporate tax rate from 34% to 21%, effective January 1, 2018. At December 31, 2017, the Company has substantially completed its accounting for the tax effects of enactment of the Tax Act. For deferred tax assets and liabilities, amounts were remeasured based on the rates expected to reverse in the future, which is now 21%. Based on this new law, we recorded an additional tax expense of $2.0 million due to the revaluation of the company’s deferred tax asset. The Company continues to analyze certain aspects of the Tax Act and further refinements are possible, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. We do not expect these adjustments to materially impact our financial statements.
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Taxable Distributions and Recapture. Prior to 1998, bad debt reserves created prior to the year ended December 31, 1997 were subject to recapture into taxable income if MutualBank failed to meet certain thrift asset and definitional tests. Federal legislation eliminated these thrift recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should MutualBank make certain non-dividend distributions or cease to maintain a bank charter.
Minimum Tax. For tax years beginning after December 31, 2017, corporate alternative minimum tax is repealed. The prior year minimum tax credit is continued to be allowed to offset the taxpayer’s regular tax liability for any tax year. For tax years beginning after 2017 and before 2022, the prior year minimum tax credit would be refundable in an amount equal to 50% (100% for tax years beginning in 2021) of the excess of the credit for the tax year over the amount of the credit allowable for the year against regular tax liability. MutualBank has $1.4 million available as minimum tax credits for carryover, as of December 31, 2017.
Corporate Dividends-Received Deduction. MutualFirst may eliminate from its income dividends received from MutualBank as a wholly owned subsidiary of MutualFirst if it elects to file a consolidated return with MutualBank. The corporate dividends-received deduction is 100% or 80%, in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, depending on the level of stock ownership of the payer of the dividend. Corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct 70% of dividends received or accrued on their behalf.
State Taxation
MutualBank is subject to Indiana’s financial institutions tax, which is imposed at a flat rate as of December 31, 2017, of 6.5% on “adjusted gross income” apportioned to Indiana. “Adjusted gross income,” for purposes of the financial institutions tax, begins with taxable income as defined by Section 63 of the Internal Revenue Code and incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several Indiana modifications including only considering members of the combined group which have Indiana nexus. Indiana legislature started reducing the financial institutions tax from 8.5% to 6.5% in 0.5% increments over a four year period that commenced in 2014. The full rate reduction to 4.9% will be phased in fully by 2023.
Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. The Company is subject to a Michigan business tax on apportioned capital employed in the state of Michigan. The Company also files the Pennsylvania Bank & Trust Company shares and loans tax report. Ultimately, this tax is based on apportioned adjusted capital in the state of Pennsylvania.
Internet Website
We maintain a website with the address of www.bankwithmutual.com. The information contained on our website is not included as a part of, or incorporated by reference into, this Annual Report on Form 10-K. This Annual Report on Form 10-K and our other reports, proxy statements and other information, including earnings press releases, filed with the SEC are available on that website through a link to the SEC’s website at “About Us - Investor Relations - SEC Filings.” For more information regarding access to these filings on our website, please contact our Corporate Secretary, MutualFirst Financial, Inc., 110 E. Charles Street, Muncie, Indiana, 47305-2400; telephone number (765) 747-2800.
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The following are certain risk factors that could impact our business, financial results and results of operations. Investing in our common stock involves risks, including those described below. These risk factors should be considered by prospective and current investors in our common stock when evaluating the disclosures in this Annual Report on Form 10-K (particularly the forward-looking statements). These risk factors could cause actual results and conditions to differ materially from those projected in forward-looking statements. If any of the events in the following risks actually occur, or if additional risks and uncertainties not presently known to us or that we believe are immaterial do materialize, then our business, financial condition or results of operations could be materially adversely impacted. In addition, the trading price of our common stock could decline due to any of the events described in these risks.
The previous economic recession was severe in our primary market area of northern and east central Indiana, which is not a high growth market. A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.
Our business activities and earnings are affected by general business conditions in the United States and in our local market area. These conditions are impacted by changes to short-term and long-term interest rates, inflation, unemployment levels, monetary supply, consumer confidence and spending, fluctuations in both debt and equity capital markets, and the strength of the economy in the United States generally and in our primary market area in particular. The economy continues to recover from the recent most severe recession, which caused high unemployment levels, declining real estate values and eroded consumer confidence. The recession also reduced demand for commercial business and real estate loans in our local market. Declines in real estate values and other effects of the recession impacted household and corporate incomes, impairing the ability of our borrowers to repay their loans in accordance with their terms and increasing our non-performing loans, loan charge-offs, provisions for loan losses and foreclosures.
Substantially all of our loans are located in northern and east central Indiana, which was impacted by the recession more severely than the national average. Our primary market area, which consists of Allen, Delaware, Elkhart, Grant, Kosciusko, Randolph, St. Joseph and Wabash counties in Indiana and Berrien county in Michigan, has experienced limited population growth of 0.64% from 2000 through 2010. This data from the census bureau reflects population increases in our northern region market of 2.02% compared to the reduction in population of our central region of (3.04%). Unemployment levels in our market areas in Indiana historically have been above the state and federal averages but have been below the state and federal level over the last two years. According to data published by the Bureau of Labor Statistics of the United States Department of Labor, the national unemployment rate for the United States at December 31, 2017 was 3.9% (not seasonally adjusted) compared to an average rate of 3.9% (not seasonally adjusted) for our market areas in Indiana. See “Item 1 - Business - Market Area.”
A return of recessionary conditions in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and an increase in unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition. Stock prices for financial institution holding companies, including MutualFirst , would be expected to decline substantially, and it would be significantly more difficult to raise capital or borrow in the debt markets.
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Combining the Company and Universal Bancorp, which was completed during the first quarter 2018, may be more difficult, costly or time consuming than expected, and the anticipated benefits and cost savings of the merger may not be realized.
The success of the merger, including anticipated benefits and cost savings, will depend, in part, on our ability to successfully combine the businesses of MutualFirst and Universal. To realize these anticipated benefits and cost savings, after the completion of the merger, we expect to integrate Universal’s business into our own. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. If we experience difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected. As with any merger of financial institutions, there also may be business disruptions that cause us and/or Universal to lose customers or cause customers to remove their accounts from MutualFirst and/or Universal and move their business to competing financial institutions. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of Universal and MutualFirst during this transition period and on us for an undetermined period after completion of the merger. In addition, the actual cost savings of the merger could be less than anticipated.
A substantial portion of our assets consist of various types of loans that carry varying levels of credit and interest rate risk and that are sensitive to changes in the local and national economies.
Loans Secured by Residential Property. At December 31, 2017, $518.3 million, or 43.5% of our total loan portfolio, was secured by one- to four-family residential property, including loans held for sale and home equity loans and home equity lines of credit. This type of lending is generally sensitive to regional and local economic conditions that impact the ability of borrowers to meet their loan payment obligations. Although we continue to see recovery in the market areas we serve, the decline in residential real estate values as a result of the last downturn in the Indiana housing markets has reduced the value of the real estate collateral securing these types of loans and increased the risk that we could incur losses if borrowers default on their loans. In addition, borrowers seeking to sell their homes may find that they cannot sell their properties for an amount equal to or greater than the unpaid principal loan balance. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial condition and business operations.
Commercial Real Estate, Construction and Development and Commercial Business Loans. At December 31, 2017, $478.0 million, or 40.1% of our total loan portfolio, consisted of commercial real estate, construction and development and commercial business loans to small and mid-sized businesses, predominantly in our primary market area, which are the types of businesses that have a heightened vulnerability to local economic conditions. At December 31, 2017, our loan portfolio included $28.2 million of commercial construction and development loans, $318.7 million of commercial real estate loans and $131.1 million of commercial business loans compared to $22.5 million, $302.6 million and $131.1 million for construction and development, commercial real estate and business loans, respectively, at December 31, 2016. Because we have seen growth in the credit risk of the portfolio in 2017 primarily due to the increased percentage of our total loan portfolio in these types of loans, a decline in property values and other market impacts could lead to an increase in non-performing loans. See “Item 1 - Business of MutualBank - Asset Quality - Non-Performing Assets.”
The credit risk related to these types of loans is considered to be greater than the risk related to one- to four-family residential loans because the repayment of commercial real estate loans and commercial business loans typically is dependent on the successful operation and income stream of the borrowers’ business and the real estate securing the loans as collateral, which can be significantly affected by economic conditions. Any delinquent payments or the failure to repay these loans would hurt our earnings. Additionally, commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. Several of our commercial borrowers have more than one commercial real estate or business loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to any one- to four-family residential mortgage loan. Finally, if we foreclose on a commercial real estate loan, our holding period for the collateral, if any, is typically longer than a one- to four-family residential property because there are fewer potential purchasers of the collateral. If loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could require us to increase our provision for loan losses and adversely affect our operating results and financial condition.
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Other Consumer Loans . At December 31, 2017, $195.0 million, or 16.4% of our total loan portfolio consisted of consumer loans, of which $19.6 million consisted of automobile loans, $169.2 million consisted of boat/RV loans and $6.2 million consisted of other consumer loans, including unsecured lines of credit. Generally, we consider these types of loans to involve a higher degree of risk compared to mortgage loans on one- to four-family, owner-occupied residential properties, particularly in the case of loans that are secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. Although our indirect loans, which totaled $176.7 million at December 31, 2017, were underwritten by a third party using our guidelines, they were primarily originated to customers outside of our normal lending area which presents greater risks than other types of lending activities. As a result of this portfolio of consumer loans, it may become necessary to increase the level of our provision for loan losses, which could negatively impact our earnings and financial condition.
Adjustable Rate Loans . At December 31, 2017, $535.7 million, or 45.0% of our total loan portfolio consisted of adjustable rate loans. Borrowers with adjustable rate loans are exposed to increased monthly payments when the related interest rate adjusts upward under the terms of the loan to the rate computed in accordance with the applicable index and margin. Any rise in prevailing market interest rates may result in increased payments for borrowers who have adjustable-rate loans, increasing the possibility of default. Borrowers seeking to avoid these increased monthly payments by refinancing their loans may no longer be able to find available replacement loans at comparable or lower interest rates. In addition, declining real estate prices may prevent refinancing or a sale of the property, because borrowers have insufficient equity in the real estate. These events, alone or in combination, may contribute to higher delinquency rates and negatively impact our earnings.
If our allowance for loan losses is not sufficient to cover actual loan losses or our non-performing assets increase, our earnings will suffer. Increases in our provision for loan losses adversely impact our earnings and operations.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience and evaluate current economic conditions. Management recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover actual losses, resulting in additions to our allowance. Additions to our allowance decrease our net income. Our regulators periodically review our allowance for loan losses and may require us to recognize additions to the allowance based on their judgments about information available to them at the time of their review. These increases in our allowance for loan losses or loan charge-offs may have a material adverse effect on our financial condition and results of operations. Our allowance for loan losses was 1.05% of gross loans and 235.90% of non-performing loans at December 31, 2017, compared to 1.06% of gross loans and 230.99% of non-performing loans at December 31, 2016 and 1.17% of gross loans and 176.28% of non-performing loans at December 31, 2015.
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At December 31, 2017, our non-performing assets (which consist of non-accrual loans, loans 90 days delinquent and still accruing, non-accrual troubled debt restructurings, foreclosed real estate and other repossessed assets) totaled $6.0 million, which was a decrease of $600,000, or a 9.0% reduction in non-performing assets from December 31, 2016. This decrease reflects improved economic conditions within our market areas. Our non-performing assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans or real estate owned. We must reserve for estimated credit losses, which are established through a current period charge to the provision for loan losses, and from time to time, if appropriate, we must write down the value of properties in our real estate owned (“REO”) portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs including taxes, insurance and maintenance related to our REO. Further, the resolution of non-performing assets requires the active involvement of management, potentially distracting them from the overall supervision of our operations and other income-producing activities.
During 2017, we recorded a provision for loan losses of $1.2 million compared to $850,000 in 2016 and $125,000 in 2015. We also recorded net loan charge-offs of $1.2 million in 2017, compared to $1.1 million in 2016 and $652,000 million in 2015. During 2017, we experienced an increase in net charge-offs in addition to an increase in our loan portfolio of $10.6 million. This combination increased our need to add to our allowance for loan loss to support the existing loan portfolio mix with commercial and non-real estate consumer loans making up 57.0% of the loan portfolio at the end of 2017 compared to 53.2% at the end of 2016. We did not experience declining trends in the housing, real estate and local business markets; however, if that would return, we would expect increased levels of delinquencies and credit losses to return, which would adversely impact our financial condition and results of operations.
Changes in interest rates could adversely affect our results of operations and financial condition.
Our results of operations and financial condition are affected significantly by changes in interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings. Because interest-bearing liabilities generally reprice or mature more quickly than interest-earning assets, an increase in interest rates generally would tend to result in a decrease in net interest income.
Changes in interest rates also may affect the average life of loans and mortgage-related securities. Decreases in interest rates or continuing low interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we have been and continue to be subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable-rate loans. Also, increases in interest rates may extend the life of fixed-rate assets, which could limit the funds we have available to reinvest in higher-yielding alternatives, and may result in customers withdrawing certificates of deposit early so long as the early withdrawal penalty is less than the interest they could receive as a result of the higher market interest rates.
Changes in interest rates also affect the current fair value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At December 31, 2017, the fair value of our portfolio of available for sale securities totaled $277.4 million. Gross unrealized gains on these securities totaled $4.1 million, while gross unrealized losses on these securities totaled $3.5 million, resulting in a net unrealized gain of $529,000 at December 31, 2017.
At December 31, 2017, our interest rate risk analysis indicated that our net portfolio value would decrease by 10.4% if there was an instantaneous parallel 200 basis point increase in market interest rates. See the “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Asset/Liability Management.”
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Our strategies to modify our interest rate risk profile may be difficult to implement.
Our asset/liability management strategies are designed to minimize our interest rate risk sensitivity. One such strategy is to increase the amount of adjustable rate and/or short-term assets. The Bank offers adjustable rate loan products as a means to achieve this strategy. The recent availability of lower rates on fixed-rate loans has generally created a decrease in borrower demand for adjustable rate assets. Additionally, these adjustable-rate assets may prepay. Despite this, at December 31, 2017, 45.0% of our loan portfolio consisted of adjustable-rate loans, compared to 42.2% at December 31, 2016.
We also are managing our liabilities to moderate our interest rate risk sensitivity. Customer demand is primarily for short-term certificates of deposit and transaction accounts. Using short-term liabilities to fund long-term, fixed-rate assets will increase the interest rate sensitivity of any financial institution. When needed, we are utilizing FHLB advances agreements to mitigate the impact of customer demand by lengthening the maturities of these advances or entering into longer term repurchase agreements, depending on liquidity or investment opportunities.
FHLB advances are entered into as liquidity is needed or to fund assets that provide for a spread considered sufficient by management. If we are unable to originate adjustable rate assets at favorable rates or fund loan originations or securities purchases with long-term advances or structured borrowings, we may have difficulty executing this asset/liability management strategy and/or it may result in a reduction in profitability.
OTTI charges in our investment securities portfolio could result in losses and adversely affect our continuing operations. Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates, which may have an adverse effect on our financial condition.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings, which may materially adversely affect our stockholders’ equity, regulatory capital and continuing operations. Fluctuations in market value may be caused by decreases in interest rates, lower market prices for securities and limited investor demand, as well as the default rates of specific financial institutions whose securities provide the underlying collateral for these securities and changes in credit risk based on the condition of the issuer. The valuation of our investment securities also is influenced by the implementation of Securities and Exchange Commission and Financial Accounting Standards Board guidance on fair value accounting, which requires us to report our available for sale securities at their estimated fair value. Our stockholders’ equity is periodically adjusted by the amount of change in the estimated fair value of the available for sale securities, net of taxes. At December 31, 2017, the change in unrealized gains on securities available for sale from the level at December 31, 2016 was an increase of $2.4 million. When OTTI is present, the market environment more likely than not limits our ability to mitigate our exposure to valuation changes in these securities by selling them.
Our securities portfolio is evaluated for OTTI on at least a quarterly basis. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. We have not recorded any OTTI since 2011. As of December 31, 2017, we have no securities that are deemed impaired.
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If our investments in real estate are not properly valued or sufficiently reserved for to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.
We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property taken in as REO, and at certain other times during the assets holding period. Our net book value (“NBV”) in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset’s NBV over its fair value. If our valuation process is incorrect, the fair value of our investments in real estate may not be sufficient to recover our NBV in such assets, resulting in the need for additional charge-offs. Additional material charge-offs to our investments in real estate could have a material adverse effect on our financial condition and results of operations. Our regulators periodically review our REO and may require us to recognize further charge-offs. Any increase in our charge-offs, as required by our regulator, may have a material adverse effect on our financial condition and results of operations.
We face risks related to covenants in our loan sales to investors and secondary mortgage market conditions.
Our agreements with investors to sell our loans generally contain covenants that require us to repurchase loans under certain circumstances, including some delinquencies, or to return premiums paid by those investors if the loans are paid off early. If we are required to repurchase sold loans under these covenants, they may be deemed troubled loans, with the potential for charge-offs and/or loss provision changes, which could impact our earnings and asset quality ratios adversely. The Bank was not required to repurchase any loans from investors during 2017 or 2016.
Our ability to sell loans on the secondary mortgage market is impacted by interest rate changes and investor demand or expected return. If this market becomes less liquid, we may not be able to rely as much on loan sales to reduce our interest rate and credit risk.
We use estimates in determining the fair value of certain assets, such as mortgage servicing rights (“MSRs”). If our estimates prove to be incorrect, we may be required to write down the value of these assets which could adversely affect our earnings.
We sell a portion of our one- to four-family loans in the secondary market. We generally retain the right to service these loans through the Bank. At December 31, 2017, the book value of our MSRs was $1.5 million. We use a financial model that uses, wherever possible, quoted market prices to value our MSRs. This model is complex and also uses assumptions related to interest and discount rates, prepayment speeds, delinquency and foreclosure rates and ancillary fee income. Valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of the model. The primary risk associated with MSRs is that they will lose a substantial portion of their value as a result of higher than anticipated prepayments occasioned by declining interest rates. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than anticipated. If prepayment speeds increase more than estimated or delinquency and default levels are higher than anticipated we may be required to write down the value of our MSRs which could have a material adverse effect on our net income and capital levels. The Company obtains independent valuations at least semi-annually to determine if impairment in the asset exists.
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Declining economic conditions may adversely impact the fees generated by our asset management and trust business.
To the extent our asset management and trust clients and their assets become adversely impacted by weak economic and stock market conditions, they may choose to withdraw the assets managed by us and/or the value of their assets may decline. Our asset management revenues are based on the value of the assets we manage. If our clients withdraw assets or the value of their assets decline, our revenues from these activities may be adversely affected. These fees totaled $4.0 million and $3.9 million in 2017 and 2016, respectively.
We face significant operational and reputational risks. As a community bank, maintaining our reputation in our market area is critical to the success of our business, and the failure to do so may materially adversely affect our performance. Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes impacting the banking industry.
We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. We operate in many different financial service businesses and rely on the ability of our employees and systems to process a significant number of transactions. Operational risk is the risk of loss from operations, including fraud by employees or outside persons, employees’ execution of incorrect or unauthorized transactions, data processing and technology errors or hacking and breaches of internal control systems. If our reputation is negatively affected, by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business and, therefore, our operating results may be materially adversely affected. Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to fraud and other financial crimes. Nationally, reported incidents of fraud and other financial crimes have increased. We have experienced an increase in losses due to apparent fraud and other financial crimes. Our policies and procedures designed to prevent such losses may not prevent all such losses. The Company continues to evaluate and implement new technologies; including, but not limited to, systems such as anti-skimming devices, new card technology, and monitoring systems that help to limit these types of instances.
Strong competition within our market area may limit our growth and profitability.
Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have national name recognition, greater resources and lending limits than we do and may offer certain services or prices for services that we do not or cannot provide. Our profitability depends upon our continued ability to successfully compete in our market.
The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a bank holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.
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A tightening of credit markets and liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. A tightening of the credit markets and the inability to obtain adequate funding to replace deposits and fund continued loan growth may affect asset growth, our earnings capability and capital levels negatively. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary sources of liquidity are increases in deposit accounts, including brokered deposits, as well as cash flows from loan payments and our securities portfolio. Borrowings, especially from the FHLB and repurchase agreements, also provide us with a source of funds to meet liquidity demands. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include adverse regulatory action against us or a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated. Our ability to borrow also could be impaired by factors that are not specific to us, such as a disruption in the financial markets, negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations or continued deterioration in credit markets.
Our core deposit premium could be deemed partially or fully impaired in the future, which would reduce our earnings and the values of that intangible asset.
At December 31, 2017, we had a core deposit premium of $71,000, due mainly to our 2008 acquisition of another financial institution. We also expect to record a core deposit premium in 2018 in connection with the merger with Universal. Under GAAP, we are required to periodically assess the value of this intangible asset based on a number of factors to determine if there is partial or full impairment. The factors taken into consideration include the market price of our stock, the net present value of our assets and liabilities and valuation information for similar financial institutions. This evaluation involves a substantial amount of judgment. If actual conditions underlying the factors differ from our assessment, the core deposit intangible could be subjected to faster amortization or partial or complete impairment, which would reduce the value of this asset and reduce our earnings, perhaps materially.
We currently hold a significant amount of bank-owned life insurance.
At December 31, 2017, we held $90.5 million of bank-owned life insurance or BOLI on key employees and executives, with a cash surrender value of $52.7 million. These policies are maintained to informally fund various benefit plans. The eventual repayment of the cash surrender value is subject to the ability of the various insurance companies to pay death benefits or to return the cash surrender value to us if needed for liquidity purposes. We continually monitor the financial strength of the various companies with whom we carry these policies. However, any one of these companies could experience a decline in financial strength, which could impair its ability to pay benefits or return our cash surrender value. If we need to liquidate these policies for liquidity purposes, we would be subject to taxation on the increase in cash surrender value and penalties for early termination, both of which would adversely impact earnings.
We may not be able to fully realize our deferred tax asset.
At December 31, 2017, we had a $7.5 million deferred income tax asset based on differences between the financial statement amounts and tax bases of assets and liabilities and reflecting mainly an allowance for loan loss timing difference and business tax and AMT carryover. The value of our deferred income tax benefit is reviewed regularly under various forecasts and assumptions, including anticipated levels of taxable net income, to determine the likelihood of realizing the benefit. If actual results or subsequent forecasts differ from our current judgments, to the extent that it becomes more likely than not that this benefit will not be fully realized, we would have to write down this asset, which would negatively impact results of operations and reduce our asset size.
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Transactions between the Company and its insurance subsidiary MutualFirst Risk Management, Inc. (the “Captive”), may be subject to certain IRS responsibilities and penalties.
The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company and the Bank as well as to 14 other third-party insurance captives for which insurance may not be available or economically feasible. The Treasury Department of the United States and the IRS by way of Notice 2016-66 have stated that transactions believed similar in nature to transactions between the Company and the Captive may have the potential for tax avoidance or evasion and may be deemed by the IRS as an abusive tax structure subject to significant penalties, interest and possible criminal prosecution.
If our investment in the FHLB of Indianapolis becomes impaired, our earnings and stockholders’ equity could decrease.
At December 31, 2017, we owned $11.2 million in FHLB of Indianapolis stock. We are required to own this stock to be a member of and to obtain advances from our FHLB. This stock is not marketable and can only be redeemed by our FHLB. The most recent stock buyback initiated by FHLB was in 2015. Our FHLB’s financial condition is linked, in part, to the eleven other members of the FHLB System and to accounting rules and asset quality risks that could materially lower their capital, which would cause our FHLB stock to be deemed impaired, resulting in a decrease in our earnings and assets.
Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and our income.
The Bank and the Company are subject to extensive regulation, supervision and examination by federal and state regulators, which have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify assets, determine the adequacy of a bank’s allowance for loan losses and determine the level of deposit insurance premiums assessed. Because our business is highly regulated, the applicable laws and regulations are subject to frequent change. Any change in these laws, regulations and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums, could have a material impact on our operations. See “Item 1 - How We Are Regulated.”
In response to the last financial crisis, Congress took actions that are intended to strengthen confidence and encourage liquidity in financial institutions, and the FDIC has taken actions to increase insurance coverage on deposit accounts. The Dodd-Frank Act created the CFPB.
The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets, their service providers and certain non-depository entities such as debt collectors and consumer reporting agencies. In the case of banks, such as the Bank, with total assets of less than $10 billion, this examination and enforcement authority is held by the institution’s primary federal banking regulator (the FDIC, in the case of the Bank).
The CFPB has finalized a number of significant rules that could have a significant impact on our business and the financial services industry more generally. In particular, the CFPB has adopted rules impacting nearly every aspect of the lifecycle of a residential mortgage loan. The CFPB has also issued guidance which could significantly affect the automotive financing industry by subjecting indirect auto lenders, such as the Bank, to regulation as creditors under the Equal Credit Opportunity Act, which would make indirect auto lenders monitor and control certain credit policies and procedures undertaken by auto dealers.
In the last economic downturn, federal and state banking regulators were active in responding to concerns and trends identified in examinations and have issued many formal enforcement orders requiring capital ratios in excess of regulatory requirements. The FDIC and IDFI regulate the activities in which the Bank may engage primarily for the protection of depositors and not for the protection or benefit of stockholders. In addition, new laws and regulations may increase our costs of regulatory compliance and of doing business and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge and our ongoing operations, costs and profitability. Regulatory changes regarding card interchange fee income do not currently apply to us but could change in the future. Further, legislative proposals limiting our rights as a creditor could result in credit losses or increased expense in pursuing our remedies as a creditor.
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Increases in deposit insurance premiums and special FDIC assessments will negatively impact our earnings.
The Dodd-Frank Act established 1.35% of total insured deposits as the minimum reserve ratio for the FDIC Deposit Insurance Fund effective September 30, 2020. The FDIC adopted a plan under which it will meet this ratio by the statutory deadline and has reached a 1.28% as of September 30, 2017. The FDIC must offset the requirement that the minimum reserve ratio to reach 1.35% on institutions with assets less than $10 billion. To implement the offset requirement, FDIC regulations require that institutions with assets of $10 billion or more pay a surcharge during a temporary period and smaller institutions will receive credits whenever the reserve ratio reaches 1.38%. The FDIC has not announced how it will implement this offset. In addition to the statutory minimum ratio, the FDIC must set a designated reserve ratio or DRR, which may exceed the statutory minimum. The FDIC has set 2.0% as the DRR.
As required by the Dodd-Frank Act, the FDIC has adopted final regulations under which insurance premiums are based on an institution's total assets minus its tangible equity instead of its deposits. Since the implementation of these changes, we have seen a decline in our deposit insurance premiums. The insurance costs were $724,000, $788,000 and $897,000 for the years ended December 31, 2017, 2016 and 2015, respectively. Our future deposit insurance premiums may increase if the FDIC determines that it will not meet the required or anticipated minimum reserve ratios discussed, which could have a negative impact on our earnings.
Our accounting policies and methods impact how we report our financial condition and results of operations. Application of these policies and methods may require management to make estimates about matters that are uncertain.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in our reporting materially different amounts than would have been reported under a different alternative. These accounting policies are critical to presenting our financial condition and results of operations. They may require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions.
Our controls and procedures may be ineffective.
We regularly review and update our internal controls, disclosure controls and procedures and corporate governance policies and procedures. As a result, we may incur increased costs to maintain and improve our controls and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls or procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations or financial condition.
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System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. Though the third-party vendors providing key components of our business infrastructure have been carefully chosen by us, we cannot control their actions, and their failures may impact the Bank’s ability to provide services to its customers and cause us to incur significant expense. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our reputation, financial condition and results of operations.
We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed or on terms acceptable to us.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise more capital to support our business or to finance acquisitions, if any, or we may otherwise elect or be required to raise additional capital. Should we be required by regulatory authorities to raise additional capital, we may seek to do so through the issuance of, among other things, our common stock or preferred stock. The issuance of additional shares of common stock or convertible securities to new stockholders would be dilutive to our current stockholders.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed, or if the terms of such a capital raise are not advantageous, it may have a material adverse effect on our financial condition, results of operations and prospects.
There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the market price of our common stock.
We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur.
Our board of directors is authorized to allow us to issue additional common stock, as well as classes or series of preferred stock, generally without any action on the part of the stockholders. In addition, the board has the power, generally without stockholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights and preferences over the common stock with respect to dividends or upon the liquidation, dissolution or winding-up of our business and other terms. If we issue additional preferred stock in the future that has a preference over the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue additional preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market value of the common stock could be adversely affected.
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Anti-takeover provisions could negatively impact our stockholders.
Provisions in our charter and bylaws, the corporate law of the State of Maryland and federal regulations could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the market price of any class of our equity securities, including our common stock. These provisions include: a prohibition on voting shares of common stock beneficially owned in excess of 10% of total shares outstanding, supermajority voting requirements for certain business combinations with any person who beneficially owns more than 10% of our outstanding common stock; the election of directors to staggered terms of three years; advance notice requirements for nominations for election to our board of directors and for proposing matters that stockholders may act on at stockholder meetings, a requirement that only directors may fill a vacancy in our board of directors, supermajority voting requirements to remove any of our directors and the other provisions of our charter. Our charter also authorizes our board of directors to issue preferred stock, and preferred stock could be issued as a defensive measure in response to a takeover proposal. In addition, pursuant to federal and state laws and regulations, as a general matter, no person or company, acting individually or in concert with others, may acquire more than 10% of our common stock without prior approval from our regulators.
These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for holders of our common stock to elect directors other than the candidates nominated by our board of directors.
The voting limitation provision in our charter could limit your voting rights as a holder of our common stock.
Our charter provides that any person or group who acquires beneficial ownership of our common stock in excess of 10% of the outstanding shares may not vote the excess shares. Accordingly, if you acquire beneficial ownership of more than 10% of the outstanding shares of our common stock, your voting rights with respect to the common stock will not be commensurate with your economic interest in the Company.
We rely on dividends from MutualBank for substantially all of the Company’s revenue.
MutualFirst’s primary source of revenue is dividends from the Bank. In certain instances, the IDFI must be notified of dividends made from the Bank to the Company and may choose to limit Bank dividends. If the Bank is unable to pay dividends, MutualFirst may not be able to service its debt, pay its other obligations or pay dividends on the Company’s common stock, which could have a material adverse impact on our financial condition or the value of your investment in our common stock.
Our common stock trading volume may not provide adequate liquidity for investors.
Our common stock is listed on the Nasdaq Global Market. However, the average daily trading volume in our common stock is less than that of many larger financial services companies. A public trading market having the desired depth, liquidity and orderliness depends on the presence of a sufficient number of willing buyers and sellers for our common stock at any given time. This presence is impacted by general economic and market conditions and investors’ views of our Company. Because our trading volume is limited, any significant sales of our shares could cause a decline in the price of our common stock.
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Our directors and executive officers have the ability to influence stockholder actions in a manner that may be adverse to the personal investment objectives of our stockholders.
As of December 31, 2017, our directors and executive officers as a group beneficially owned 1,605,356 shares, or 21.1%, of our common stock (including immediately exercisable options for 205,000 shares). In addition, our employee stock ownership and 401(k) plan controlled 5.5% of our common stock on that date. In addition, as of December 31, 2017, 58,003 shares were reserved under our current stock benefit plan for future awards for our directors, officers and employees. Due to this significant collective ownership of or control over our common stock, our directors and executive officers may be able to influence the outcome of director elections or block significant transactions, such as a merger or acquisition, or any other matter that might otherwise be favored by other stockholders and could prevent any stockholder action requiring a supermajority vote under our articles of incorporation.
Item 1B. Unresolved Staff Comments
Not applicable.
At December 31, 2017 we had 27 full service offices. During 2017 we closed four of the full-service offices throughout our footprint. Our offices are located within east central and northern Indiana. At December 31, 2017, we owned our home office in Muncie, Indiana and all but two of our financial center offices. We lease offices in central and northern Indiana for our trust and brokerage services, financial center offices in Fort Wayne and Mishawaka, Indiana and loan origination offices in northwestern Indiana and southwest Michigan. The net book value of our investment in premises and leaseholds was approximately $18.8 million at December 31, 2017. We believe that our current facilities are adequate to meet our present and immediately foreseeable needs. See Note 7 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
From time to time, we are involved as plaintiff or defendant in various legal actions arising in the normal course of business. We do not anticipate incurring any material liability as a result of such litigation. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosure
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The common stock of MutualFirst Financial, Inc. is traded under the symbol “MFSF” on the Nasdaq Global Market. The table below shows the high and low closing prices for our common stock for the periods indicated. This information was provided by the Nasdaq.
Stock Price | Dividends | |||||||||||
High | Low | per Share | ||||||||||
2017 Quarters: | ||||||||||||
First Quarter (ended 03/31/17) | $ | 33.55 | $ | 29.75 | $ | 0.16 | ||||||
Second Quarter (ended 06/30/17) | $ | 36.25 | $ | 31.25 | $ | 0.16 | ||||||
Third Quarter (ended 09/30/17) | $ | 38.65 | $ | 32.75 | $ | 0.16 | ||||||
Fourth Quarter (ended 12/31/17) | $ | 40.35 | $ | 36.55 | $ | 0.18 | ||||||
2016 Quarters: | ||||||||||||
First Quarter (ended 03/31/16) | $ | 26.13 | $ | 22.75 | $ | 0.14 | ||||||
Second Quarter (ended 06/30/16) | $ | 28.20 | $ | 24.82 | $ | 0.14 | ||||||
Third Quarter (ended 09/30/16) | $ | 28.90 | $ | 27.10 | $ | 0.14 | ||||||
Fourth Quarter (ended 12/31/16) | $ | 34.90 | $ | 26.50 | $ | 0.16 |
At December 31, 2017, there were 7,389,394 shares of common stock outstanding and approximately 3,300 common stockholders of record.
Our common stock cash dividend payout policy is continually reviewed by management and the Board of Directors. During 2017, the Company paid total common stock dividends of $0.66 per share, up from $0.58 per share in 2016. The Company intends to continue its policy of paying quarterly cash dividends and hopes to continue to pay dividends at least at the same level as in 2017. However, future common stock dividend payments will depend upon a number of factors, including capital requirements, regulatory limitations, the Company’s financial condition, results of operations, debt service on Company borrowings and the Bank’s ability to pay dividends to the Company. The Company relies significantly upon dividends from the Bank to accumulate earnings for payment of cash dividends to our common stockholders.
Information regarding our equity compensation plans is included in Part III, Item 12 of this Form 10-K.
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Shareholder Performance Graph Presentation
The following graph and related discussion are being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K and shall not be deemed to be “soliciting materials” or to be “filed” with the SEC (other than as provided in Item 201) nor shall this information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained therein, except to the extent that the Company specifically incorporates it by reference into a filing.
The following graph shows a comparison of stockholder return on MutualFirst Financial Inc.’s common stock with the cumulative total returns for: 1) the Nasdaq Composite ® (U.S.) Index; and 2) the SNL U.S. Bank and Thrift Index, which was compiled by SNL Financial LC of Charlottesville, Virginia. The graph assumes an initial investment of $100 and reinvestment of dividends. The graph is historical only and may not be indicative of possible future performance.
Period Ending | ||||||||||||||||||||||||
Index | 12/31/12 | 12/31/13 | 12/31/14 | 12/31/15 | 12/31/16 | 12/31/17 | ||||||||||||||||||
Mutual First Financial, Inc. | 100.00 | 152.28 | 197.66 | 228.83 | 312.13 | 370.50 | ||||||||||||||||||
NASDAQ Composite Index | 100.00 | 140.12 | 160.78 | 171.97 | 187.22 | 242.71 | ||||||||||||||||||
SNL U.S. Bank and Thrift Index | 100.00 | 136.92 | 152.85 | 155.94 | 196.86 | 231.49 |
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Item 6. Selected Financial and Other Data
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following information is only a summary and you should read it in conjunction with our consolidated financial statements and accompanying notes contained in Item 8 of this Form 10-K. Balances have been updated to reflect the adoption of ASU 2014-01 in January 2015.
At or For the Year Ended December 31, | ||||||||||||||||||||
2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Selected Financial Condition Data: | ||||||||||||||||||||
Total assets | $ | 1,588,932 | $ | 1,553,133 | $ | 1,478,265 | $ | 1,423,423 | $ | 1,391,405 | ||||||||||
Cash and cash equivalents | 27,341 | 26,860 | 20,915 | 29,575 | 25,285 | |||||||||||||||
Loans, net | 1,167,758 | 1,157,120 | 1,068,204 | 1,003,518 | 965,966 | |||||||||||||||
Investment securities | ||||||||||||||||||||
Available for sale, at fair value | 277,378 | 249,913 | 261,138 | 260,806 | 264,348 | |||||||||||||||
Total deposits | 1,202,034 | 1,153,382 | 1,091,382 | 1,079,320 | 1,113,084 | |||||||||||||||
Total borrowings | 221,395 | 244,780 | 235,075 | 202,616 | 153,818 | |||||||||||||||
Total stockholders' equity | 150,282 | 140,038 | 137,025 | 126,752 | 110,629 | |||||||||||||||
Selected Operations Data: | ||||||||||||||||||||
Total interest income | $ | 58,868 | $ | 53,802 | $ | 51,776 | $ | 51,178 | $ | 51,667 | ||||||||||
Total interest expense | 10,611 | 9,247 | 8,803 | 8,923 | 11,224 | |||||||||||||||
Net interest income | 48,257 | 44,555 | 42,973 | 42,255 | 40,443 | |||||||||||||||
Provision for loan losses | 1,220 | 850 | 125 | 850 | 1,300 | |||||||||||||||
Net interest income after provision for loan losses | 47,037 | 43,705 | 42,848 | 41,405 | 39,143 | |||||||||||||||
Service fee income | 6,584 | 6,124 | 5,947 | 5,995 | 5,989 | |||||||||||||||
Gain on sale of loans and investment securities | 4,595 | 5,784 | 4,612 | 2,162 | 1,687 | |||||||||||||||
Other non-interest income | 6,897 | 7,514 | 6,580 | 6,728 | 6,387 | |||||||||||||||
Total non-interest income | 18,076 | 19,422 | 17,139 | 14,885 | 14,063 | |||||||||||||||
Salaries and employee benefits | 27,229 | 27,427 | 25,526 | 23,560 | 22,492 | |||||||||||||||
Other expenses | 18,776 | 18,073 | 17,621 | 17,818 | 17,195 | |||||||||||||||
Total non-interest expenses | 46,005 | 45,500 | 43,147 | 41,378 | 39,687 | |||||||||||||||
Income before income taxes | 19,108 | 17,627 | 16,840 | 14,912 | 13,519 | |||||||||||||||
Income tax expense | 6,793 | 4,386 | 4,578 | 3,866 | 4,136 | |||||||||||||||
Net income | 12,315 | 13,241 | 12,262 | 11,046 | 9,383 | |||||||||||||||
Preferred stock dividends and accretion | - | - | - | - | 1,257 | |||||||||||||||
Net income available to common stockholders | $ | 12,315 | $ | 13,241 | $ | 12,262 | $ | 11,046 | $ | 8,126 |
48 |
Quarter Ended | Interest Income |
Interest
Expense |
Net
Interest
Income |
Provision
for
Loan Losses |
Net
Income
Available to Common Shareholders |
Basic
Earnings Per
Common Share |
Diluted
Earnings
Per Common Share |
|||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||
March 31 | $ | 14,109 | $ | 2,396 | $ | 11,713 | $ | 200 | $ | 3,206 | $ | 0.44 | $ | 0.43 | ||||||||||||||
June 30 | 14,652 | 2,565 | 12,087 | 300 | 3,898 | 0.53 | 0.52 | |||||||||||||||||||||
September 30 | 15,026 | 2,762 | 12,264 | 370 | 3,751 | 0.51 | 0.50 | |||||||||||||||||||||
December 31 | 15,081 | 2,888 | 12,193 | 350 | 1,460 | 0.20 | 0.19 | |||||||||||||||||||||
Total | $ | 58,868 | $ | 10,611 | $ | 48,257 | $ | 1,220 | $ | 12,315 | $ | 1.67 | $ | 1.64 | ||||||||||||||
2016 | ||||||||||||||||||||||||||||
March 31 | $ | 13,034 | $ | 2,272 | $ | 10,762 | $ | 200 | $ | 2,365 | $ | 0.32 | $ | 0.31 | ||||||||||||||
June 30 | 13,258 | 2,271 | 10,987 | 150 | 4,157 | 0.56 | 0.55 | |||||||||||||||||||||
September 30 | 13,567 | 2,330 | 11,237 | 250 | 3,482 | 0.48 | 0.47 | |||||||||||||||||||||
December 31 | 13,943 | 2,374 | 11,569 | 250 | 3,237 | 0.44 | 0.43 | |||||||||||||||||||||
Total | $ | 53,802 | $ | 9,247 | $ | 44,555 | $ | 850 | $ | 13,241 | $ | 1.79 | $ | 1.76 | ||||||||||||||
2015 | ||||||||||||||||||||||||||||
March 31 | $ | 12,683 | $ | 2,165 | $ | 10,518 | $ | - | $ | 2,481 | $ | 0.34 | $ | 0.33 | ||||||||||||||
June 30 | 12,731 | 2,191 | 10,540 | - | 3,218 | 0.44 | 0.43 | |||||||||||||||||||||
September 30 | 13,049 | 2,233 | 10,816 | - | 3,225 | 0.44 | 0.43 | |||||||||||||||||||||
December 31 | 13,313 | 2,214 | 11,099 | 125 | 3,338 | 0.45 | 0.44 | |||||||||||||||||||||
Total | $ | 51,776 | $ | 8,803 | $ | 42,973 | $ | 125 | $ | 12,262 | $ | 1.66 | $ | 1.62 |
49 |
Reconciliation of Non-GAAP Financial Measures
The annual report on Form 10-K contains financial information determined by methods other than in accordance with U.S. generally accepted accounting principles (“GAAP”). Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share and return on average tangible common equity 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.
December 31, | ||||||||||||
2017 | 2016 | 2015 | ||||||||||
Total Stockholders' Equity (GAAP) | $ | 150,282 | $ | 140,038 | $ | 137,025 | ||||||
Less: Intangible Assets | 1,927 | 2,191 | 2,611 | |||||||||
Tangible common equity (non-GAAP) | $ | 148,355 | $ | 137,847 | $ | 134,414 | ||||||
Total assets (GAAP) | $ | 1,588,932 | $ | 1,553,133 | $ | 1,478,265 | ||||||
Less: Intangible Assets | 1,927 | 2,191 | 2,611 | |||||||||
Tangible assets (non-GAAP) | $ | 1,587,005 | $ | 1,550,942 | $ | 1,475,654 | ||||||
Tangible common equity to tangible assets (non-GAAP) | 9.35 | % | 8.89 | % | 9.11 | % | ||||||
Book value per common share (GAAP) | $ | 20.34 | $ | 19.12 | $ | 18.46 | ||||||
Less: Effect of Intangible Assets | 0.26 | 0.30 | 0.35 | |||||||||
Tangible book value per common share (non-GAAP) | $ | 20.08 | $ | 18.82 | $ | 18.11 | ||||||
Return on average stockholders' equity (GAAP) | 8.40 | % | 9.40 | % | 9.29 | % | ||||||
Add: Effect of Intangible Assets | 0.12 | 0.16 | 0.20 | |||||||||
Return on average tangible common equity (non-GAAP) | 8.52 | % | 9.56 | % | 9.49 | % | ||||||
Total tax free interest income (GAAP) | ||||||||||||
Loans receivable | $ | 424 | $ | 443 | $ | 355 | ||||||
Investment securities | 2,752 | 2,193 | 1,541 | |||||||||
Total tax free interest income | $ | 3,176 | $ | 2,636 | $ | 1,896 | ||||||
Total tax free interest income, gross (at 34% tax rate) | $ | 4,812 | $ | 3,994 | $ | 2,873 | ||||||
Net interest margin (GAAP) | ||||||||||||
Net interest income (GAAP) | $ | 48,257 | $ | 44,555 | $ | 42,973 | ||||||
Add: Tax effect tax free interest income at 34% tax rate | 1,636 | 1,358 | 977 | |||||||||
Net interest income (non-GAAP) | 49,893 | 45,913 | 43,950 | |||||||||
Divided by: Average interest-earning assets | 1,473,968 | 1,405,326 | 1,336,622 | |||||||||
Net interest margin, tax equivalent | 3.38 | % | 3.27 | % | 3.29 | % | ||||||
Effective income tax rate | 35.6 | % | 24.9 | % | 27.2 | % | ||||||
Less: Effect on net deferred tax asset revaluation | 10.5 | - | - | |||||||||
Adjusted effective income tax rate | 25.1 | % | 24.9 | % | 27.2 | % | ||||||
Ratio Summary: | ||||||||||||
Return on average equity (ROE) | 8.40 | % | 9.40 | % | 9.29 | % | ||||||
Return on average tangible common equity | 8.52 | % | 9.56 | % | 9.49 | % | ||||||
Return on average assets (ROA) | 0.78 | % | 0.87 | % | 0.85 | % | ||||||
Tangible common equity to tangible assets | 9.35 | % | 8.89 | % | 9.11 | % | ||||||
Net interest margin, tax equivalent | 3.38 | % | 3.27 | % | 3.29 | % |
50 |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Overview and Significant Events in 2017
MutualFirst is a Maryland corporation and a bank holding company headquartered in Muncie, Indiana, with operations in Allen, Delaware, Elkhart, Grant, Kosciusko, Randolph, St. Joseph and Wabash counties in Indiana. It owns MutualBank, an Indiana commercial bank with 27 financial centers in Indiana, trust offices in Fishers and Crawfordsville, Indiana and a loan origination office in New Buffalo, Michigan. MutualFirst also owns MutualFirst Risk Management, a captive insurance company based in Nevada and Mutual Risk Advisors, an information security consulting firm based in Indiana.
MutualBank is an Indiana commercial bank subject to regulation, supervision and examination by the IDFI and the FDIC. MutualFirst is a bank holding company subject to examination, supervision and regulation by the FRB, which is subjected to regulatory capital requirements similar to those imposed on the Bank. For more details on these regulations see “Item 1. Business – How We Are Regulated.”
At December 31, 2017, we had $1.6 billion in assets, $1.2 billion in loans, $1.2 billion in deposits and $150.3 million in stockholders’ equity. The Company’s total risk-based capital ratio at December 31, 2017 was 13.5%, exceeding the 10.0% requirement for a well-capitalized institution. The ratio of average tangible common equity increased to 9.35% as of year-end 2017 compared to 8.89% at year-end 2016. For the year ended December 31, 2017, net income available to common shareholders was $12.3 million, or $1.67 per basic and $1.64 per diluted share, compared with net income available to common shareholders of $13.2 million, or $1.79 per basic and $1.76 per diluted share for 2016. The details of our 2017 performance are set forth below and in our Consolidated Audited Financial Statements contained in Item 8 of this Form 10-K.
Key aspects of our 2017 operations include:
· | Commercial loan balances increased $21.8 million, or 4.8% in 2017. |
· | Non-real estate consumer loan balances increased $28.6 million, or 17.2% in 2017. |
· | Mortgage loans sold in 2017 of $134.4 million decreased compared to mortgage loans sold in 2016 of $152.1 million. |
· | Deposits increased $48.7 million, or 4.2% in 2017. |
· | Tangible book value per common share was $20.08 as of December 31, 2017 compared to $18.82 as of December 31, 2016. |
· | Net interest income increased $3.7 million in 2017 compared to 2016. |
· | Net interest margin for 2017 was 3.27% compared to 3.17% in 2016. Tax equivalent net interest margin was 3.38% for 2017 compared to 3.27% in 2016. |
· | Provision for loan losses increased by $370,000 to $1.2 million in 2017 compared to $850,000 in 2016. |
· | Non-interest income decreased $1.3 million in 2017 compared to 2016. |
· | Non-interest expense increased $505,000 in 2017 compared to 2016. |
Our principal business consists of attracting retail deposits from the general public, including some brokered deposits, and investing those funds primarily in loans secured by first mortgages on owner-occupied, one- to four-family residences, a variety of consumer loans, loans secured by commercial real estate and commercial business loans. Funds not invested in loans generally are invested in investment securities, including mortgage-backed and mortgage-related securities and agency and municipal bonds. We also obtain funds from FHLB advances and other borrowings.
51 |
MutualWealth is the wealth management division of the Bank providing a variety of fee-based financial services, including trust, investment, insurance, broker advisory, retirement plan and private banking services, in the Bank’s market area. MutualWealth produces non-interest income for the Bank that is tied primarily to the market value of the portfolios being managed. As of December 31, 2017, MutualWealth had $614.5 million of fiduciary assets and generated $4.0 million in commission income during 2017.
MutualFinancial Services is the brokerage division of the Bank providing a variety of fee-based financial services related to securities and investment transactions. MutualFinancial Services produces non-interest income for the Bank that is tied primarily to the volume of the transactions being processed. During 2017, MutualFinancial Services generated $893,000 in commission income.
Our results of operations depend primarily on the level of our net interest income, which is the difference between interest income on interest-earning assets, such as loans, mortgage-backed securities and investment securities, and interest expense on interest-bearing liabilities, primarily deposits and borrowings. The structure of our interest-earning assets versus the structure of interest-bearing liabilities, along with the shape of the yield curve, has a direct impact on our net interest income. Historically, our interest-earning assets have been longer term in nature (i.e., fixed-rate mortgage loans) and interest-bearing liabilities have been shorter term (i.e., certificates of deposit, regular savings accounts, etc.). This structure would impact net interest income favorably in a decreasing rate environment, assuming a normally shaped yield curve, as the rates on interest-bearing liabilities would decrease more rapidly than rates on the 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.
The Company continues to reduce the impact of interest rate changes on its net interest income by shortening the term of its interest-earning assets to better match the terms of our interest-bearing liabilities and by selling long-term fixed rate loans and increasing the term of certain liabilities. See “Item 7A - Quantitative and Qualitative Disclosures About Market Risk - Asset and Liability Management and Market Risk” in this Form 10-K. It has been the Company’s strategic objective to change the repricing structure of its interest-earning assets from longer term to shorter term to better match the structure of our interest-bearing liabilities and therefore reduce the impact interest rate changes have on our net interest income. Strategies employed to accomplish this objective have been to increase the originations of variable rate commercial loans and shorter term consumer loans and to sell longer term mortgage loans. The percentage of non-residential consumer and commercial loans to total loans has increased from 52.9% at the end of 2016 to 56.5% as of December 31, 2017. We continued to see improvements in our markets during 2017 and made significant progress toward achieving our strategic target loan mix. On the liability side of the balance sheet, the Company is employing strategies intended to increase the balance of core deposit accounts, such as low cost checking and money market accounts. The percentage of core deposits to total deposits remained fairly consistent throughout the year. These are ongoing strategies that are dependent on current market conditions and competition. The Company lengthens the term to maturity of FHLB advances when advantageous to lengthen repricing of the liability side of the balance sheet in order to reduce interest rate risk exposure.
During 2017, in keeping with our strategic objective to reduce interest rate risk exposure, the Company also sold $134.4 million of long-term fixed rate loans, which reduced potential earning assets and therefore had a negative impact on net interest income. This was offset, in the short term, by recognizing a gain on the sale of these loans of $3.9 million.
Recent Accounting Standards
For discussion of recent accounting standards, please see Note 2: Impact of Accounting Pronouncements to our Consolidated Financial Statements in Item 8 of this Form 10-K.
Critical Accounting Policies
The Notes to the Consolidated Financial Statements in Item 8 of this Form 10-K contain 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.
52 |
The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. A worsening or protracted economic decline would increase the likelihood of additional losses due to credit and market risk and could create the need for additional loss reserves.
Allowance for Loan Losses . The allowance for loan losses is a significant estimate that can and does change based on management’s assumptions about specific borrowers and current general economic and business conditions, among other factors. Management reviews the adequacy of the allowance for loan losses on at least a quarterly basis. The evaluation by management includes consideration of past loss experience, changes in the composition of the loan portfolio, the current condition and amount of loans outstanding, identified problem loans and the probability of collecting all amounts due.
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 . 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.
Goodwill is tested for impairment on an annual basis as of December 31, or whenever events or changes in circumstances indicate the carrying amount of goodwill exceeds its implied fair value. No events or changes in circumstances have occurred since the annual impairment test that would suggest is was more likely than not goodwill impairment existed.
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.
53 |
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 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 recoveries related to the value of these securities are recorded as an unrealized gain (as accumulated other comprehensive income (loss) in stockholders’ equity) and not recognized in income until the security is ultimately sold.
The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.
Deferred Tax Asset . The Company has evaluated its deferred tax asset to determine if it is more likely than not that the asset will be utilized in the future. The Company’s most recent evaluation has determined that, except for the amounts represented by the valuation allowance as discussed below, the Company will more likely than not be able to utilize the remaining deferred tax asset. The Company has generated average positive pre-tax pre-provision earnings of $17.3 million, or 1.2% of pre-tax pre-provision ROA over the previous five years. These earnings would be sufficient to utilize portions of the operating losses, tax credit carryforwards and temporary tax differences over the allowable periods. The analysis supports no additional valuation reserve is needed.
The valuation allowance established is the result of net operating losses for state franchise tax purposes totaling $17.9 million. See Note 15 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
54 |
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.
The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017 reducing the Company’s federal corporate tax rate from 34% to 21%, effective January 1, 2018. At December 31, 2017, the Company has substantially completed its accounting for the tax effects of enactment of the Tax Act. For deferred tax assets and liabilities, amounts were remeasured based on the rates expected to reverse in the future, which is now 21%. Based on this new law, we recorded an additional tax expense of $2.0 million due to the revaluation of the company’s deferred tax asset.
Management Strategy
Our strategy is to operate as an independent, business- and retail- oriented financial institution dedicated to serving customers in our market area. Our commitment is to provide a broad range of products and services to meet the needs of our customers. As part of this commitment, we are looking to increase our emphasis on commercial business products and services. We also operate a fully interactive transactional website that also allows consumers to open accounts. In addition, we are continually looking at cost-effective ways to expand our market area. Financial highlights of our strategy have included:
Broadening Loan Portfolio Diversification. We continue to work toward diversifying our loan portfolio to reduce our reliance on any one type of loan. Approximately 52.9% of our loan portfolio consisted of loans other than consumer real estate loans at the end of 2016. At the end of 2017, that percentage had increased to 56.5%, reflecting an increase of $50.4 million in our commercial and non-residential consumer loan portfolios.
Continuing as a Leading One- to Four-Family Lender in Indiana. We are one of the largest originators of one- to four-family residential loans in our market area. During 2017, we originated $187.2 million of one- to four-family residential first mortgage loans. While the last economic downturn decreased real estate values, we have seen a stabilization and slight increase in our market areas which is leading to an increase in purchase activity as rates have remained low.
Increasing Market Share and Changing Mix of Deposits. We continue to be focused on growth of core deposits, as deposits grew $48.7 million in 2017.
Expanding Wealth Management Presence. We continue to focus on leveraging our operations in the markets in which we serve. Total fiduciary balances remained consistent with that of year-end 2016. Commission income (non-interest income) generated by these relationships during 2017 totaled $4.0 million.
Financial Condition at December 31, 2017 Compared to December 31, 2016
General . Total assets at year-end 2017 were $1.6 billion, reflecting a $35.8 million increase during the year, primarily due to the increase in the investment portfolio of $27.5 million and the $14.0 million, or 1.2% increase in the gross loan portfolio, excluding loans held for sale. Average interest-earning assets increased $68.7 million, or 4.9%, to $1.5 billion at December 31, 2017 from $1.4 billion at December 31, 2016. Average interest-bearing liabilities increased by $42.2 million, or 3.6% to $1.2 billion at year-end 2017 from $1.2 billion at year-end 2016 reflecting an increase in total deposits. Average stockholders’ equity increased by $5.7 million, or 4.0%, during 2017.
55 |
Cash and Investments . Cash and investments increased $28.8 million from $277.8 million at year-end 2016 to $306.6 million at year-end 2017. The details of our cash and investments are as follows:
At December 31, | Amount | Percent | ||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Cash | $ | 8,763 | $ | 8,503 | $ | 260 | 3.06 | % | ||||||||
Interest-bearing demand deposits | 18,578 | 18,357 | 221 | 1.20 | ||||||||||||
Interest-bearing time deposits | 1,853 | 993 | 860 | 86.61 | ||||||||||||
Securities available for sale (fair value) | 277,378 | 249,913 | 27,465 | 10.99 | ||||||||||||
Total | $ | 306,572 | $ | 277,766 | $ | 28,806 | 10.37 | % |
At December 31, 2017, our investment portfolio consisted of $155.0 million in government-sponsored agency and government-sponsored entity mortgage-backed securities and collateralized mortgage obligations, $110.5 million in municipal securities and $11.8 million in corporate obligations. At December 31, 2017, these securities had gross unrealized gains of $4.1 million and gross unrealized losses of $3.5 million, of which $1.2 million was primarily due to unrealized losses on trust preferred securities. We have the ability to hold the trust preferred securities until maturity and believe that we will be able to collect the adjusted amortized cost basis of the securities. See Note 4 of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information about our investment securities.
Loans . Our gross loan portfolio, excluding loans held for sale, increased $14.1 million remaining consistent at approximately $1.2 billion at year-end 2017 and 2016. The following table reflects the changes in the gross amount of loans, excluding loans held for sale, by type during 2017:
At December 31, | Amount | Percent | ||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Real estate | ||||||||||||||||
Commercial | $ | 318,684 | $ | 302,577 | $ | 16,107 | 5.32 | % | ||||||||
Commercial construction and development | 28,164 | 22,453 | 5,711 | 25.44 | ||||||||||||
Consumer closed end first mortgage | 444,243 | 478,848 | (34,605 | ) | (7.23 | ) | ||||||||||
Consumer open end and junior liens | 69,477 | 71,222 | (1,745 | ) | (2.45 | ) | ||||||||||
Total real estate loans | 860,568 | 875,100 | (14,532 | ) | (1.66 | ) | ||||||||||
Consumer loans | ||||||||||||||||
Auto | 19,640 | 18,939 | 701 | 3.70 | ||||||||||||
Boat/RV | 169,238 | 141,602 | 27,636 | 19.52 | ||||||||||||
Other | 6,188 | 5,892 | 296 | 5.02 | ||||||||||||
Total consumer other | 195,066 | 166,433 | 28,633 | 17.20 | ||||||||||||
Commercial and industrial | 131,079 | 131,103 | (24 | ) | (0.02 | ) | ||||||||||
Total other loans | 326,145 | 297,536 | 28,609 | 9.62 | ||||||||||||
Total loans | $ | 1,186,713 | $ | 1,172,636 | $ | 14,077 | 1.20 | % |
The Bank made significant progress in its strategy to increase commercial and consumer loans as we increased the commercial portfolio by $21.8 million and the non-residential consumer portfolio by $28.6 million during 2017. We actively seek out opportunities to provide financing for new and growing commercial borrowers, as well as refinancing to sound commercial borrowers currently served by other financial institutions. The increase in the commercial and consumer portfolios was offset by selling $134.4 million of consumer residential mortgage loans including an $18.5 million portfolio mortgage loan sale during the period and a decline in residential mortgage loan originations as rates are starting to slowly increase. The Bank continues to sell longer term fixed-rate mortgage loans to reduce related interest rate risk.
56 |
Delinquencies and Non-performing Assets . As of December 31, 2017, our total loans delinquent 30-to-89 days was $15.6 million, or 1.3% of total loans, compared to $12.3 million, or 1.1% of total loans, at the end of 2016.
At December 31, 2017, our non-performing assets totaled $6.0 million, or 0.38% of total assets, compared to $6.6 million, or 0.42% of total assets, at December 31, 2016. This $596,000, or 9.1%, decrease was due to a decrease in non-performing loans primarily in the consumer residential mortgage loan portfolio. The table below sets forth the amounts and categories of non-performing assets in our loan portfolio at the dates indicated.
At December 31, | Amount | Percent | ||||||||||||||
2017 | 2016 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Non-accruing loans | $ | 5,220 | $ | 5,144 | $ | 76 | 1.48 | % | ||||||||
Accruing loans delinquent 90 days or more | 31 | 237 | (206 | ) | (86.92 | ) | ||||||||||
Other real estate owned and repossessed assets | 733 | 1,199 | (466 | ) | (38.87 | ) | ||||||||||
Total | $ | 5,984 | $ | 6,580 | $ | (596 | ) | (9.06 | )% |
Our non-performing assets decreased in 2017 primarily due to a decrease of $466,000 in other real estate owned and repossessed assets from $6.5 million at December 31, 2016 to $6.0 million at December 31, 2017. The Bank continues to diligently monitor and write down loans that appear to have irreversible weakness. The Bank works to ensure possible problem loans have been identified and steps have been taken to reduce loss by restructuring loans to improve cash flow or by increasing collateral. Total classified assets increased by 51.8% from $11.4 million at December 31, 2016 to $17.3 million at December 31, 2017. The increase in total classified loans was primarily the result of a $4.9 million increase in commercial and industrial loans classified as substandard credits. These credits were performing as agreed as of December 31, 2017.
At December 31, 2017, foreclosed real estate totaled $251,000. All foreclosed real estate properties were one- to four-family residential properties within our footprint. The Bank has seen improvement in this portfolio as market values have stabilized, which has decreased the number of new foreclosures and assisted in our sale of existing commercial and residential properties. All foreclosed real estate is currently for sale. At the end of 2017, the Bank also held $482,000 in other repossessed assets, such as autos, boats, RVs and horse trailers.
57 |
Allowance for Loan Loss . Allowance for loan losses increased $5,000 from $12.4 million at December 31, 2016 to $12.4 million December 31, 2017 as reflected below:
Year Ended December 31, | ||||||||
2017 | 2016 | |||||||
(Dollars in thousands) | ||||||||
Balance at beginning of period | $ | 12,382 | $ | 12,641 | ||||
Charge-offs | 1,412 | 1,482 | ||||||
Recoveries | 197 | 373 | ||||||
Net charge-offs | 1,215 | 1,109 | ||||||
Provisions charged to operations | 1,220 | 850 | ||||||
Balance at end of period | $ | 12,387 | $ | 12,382 | ||||
Ratio of net charge-offs during the period to average loans outstanding during the period | 0.10 | % | 0.10 | % | ||||
Allowance as a percentage of non-performing loans | 235.90 | % | 230.99 | % | ||||
Allowance as a percentage of total loans (end of period) | 1.05 | % | 1.06 | % |
Specific loan loss allocation related to loans that have been individually evaluated for impairment remained unchanged throughout the year, and general loan loss reserves have increased $5,000 as the non-performing loans and classified assets have remained consistent from 2016 to 2017. Net charge-offs for the year 2017 were $1.2 million, or 0.10% of average loans on an annualized basis, compared to $1.1 million, or 0.10% of average loans, for 2016. As of December 31, 2017, the allowance for loan losses as a percentage of loans receivable and non-performing loans was 1.05% and 235.9%, respectively, compared to 1.06% and 230.1%, respectively, at December 31, 2016. Allowance for loan losses as a percentage of loans receivable decreased primarily due to an increase in the total loan portfolio. Allowance for loan losses as a percentage of non-performing loans increased due to the decrease in non-performing loans as of December 31, 2017. The increase in the allowance was primarily due to management’s ongoing evaluation of the loan portfolio conditions in our market areas.
Other Assets. Other material changes in our assets during 2017 include a decrease in deferred tax asset of $4.5 million primarily due to the revaluation and write down of the deferred tax asset to reflect the signing of the Tax Cuts and Jobs Act that resulted in an increase in income tax expense of $2.0 million in the fourth quarter of 2017 due to the reduction in the federal corporate income tax rate to 21%, effective January 1, 2018. The decrease in deferred tax asset was also due to the change in and utilization of temporary differences such as change in securities available for sale, the use of tax credit carryovers and other temporary differences.
58 |
Deposits. Total deposits increased $48.7 million to $1.2 billion at year-end 2017 compared to $1.2 billion at year-end 2016, primarily due to increased interest-bearing NOW accounts and non-interest checking accounts, as reflected in the table below, with corresponding weighted average rates as of the same date. The changes reflected below are consistent with the Bank’s strategy to grow and strengthen core deposit relationships.
At December 31, | ||||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Amount |
Weighted
Average Rate |
Amount |
Weighted
Average Rate |
Amount
Change |
Percent
Change |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Type of Account: | ||||||||||||||||||||||||
Non-interest Checking | $ | 194,134 | 0.00 | % | $ | 178,046 | 0.00 | % | $ | 16,088 | 9.04 | % | ||||||||||||
Interest-bearing NOW | 330,821 | 0.52 | 292,977 | 0.27 | 37,844 | 12.92 | ||||||||||||||||||
Savings | 138,348 | 0.01 | 136,314 | 0.01 | 2,034 | 1.49 | ||||||||||||||||||
Money Market | 167,574 | 0.46 | 173,305 | 0.26 | (5,731 | ) | (3.31 | ) | ||||||||||||||||
Certificates of Deposit | 371,157 | 1.42 | 372,740 | 1.19 | (1,583 | ) | (0.42 | ) | ||||||||||||||||
Total | $ | 1,202,034 | 0.65 | % | $ | 1,153,382 | 0.49 | % | $ | 48,652 | 4.22 | % |
Borrowings . Total borrowings decreased $23.4 million, or 9.6%, to $221.4 million at year-end 2017 primarily due to a $23.4 million decrease in FHLB advances due to increases in total deposits. Other borrowings, increased $43,000 to $4.2 million at year-end 2017.
The Company acquired $5.0 million of issuer trust preferred securities in a 2008 acquisition of another financial institution, which had a net balance of $4.2 million at December 31, 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 bore a variable rate based quarterly at the prevailing three-month LIBOR rate plus 170 basis points, which was 3.29%. The Company has had the right to redeem the trust preferred securities, in whole or in part, without penalty, since September 2010.
Stockholders’ Equity . Stockholders’ equity was $150.3 million as of December 31, 2017, an increase of $10.2 million from December 31, 2016. The increase was primarily due to net income available to common shareholders of $12.3 million and an increase of $1.2 million due to exercises of stock options. These increases were partially offset by cash dividends of $4.9 million. The Company’s tangible book value per common share as of December 31, 2017 increased to $20.08 compared to $18.82 as of December 31, 2016 and the tangible common equity ratio increased to 9.35% as of December 31, 2017 compared to 8.89% as of December 31, 2016. The Company and the Bank’s risk-based capital ratios were well in excess of “well-capitalized” levels as defined by all regulatory standards as of December 31, 2017.
Financial Condition at December 31, 2016 Compared to December 31, 2015
General . Total assets at year-end 2016 were $1.6 billion, reflecting a $74.9 million increase during the year, primarily due to the $89.2 million, or 8.2% increase in the gross loan portfolio, excluding loans held for sale. Average interest-earning assets increased $68.7 million, or 5.1%, to $1.4 billion at December 31, 2016 from $1.3 billion at December 31, 2015. Average interest-bearing liabilities increased by $46.8 million, or 4.1% to $1.2 billion at year-end 2016 from $1.1 billion at year-end 2015 reflecting an increase in FHLB advances. Average stockholders’ equity increased by $8.9 million, or 6.7%, during 2016.
59 |
Cash and Investments . Cash and investments decreased from $282.1 million at year-end 2015 to $277.8 million at year-end 2016. The details of our cash and investments are as follows:
At December 31, | Amount | Percent | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Cash | $ | 8,503 | $ | 8,610 | $ | (107 | ) | (1.24 | )% | |||||||
Interest-bearing demand deposits | 18,357 | 12,305 | 6,052 | 49.18 | ||||||||||||
Interest-bearing time deposits | 993 | - | 993 | 0.00 | ||||||||||||
Securities available for sale (fair value) | 249,913 | 261,138 | (11,225 | ) | (4.30 | ) | ||||||||||
Total | $ | 277,766 | $ | 282,053 | $ | (4,287 | ) | (1.52 | )% |
At December 31, 2016, our investment portfolio consisted of $160.5 million in government-sponsored agency and government-sponsored entity mortgage-backed securities and collateralized mortgage obligations, $77.7 million in municipal securities and $11.7 million in corporate obligations. At December 31, 2016, these securities had gross unrealized gains of $2.8 million and gross unrealized losses of $4.7 million, of which $3.5 million was primarily due to unrealized losses associated with the increase in treasury rates near the end of the year. We have the ability to hold the trust preferred securities until maturity and believe that we will be able to collect the adjusted amortized cost basis of the securities. See Note 4 of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K for additional information about our investment securities.
Loans . Our gross loan portfolio, excluding loans held for sale, increased to $1.2 billion at year-end 2016 from $1.1 billion at year-end 2015. The following table reflects the changes in the gross amount of loans, excluding loans held for sale, by type during 2016:
At December 31, | Amount | Percent | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Real estate | ||||||||||||||||
Commercial | $ | 302,577 | $ | 236,895 | $ | 65,682 | 27.73 | % | ||||||||
Commercial construction and development | 22,453 | 15,744 | 6,709 | 42.61 | ||||||||||||
Consumer closed end first mortgage | 478,848 | 491,451 | (12,603 | ) | (2.56 | ) | ||||||||||
Consumer open end and junior liens | 71,222 | 70,990 | 232 | 0.33 | ||||||||||||
Total real estate loans | 875,100 | 815,080 | 60,020 | 7.36 | ||||||||||||
Consumer loans | ||||||||||||||||
Auto | 18,939 | 15,480 | 3,459 | 22.34 | ||||||||||||
Boat/RV | 141,602 | 123,621 | 17,981 | 14.55 | ||||||||||||
Other | 5,892 | 6,171 | (279 | ) | (4.52 | ) | ||||||||||
Total consumer other | 166,433 | 145,272 | 21,161 | 14.57 | ||||||||||||
Commercial and industrial | 131,103 | 123,043 | 8,060 | 6.55 | ||||||||||||
Total other loans | 297,536 | 268,315 | 29,221 | 10.89 | ||||||||||||
Total loans | $ | 1,172,636 | $ | 1,083,395 | $ | 89,241 | 8.24 | % |
The Bank made significant progress in its strategy to increase commercial and consumer loans as we increased the commercial portfolio by $80.5 million and the non-residential consumer portfolio by $21.2 million during 2016. We actively seek out opportunities to provide financing for new and growing commercial borrowers, as well as refinancing to sound commercial borrowers currently served by other financial institutions. The increase in the commercial and consumer portfolios was partially offset by the decrease in one- to four-family loans during the period. We increased our purchase loan activity while also allowing consumers to refinance their mortgage loans; however, we are starting to see those activities slow down as rates are starting to slowly increase. The Bank continues to sell longer term fixed-rate mortgage loans to reduce related interest rate risk.
60 |
Delinquencies and Non-performing Assets . As of December 31, 2016, our total loans delinquent 30-to-89 days was $12.3 million, or 1.1% of total loans, compared to $12.0 million, or 1.1% of total loans, at the end of 2015.
At December 31, 2016, our non-performing assets totaled $6.6 million, or 0.42% of total assets, compared to $9.6 million, or 0.65% of total assets, at December 31, 2015. This $3.0 million, or 31.7%, decrease was due to a decrease in non-performing loans primarily in the commercial real estate portfolio. The table below sets forth the amounts and categories of non-performing assets in our loan portfolio at the dates indicated.
At December 31, | Amount | Percent | ||||||||||||||
2016 | 2015 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Non-accruing loans | $ | 5,144 | $ | 6,904 | $ | (1,760 | ) | (25.49) | % | |||||||
Accruing loans delinquent 90 days or more | 237 | 267 | (30 | ) | (11.24 | ) | ||||||||||
Other real estate owned and repossessed assets | 1,199 | 2,456 | (1,257 | ) | (51.18 | ) | ||||||||||
Total | $ | 6,580 | $ | 9,627 | $ | (3,047 | ) | (31.65) | % |
Our non-performing assets decreased in 2016 as local economic conditions improved. The Bank continues to diligently monitor and write down loans that appear to have irreversible weakness. The Bank works to ensure possible problem loans have been identified and steps have been taken to reduce loss by restructuring loans to improve cash flow or by increasing collateral. In addition to the decrease in non-performing assets, the Company has seen significant improvement during the year in total classified assets. Total classified assets decreased by 33.9% from $17.5 million at December 31, 2015 to $11.4 million at December 31, 2016.
At December 31, 2016, foreclosed real estate totaled $718,000 and consisted of primarily one- to four-family residential properties within our footprint. The Bank has seen improvement in this portfolio as market values have stabilized, which has decreased the number of new foreclosures and assisted in our sale of existing commercial and residential properties. At December 31, 2016, the Bank had 10 foreclosed residential properties with a book value totaling $552,000. All foreclosed real estate is currently for sale. At the end of 2016, the Bank also held $481,000 in other repossessed assets, such as autos, boats, RVs and horse trailers.
61 |
Allowance for Loan Loss . Allowance for loan losses decreased $259,000 from $12.6 million at December 31, 2015 to $12.4 million December 31, 2016 as reflected below:
Year Ended December 31, | ||||||||
2016 | 2015 | |||||||
(Dollars in thousands) | ||||||||
Balance at beginning of period | $ | 12,641 | $ | 13,168 | ||||
Charge-offs | 1,482 | 1,387 | ||||||
Recoveries | 373 | 735 | ||||||
Net charge-offs | 1,109 | 652 | ||||||
Provisions charged to operations | 850 | 125 | ||||||
Balance at end of period | $ | 12,382 | $ | 12,641 | ||||
Ratio of net charge-offs during the period to average loans outstanding during the period | 0.10 | % | 0.06 | % | ||||
Allowance as a percentage of non-performing loans | 230.99 | % | 176.28 | % | ||||
Allowance as a percentage of total loans (end of period) | 1.06 | % | 1.17 | % |
Specific loan loss allocation related to loans that have been individually evaluated for impairment remained unchanged throughout the year, and general loan loss reserves have decreased $259,000 as the non-performing loans and classified assets have improved. Net charge-offs for the year 2016 were $1.1 million, or 0.10% of average loans on an annualized basis, compared to $652,000, or 0.06% of average loans, for 2015. As of December 31, 2016, the allowance for loan losses as a percentage of loans receivable and non-performing loans was 1.06% and 230.1%, respectively, compared to 1.17% and 176.3%, respectively, at December 31, 2015. Allowance for loan losses as a percentage of loans receivable decreased primarily due to an increase in the total loan portfolio. Allowance for loan losses as a percentage of non-performing loans increased due to the decrease in non-performing loans as of December 31, 2016. The decrease in the allowance was primarily due to management’s ongoing evaluation of the loan portfolio conditions in our market areas.
Other Assets. Other material changes in our assets during 2016 include a decrease in premises and equipment of $9.8 million primarily due to the sale of an office building, we owned and occupied, in December 2016 and the closing of several financial centers locations that will be finalized in the first quarter of 2017. These transactions produced a $426,000 gain and a $215,000 loss, respectively, in 2016.
62 |
Deposits. Total deposits increased $62.0 million to $1.2 billion at year-end 2016 compared to $1.1 billion at year-end 2015, primarily due to increased interest-bearing checking accounts and certificates of deposit, as reflected in the table below, with corresponding weighted average rates as of the same date. The changes reflected below are consistent with the Bank’s strategy to grow and strengthen core deposit relationships.
At December 31, | ||||||||||||||||||||||||
2016 | 2015 | |||||||||||||||||||||||
Amount |
Weighted
Average Rate |
Amount |
Weighted
Average Rate |
Amount
Change |
Percent
Change |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Type of Account: | ||||||||||||||||||||||||
Non-interest Checking | $ | 178,046 | 0.00 | % | $ | 179,542 | 0.00 | % | $ | (1,496 | ) | (0.83) | % | |||||||||||
Interest-bearing NOW | 292,977 | 0.27 | 267,089 | 0.23 | 25,888 | 9.69 | ||||||||||||||||||
Savings | 136,314 | 0.01 | 131,578 | 0.01 | 4,736 | 3.60 | ||||||||||||||||||
Money Market | 173,305 | 0.26 | 162,551 | 0.20 | 10,754 | 6.62 | ||||||||||||||||||
Certificates of Deposit | 372,740 | 1.19 | 350,622 | 1.14 | 22,118 | 6.31 | ||||||||||||||||||
Total | $ | 1,153,382 | 0.49 | % | $ | 1,091,382 | 0.45 | % | $ | 62,000 | 5.68 | % |
Borrowings . Total borrowings increased $9.7 million, or 4.1%, to $244.8 million at year-end 2016 primarily due to a $15.0 million increase in FHLB advances to fund increases in the loan portfolio. Other borrowings, decreased $5.3 million to $4.2 million at year-end 2016 due to pre-payment of a holding company note with FTN, leaving outstanding a subordinate debenture.
The Company acquired $5.0 million of issuer trust preferred securities in a 2008 acquisition of another financial institution, which had a net balance of $4.2 million at December 31, 2016 due to the purchase accounting adjustment in the acquisition. These securities mature 30 years from the date of issuance or September 15, 2035. The securities bore a variable rate based quarterly at the prevailing three-month LIBOR rate plus 170 basis points, which was 2.66%. The Company has had the right to redeem the trust preferred securities, in whole or in part, without penalty, since September 2010.
Stockholders’ Equity . Stockholders’ equity was $140.0 million as of December 31, 2016, an increase of $3.0 million from December 31, 2015. The increase was primarily due to net income available to common shareholders of $13.2 million and an increase of $976,000 due to exercises of stock options. These increases were partially offset by cash dividends of $4.3 million and stock repurchases of $4.4 million. The Company’s tangible book value per common share as of December 31, 2016 increased to $18.81 compared to $18.11 as of December 31, 2015 and the tangible common equity ratio decreased to 8.89% as of December 31, 2016 compared to 9.11% as of December 31, 2015. The Company and the Bank’s risk-based capital ratios were well in excess of “well-capitalized” levels as defined by all regulatory standards as of December 31, 2016.
63 |
Average Balances and Net Interest Margin
The following table presents for the periods indicated the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. All average balances are daily average balances. Non-accruing loans have been included in the table as loans carrying a zero yield.
Year ended December 31, | ||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2015 | ||||||||||||||||||||||||||||||||||
Average
Outstanding Balance |
Interest
Earned/Paid |
Average
Yield/Rate |
Average
Outstanding Balance |
Interest
Earned/Paid |
Average
Yield/Rate |
Average
Outstanding Balance |
Interest
Earned/Paid |
Average
Yield/Rate |
||||||||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||||||||||
Interest-Earning Assets: | ||||||||||||||||||||||||||||||||||||
Interest -bearing deposits | $ | 21,465 | $ | 130 | 0.61 | % | $ | 24,272 | $ | 76 | 0.31 | % | $ | 19,789 | $ | 14 | 0.07 | % | ||||||||||||||||||
Mortgage-backed securities available for sale (1) | 156,887 | 3,814 | 2.43 | 173,786 | 4,059 | 2.34 | 195,781 | 5,294 | 2.70 | |||||||||||||||||||||||||||
Investment securities available for sale (1) | 98,493 | 3,223 | 3.27 | 77,266 | 2,441 | 3.16 | 63,041 | 1,796 | 2.85 | |||||||||||||||||||||||||||
Loans (2) | 1,185,956 | 51,231 | 4.32 | 1,119,408 | 46,785 | 4.18 | 1,047,313 | 44,190 | 4.22 | |||||||||||||||||||||||||||
Stock in FHLB of Indianapolis | 11,167 | 470 | 4.21 | 10,594 | 441 | 4.16 | 10,698 | 482 | 4.51 | |||||||||||||||||||||||||||
Total interest-earning assets | 1,473,968 | 58,868 | 3.99 | 1,405,326 | 53,802 | 3.83 | 1,336,622 | 51,776 | 3.87 | |||||||||||||||||||||||||||
Non-Interest Earning Assets (net of allowance for loan losses and unrealized gain (loss) | 97,768 | 112,601 | 108,765 | |||||||||||||||||||||||||||||||||
Total Assets | $ | 1,571,736 | $ | 1,517,927 | $ | 1,445,387 | ||||||||||||||||||||||||||||||
Interest-Bearing Liabilities: | ||||||||||||||||||||||||||||||||||||
Demand and NOW accounts | $ | 307,395 | $ | 1,242 | 0.40 | $ | 281,626 | $ | 670 | 0.24 | $ | 262,424 | $ | 591 | 0.23 | |||||||||||||||||||||
Savings deposits | 139,335 | 15 | 0.01 | 136,102 | 14 | 0.01 | 129,980 | 13 | 0.01 | |||||||||||||||||||||||||||
Money market accounts | 172,163 | 645 | 0.37 | 169,595 | 452 | 0.27 | 160,095 | 396 | 0.25 | |||||||||||||||||||||||||||
Certificate accounts | 382,134 | 4,913 | 1.29 | 356,157 | 4,160 | 1.17 | 375,102 | 4,259 | 1.14 | |||||||||||||||||||||||||||
Total deposits | 1,001,027 | 6,815 | 0.68 | 943,480 | 5,296 | 0.56 | 927,601 | 5,259 | 0.57 | |||||||||||||||||||||||||||
Borrowings | 220,648 | 3,796 | 1.72 | 235,967 | 3,951 | 1.67 | 205,066 | 3,544 | 1.73 | |||||||||||||||||||||||||||
Total interest-bearing accounts | 1,221,675 | 10,611 | 0.87 | 1,179,447 | 9,247 | 0.78 | 1,132,667 | 8,803 | 0.77 | |||||||||||||||||||||||||||
Non-Interest Bearing Accounts | 188,203 | 181,594 | 165,470 | |||||||||||||||||||||||||||||||||
Other Liabilities | 15,282 | 16,014 | 15,271 | |||||||||||||||||||||||||||||||||
Total Liabilities | 1,425,160 | 1,377,055 | 1,313,408 | |||||||||||||||||||||||||||||||||
Stockholders' Equity | 146,576 | 140,872 | 131,979 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 1,571,736 | $ | 1,517,927 | $ | 1,445,387 | ||||||||||||||||||||||||||||||
Net Earning Assets | $ | 252,293 | $ | 225,879 | $ | 203,955 | ||||||||||||||||||||||||||||||
Net Interest Income | $ | 48,257 | $ | 44,555 | $ | 42,973 | ||||||||||||||||||||||||||||||
Net Interest Rate Spread (3) | 3.13 | % | 3.04 | % | 3.10 | % | ||||||||||||||||||||||||||||||
Net interest margin (4) | 3.27 | % | 3.17 | % | 3.22 | % | ||||||||||||||||||||||||||||||
Net interest margin, tax equivalent (5) | 3.38 | % | 3.27 | % | 3.29 | % | ||||||||||||||||||||||||||||||
Average Interest-Earning Assets to Average Interest- Bearing Liabilities | 120.65 | % | 119.15 | % | 118.01 | % |
(1) Average balances of securities is computed based on the average of the historical amortized cost balances without the effects of the fair value adjustments.
(2) Calculated net of deferred loan fees, loan discounts and loans in process.
(3) Interest rate spread is calculated by subtracting weighted average interest rate cost form weighted average interest rate yield for the period indicated.
(4) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated.
(5) Tax equivalent margin is calculated by taking non-taxable interest and grossing up by 34% applicable tax rate.
64 |
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to changes in volume, which are changes in volume multiplied by the old rate, and changes in rate, which is a change in rate multiplied by the old volume. Changes attributable to both rate and volume, which cannot be segregated, are allocated proportionately to the change due to volume and the change due to rate.
Year Ended December 31, | ||||||||||||||||||||||||
2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||||||||
Increase (Decrease) Due to | Increase (Decrease) Due to | |||||||||||||||||||||||
Volume | Rate |
Total
Increase (Decrease) |
Volume | Rate |
Total
Increase (Decrease) |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Interest-Earning Assets: | ||||||||||||||||||||||||
Interest -bearing deposits | $ | (9 | ) | $ | 63 | $ | 54 | $ | 3 | $ | 59 | $ | 62 | |||||||||||
Investment securities available for sale | 276 | 261 | 537 | (189 | ) | (401 | ) | (590 | ) | |||||||||||||||
Loans receivable | 2,781 | 1,665 | 4,446 | 3,043 | (448 | ) | 2,595 | |||||||||||||||||
Stock in FHLB of Indianapolis | 24 | 5 | 29 | (5 | ) | (36 | ) | (41 | ) | |||||||||||||||
Total interest-earning assets | $ | 3,072 | $ | 1,994 | $ | 5,066 | $ | 2,852 | $ | (826 | ) | $ | 2,026 | |||||||||||
Interest-Bearing Liabilities: | ||||||||||||||||||||||||
Savings deposits | $ | - | $ | 1 | $ | 1 | $ | 1 | $ | - | $ | 1 | ||||||||||||
Money market accounts | 7 | 186 | 193 | 24 | 32 | 56 | ||||||||||||||||||
Demand and NOW accounts | 61 | 511 | 572 | 44 | 35 | 79 | ||||||||||||||||||
Certificate accounts | 303 | 450 | 753 | (216 | ) | 117 | (99 | ) | ||||||||||||||||
Borrowings | (256 | ) | 101 | (155 | ) | 534 | (127 | ) | 407 | |||||||||||||||
Total interest-bearing liabilities | $ | 115 | $ | 1,249 | $ | 1,364 | $ | 387 | $ | 57 | $ | 444 | ||||||||||||
Change in net interest income | $ | 3,702 | $ | 1,582 |
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Comparison of Results of Operations for the Years Ended December 31, 2017 and 2016.
General . Net income available to common stockholders for the year ended December 31, 2017 was $12.3 million, or $1.67 basic and $1.64 diluted earnings per common share, compared to net income available to common stockholders of $13.2 million, or $1.79 basic and $1.76 diluted earnings per common share, for the year ended December 31, 2016.
Interest Income . Total interest income increased $5.1 million, or 9.4%, to $58.9 million during the year ended December 31, 2017 from $53.8 million during the year ended December 31, 2016. The increase was a result of the $68.7 million increase in average interest-earning assets to $1.5 billion at year end 2017 and a sixteen basis point increase in yield on average interest-earning assets to 3.99% in 2017 compared to 3.83% in 2016 as average interest earning assets reprice higher. Interest income on loans in 2017 was $51.2 million compared to $46.8 million in 2016, a result of a $66.5 million increase in average loan balances and a fourteen basis point increase in the weighted average yield on average loans in 2017 to 4.32%. Interest income on investments, including FHLB stock, increased in 2017 by $566,000 to $7.5 million.
Interest Expense . Interest expense increased $1.4 million, or 14.8%, to $10.6 million during the year ended December 31, 2017 compared to $9.2 million during the year ended December 31, 2016. The reason for this increase was an increase in average interest-bearing liabilities of $42.2 million and a five basis point increase in the expense on average advances. The increase in average interest-bearing liabilities was a result of a $57.5 million increase in average interest-bearing deposits, as additional funding was used to fund increased loan demand, partially offset by a decrease of $15.3 million in average FHLB advances.
Net Interest Income . Net interest income before the provision for loan losses increased $3.7 million in 2017 compared to 2016. The increase was a result of an increase of $68.6 million in average interest earning assets due to an increase in the average loan portfolio of $66.5 million. This increase was aided by the net interest margin increasing to 3.27% in 2017 compared to 3.17% in 2016, while the tax equivalent net interest margin increased to 3.38% in 2017 compared to 3.27% 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 this Form 10-K.
Provision for Loan Losses . The provision for loan losses for 2017 was $1.2 million compared to $850,000 during 2016. The increase was primarily due to our loan portfolio that has increased $10.6 million, or 0.9% over the last year and a slightly increased level of net charge-offs. The loan mix also has contributed to the increase in provision with commercial and non-real estate consumer loans making up 57.0% of the loan portfolio at the end of 2017 compared to 53.2% as of the end of 2016. Net charge-offs for 2017 equaled $1.2 million, or 0.10% of total average loans compared to $1.1 million, or 0.10% of total average loans in 2016.
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Non-Interest Income . Non-interest income decreased by $1.3 million to $18.1 million in 2017.
Year Ended | Amount | Percent | ||||||||||||||
12/31/2017 | 12/31/2016 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Non-Interest Income: | ||||||||||||||||
Service fee income | $ | 6,584 | $ | 6,124 | $ | 460 | 7.51 | % | ||||||||
Net realized gain (loss) on sale of securities | 708 | 1,023 | (315 | ) | (30.79 | ) | ||||||||||
Commissions | 5,027 | 5,049 | (22 | ) | (0.44 | ) | ||||||||||
Net gains on sales of loans | 3,887 | 4,761 | (874 | ) | (18.36 | ) | ||||||||||
Net servicing fees | 391 | 332 | 59 | 17.77 | ||||||||||||
Increase in cash surrender value of life insurance | 1,113 | 1,159 | (46 | ) | (3.97 | ) | ||||||||||
Loss on sale of other real estate and repossessed assets | (122 | ) | (210 | ) | 88 | (41.90 | ) | |||||||||
Other income | 488 | 1,184 | (696 | ) | (58.78 | ) | ||||||||||
Total | $ | 18,076 | $ | 19,422 | $ | (1,346 | ) | (6.93 | )% |
Non-interest income decreased due to a decrease of $874,000 on gain on sale of mortgage loans caused by a decline in mortgage production, a decrease of $315,000 in gain on sale of investment securities and a decrease of $696,000 on other income resulting from one-time income received in 2016, but not repeated in 2017. The non-recurring income in 2016 included $165,000 of fee income on interest rate swaps and $349,000 life insurance benefit income from death benefit proceeds. These declines were partially offset by an increase of $460,000 in service charges on deposit accounts as interchange revenue has increased due to increased debit card activity.
Non-Interest Expenses . Non-interest expenses increased by $505,000 to $46.0 million in 2017.
Year Ended | Amount | Percent | ||||||||||||||
12/31/2017 | 12/31/2016 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Non-Interest Expenses: | ||||||||||||||||
Salaries and employee benefits | $ | 27,229 | $ | 27,427 | $ | (198 | ) | (0.72 | )% | |||||||
Net occupancy expenses | 3,133 | 2,308 | 825 | 35.75 | ||||||||||||
Equipment expenses | 1,773 | 1,818 | (45 | ) | (2.48 | ) | ||||||||||
Data processing fees | 2,321 | 1,991 | 330 | 16.57 | ||||||||||||
Advertising and promotion | 1,223 | 1,204 | 19 | 1.58 | ||||||||||||
ATM expense | 1,676 | 1,536 | 140 | 9.11 | ||||||||||||
Deposit insurance | 724 | 788 | (64 | ) | (8.12 | ) | ||||||||||
Professional fees | 1,855 | 1,807 | 48 | 2.66 | ||||||||||||
Software subscriptions and publications | 2,202 | 2,117 | 85 | 4.02 | ||||||||||||
Other real estate and repossessed assets | 165 | 73 | 92 | 126.03 | ||||||||||||
Other expenses | 3,704 | 4,431 | (727 | ) | (16.41 | ) | ||||||||||
Total | $ | 46,005 | $ | 45,500 | $ | 505 | 1.11 | % |
The increase in non-interest expenses was primarily due to net occupancy expense increasing by $825,000 primarily due to the loss of rental income from an office building sold in the fourth quarter of 2016. Other increases included a $330,000 increase in data processing expenses primarily related to increased technological services offered to customers and an increase of $140,000 on ATM and debit card expenses due to increased usage of debit cards. These increases were partially offset by a decrease of $727,000 in other expenses primarily related to $236,000 in one-time expenses associated with the start-up of the pooled captive insurance company in 2016, not repeated in 2017. Additional decreases in other expenses were a reduction in intangible amortization, a reduction in fraud losses and decreased expenses as a result of branch closings. These increases were also partially offset by a decrease of $198,000 in salaries and employee benefits primarily due to a decline in health insurance costs compared to 2016, despite a one-time bonus accrual at year end 2017 of $340,000. Merger-related expenses were $288,000.
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Income Tax Expense . Income tax expense in 2017 increased $2.4 million compared to 2016. The effective tax rate for 2017 was 35.6% compared to 24.9% for 2016. The reason for the increase was primarily due to additional tax expense caused by the revaluation of the Company’s deferred tax asset as a result of the Tax Cuts and Jobs Act which was enacted into law in December 2017, reducing the Company’s federal corporate tax rate to 21% effective January 1, 2018. The effective tax rate excluding the $2.0 million tax expense resulting from the revaluation was 25.1% in 2017. The reason for the remaining increase was due to an increase in taxable income and an increase in non-deductible expenses primarily related to the merger with Universal Bancorp.
Comparison of Results of Operations for the Years Ended December 31, 2016 and 2015.
General . Net income available to common stockholders for the year ended December 31, 2016 was $13.2 million, or $1.79 basic and $1.76 diluted earnings per common share, compared to net income available to common stockholders of $12.3 million, or $1.66 basic and $1.62 diluted earnings per common share, for the year ended December 31, 2015.
Interest Income . Total interest income increased $2.0 million, or 3.9%, to $53.8 million during the year ended December 31, 2016 from $51.8 million during the year ended December 31, 2015. The $68.7 million increase in average interest-earning assets to $1.4 billion at year end 2016 was partially offset by a four basis point decrease in yield on average interest-earning assets to 3.83% in 2016 compared to 3.87% in 2015 as average interest earning assets continued to reprice lower. Interest income on loans in 2016 was $46.8 million compared to $44.2 million in 2015, a result of a $72.1 million increase in average loan balances, partially offset by a four basis point decrease in the weighted average yield on average loans in 2016 to 4.18%. Interest income on investments, including FHLB stock, decreased in 2016 by $631,000 to $6.9 million.
Interest Expense . Interest expense increased $444,000, or 5.0%, to $9.2 million during the year ended December 31, 2016 compared to $8.8 million during the year ended December 31, 2015. The reason for this increase was an increase in average interest-bearing liabilities of $46.8 million, including an increase of $30.9 million in average FHLB advances, partially offset by a six basis point decline in the expense on average advances, and a $15.9 million increase in average interest-bearing deposits, as additional funding was used to fund increased loan demand.
Net Interest Income . Net interest income before the provision for loan losses increased $1.6 million in 2016 compared to 2015. The increase was a result of an increase of $68.7 million in average interest earning assets due to an increase in the average loan portfolio of $72.1 million. This increase was partially offset by the net interest margin decreasing to 3.17% in 2016 compared to 3.22% in 2015, while the tax equivalent net interest margin declined to 3.27% in 2016 compared to 3.29% in 2015. For more information on our asset/liability management especially as it relates to interest rate risk, see “Item 7A - Quantitative and Qualitative Disclosures About Market Risk” in this Form 10-K.
Provision for Loan Losses . The provision for loan losses for 2016 was $850,000 compared to $125,000 during 2015. The increase was primarily due to our loan portfolio that has increased $88.7 million, or 8.2% over the last year and an increased level of net charge-offs. Net charge-offs for 2016 equaled $1.1 million, or 0.10% of total average loans compared to $652,000, or 0.06% of total average loans, in 2015.
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Non-Interest Income . Non-interest income increased by $2.3 million to $19.4 million in 2016.
Year Ended | Amount | Percent | ||||||||||||||
12/31/2016 | 12/31/2015 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Non-Interest Income: | ||||||||||||||||
Service fee income | $ | 6,124 | $ | 5,947 | $ | 177 | 2.98 | % | ||||||||
Net realized gain (loss) on sale of securities | 1,023 | 436 | 587 | 134.63 | ||||||||||||
Commissions | 5,049 | 4,603 | 446 | 9.69 | ||||||||||||
Net gains on sales of loans | 4,761 | 4,176 | 585 | 14.01 | ||||||||||||
Net servicing fees | 332 | 274 | 58 | 21.17 | ||||||||||||
Increase in cash surrender value of life insurance | 1,159 | 1,184 | (25 | ) | (2.11 | ) | ||||||||||
Loss on sale of other real estate and repossessed assets | (210 | ) | (111 | ) | (99 | ) | 89.19 | |||||||||
Other income | 1,184 | 630 | 554 | 87.94 | ||||||||||||
Total | $ | 19,422 | $ | 17,139 | $ | 2,283 | 13.32 | % |
The increase in non-interest income was driven by an increase in gain on sale of loans due to higher mortgage production over the prior year, an increase in commission income due to the trust and wealth management business as we have continued to see growth in our fiduciary assets, and an increase in service charges on deposit accounts due to increased interchange revenue (fees from debit and credit card activity signature based activity) and checking account growth. Other increases included an increase in gain on sale of securities and an increase in other income primarily related to non-recurring life insurance benefit income from death benefit proceeds.
Non-Interest Expenses . Non-interest expenses increased by $2.4 million to $45.5 million in 2016.
Year Ended | Amount | Percent | ||||||||||||||
12/31/2016 | 12/31/2015 | Change | Change | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Non-Interest Expenses: | ||||||||||||||||
Salaries and employee benefits | $ | 27,427 | $ | 25,526 | $ | 1,901 | 7.45 | % | ||||||||
Net occupancy expenses | 2,308 | 2,260 | 48 | 2.12 | ||||||||||||
Equipment expenses | 1,818 | 1,831 | (13 | ) | (0.71 | ) | ||||||||||
Data processing fees | 1,991 | 1,746 | 245 | 14.03 | ||||||||||||
Advertising and promotion | 1,204 | 1,193 | 11 | 0.92 | ||||||||||||
ATM expense | 1,536 | 1,436 | 100 | 6.96 | ||||||||||||
Deposit insurance | 788 | 897 | (109 | ) | (12.15 | ) | ||||||||||
Professional fees | 1,807 | 1,695 | 112 | 6.61 | ||||||||||||
Software subscriptions and publications | 2,117 | 1,749 | 368 | 21.04 | ||||||||||||
Other real estate and repossessed assets | 73 | 374 | (301 | ) | (80.48 | ) | ||||||||||
Other expenses | 4,431 | 4,440 | (9 | ) | (0.20 | ) | ||||||||||
Total | $ | 45,500 | $ | 43,147 | $ | 2,353 | 5.45 | % |
The increase was primarily a result of increases in salaries and employee benefits due primarily to increases in health insurance, an investment in a financial center and commercial lending staff in Fort Wayne, Indiana late in 2015, and increased commission expense for mortgage originators. Additionally, software subscriptions and maintenance increased due to costs associated with upgraded or more efficient software technologies and data processing expenses increased primarily due to increased services being provided. These increases were partially offset by a decrease of $301,000 in foreclosed real estate and repossessed assets expense due to a reduction in the number of foreclosed properties.
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Income Tax Expense . Income tax expense in 2016 decreased $192,000 compared to 2015. The effective tax rate for 2016 was 24.9% compared to 27.2% for 2015. The reason for the decline was an increase in tax free income due in part to an increase in holdings of tax free municipal securities.
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 December 31, 2017, our ratio was 20.9%. 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 reduce excess liquidity by utilizing proceeds generated from the investment portfolio to fund loan growth over the next few years as demand for loans increases while maintaining an adequate level of investments. 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 and municipal 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 maintain 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 December 31, 2017, on a consolidated basis, the Company had $304.7 million in cash and investment securities available for sale and $4.6 million in loans held for sale generally available for its cash needs. We can also generate funds from borrowings, primarily FHLB advances, and, to a lesser degree, third party loans. At December 31, 2017, the Bank had the ability to borrow an additional $51.4 million in FHLB advances and $40.0 million in fed funds. In addition, we have historically sold 15- and 30-year long-term, fixed-rate mortgage loans in the secondary market in order to reduce interest rate risk and to create another source of liquidity. The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its own operating expenses (many of which are paid to the Bank), the Company is responsible for paying amounts owed on its trust preferred securities, any dividends declared to its common stockholders, and interest and principal on outstanding debt. The Company’s primary source of funds is Bank dividends, the payment of which is subject to regulatory limits. At December 31, 2017, the Company, on an unconsolidated basis, had $12.0 million in cash, interest-bearing deposits and liquid investments generally available for its cash needs.
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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 December 31, 2017, the approved outstanding loan commitments, including unused lines of credit, amounted to $235.9 million. Certificates of deposit scheduled to mature in one year or less at December 31, 2017, totaled $172.1 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 year ended December 31, 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 December 31, 2017, the Bank had $112.7 million in commitments to make loans, $13.1 million in undisbursed portions of closed loans, $107.1 million in unused lines of credit and $3.0 million in standby letters of credit. In addition, on a consolidated basis, at December 31, 2017, the Company had $221.4 million in outstanding non-deposit borrowings, primarily FHLB advances, of which $67.6 million is due during 2018.
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.” 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.
At December 31, 2017, the Bank’s regulatory capital exceeded the FDIC regulatory requirements, and the Bank was well-capitalized under regulatory prompt corrective action standards. In addition, at December 31, 2017, the Company’s capital levels exceeded the FRB’s requirements, and the Company was considered well-capitalized under FRB guidelines. Consistent with our goals to operate a sound and profitable organization, our policy is for the Bank to maintain well-capitalized status.
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Our capital ratios at December 31, 2017 are reflected below:
Actual Capital Levels |
Minimum Regulatory
Capital Levels |
Minimum Required To
Be Considered Well- Capitalized |
||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
Leverage Capital Level (1) : | ||||||||||||||||||||||||
MutualFirst Consolidated | $ | 148,135 | 9.4 | % | $ | 63,293 | 4.0 | % | N/A | N/A | ||||||||||||||
MutualBank | 133,515 | 8.4 | 63,254 | 4.0 | $ | 79,068 | 5.0 | % | ||||||||||||||||
Common Equity Tier 1 Capital Level (2) : | ||||||||||||||||||||||||
MutualFirst Consolidated | $ | 144,764 | 12.2 | % | $ | 53,249 | 4.5 | % | N/A | N/A | ||||||||||||||
MutualBank | 133,515 | 11.3 | 53,407 | 4.5 | $ | 77,143 | 6.5 | % | ||||||||||||||||
Tier 1 Risk-Based Capital Level (3) : | ||||||||||||||||||||||||
MutualFirst Consolidated | $ | 148,135 | 12.5 | % | $ | 71,238 | 6.0 | % | N/A | N/A | ||||||||||||||
MutualBank | 133,515 | 11.3 | 71,209 | 6.0 | $ | 94,946 | 8.0 | % | ||||||||||||||||
Total Risk-Based Capital Level (4) : | ||||||||||||||||||||||||
MutualFirst Consolidated | $ | 160,522 | 13.5 | % | $ | 94,984 | 8.0 | % | N/A | N/A | ||||||||||||||
MutualBank | 145,902 | 12.3 | 94,946 | 8.0 | $ | 118,682 | 10.0 | % |
(1) Tier 1 Capital to Average Total Assets for Leverage Ratio of $1.6 billion for the Bank and Company at December 31, 2017.
(2) Common Equity Tier 1 Capital to Risk-Weighted Assets of $1.2 billion for the Bank and Company at December 31, 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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.
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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 2017 we sold in the secondary market $134.4 million of primarily fixed rate, one- to four-family mortgage loans with a term to maturity of 15 years or greater, which was 76.2% of all such loans originated by the Bank and its subsidiaries during the year.
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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 December 31, 2017.
Percentage Change in | ||||||||
Net Interest Income | NPV | |||||||
Rate Shock: | ||||||||
Up 400 basis points | (9.8 | )% | (22.0 | )% | ||||
Up 300 basis points | (6.9 | )% | (16.1 | )% | ||||
Up 200 basis points | (4.3 | )% | (10.4 | )% | ||||
Up 100 basis points | (2.0 | )% | (4.6 | )% | ||||
Down 100 basis points | (4.2 | )% | (9.4 | )% |
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 | (3.4 | )% | (19.0 | )% | ||||
Up 300 basis points | (2.5 | )% | (13.9 | )% | ||||
Up 200 basis points | (1.6 | )% | (8.9 | )% | ||||
Up 100 basis points | (0.7 | )% | (3.8 | )% | ||||
Down 100 basis points | (4.2 | )% | (9.4 | )% |
The analyses indicate that net interest income and NPV would decline in an instantaneous upward or downward rate shock. While our balance sheet is slightly liability sensitive, the model does not take into consideration any rates below zero. Since deposit rates are close to the floor, there would be limited opportunity to reprice deposits in a downward rate environment.
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.
74 |
Item 8. Financial Statements and Supplementary Data
MutualFirst Financial, Inc.
Report of Independent Registered Public Accounting Firm and
Consolidated Financial Statements
December 31, 2017, 2016 and 2015
75 |
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
MutualFirst Financial, Inc.
Muncie, Indiana
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of MutualFirst Financial. Inc. (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 15, 2018, expressed an unqualified opinion on the effectiveness of the Company’s Internal Control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 1978.
/s/ BKD, LLP | |
Indianapolis, Indiana | |
March 15, 2018 |
76 |
MutualFirst Financial, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
2017 | 2016 | |||||||
Assets | ||||||||
Cash and due from banks | $ | 8,763 | $ | 8,503 | ||||
Interest-bearing demand deposits | 18,578 | 18,357 | ||||||
Cash and cash equivalents | 27,341 | 26,860 | ||||||
Interest-bearing time deposits | 1,853 | 993 | ||||||
Investment securities available for sale (carried at fair value) | 277,378 | 249,913 | ||||||
Loans held for sale | 4,577 | 4,063 | ||||||
Loans, net of allowance for loan losses of $12,387 and $12,382, at December 31, 2017 and 2016, respectively | 1,167,758 | 1,157,120 | ||||||
Premises and equipment, net | 21,539 | 21,200 | ||||||
Federal Home Loan Bank stock | 11,183 | 10,925 | ||||||
Deferred tax asset, net | 7,530 | 12,037 | ||||||
Cash value of life insurance | 52,707 | 51,594 | ||||||
Goodwill | 1,800 | 1,800 | ||||||
Other real estate owned and repossessed assets | 733 | 1,199 | ||||||
Other assets | 14,533 | 15,429 | ||||||
Total assets | $ | 1,588,932 | $ | 1,553,133 | ||||
Liabilities and Stockholders' Equity | ||||||||
Liabilities | ||||||||
Deposits | ||||||||
Noninterest-bearing | $ | 194,134 | $ | 178,046 | ||||
Interest-bearing | 1,007,900 | 975,336 | ||||||
Total deposits | 1,202,034 | 1,153,382 | ||||||
Federal Home Loan Bank advances | 217,163 | 240,591 | ||||||
Other borrowings | 4,232 | 4,189 | ||||||
Other liabilities | 15,221 | 14,933 | ||||||
Total liabilities | 1,438,650 | 1,413,095 | ||||||
Commitments and Contingencies | ||||||||
Stockholders' Equity | ||||||||
Common stock, $.01 par value | ||||||||
Authorized - 20,000,000 shares | ||||||||
Issued and outstanding - 7,389,394 and 7,324,233 shares at December 31, 2017 and 2016, respectively | 74 | 73 | ||||||
Additional paid-in capital | 75,319 | 74,164 | ||||||
Retained earnings | 74,508 | 67,055 | ||||||
Accumulated other comprehensive income (loss) | 381 | (1,254 | ) | |||||
Total stockholders' equity | 150,282 | 140,038 | ||||||
Total liabilities and stockholders' equity | $ | 1,588,932 | $ | 1,553,133 |
See Notes to Consolidated Financial Statements
77 |
MutualFirst Financial, Inc.
Consolidated Statements of Income
(In Thousands, Except Share and Per Share Data)
2017 | 2016 | 2015 | ||||||||||
Interest and Dividend Income | ||||||||||||
Loans receivable | $ | 51,231 | $ | 46,785 | $ | 44,190 | ||||||
Investment securities | 7,037 | 6,500 | 7,090 | |||||||||
Federal Home Loan Bank stock | 470 | 441 | 482 | |||||||||
Deposits with financial institutions | 130 | 76 | 14 | |||||||||
Total interest and dividend income | 58,868 | 53,802 | 51,776 | |||||||||
Interest Expense | ||||||||||||
Deposits | 6,815 | 5,296 | 5,259 | |||||||||
Federal Home Loan Bank advances | 3,604 | 3,604 | 3,063 | |||||||||
Other | 192 | 347 | 481 | |||||||||
Total interest expense | 10,611 | 9,247 | 8,803 | |||||||||
Net Interest Income | 48,257 | 44,555 | 42,973 | |||||||||
Provision for loan losses | 1,220 | 850 | 125 | |||||||||
Net Interest Income After Provision for Loan Losses | 47,037 | 43,705 | 42,848 | |||||||||
Non-interest Income | ||||||||||||
Service fee income | 6,584 | 6,124 | 5,947 | |||||||||
Net realized gain on sales of available for sale securities | 708 | 1,023 | 436 | |||||||||
Commissions | 5,027 | 5,049 | 4,603 | |||||||||
Net gains on sales of loans | 3,887 | 4,761 | 4,176 | |||||||||
Net servicing fees | 391 | 332 | 274 | |||||||||
Increase in cash value of life insurance | 1,113 | 1,159 | 1,184 | |||||||||
Loss on sale of other real estate and repossessed assets | (122 | ) | (210 | ) | (111 | ) | ||||||
Other income | 488 | 1,184 | 630 | |||||||||
Total non-interest income | 18,076 | 19,422 | 17,139 | |||||||||
Non-interest Expenses | ||||||||||||
Salaries and employee benefits | 27,229 | 27,427 | 25,526 | |||||||||
Net occupancy expenses | 3,133 | 2,308 | 2,260 | |||||||||
Equipment expenses | 1,773 | 1,818 | 1,831 | |||||||||
Data processing fees | 2,321 | 1,991 | 1,746 | |||||||||
ATM and debit card expenses | 1,676 | 1,536 | 1,436 | |||||||||
Deposit insurance | 724 | 788 | 897 | |||||||||
Professional fees | 1,855 | 1,807 | 1,695 | |||||||||
Advertising and promotion | 1,223 | 1,204 | 1,193 | |||||||||
Software subscriptions and maintenance | 2,202 | 2,117 | 1,749 | |||||||||
Other real estate and repossessed assets | 165 | 73 | 374 | |||||||||
Other expenses | 3,704 | 4,431 | 4,440 | |||||||||
Total non-interest expenses | 46,005 | 45,500 | 43,147 | |||||||||
Income Before Income Tax | 19,108 | 17,627 | 16,840 | |||||||||
Income tax expense | 6,793 | 4,386 | 4,578 | |||||||||
Net Income | $ | 12,315 | $ | 13,241 | $ | 12,262 | ||||||
Earnings Per Common Share | ||||||||||||
Basic | $ | 1.67 | $ | 1.79 | $ | 1.66 | ||||||
Diluted | $ | 1.64 | $ | 1.76 | $ | 1.62 | ||||||
Dividends Per Common Share | $ | 0.66 | $ | 0.58 | $ | 0.48 |
See Notes to Consolidated Financial Statements
78 |
MutualFirst Financial, Inc.
Consolidated Statements of Comprehensive
Income
(In Thousands)
2017 | 2016 | 2015 | ||||||||||
Net Income | $ | 12,315 | $ | 13,241 | $ | 12,262 | ||||||
Other Comprehensive Income (Loss) | ||||||||||||
Net unrealized holding gain (loss) on securities available for sale | 3,112 | (3,258 | ) | (1,174 | ) | |||||||
Reclassification adjustment for realized gains included in net income | (708 | ) | (1,023 | ) | (436 | ) | ||||||
Net unrealized gain (loss) on derivative used for cash flow hedges | - | 1 | 108 | |||||||||
Net unrealized gain (loss) related to defined benefit plan | (20 | ) | 62 | 77 | ||||||||
2,384 | (4,218 | ) | (1,425 | ) | ||||||||
Income tax benefit (expense) related to other comprehensive income | (749 | ) | 1,474 | 537 | ||||||||
Other comprehensive income (loss), net of tax | 1,635 | (2,744 | ) | (888 | ) | |||||||
Comprehensive Income | $ | 13,950 | $ | 10,497 | $ | 11,374 |
See Notes to Consolidated Financial Statements
79 |
MutualFirst Financial, Inc.
Consolidated Statements of Stockholders’
Equity
(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, 2014 | $ | 72 | $ | 74,916 | $ | 49,386 | $ | 2,378 | $ | 126,752 | ||||||||||
Net income | 12,262 | 12,262 | ||||||||||||||||||
Other comprehensive loss, net of taxes | (888 | ) | (888 | ) | ||||||||||||||||
Stock options, exercised | 2 | 2,009 | 2,011 | |||||||||||||||||
Tax benefit on stock options | 438 | 438 | ||||||||||||||||||
Cash dividends, common stock ($.48 per share) | (3,550 | ) | (3,550 | ) | ||||||||||||||||
Balances December 31, 2015 | $ | 74 | $ | 77,363 | $ | 58,098 | $ | 1,490 | $ | 137,025 | ||||||||||
Net income | 13,241 | 13,241 | ||||||||||||||||||
Other comprehensive loss, net of taxes | (2,744 | ) | (2,744 | ) | ||||||||||||||||
Stock repurchased | (2 | ) | (4,352 | ) | (4,354 | ) | ||||||||||||||
Stock options, exercised | 1 | 975 | 976 | |||||||||||||||||
Tax benefit on stock options | 178 | 178 | ||||||||||||||||||
Cash dividends, common stock ($.58 per share) | (4,284 | ) | (4,284 | ) | ||||||||||||||||
Balances December 31, 2016 | $ | 73 | $ | 74,164 | $ | 67,055 | $ | (1,254 | ) | $ | 140,038 | |||||||||
Net income | 12,315 | 12,315 | ||||||||||||||||||
Other comprehensive income, net of taxes | 1,635 | 1,635 | ||||||||||||||||||
Stock options, exercised | 1 | 1,155 | 1,156 | |||||||||||||||||
Cash dividends, common stock ($.66 per share) | (4,862 | ) | (4,862 | ) | ||||||||||||||||
Balances December 31, 2017 | $ | 74 | $ | 75,319 | $ | 74,508 | $ | 381 | $ | 150,282 |
See Notes to Consolidated Financial Statements
80 |
MutualFirst Financial, Inc.
Consolidated Statements of Cash Flows
(In Thousands, Except Share and Per Share Data)
2017 | 2016 | 2015 | ||||||||||
Operating Activities | ||||||||||||
Net income | $ | 12,315 | $ | 13,241 | $ | 12,262 | ||||||
Items not requiring cash | ||||||||||||
Provision for loan losses | 1,220 | 850 | 125 | |||||||||
Depreciation and amortization | 4,542 | 5,006 | 4,546 | |||||||||
Deferred income tax | 3,562 | 1,537 | 1,926 | |||||||||
Increase in cash value of life insurance | (1,113 | ) | (1,159 | ) | (1,184 | ) | ||||||
Loans originated for sale | (116,887 | ) | (150,620 | ) | (145,749 | ) | ||||||
Proceeds from sales of loans held for sale | 119,711 | 156,827 | 149,613 | |||||||||
Net gain on sale of loans | (3,887 | ) | (4,761 | ) | (4,176 | ) | ||||||
Net gain on sale of securities, available for sale | (708 | ) | (1,023 | ) | (436 | ) | ||||||
Gain on bank owned life insurance | - | (346 | ) | (204 | ) | |||||||
Loss on sale of other real estate and repossessed assets | 122 | 210 | 111 | |||||||||
Change in | ||||||||||||
Interest receivable and other assets | 619 | (1,349 | ) | (1,321 | ) | |||||||
Interest payable and other liabilities | 287 | (5 | ) | 277 | ||||||||
Other adjustments | 259 | 143 | 143 | |||||||||
Net cash provided by operating activities | 20,042 | 18,551 | 15,933 | |||||||||
Investing Activities | ||||||||||||
Net change in interest-bearing time deposits | (860 | ) | (993 | ) | - | |||||||
Purchases of securities, available for sale | (86,499 | ) | (88,161 | ) | (67,414 | ) | ||||||
Proceeds from maturities and paydowns of securities, available for sale | 26,622 | 37,872 | 41,824 | |||||||||
Proceeds from sales of securities, available for sale | 34,592 | 57,037 | 23,109 | |||||||||
Redemption of Federal Home Loan Bank stock | - | - | 2,154 | |||||||||
Purchase of Federal Home Loan Bank stock | (258 | ) | (443 | ) | (672 | ) | ||||||
Net change in loans | (32,901 | ) | (92,946 | ) | (67,561 | ) | ||||||
Proceeds from sales of portfolio loans | 18,543 | - | - | |||||||||
Purchases of premises and equipment | (1,809 | ) | (2,079 | ) | (2,413 | ) | ||||||
Proceeds from real estate owned sales | 980 | 2,497 | 2,260 | |||||||||
Proceeds from sale of real estate held for investment | 511 | - | - | |||||||||
Proceeds from bank owned life insurance | - | 1,120 | 1,181 | |||||||||
Proceeds from sale of premises and equipment | - | 9,490 | - | |||||||||
Net cash used in investing activities | (41,079 | ) | (76,606 | ) | (67,532 | ) | ||||||
Financing Activities | ||||||||||||
Net change in | ||||||||||||
Noninterest-bearing, interest-bearing demand and savings deposits | 50,235 | 39,883 | 62,642 | |||||||||
Certificates of deposit | (1,583 | ) | 22,117 | (50,580 | ) | |||||||
Proceeds from FHLB advances | 414,700 | 316,300 | 355,700 | |||||||||
Repayments of FHLB advances | (438,128 | ) | (301,326 | ) | (322,525 | ) | ||||||
Net repayments other borrowings | - | (5,312 | ) | (759 | ) | |||||||
Cash dividends | (4,862 | ) | (4,284 | ) | (3,550 | ) | ||||||
Stock options exercised | 1,156 | 976 | 2,011 | |||||||||
Stock repurchased | - | (4,354 | ) | - | ||||||||
Net cash provided by financing activities | 21,518 | 64,000 | 42,939 | |||||||||
Net Change in Cash and Cash Equivalents | 481 | 5,945 | (8,660 | ) | ||||||||
Cash and Cash Equivalents, Beginning of Period | 26,860 | 20,915 | 29,575 | |||||||||
Cash and Cash Equivalents, End of Period | $ | 27,341 | $ | 26,860 | $ | 20,915 | ||||||
Additional Cash Flows Information | ||||||||||||
Interest paid | $ | 10,505 | $ | 9,096 | $ | 8,827 | ||||||
Income tax paid | 2,500 | 2,650 | 2,850 | |||||||||
Transfers from loans to foreclosed assets | 624 | 1,450 | 1,301 | |||||||||
Mortgage servicing rights capitalized | 549 | 482 | 460 | |||||||||
Transfers from fixed assets to other assets | - | 763 | 702 |
See Notes to Consolidated Financial Statements
81 |
Note 1: Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of MutualFirst Financial, Inc. (Company) and its wholly owned subsidiaries, MFBC Statutory Trust I, MutualFirst Risk Management, Inc., Mutual Risk Advisors, Inc., and MutualBank (Bank) and the Bank’s wholly owned subsidiaries, Mishawaka Financial Services, Inc., Mutual Federal Investment Company and the wholly owned subsidiary of Mutual Federal Investment Company, Mutual Federal REIT, Inc. and Summit Service Corp. and their wholly owned subsidiary, Summit Mortgage, Inc., 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.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, goodwill, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, loan servicing rights, valuation of deferred tax assets, other-than-temporary impairments (OTTI) and fair value of financial instruments.
The Bank generates mortgage, consumer and commercial loans and receives deposits from customers located primarily in North and Central Indiana. The Bank’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Mutual Federal Investment Company invests in various investment securities and loans through Mutual Federal REIT, Inc.
Consolidation - The consolidated financial statements include the accounts of the Company, the Bank, and the Bank’s subsidiaries, after elimination of all material intercompany transactions.
Cash Equivalents - The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2017 and 2016, cash equivalents consisted primarily of money market accounts with brokers and checking accounts with government sponsored entities.
At December 31, 2017, the Company’s cash accounts exceeded federally insured limits by approximately $6.1 million. Included in this amount are uninsured accounts of approximately $2.6 million at the Federal Reserve Bank of Chicago and Federal Home Loan Bank of Indianapolis.
Interest-bearing time deposits – The fair value of interest-bearing time deposits approximates carrying value.
Derivative Instruments – The Company occasionally enters into derivative financial instruments as part of its interest rate risk strategies. These derivative financial instruments consist primarily of interest rate swaps. These instruments are carried at the fair value of the derivatives and reflects the estimated amounts that would have been received to terminate these contracts at the reporting date based upon pricing or valuation models applied to current market information.
The Company offers interest rate derivative products (e.g. interest rate swaps) to certain of its high-quality commercial borrowers. This product allows customers to enter into an agreement with the Company to swap their variable rate loan to a fixed rate. These derivative products are designed to reduce, eliminate or modify the risk of changes in the borrower’s interest rate. The extension of credit incurred through the execution of these derivative products is subject to the same approvals and rigorous underwriting standards as the related traditional credit product. The Company limits its risk exposure to these products by entering into a mirror-image, offsetting swap agreement with a separate, well-capitalized and rated counterparty. These transactions are ratified by the Asset Liability Committee. By using these interest rate swap arrangements, the Company is also better insulated from the interest rate risk associated with underwriting fixed-rate loans. These derivative products do not qualify for hedge accounting. The derivatives are recorded on the balance sheet at fair value and changes in fair value of both the customer and the offsetting swap agreements are recorded (and essentially offset) in non-interest income.
82 |
Investment Securities - Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. At December 31, 2017 and 2016, no securities were classified as held to maturity. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. When the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held to maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.
The Company’s consolidated statement of income reflects the full impairment (that is, the differences between the security’s amortized cost basis and fair value) on debt securities that the Company intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For available for sale and held to maturity debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.
For equity securities, when the Company has decided to sell an impaired available for sale security and does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other than temporary even if a decision to sell has not been made.
Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers the length of time and extent that fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.
Loans held for sale are carried at the lower of aggregate cost or market. Market is determined using the aggregate method. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income based on the difference between estimated sales proceeds and aggregate cost.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.
The accrual of interest on mortgage, consumer and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
83 |
Discounts and premiums on purchased residential real estate and commercial loans is amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method.
Allowance for loan losses - The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the inability to collect a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
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 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 historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior three years. Management believes the three year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed.
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 allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the ability to collect the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
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The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.
Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
Premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based principally on the estimated useful lives of the assets which range from 3 to 40 years. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations.
Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank (FHLB) system. The required investment in the common stock is based on a predetermined formula, carried at cost and is evaluated for impairment.
Mortgage-servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing assets and liabilities accounting guidance, servicing rights resulting from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer. The Company subsequently measures each class of servicing asset using the amortization method. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment based on fair value at each reporting date.
Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing right and may result in a reduction to noninterest income.
Each class of separately recognized servicing assets subsequently measured using the amortization method are evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment. Changes in valuation allowances are reported with net servicing fees on the income statement. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized.
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Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.
Intangible assets are being amortized on an accelerated basis over periods ranging from three to 11 years. Such assets are periodically evaluated as to the recoverability of their carrying value.
Income taxes are accounted for in accordance with income tax accounting guidance. The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred tax assets are evaluated on a quarterly basis for recoverability based on all available evidence. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between our future projected operating performance and our actual results. We are required to establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the more-likely-than-not criterion, we evaluate all positive and negative available evidence as of the end of each reporting period. Future adjustments to the deferred tax asset valuation allowance, if any, will be determined based upon changes in the expected realization of the net deferred tax assets. The realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income in either the carry back or carry forward periods under applicable tax laws. Due to significant estimates utilized in establishing the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we will be required to record adjustments to the valuation allowance in the near term if estimates of future taxable income during the carry forward period are reduced. Such a charge could have a material adverse effect on our results of operations, financial condition, and capital position.
Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
The Company files consolidated income tax returns with its subsidiaries.
Earnings per share is computed based upon the weighted-average common and common equivalent shares outstanding during each year.
Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes unrealized gains (losses) on available for sale securities, unrealized gains (losses) on available for sale securities for which a portion of an other-than-temporary impairment has been recognized in income, unrealized and realized gains and losses in derivative financial instruments and changes in the funded status of defined benefit pension plans.
Stock options - The Company has stock-based employee compensation plans, which are described more fully in Note 20.
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Note 2: Impact of Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, provides financial statement preparers with an option to reclassify stranded tax effects within AOCI to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments are effective for all organizations for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company has assessed ASU 2018-02 and does not expect it to have a material impact on the Company’s accounting and disclosures.
In March 2017, the 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 adopted ASU 2017-01 on January 1, 2018 and it did not have an 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.
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· | 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. 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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In March 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers . This ASU states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU affects entities that enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which deferred the effective date of ASU 2014-09 for public entities to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. The Company’s revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. We have completed our evaluation of the impact of ASU 2014-09 on components of our non-interest income including trust and investment management fees, insurance commissions and fees and have not found any significant changes to our methodology of recognizing revenue. As required by the ASU, we will adopt the standard in the first quarter of 2018 and, at the time of this filing, we do not anticipate recording a cumulative effect adjustment to opening retained earnings because the adjustment was determined to be insignificant. We will include newly applicable revenue disclosures on the Company’s Form 10-Q for the quarter ended March 31, 2018.
Note 3: Restriction on Cash
The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank of Chicago. The reserve requirement at December 31, 2017 was $2.2 million.
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Note 4: Investment Securities
The amortized costs and approximate fair values, together with gross unrealized gains and losses on securities, are as follows:
December 31, 2017 | ||||||||||||||||
Amortized Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair Value | |||||||||||||
Available for Sale Securities | ||||||||||||||||
Mortgage-backed securities | $ | 68,335 | $ | 225 | $ | (762 | ) | $ | 67,798 | |||||||
Collateralized mortgage obligations | 88,488 | 58 | (1,296 | ) | 87,250 | |||||||||||
Municipal obligations | 107,060 | 3,709 | (274 | ) | 110,495 | |||||||||||
Corporate obligations | 12,966 | 69 | (1,200 | ) | 11,835 | |||||||||||
Total investment securities | $ | 276,849 | $ | 4,061 | $ | (3,532 | ) | $ | 277,378 |
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 |
All mortgage-backed securities and collateralized-mortgage obligations held by the Company as of December 31, 2017 were in government-sponsored and federal agency securities.
Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2017 and 2016 was $142.9 million and $143.8 million, which is approximately 51.5% and 57.6% of the Company’s investment portfolio at those dates. While the federal funds rate increased fifty basis points in 2017, the longer end of the yield curve has remained relatively flat allowing for minimal change in the fair value of securities.
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 2017 and 2016, the Bank determined that its security holdings had no other-than-temporary impairment.
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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 December 31, 2017 and 2016:
December 31, 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 Securities | ||||||||||||||||||||||||
Mortgage-backed securities | $ | 21,975 | $ | (127 | ) | $ | 27,675 | $ | (635 | ) | $ | 49,650 | $ | (762 | ) | |||||||||
Collateralized mortgage obligations | 47,153 | (400 | ) | 28,887 | (896 | ) | 76,040 | (1,296 | ) | |||||||||||||||
Municipal obligations | 4,479 | (64 | ) | 10,041 | (210 | ) | 14,520 | (274 | ) | |||||||||||||||
Corporate obligations | - | - | 2,722 | (1,200 | ) | 2,722 | (1,200 | ) | ||||||||||||||||
Total temporarily impaired securities | $ | 73,607 | $ | (591 | ) | $ | 69,325 | $ | (2,941 | ) | $ | 142,932 | $ | (3,532 | ) |
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 Securities | ||||||||||||||||||||||||
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 CMOs and MBSs were caused by interest rate changes and illiquidity. 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 illiquidity 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 these investments to be other-than-temporarily impaired at December 31, 2017.
Municipal Obligations
The unrealized losses on the Company’s investments in securities of state and political subdivisions were caused by changes in interest rates and illiquidity. 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 the investment and it is not 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 December 31, 2017.
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Corporate Obligations
The Company’s unrealized loss on investments in corporate obligations primarily relates to investments in pooled trust preferred securities. The unrealized losses were primarily caused by (1) a decrease in performance and regulatory capital resulting from exposure to subprime mortgages and (2) a sector downgrade by several industry analysts.
Other-Than-Temporary Impairment
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 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.
The Bank’s trust preferred securities valuation was prepared by an independent third party. Their approach to determining fair value involved several steps including:
· | Detailed credit and structural evaluation of each piece of collateral in the trust preferred securities; |
· | Collateral performance projections for each piece of collateral in the trust preferred security; |
· | Terms of the trust preferred structure, as laid out in the indenture; and |
· | Discounted cash flow modeling. |
The Company 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 no active market 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.
The default and recovery probabilities for each piece of collateral were formed based on the evaluation of the collateral credit and a review of historical industry default data and current/near-term operating conditions. For collateral that has already defaulted, the Company assumed no recovery. For collateral that was in deferral, the Company assumed a recovery of 10% of par for banks, thrifts or other depository institutions and 15% of par for insurance companies. Although the Company conservatively assumed that the majority of the deferring collateral continues to defer and eventually defaults, we also recognize there is a possibility that some deferring collateral may become current at some point in the future.
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Credit Losses Recognized on Investments
Certain debt securities have experienced fair value deterioration due to credit losses, as well as due to other market factors, but are not otherwise other-than-temporarily impaired.
The amortized cost and fair value of securities available for sale at December 31, 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 of Securities | Amortized Cost | Fair Value | ||||||
Security obligations due | ||||||||
Within one year | $ | 160 | $ | 158 | ||||
One to five years | 5,001 | 5,034 | ||||||
Five to ten years | 24,044 | 25,175 | ||||||
After ten years | 90,821 | 91,963 | ||||||
120,026 | 122,330 | |||||||
Mortgage-backed securities | 68,335 | 67,798 | ||||||
Collateralized mortgage obligations | 88,488 | 87,250 | ||||||
Totals | $ | 276,849 | $ | 277,378 |
The Company did not have securities pledged as collateral, to secure public deposits or for other purposes as of December 31, 2017 or 2016.
Proceeds from sales of securities available for sale during 2017, 2016 and 2015 were $34.6 million, $57.0 million and $23.1 million, respectively. Gross gains of $776,000, $1.1 million and $436,000 in 2017, 2016 and 2015 were recognized on those sales. Gross losses of $68,000 and $71,000 in were recognized on those sales 2017 and 2016, respectively. There were no gross losses recognized on the sales of securities in 2015.
Note 5: Loans and Allowance
Classes of loans at December 31, 2017 and 2016 include:
December 31, | ||||||||
2017 | 2016 | |||||||
Real estate | ||||||||
Commercial | $ | 318,684 | $ | 302,577 | ||||
Commercial construction and development | 28,164 | 22,453 | ||||||
Consumer closed end first mortgage | 444,243 | 478,848 | ||||||
Consumer open end and junior liens | 69,477 | 71,222 | ||||||
Total real estate loans | 860,568 | 875,100 | ||||||
Other loans | ||||||||
Consumer loans | ||||||||
Auto | 19,640 | 18,939 | ||||||
Boat/RVs | 169,238 | 141,602 | ||||||
Other | 6,188 | 5,892 | ||||||
Commercial and industrial | 131,079 | 131,103 | ||||||
Total other loans | 326,145 | 297,536 | ||||||
Total loans | 1,186,713 | 1,172,636 | ||||||
Undisbursed loans in process | (13,071 | ) | (8,691 | ) | ||||
Unamortized deferred loan costs, net | 6,503 | 5,557 | ||||||
Allowance for loan losses | (12,387 | ) | (12,382 | ) | ||||
Net loans | $ | 1,167,758 | $ | 1,157,120 |
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Year-end non-accrual loans, segregated by class of loans, were as follows:
December 31, | ||||||||
2017 | 2016 | |||||||
Real estate | ||||||||
Commercial | $ | 1,107 | $ | 912 | ||||
Commercial construction and development | - | - | ||||||
Consumer closed end first mortgage | 3,409 | 3,626 | ||||||
Consumer open end and junior liens | 309 | 335 | ||||||
Consumer loans | ||||||||
Auto | 22 | 5 | ||||||
Boat/RVs | 198 | 224 | ||||||
Other | 16 | 24 | ||||||
Commercial and industrial | 159 | 18 | ||||||
Total nonaccrual loans | $ | 5,220 | $ | 5,144 |
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 the loan is greater than 90 days past due, the borrower, in management’s opinion, may be unable to meet payment obligations as they become due or when required by regulatory provisions.
All interest accrued but not collected for loans that are placed on nonaccrual 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.
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An age analysis of the Company’s past due loans, segregated by class of loans, as of December 31, 2017 and 2016 are as follows:
December 31, 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 | $ | 2,171 | $ | 3,311 | $ | 998 | $ | 6,480 | $ | 312,204 | $ | 318,684 | $ | - | ||||||||||||||
Commercial construction and development | - | - | - | - | 28,164 | 28,164 | - | |||||||||||||||||||||
Consumer closed end first mortgage | 5,914 | 1,340 | 3,224 | 10,478 | 433,765 | 444,243 | 31 | |||||||||||||||||||||
Consumer open end and junior liens | 540 | 123 | 264 | 927 | 68,550 | 69,477 | - | |||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||||||
Auto | 114 | 24 | 1 | 139 | 19,501 | 19,640 | - | |||||||||||||||||||||
Boat/RVs | 1,613 | 338 | 103 | 2,054 | 167,184 | 169,238 | - | |||||||||||||||||||||
Other | 65 | 18 | 12 | 95 | 6,093 | 6,188 | ||||||||||||||||||||||
Commercial and industrial | 276 | 10 | 159 | 445 | 130,634 | 131,079 | - | |||||||||||||||||||||
Total | $ | 10,693 | $ | 5,164 | $ | 4,761 | $ | 20,618 | $ | 1,166,095 | $ | 1,186,713 | $ | 31 |
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 commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
Interest on impaired loans is recorded based on the performance of the loan. All interest received on impaired loans that are on nonaccrual status is accounted for on the cash-basis method until qualifying for return to accrual status. Interest is accrued per the contract for impaired loans that are performing.
95 |
The following tables present impaired loans as of December 31, 2017, 2016 and 2015:
December 31, 2017 | ||||||||||||||||||||
Recorded
Balance |
Unpaid
Principal Balance |
Specific
Allowance |
Average
Investment in Impaired Loans |
Interest
Income Recognized |
||||||||||||||||
Loans without a specific valuation allowance | ||||||||||||||||||||
Real estate | ||||||||||||||||||||
Commercial | $ | 878 | $ | 878 | $ | - | $ | 765 | $ | 1 | ||||||||||
Commercial construction and development | 700 | 700 | - | 762 | 33 | |||||||||||||||
Consumer closed end first mortgage | 1,543 | 1,543 | - | 1,451 | 1 | |||||||||||||||
Commercial and industrial | 272 | 342 | - | 216 | 5 | |||||||||||||||
Loans with a specific valuation allowance | ||||||||||||||||||||
Real estate | ||||||||||||||||||||
Commercial | 214 | 214 | 100 | 214 | - | |||||||||||||||
Total | ||||||||||||||||||||
Real estate | ||||||||||||||||||||
Commercial | $ | 1,092 | $ | 1,092 | $ | 100 | $ | 979 | $ | 1 | ||||||||||
Commercial construction and development | $ | 700 | $ | 700 | $ | - | $ | 762 | $ | 33 | ||||||||||
Consumer closed end first mortgage | $ | 1,543 | $ | 1,543 | $ | - | $ | 1,451 | $ | 1 | ||||||||||
Commercial and industrial | $ | 272 | $ | 342 | $ | - | $ | 216 | $ | 5 | ||||||||||
Total | $ | 3,607 | $ | 3,677 | $ | 100 | $ | 3,408 | $ | 40 |
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 |
96 |
December 31, 2015 | ||||||||||||||||||||
Recorded
Balance |
Unpaid
Principal Balance |
Specific
Allowance |
Average
Investment in Impaired Loans |
Interest
Income Recognized |
||||||||||||||||
Loans without a specific valuation allowance | ||||||||||||||||||||
Real estate | ||||||||||||||||||||
Commercial | $ | 3,608 | $ | 3,608 | $ | - | $ | 4,115 | $ | 172 | ||||||||||
Commercial construction and development | 595 | 595 | - | 735 | 31 | |||||||||||||||
Consumer closed end first mortgage | 1,126 | 1,126 | - | 1,131 | - | |||||||||||||||
Consumer open end and junior liens | 481 | 481 | - | 381 | - | |||||||||||||||
Commercial and industrial | 214 | 214 | - | 423 | 2 | |||||||||||||||
Loans with a specific valuation allowance | ||||||||||||||||||||
Real estate | ||||||||||||||||||||
Commercial | 676 | 676 | 100 | 793 | 20 | |||||||||||||||
Total | ||||||||||||||||||||
Real estate | ||||||||||||||||||||
Commercial | $ | 4,284 | $ | 4,284 | $ | 100 | $ | 4,908 | $ | 192 | ||||||||||
Commercial construction and development | $ | 595 | $ | 595 | $ | - | $ | 735 | $ | 31 | ||||||||||
Consumer closed end first mortgage | $ | 1,126 | $ | 1,126 | $ | - | $ | 1,131 | $ | - | ||||||||||
Consumer open end and junior liens | $ | 481 | $ | 481 | $ | - | $ | 381 | $ | - | ||||||||||
Commercial and industrial | $ | 214 | $ | 214 | $ | - | $ | 423 | $ | 2 | ||||||||||
Total | $ | 6,700 | $ | 6,700 | $ | 100 | $ | 7,578 | $ | 225 |
The following information presents the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of December 31, 2017 and 2016.
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.
97 |
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.
During 2017, special mention commercial business loans increased as management determined that a few credits had potential weaknesses deserving management’s close attention. These credits were performing as agreed as of December 31, 2017.
December 31, 2017 | ||||||||||||||||||||||||||||||||
Commercial | Consumer | |||||||||||||||||||||||||||||||
Pass |
Special
Mention |
Substandard | Doubtful | Pass |
Special
Mention |
Substandard | Total | |||||||||||||||||||||||||
Real estate | ||||||||||||||||||||||||||||||||
Commercial | $ | 309,451 | $ | 4,219 | $ | 4,996 | $ | 18 | $ | 318,684 | ||||||||||||||||||||||
Commercial construction and development | 27,464 | - | 700 | - | 28,164 | |||||||||||||||||||||||||||
Consumer closed end first mortgage | $ | 439,075 | $ | - | $ | 5,168 | 444,243 | |||||||||||||||||||||||||
Consumer open end and junior liens | 69,130 | - | 347 | 69,477 | ||||||||||||||||||||||||||||
Other loans | ||||||||||||||||||||||||||||||||
Consumer loans | ||||||||||||||||||||||||||||||||
Auto | 19,616 | - | 24 | 19,640 | ||||||||||||||||||||||||||||
Boat/RVs | 169,036 | - | 202 | 169,238 | ||||||||||||||||||||||||||||
Other | 6,133 | - | 55 | 6,188 | ||||||||||||||||||||||||||||
Commercial and industrial | 120,211 | 5,784 | 5,084 | - | 131,079 | |||||||||||||||||||||||||||
$ | 457,126 | $ | 10,003 | $ | 10,780 | $ | 18 | $ | 702,990 | $ | - | $ | 5,796 | $ | 1,186,713 |
98 |
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
The risk characteristics of each loan portfolio segment are as follows:
Commercial Loans
Commercial real estate 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.
Commercial 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 business 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.
99 |
Residential and Consumer
With respect to residential loans that are secured by one-to-four family residences and are primarily owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance (PMI) if that ratio is exceeded. Consumer open end and junior lien loans are typically secured by a subordinate interest in one-to-four 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.
The following tables detail activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2017, 2016 and 2015. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses on other segments.
December 31, 2017 | ||||||||||||||||
Commercial | Mortgage | Consumer | Total | |||||||||||||
Allowance for loan losses: | ||||||||||||||||
Balance, beginning of year | $ | 7,358 | $ | 2,303 | $ | 2,721 | $ | 12,382 | ||||||||
Provision charged (credited) to expense | 483 | (271 | ) | 1,008 | 1,220 | |||||||||||
Losses charged off | (161 | ) | (284 | ) | (967 | ) | (1,412 | ) | ||||||||
Recoveries | 24 | 13 | 160 | 197 | ||||||||||||
Balance, end of period | $ | 7,704 | $ | 1,761 | $ | 2,922 | $ | 12,387 |
December 31, 2016 | ||||||||||||||||
Commercial | Mortgage | Consumer | Total | |||||||||||||
Allowance for loan losses: | ||||||||||||||||
Balance, beginning of period | $ | 7,090 | $ | 2,683 | $ | 2,868 | $ | 12,641 | ||||||||
Provision charged (credited) to expense | 457 | 15 | 378 | 850 | ||||||||||||
Losses charged off | (274 | ) | (420 | ) | (788 | ) | (1,482 | ) | ||||||||
Recoveries | 85 | 25 | 263 | 373 | ||||||||||||
Balance, end of period | $ | 7,358 | $ | 2,303 | $ | 2,721 | $ | 12,382 |
December 31, 2015 | ||||||||||||||||
Commercial | Mortgage | Consumer | Total | |||||||||||||
Allowance for loan losses: | ||||||||||||||||
Balance, beginning of year | $ | 7,085 | $ | 3,471 | $ | 2,612 | $ | 13,168 | ||||||||
Provision charged to expense | (389 | ) | (179 | ) | 693 | 125 | ||||||||||
Losses charged off | (104 | ) | (643 | ) | (640 | ) | (1,387 | ) | ||||||||
Recoveries | 498 | 34 | 203 | 735 | ||||||||||||
Balance, end of period | $ | 7,090 | $ | 2,683 | $ | 2,868 | $ | 12,641 |
100 |
The following tables provide a breakdown of the allowance for loan losses and loan portfolio balances by segment as of December 31, 2017, 2016, and 2015.
December 31, 2017 | ||||||||||||||||
Commercial | Mortgage | Consumer | Total | |||||||||||||
Allowance balances | ||||||||||||||||
Individually evaluated for impairment | $ | 100 | $ | - | $ | - | $ | 100 | ||||||||
Collectively evaluated for impairment | 7,604 | 1,761 | 2,922 | 12,287 | ||||||||||||
Total allowance for loan losses | $ | 7,704 | $ | 1,761 | $ | 2,922 | $ | 12,387 | ||||||||
Loan balances | ||||||||||||||||
Individually evaluated for impairment | $ | 2,064 | $ | 1,543 | $ | - | $ | 3,607 | ||||||||
Collectively evaluated for impairment | 475,863 | 442,700 | 264,543 | 1,183,106 | ||||||||||||
Gross loans | $ | 477,927 | $ | 444,243 | $ | 264,543 | $ | 1,186,713 |
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 |
December 31, 2015 | ||||||||||||||||
Commercial | Mortgage | Consumer | Total | |||||||||||||
Allowance balances | ||||||||||||||||
Individually evaluated for impairment | $ | 100 | $ | - | $ | - | $ | 100 | ||||||||
Collectively evaluated for impairment | 6,990 | 2,683 | 2,868 | 12,541 | ||||||||||||
Total allowance for loan losses | $ | 7,090 | $ | 2,683 | $ | 2,868 | $ | 12,641 | ||||||||
Loan balances | ||||||||||||||||
Individually evaluated for impairment | $ | 5,093 | $ | 1,126 | $ | 481 | $ | 6,700 | ||||||||
Collectively evaluated for impairment | 370,589 | 490,325 | 215,781 | 1,076,695 | ||||||||||||
Gross loans | $ | 375,682 | $ | 491,451 | $ | 216,262 | $ | 1,083,395 |
101 |
Troubled Debt Restructurings
Certain categories of impaired loans include loans that have been modified in a troubled debt restructuring that involves granting economic concessions to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances.
When we modify loans in a troubled debt restructuring, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or we use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a specific reserve or a charge-off to the allowance.
Loans retain their accrual status at the time of their modification. As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual until a period of satisfactory performance, generally six months, is obtained. If a loan is on accrual at the time of the modification, the loan is evaluated to determine the collection of principal and interest is reasonably assured and generally stays on accrual.
At December 31, 2017 and 2016, the Company had a number of loans that were modified in troubled debt restructurings and impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.
102 |
The following tables describe troubled debts restructured during the years ended December 31, 2017, 2016 and 2015.
2017 | ||||||||||||
No. of Loans |
Pre-Modification Recorded
Balance |
Post-Modification Recorded
Balance |
||||||||||
Real estate | ||||||||||||
Consumer closed end first mortgage | 7 | $ | 320 | $ | 324 | |||||||
Consumer open end and junior liens | 2 | 16 | 16 | |||||||||
Commercial and industrial | 1 | 72 | 72 |
2016 | ||||||||||||
No. of Loans |
Pre-Modification Recorded
Balance |
Post-Modification Recorded
Balance |
||||||||||
Real estate | ||||||||||||
Commercial | 1 | $ | 406 | $ | 406 | |||||||
Construction and development | 1 | 83 | 83 | |||||||||
Consumer closed end first mortgage | 14 | 881 | 911 | |||||||||
Consumer open end and junior liens | 1 | 39 | 39 | |||||||||
Other loans | ||||||||||||
Consumer loans | ||||||||||||
Auto | 1 | 4 | 4 | |||||||||
Boat/RVs | 3 | 56 | 56 | |||||||||
Other | 2 | 7 | 7 |
2015 | ||||||||||||
No. of Loans |
Pre-Modification Recorded
Balance |
Post-Modification Recorded
Balance |
||||||||||
Real estate | ||||||||||||
Commercial | 4 | $ | 2,399 | $ | 2,406 | |||||||
Construction and development | 1 | 155 | 155 | |||||||||
Consumer closed end first mortgage | 8 | 287 | 287 | |||||||||
Consumer open end and junior liens | 3 | 51 | 51 | |||||||||
Other loans | ||||||||||||
Consumer loans | ||||||||||||
Auto | 2 | 25 | 25 | |||||||||
Commercial and industrial | 1 | 88 | 83 |
The impact on the allowance for loan losses was insignificant as a result of these modifications.
103 |
Newly restructured loans by type for the years ended December 31, 2017, 2016 and 2015 are as follows:
2017 | ||||||||||||||||
Rate | Term | Combination |
Total
Modification |
|||||||||||||
Real estate | ||||||||||||||||
Consumer closed end first mortgage | $ | - | $ | 27 | 297 | $ | 324 | |||||||||
Consumer open end and junior liens | - | 3 | 13 | 16 | ||||||||||||
Commercial and industrial | - | 72 | - | 72 |
2016 | ||||||||||||||||
Rate | Term | Combination |
Total
Modification |
|||||||||||||
Real estate | ||||||||||||||||
Commercial | $ | - | $ | 406 | $ | - | $ | 406 | ||||||||
Commercial construction and development | - | 83 | - | 83 | ||||||||||||
Consumer closed end first mortgage | - | 47 | 864 | 911 | ||||||||||||
Consumer open end and junior liens | - | - | 39 | 39 | ||||||||||||
Other loans | ||||||||||||||||
Consumer loans | ||||||||||||||||
Auto | - | - | 4 | 4 | ||||||||||||
Boat/RVs | - | 48 | 8 | 56 | ||||||||||||
Other | - | 7 | - | 7 |
2015 | ||||||||||||||||
Rate | Term | Combination |
Total
Modification |
|||||||||||||
Real Estate | ||||||||||||||||
Commercial | $ | - | $ | 2,406 | $ | - | $ | 2,406 | ||||||||
Construction and development | - | - | 155 | 155 | ||||||||||||
Consumer closed end first mortgage | - | 11 | 276 | 287 | ||||||||||||
Consumer open end and junior liens | - | 51 | - | 51 | ||||||||||||
Other loans | ||||||||||||||||
Consumer loans | ||||||||||||||||
Auto | - | 25 | - | 25 | ||||||||||||
Commercial and industrial | - | 83 | - | 83 |
104 |
Defaults of any loans modified as troubled debt restructurings made in the years ended December 31, 2017, 2016 and 2015, respectively, are listed in the tables below. Defaults are defined as any loans that become 90 days past due.
2017 | ||||||||
No. of Loans |
Post-Modification Outstanding
Recorded Balance |
|||||||
Real Estate | ||||||||
Consumer closed end first mortgage | 1 | $ | 79 |
2016 | ||||||||
No. of Loans |
Post-Modification Outstanding
Recorded Balance |
|||||||
Real Estate | ||||||||
Consumer closed end first mortgage | 5 | $ | 179 | |||||
Other Loans | ||||||||
Consumer Loans | ||||||||
Boat/RV | 1 | 7 |
December 31, 2015 | ||||||||
No. of Loans |
Post-Modification Outstanding
Recorded Balance |
|||||||
Real Estate | ||||||||
Commercial | 1 | $ | 820 |
At December 31, 2017, the Company held residential real estate held for sale as a result of foreclosure totaling $251,000 and real estate in the process of foreclosure of $970,000. As of December 31, 2017, the Company also held $482,000 in other repossessed assets, such as autos, boats, RVs and horse trailers.
Note 6: Related Party Transactions
The Bank has entered into transactions with certain directors, executive officers and significant shareholders of the Company and Bank and their affiliates or associates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.
The aggregate amount of loans, as defined, to such related parties was as follows:
2017 | ||||
Balances, January 1, | $ | 7,135 | ||
Change in composition | (183 | ) | ||
New loans, including renewals | 4,701 | |||
Payments, etc., including renewals | (4,411 | ) | ||
Balances, December 31, | $ | 7,242 |
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Note 7: Premises and Equipment
Major classifications of premises and equipment are as follows:
December 31, | ||||||||
2017 | 2016 | |||||||
Cost | ||||||||
Land | $ | 8,074 | $ | 8,074 | ||||
Buildings and land improvements | 19,775 | 19,264 | ||||||
Equipment | 13,865 | 13,562 | ||||||
Total cost | 41,714 | 40,900 | ||||||
Accumulated depreciation and amortization | (20,175 | ) | (19,700 | ) | ||||
Net | $ | 21,539 | $ | 21,200 |
Note 8: Core Deposit and Other Intangibles
The carrying basis of recognized intangible assets at December 31, 2017 and 2016, were:
2017 | 2016 | |||||||
Core deposits | $ | 71 | $ | 200 | ||||
Other intangibles | 56 | 191 | ||||||
$ | 127 | $ | 391 |
Amortization expense for the years ended December 31, 2017, 2016 and 2015, was $264,000, $420,000 and $517,000, respectively. Estimated amortization expense for the next two years, which is the remaining life, is:
2018 | $ | 114 |
2019 | 13 | |
$ | 127 |
Note 9: Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 were:
2017 | 2016 | |||||||
Balance as of January 1 | $ | 1,800 | $ | 1,800 | ||||
Goodwill acquired during the year | - | - | ||||||
Balance as of December 31 | $ | 1,800 | $ | 1,800 |
Goodwill is tested for impairment on an annual basis as of December 31, or whenever events or changes in circumstances indicate the carrying amount of goodwill exceeds its implied fair value. No events or changes in circumstances have occurred since the annual impairment test that would suggest is was more likely than not goodwill impairment existed.
106 |
Note 10: 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 December 31, 2017 and 2016 was approximately $17.3 million and $14.6 million, respectively.
The following table shows the amounts of derivative financial instruments at December 31, 2017 and 2016.
Asset Derivatives | ||||||||||||||||||||
Fair Value | Fair Value | |||||||||||||||||||
Balance Sheet | December 31, | Balance Sheet | December 31, | |||||||||||||||||
Location | 2017 | 2016 | Location | 2017 | 2016 | |||||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||
Interest rate contracts | Other assets | $ | 525 | $ | 553 | Other liabilities | $ | 525 | $ | 553 |
Note 11: Deposits
Deposits were comprised of the following at December 31, 2017 and 2016:
December 31, | ||||||||
2017 | 2016 | |||||||
Demand deposits | $ | 519,458 | $ | 471,023 | ||||
Savings | 138,348 | 136,314 | ||||||
Money market savings | 151,661 | 156,434 | ||||||
Certificates and other time deposits of $100,000 or more | 122,951 | 120,000 | ||||||
Other certificates | 177,336 | 190,594 | ||||||
Brokered deposits | 92,280 | 79,017 | ||||||
Total deposits | $ | 1,202,034 | $ | 1,153,382 |
At December 31, 2017 and 2016, total deposits that meet or exceed the FDIC’s standard deposit insurance amount of $250,000 were $335.2 million and $303.6 million, respectively.
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Certificates maturing in years ending December 31 are as follows:
2018 | $ | 172,139 | ||
2019 | 58,919 | |||
2020 | 70,893 | |||
2021 | 29,559 | |||
2022 | 37,525 | |||
Thereafter | 2,122 | |||
$ | 371,157 |
Note 12: Federal Home Loan Bank Advances
FHLB advances maturing in years ending December 31 are as follows:
2018 | $ | 67,630 | ||
2019 | 43,533 | |||
2020 | 46,500 | |||
2021 | 26,500 | |||
2022 | 13,000 | |||
Thereafter | 20,000 | |||
$ | 217,163 |
At December 31, 2017, the Company had pledged $361.4 million in qualifying first mortgage loans as collateral for advances and outstanding letters of credit. Advances, at interest rates from 0.97% to 6.73% at December 31, 2017, were subject to restrictions or penalties in the event of prepayment.
At December 31, 2017, the Company had a total of $15.0 million in putable and $45.0 million in symmetrical advances with Federal Home Loan Bank. The call dates for these advances range from 2020 through 2021 even though maturity dates extend beyond those dates.
Note 13: Other Borrowings
Other borrowings consisted of the following component as of December 31:
2017 | 2016 | |||||||
Subordinated debenture, net of discount | $ | 4,232 | $ | 4,189 |
The Company assumed $5.0 million in debentures as the result of the acquisition of MFB Corp. in 2008. In 2005, MFB Corp. had formed MFBC Statutory Trust I (MFBC), as a wholly owned business trust, to sell trust preferred securities. The proceeds from the sale of these trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from the acquired company. The junior subordinated debentures are the sole assets of MFBC and are fully and unconditionally guaranteed by the Company. The junior subordinated debentures and the trust preferred securities pay interest and dividends, respectively, on a quarterly basis. The rate resets quarterly at the prevailing three-month LIBOR rate plus 170 basis points, which was 3.29% at December 31, 2017. The Company may redeem the trust preferred securities, in whole or in part, without penalty, on or after September 15, 2010. These securities mature on September 15, 2035. The net balance of the securities as of December 31, 2017 was $4.2 million due to the fair value adjustment of the securities made at the time of the acquisition.
108 |
Note 14: Loan Servicing
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans consist of the following:
2017 | 2016 | |||||||
Loans serviced for | ||||||||
Freddie Mac | $ | 320,334 | $ | 301,263 | ||||
Fannie Mae | 5,249 | 7,355 | ||||||
FHLB | 9,313 | 10,621 | ||||||
Other investors | 1,341 | 1,551 | ||||||
$ | 336,237 | $ | 320,790 |
The aggregate fair value of capitalized mortgage servicing rights is based on comparable market values and expected cash flows, with impairment assessed based on portfolio characteristics including product type and interest rates. The amount of servicing fees collected during 2017, 2016 and 2015 totaled approximately $783,000, $801,000, and $814,000, respectively.
2017 | 2016 | 2015 | ||||||||||
Mortgage-servicing rights | ||||||||||||
Balances, January 1 | $ | 1,351 | $ | 1,335 | $ | 1,417 | ||||||
Servicing rights capitalized | 549 | 482 | 458 | |||||||||
Amortization of servicing rights | (396 | ) | (466 | ) | (540 | ) | ||||||
$ | 1,504 | $ | 1,351 | $ | 1,335 |
The fair value of servicing rights subsequently measured using the amortization method was as follows:
2017 | 2016 | 2015 | ||||||||||
Mortgage-servicing rights | ||||||||||||
Fair value, beginning of period | $ | 2,110 | $ | 2,179 | $ | 2,048 | ||||||
Fair value, end of period | 2,246 | 2,110 | 2,179 |
109 |
Note 15: Income Tax
The provision for income taxes includes these components:
2017 | 2016 | 2015 | ||||||||||
Income tax expense | ||||||||||||
Currently payable | ||||||||||||
Federal | $ | 3,231 | $ | 2,849 | $ | 2,652 | ||||||
State | - | - | - | |||||||||
Deferred | ||||||||||||
Federal | 1,342 | 1,317 | 1,706 | |||||||||
Effect of "Tax Cuts and Jobs Act" | 2,000 | - | - | |||||||||
State | 220 | 220 | 220 | |||||||||
Total income tax expense | $ | 6,793 | $ | 4,386 | $ | 4,578 |
A reconciliation of income tax expense at the federal statutory rate to actual tax expense is shown below:
2017 | 2016 | 2015 | ||||||||||
Federal statutory income tax at 34% | $ | 6,496 | $ | 5,993 | $ | 5,721 | ||||||
Non tax captive insurance income | (310 | ) | (319 | ) | - | |||||||
State taxes | 145 | 145 | 145 | |||||||||
Low income housing credits | (96 | ) | (96 | ) | (96 | ) | ||||||
Tax-exempt income | (1,453 | ) | (1,404 | ) | (1,111 | ) | ||||||
Effect of "Tax Cuts and Jobs Act" | 2,000 | - | - | |||||||||
Other | 11 | 67 | (81 | ) | ||||||||
Actual tax expense | $ | 6,793 | $ | 4,386 | $ | 4,578 | ||||||
Effective tax rate | 35.55 | % | 24.88 | % | 27.21 | % |
The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017 reducing the Company’s federal corporate tax rate from 34% to 21%, effective January 1, 2018. At December 31, 2017, the Company has substantially completed its accounting for the tax effects of enactment of the Tax Act. For deferred tax assets and liabilities, amounts were remeasured based on the rates expected to reverse in the future, which is now 21%. Based on this new law, we recorded an additional tax expense of $2.0 million due to the revaluation of the company’s deferred tax asset. The Company continues to analyze certain aspects of the Tax Act and further refinements are possible, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. We do not expect these adjustments to materially impact our financial statements.
110 |
The components of the net deferred tax asset included on the consolidated balance sheets at December 31, were as follows:
December 31, | ||||||||
2017 | 2016 | |||||||
Assets | ||||||||
Allowance for loan losses | $ | 3,278 | $ | 4,999 | ||||
Deferred compensation | 2,142 | 3,174 | ||||||
Business tax and AMT credit carryovers | 3,434 | 4,100 | ||||||
Net operating loss carryover | 1,161 | 1,496 | ||||||
Goodwill impairment | 903 | 1,780 | ||||||
Purchase accounting adjustments | 624 | 1,010 | ||||||
Other-than-temporary-impairment, available for sale securities | - | 37 | ||||||
Unrealized loss on securities available for sale | - | 776 | ||||||
Other | 457 | 857 | ||||||
Total assets | 11,999 | 18,229 | ||||||
Liabilities | ||||||||
Unrealized gain on securities available for sale | $ | (153 | ) | $ | - | |||
Depreciation and amortization | (382 | ) | (504 | ) | ||||
FHLB stock | (253 | ) | (385 | ) | ||||
State income tax | (331 | ) | (551 | ) | ||||
Loan fees | (257 | ) | (355 | ) | ||||
Investments in limited partnerships | (1,402 | ) | (2,072 | ) | ||||
Mortgage servicing rights | (402 | ) | (564 | ) | ||||
Other | (882 | ) | (972 | ) | ||||
Total liabilities | (4,062 | ) | (5,403 | ) | ||||
Valuation Allowance | ||||||||
Beginning balance | (789 | ) | (1,220 | ) | ||||
Decrease during period | 382 | 431 | ||||||
Ending balance | (407 | ) | (789 | ) | ||||
Net deferred tax asset | $ | 7,530 | $ | 12,037 |
The Company has unused business income tax credits of $2.1 million that will begin to expire in 2029 and a state net operating loss carryover of $17.9 million that will begin to expire in 2023. In addition, the Company has an AMT credit carryover of $1.4 million with an unlimited carryover period. Management believes that the Company will be able to utilize the benefits recorded for the state loss carryforwards and federal credits within the allotted time periods, except for the amount represented by the valuation allowance. The valuation allowance has been recorded for the possible inability to use a portion of the state net operating loss carryover.
Retained earnings include approximately $14.7 million for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amounts was approximately $3.1 million at December 31, 2017.
The Company’s federal and state income tax returns have been closed without audit by the IRS through the year ended December 31, 2013.
111 |
Note 16: Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows:
December 31, | ||||||||
2017 | 2016 | |||||||
Net unrealized gain (loss) on securities available for sale | $ | 529 | $ | (1,875 | ) | |||
Net unrealized gain relating to defined benefit plan liability | 10 | 30 | ||||||
539 | (1,845 | ) | ||||||
Tax benefit (expense) | (158 | ) | 591 | |||||
Net of tax amount | $ | 381 | $ | (1,254 | ) |
The following table presents the reclassification adjustments out of accumulated other comprehensive income (loss) that were included in net income in the Consolidated Statement of Income for the years ended December 31, 2017, 2016 and 2015.
Amount Reclassified from
Accumulated Other Comprehensive Income For the Year Ended |
||||||||||||||
Details about Accumulated Other | December 31, | Affected Line Item in the Statements | ||||||||||||
Comprehensive Income Components | 2017 | 2016 | 2015 | of Income | ||||||||||
Realized gains on available for sale securities | ||||||||||||||
Realized securities gains reclassified into income | $ | 708 | $ | 1,023 | $ | 436 | Total non-interest income - net realized gains on sale of available for sale securities | |||||||
Related income tax expense | (241 | ) | (348 | ) | (148 | ) | Income tax expense | |||||||
Total reclassifications for the period, net of tax | $ | 467 | $ | 675 | $ | 288 |
Note 17: Commitments and Contingent Liabilities
In the normal course of business, there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated statements of financial condition.
Financial instruments whose contract amount represents credit risk as of December 31:
2017 | 2016 | |||||||
Loan commitments | $ | 232,866 | $ | 224,900 | ||||
Standby letters of credit | 3,021 | 2,541 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation. Collateral held varies, but may include residential real estate, income-producing commercial properties, or other assets of the borrower.
112 |
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.
The Company and Bank are also subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits at December 31, 2017 will not have a material adverse effect on the consolidated financial position of the Company.
The Company has entered into employment agreements with certain officers that provide for the continuation of salary and certain benefits for a specified period of time under certain conditions. Under the terms of the agreement, these payments could occur in the event of a change in control of the Company or other circumstances.
Mortgage loans in the process of origination represent amounts that the Company plans to fund within a normal period of 60 to 90 days, and which are primarily intended for sale to investors in the secondary market. Total mortgage loans in the process of origination amounted to $3.6 million and $4.4 million, and mortgage loans held for sale amounted to $4.6 million and $4.1 million, at December 31, 2017 and 2016, respectively.
Note 18: Stockholders’ Equity
Without prior regulatory approval, current regulations allow the Bank to pay dividends to the Company not exceeding retained net income for the previous two calendar years and the current year. In the event the Bank becomes unable to pay dividends to the Company, the Company may not be able to service its debt, pay its other obligations or pay dividends on its common stock. At December 31, 2017, the Bank was able to pay dividends without prior regulatory approval.
Note 19: Regulatory Capital
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.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier I and Common Equity Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital to average assets (as defined). As of December 31, 2017 and 2016, the Company and Bank meet all capital adequacy requirements to which it is subject.
In July 2013, the three federal bank regulatory agencies jointly published final rules (the Basel III Capital Rules) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. These rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, compared to the current U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. These rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach with a more risk-sensitive approach. The Basel III Capital Rules were effective for the Company and Bank on January 1, 2015 (subject to a four-year phase-in period).
113 |
The Company’s and Bank’s actual capital amounts and ratios as of December 31, are presented in the tables below.
December 31, 2017 | ||||||||||||||||||||||||
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 | $ | 148,135 | 9.4 | % | $ | 63,293 | 4.0 | % | N/A | N/A | ||||||||||||||
MutualBank | 133,515 | 8.4 | 63,254 | 4.0 | $ | 79,068 | 5.0 | % | ||||||||||||||||
Common Equity Tier 1 Capital Level (2) : | ||||||||||||||||||||||||
MutualFirst Consolidated | $ | 144,764 | 12.2 | % | $ | 53,249 | 4.5 | % | N/A | N/A | ||||||||||||||
MutualBank | 133,515 | 11.3 | 53,407 | 4.5 | $ | 77,143 | 6.5 | % | ||||||||||||||||
Tier 1 Risk-Based Capital Level (3) : | ||||||||||||||||||||||||
MutualFirst Consolidated | $ | 148,135 | 12.5 | % | $ | 71,238 | 6.0 | % | N/A | N/A | ||||||||||||||
MutualBank | 133,515 | 11.3 | 71,209 | 6.0 | $ | 94,946 | 8.0 | % | ||||||||||||||||
Total Risk-Based Capital Level (4) : | ||||||||||||||||||||||||
MutualFirst Consolidated | $ | 160,522 | 13.5 | % | $ | 94,984 | 8.0 | % | N/A | N/A | ||||||||||||||
MutualBank | 145,902 | 12.3 | 94,946 | 8.0 | $ | 118,682 | 10.0 | % |
(1) | Tier 1 Capital to Total Average Assets for Leverage Ratio of $1.6 billion for the Bank and Company at December 31, 2017. |
(2) | Common Equity Tier 1 Capital to Risk-Weighted Assets of $1.2 billion for the Bank and Company at December 31, 2017. |
(3) | Tier 1 Capital to Risk-Weighted Assets. |
(4) | Total Capital to Risk-Weighted Assets. |
December 31, 2016 | ||||||||||||||||||||||||
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 | $ | 138,971 | 9.0 | % | $ | 61,914 | 4.0 | % | N/A | N/A | ||||||||||||||
MutualBank | 136,301 | 8.8 | 61,832 | 4.0 | $ | 77,290 | 5.0 | % | ||||||||||||||||
Common Equity Tier 1 Capital Level (2) : | ||||||||||||||||||||||||
MutualFirst Consolidated | $ | 136,606 | 11.9 | % | $ | 51,729 | 4.5 | % | N/A | N/A | ||||||||||||||
MutualBank | 136,301 | 11.9 | 51,696 | 4.5 | $ | 74,672 | 6.5 | % | ||||||||||||||||
Tier 1 Risk-Based Capital Level (3) : | ||||||||||||||||||||||||
MutualFirst Consolidated | $ | 138,971 | 12.1 | % | $ | 68,973 | 6.0 | % | N/A | N/A | ||||||||||||||
MutualBank | 136,301 | 11.9 | 68,928 | 6.0 | $ | 91,904 | 8.0 | % | ||||||||||||||||
Total Risk-Based Capital Level (4) : | ||||||||||||||||||||||||
MutualFirst Consolidated | $ | 151,353 | 13.2 | % | $ | 91,963 | 8.0 | % | N/A | N/A | ||||||||||||||
MutualBank | 148,683 | 12.9 | 91,904 | 8.0 | $ | 114,880 | 10.0 | % |
(1) | Tier 1 Capital to Total Average Assets for Leverage Ratio of $1.5 billion for the Bank and Company at December 31, 2016. |
(2) | Common Equity Tier 1 Capital to Risk-Weighted Assets of $1.1 billion for the Bank and Company at December 31, 2016. |
(3) | Tier 1 Capital to Risk-Weighted Assets. |
(4) | Total Capital to Risk-Weighted Assets. |
The minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer is being phased in annually, which started January 1, 2016, at the rate of 0.625% per year until fully phased in during 2019. The capital conservation buffer was 1.25% at December 31, 2017. The unrealized gain or loss on available for sale securities is not included in computing regulatory capital. As of December 31, 2017, the Bank is in excess of the capital conversation buffer requirements.
114 |
Note 20: Employee Benefits
The Company has a retirement savings 401(k) plan in which substantially all employees may participate. The contributions are discretionary and determined annually. The Company matches employees' contributions at the following rates: 100 percent of participant contributions up to 4% and 50 percent of participant contributions from 4-6%, not to exceed a maximum of 5% of their compensation. The Company’s expense for the plan was $957,000, $938,000 and $810,000 for 2017, 2016 and 2015, respectively.
The Company has an executive benefit plan and deferred compensation arrangements for the benefit of certain officers. The Company also has deferred compensation arrangements with certain directors whereby, in lieu of previously receiving fees, the directors or their beneficiaries will be paid benefits for an established period following the director’s retirement or death. These arrangements are informally funded by life insurance contracts which have been purchased by the Company. The Company records a liability for these vested benefits based on the present value of future payments. The Company’s expense for the plan was $652,000, $676,000 and $669,000 for 2017, 2016 and 2015, respectively.
Note 21: Stock Option Plans
Under the Company’s stock option plans, which are accounted for in accordance with FASB ASC 718, Stock Compensation , the Company grants selected executives and other key employees and directors incentive and non-qualified stock option awards that vest and become fully exercisable at the discretion of the Compensation Committee as the options are granted. As of the end of the 2017, the Company was authorized to grant options under our stock option plan approved in 2008. Under certain provisions of the plan, the number of shares available for grant may be increased without shareholder approval by the amount of shares surrendered as payment of the exercise price of the stock option and by the number of shares of common stock of the Company that could be repurchased by the Company using proceeds from the exercise of stock options.
The Company had a stock option plan that was approved in 2000 that expired in 2015. Under the plan provisions, all option grants that have not been exercised or expired are still exercisable until the maturity or the participant forfeits the grant. No additional grants of options can be made from this plan.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatility is based on historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate timing of option exercises and employee terminations within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted represents the period of time that options are expected to be outstanding; the range given below results from certain groups of employees exhibiting different behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The discount rate for post-vesting restrictions is estimated based on the Company’s credit-adjusted risk-free rate of return.
The following is a summary of the status of the Company’s stock option plans and changes in these plans during 2017.
2017 | ||||||||||||||
Options | Shares |
Weighted-
Average Exercise Price |
Weighted-
Average Remaining Contractual Life |
Aggregate
Intrinsic Value |
||||||||||
Outstanding, beginning of year | 304,561 | $ | 9.90 | |||||||||||
Exercised | 65,161 | 17.73 | ||||||||||||
Outstanding and exercisable, end of year | 239,400 | $ | 7.78 | 7.6 years | $ | 7,236 |
115 |
There were 65,161, 77,600 and 186,059 options exercised during the years ended December 31, 2017, 2016 and 2015. There were no options granted during those periods. The Company will fulfill options with authorized but unissued shares of stock from the 352,741 shares the Company has authorized under the current shareholder-approved stock option and incentive plans. There were 58,003 shares remaining to be granted under the current plan. The Company will also fulfill options with authorized but unissued shares of stock from the 141,462 shares the Company has authorized under the 2000 stock option plan. Outstanding options may continue to be exercised from that plan; however no further grants can be made.
Cash received from options exercised under all share-based payment arrangements for years ended December 31, 2017, 2016 and 2015 was $1.2 million, $976,000 and $2.0 million, respectively. The intrinsic value on options exercised during the years ended December 31, 2017, 2016 and 2015 was $1.1 million, $911,000 and $2.2 million, respectively.
116 |
Note 22: Earnings Per Share
Earnings per share were computed as follows:
2017 | ||||||||||||
Net Income |
Weighted- Average
Shares |
Per-Share
Amount |
||||||||||
Basic Earnings Per Share | ||||||||||||
Net income | $ | 12,315 | 7,360,066 | $ | 1.67 | |||||||
Effect of Dilutive Securities | ||||||||||||
Stock options | 141,993 | |||||||||||
Diluted Earnings Per Share | ||||||||||||
Net income available and assumed conversions | $ | 12,315 | 7,502,059 | $ | 1.64 |
2016 | ||||||||||||
Net Income |
Weighted- Average
Shares |
Per-Share
Amount |
||||||||||
Basic Earnings Per Share | ||||||||||||
Net income | $ | 13,241 | 7,391,681 | $ | 1.79 | |||||||
Effect of Dilutive Securities | ||||||||||||
Stock options | 147,157 | |||||||||||
Diluted Earnings Per Share | ||||||||||||
Net income available and assumed conversions | $ | 13,241 | 7,538,838 | $ | 1.76 |
2015 | ||||||||||||
Net Income |
Weighted- Average
Shares |
Per-Share
Amount |
||||||||||
Basic Earnings Per Share | ||||||||||||
Net income | $ | 12,262 | 7,374,589 | $ | 1.66 | |||||||
Effect of Dilutive Securities | ||||||||||||
Stock options | 173,296 | |||||||||||
Diluted Earnings Per Share | ||||||||||||
Net income available and assumed conversions | $ | 12,262 | 7,547,885 | $ | 1.62 |
Options to purchase 37,161 shares of common stock were outstanding at December 31, 2015, but were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares. As of December 31, 2017 and 2016, the exercise price for all options was lower than the average market price of the common shares.
117 |
Note 23: 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, 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.
Interest Rate Derivative Agreements
Interest rate swap positions, both assets and liabilities, are valued by a third-party pricing agent using an income approach and utilizing models that use as their basis readily observable market parameters. This valuation process considers various factors including interest rate yield curves, time value and volatility factors.
118 |
The following table presents the fair value measurements of assets and liabilities measured on a recurring basis and the level within the ASC 820 fair value hierarchy.
Fair Value Measurements Using | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
December 31, 2017 | ||||||||||||||||
Available for sale securities | ||||||||||||||||
Mortgage-backed securities | $ | 67,798 | $ | - | $ | 67,798 | $ | - | ||||||||
Collateralized mortgage obligations | 87,250 | - | 87,250 | - | ||||||||||||
Municipal obligations | 110,495 | - | 110,495 | - | ||||||||||||
Corporate obligations | 11,835 | - | 9,114 | 2,721 | ||||||||||||
Interest rate swap asset | 525 | - | 525 | - | ||||||||||||
Interest rate swap liability | 525 | - | 525 | - |
Fair Value Measurements Using | ||||||||||||||||
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
December 31, 2016 | ||||||||||||||||
Available for sale securities | ||||||||||||||||
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 | ||||||||||||
Interest rate swap asset | 553 | - | 553 | - | ||||||||||||
Interest rate swap liability | 553 | - | 553 | - |
The following is a reconciliation of the beginning and ending balances for the years ended December 31, 2017, 2016 and 2015 of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:
2017 | 2016 | 2015 | ||||||||||
Beginning balance | $ | 2,588 | $ | 2,534 | $ | 2,522 | ||||||
Total realized and unrealized gains (losses) | ||||||||||||
Included in net income | - | - | - | |||||||||
Included in other comprehensive income (loss) | 133 | 54 | 12 | |||||||||
Purchases, issuances and settlements | - | - | - | |||||||||
Ending balance | $ | 2,721 | $ | 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 | $ | - | $ | - | $ | - |
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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 tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.
December 31, 2017 | Fair Value | Valuation Technique | Unobservable Inputs | Range | ||||||||
Trust Preferred Securities | $ | 2,721 | 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 | 29.3 - 34.9 | % |
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.
Derivative Instruments - The fair values of interest rate swaps reflects the estimated amounts that would have been received to terminate these contracts at the reporting date based upon pricing or valuation models applied to current market information.
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.
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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.
121 |
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:
Carrying | Fair Value Measurements Using | |||||||||||||||||||
December 31, 2017 | Amount | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
Assets | ||||||||||||||||||||
Cash and cash equivalents | $ | 27,341 | $ | 27,341 | $ | 27,341 | $ | - | $ | - | ||||||||||
Interest-bearing time deposits | 1,853 | 1,853 | 1,853 | - | - | |||||||||||||||
Loans held for sale | 4,577 | 4,584 | - | 4,584 | - | |||||||||||||||
Loans, net | 1,167,758 | 1,150,005 | - | - | 1,150,005 | |||||||||||||||
FHLB stock | 11,183 | 11,183 | - | 11,183 | - | |||||||||||||||
Interest receivable | 5,282 | 5,282 | - | 5,282 | - | |||||||||||||||
Interest rate swap asset | 525 | 525 | - | 525 | - | |||||||||||||||
Liabilities | ||||||||||||||||||||
Deposits | 1,202,034 | 1,199,781 | 830,877 | - | 368,904 | |||||||||||||||
FHLB advances | 217,163 | 215,326 | - | 215,326 | - | |||||||||||||||
Other borrowings | 4,232 | 4,300 | - | 4,300 | - | |||||||||||||||
Interest payable | 456 | 456 | - | 456 | - | |||||||||||||||
Interest rate swap liability | 525 | 525 | - | 525 | - |
Carrying | Fair Value Measurements Using | |||||||||||||||||||
December 31, 2016 | 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 | - | |||||||||||||||
Interest rate swap asset | 553 | 553 | - | 553 | - | |||||||||||||||
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 | - | |||||||||||||||
Interest rate swap liability | 553 | 553 | - | 553 | - |
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Note 24: Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:
Condensed Balance Sheets
2017 | 2016 | |||||||
Assets | ||||||||
Cash on deposit with Bank | $ | 12,006 | $ | 1,098 | ||||
Cash on deposit with others | 24 | 24 | ||||||
Total cash | 12,030 | 1,122 | ||||||
Investment in common stock of subsidiaries | 142,208 | 142,812 | ||||||
Other assets | 425 | 411 | ||||||
Total assets | $ | 154,663 | $ | 144,345 | ||||
Liabilities | ||||||||
Other borrowings | $ | 4,232 | $ | 4,189 | ||||
Other liabilities | 149 | 118 | ||||||
Total liabilities | 4,381 | 4,307 | ||||||
Stockholders' Equity | 150,282 | 140,038 | ||||||
Total liabilities and stockholders' equity | $ | 154,663 | $ | 144,345 |
Condensed Statements of Income
2017 | 2016 | 2015 | ||||||||||
Income | ||||||||||||
Interest income from bank | $ | - | $ | - | $ | 1 | ||||||
Dividends from subsidiaries | 15,100 | 12,000 | 3,600 | |||||||||
Total income | 15,100 | 12,000 | 3,601 | |||||||||
Expenses | 1,041 | 976 | 1,182 | |||||||||
Income before income tax and equity in undistributed income of subsidiaries | 14,059 | 11,024 | 2,419 | |||||||||
Income tax benefit | (495 | ) | (399 | ) | (591 | ) | ||||||
Income before equity in undistributed income (distributions in excess of income) of subsidiaries | 14,554 | 11,423 | 3,010 | |||||||||
Equity in undistributed income (distributions in excess of income) of subsidiaries | (2,239 | ) | 1,818 | 9,252 | ||||||||
Net Income Available to Common Shareholders | $ | 12,315 | $ | 13,241 | $ | 12,262 |
Condensed Statements of Comprehensive Income
2017 | 2016 | 2015 | ||||||||||
Net income | $ | 12,315 | $ | 13,241 | $ | 12,262 | ||||||
Other comprehensive income: | ||||||||||||
Net unrealized holding gain (loss) on securities available for sale | 3,112 | (3,258 | ) | (1,174 | ) | |||||||
Less: Reclassification adjustment for realized gains included in net income | (708 | ) | (1,023 | ) | (436 | ) | ||||||
Net unrealized gain on derivative used for cash flow hedges | - | 1 | 108 | |||||||||
Net unrealized gain (loss) relating to defined benefit plan | (20 | ) | 62 | 77 | ||||||||
2,384 | (4,218 | ) | (1,425 | ) | ||||||||
Income tax (expense) benefit related to other comprehensive income | (749 | ) | 1,474 | 537 | ||||||||
Other comprehensive income (loss) | 1,635 | (2,744 | ) | (888 | ) | |||||||
Comprehensive income | $ | 13,950 | $ | 10,497 | $ | 11,374 |
123 |
Condensed Statements of Cash Flows
2017 | 2016 | 2015 | ||||||||||
Operating Activities | ||||||||||||
Net income | $ | 12,315 | $ | 13,241 | $ | 12,262 | ||||||
Item not requiring cash | ||||||||||||
Deferred income tax benefit | (14 | ) | 200 | (102 | ) | |||||||
(Equity in undistributed income) distributions in excess of income of subsidiaries | 2,239 | (1,818 | ) | (9,252 | ) | |||||||
Other | 74 | (183 | ) | 13 | ||||||||
Net cash provided by operating activities | 14,614 | 11,440 | 2,921 | |||||||||
Investing Activity | ||||||||||||
Investment in subsidiary | - | (100 | ) | (250 | ) | |||||||
Net cash used in investing activity | - | (100 | ) | (250 | ) | |||||||
Financing Activities | ||||||||||||
Repayment of other borrowings | $ | - | $ | (5,312 | ) | $ | (759 | ) | ||||
Stock repurchased | - | (4,354 | ) | - | ||||||||
Cash dividends | (4,862 | ) | (4,284 | ) | (3,550 | ) | ||||||
Proceeds from stock options exercised | 1,156 | 976 | 2,011 | |||||||||
Net cash used in financing activities | (3,706 | ) | (12,974 | ) | (2,298 | ) | ||||||
Net Change in Cash | 10,908 | (1,634 | ) | 373 | ||||||||
Cash, Beginning of Year | 1,122 | 2,756 | 2,383 | |||||||||
Cash, End of Year | $ | 12,030 | $ | 1,122 | $ | 2,756 |
124 |
Note 25: Quarterly Results of Operations (Unaudited)
Quarter Ended |
Interest
Income |
Interest
Expense |
Net Interest
Income |
Provision
for Loan Losses |
Net Income
Available to Common Shareholders |
Basic
Earnings Per Common Share |
Diluted
Earnings Per Common Share |
|||||||||||||||||||||
2017 | ||||||||||||||||||||||||||||
March 31 | $ | 14,109 | $ | 2,396 | $ | 11,713 | $ | 200 | $ | 3,206 | $ | 0.44 | $ | 0.43 | ||||||||||||||
June 30 | 14,652 | 2,565 | 12,087 | 300 | 3,898 | 0.53 | 0.52 | |||||||||||||||||||||
September 30 | 15,026 | 2,762 | 12,264 | 370 | 3,751 | 0.51 | 0.50 | |||||||||||||||||||||
December 31 | 15,081 | 2,888 | 12,193 | 350 | 1,460 | 0.20 | 0.19 | |||||||||||||||||||||
Total | $ | 58,868 | $ | 10,611 | $ | 48,257 | $ | 1,220 | $ | 12,315 | $ | 1.67 | $ | 1.64 | ||||||||||||||
2016 | ||||||||||||||||||||||||||||
March 31 | $ | 13,034 | $ | 2,272 | $ | 10,762 | $ | 200 | $ | 2,365 | $ | 0.32 | $ | 0.31 | ||||||||||||||
June 30 | 13,258 | 2,271 | 10,987 | 150 | 4,157 | 0.56 | 0.55 | |||||||||||||||||||||
September 30 | 13,567 | 2,330 | 11,237 | 250 | 3,482 | 0.48 | 0.47 | |||||||||||||||||||||
December 31 | 13,943 | 2,374 | 11,569 | 250 | 3,237 | 0.44 | 0.43 | |||||||||||||||||||||
Total | $ | 53,802 | $ | 9,247 | $ | 44,555 | $ | 850 | $ | 13,241 | $ | 1.79 | $ | 1.76 | ||||||||||||||
2015 | ||||||||||||||||||||||||||||
March 31 | $ | 12,683 | $ | 2,165 | $ | 10,518 | $ | - | $ | 2,481 | $ | 0.34 | $ | 0.33 | ||||||||||||||
June 30 | 12,731 | 2,191 | 10,540 | - | 3,218 | 0.44 | 0.43 | |||||||||||||||||||||
September 30 | 13,049 | 2,233 | 10,816 | - | 3,225 | 0.44 | 0.43 | |||||||||||||||||||||
December 31 | 13,313 | 2,214 | 11,099 | 125 | 3,338 | 0.45 | 0.44 | |||||||||||||||||||||
Total | $ | 51,776 | $ | 8,803 | $ | 42,973 | $ | 125 | $ | 12,262 | $ | 1.66 | $ | 1.62 |
125 |
Note 26: Subsequent Event
On October 4, 2017, MutualFirst entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for MutualFirst’s acquisition of Universal Bancorp (“Universal”). Pursuant to the Merger Agreement, Universal would merge with and into MutualFirst, with MutualFirst surviving the merger (the “Merger”), and BloomBank, a wholly-owned subsidiary of Universal, would merge with and into a wholly-owned subsidiary of MutualFirst, MutualBank, with MutualBank as the surviving bank.
The boards of directors of each of MutualFirst and Universal have approved the Merger Agreement. Subject to the approval of the Merger Agreement by Universal shareholders, regulatory approvals and other closing conditions, the parties completed the Merger during the first quarter of 2018. BloomBank’s total assets as of December 31, 2017 were $389.4 million.
In connection with the Merger, shareholders of Universal received fixed consideration of 15.6 shares of MutualFirst common stock and $250.00 in cash for each share of Universal common stock. On February 28, 2018, the transaction closed. Based on the closing price of MutualFirst’s common stock on February 28, 2018 of $35.70 per share and cash proceeds, the transaction value for the shares of common stock was approximately $61.3 million.
126 |
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures (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 December 31, 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 December 31, 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.
Management’s Report on Internal Control over Financial Reporting
The management of MutualFirst Financial, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
127 |
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013) . Based on our assessment, we believe that, as of December 31, 2017, the Company’s internal control over financial reporting was effective based on those criteria.
Date: March 15, 2018 | By: | /s/David W. Heeter |
David W. Heeter | ||
President and Chief Executive Officer | ||
By: | /s/Christopher D. Cook | |
Christopher D. Cook | ||
Senior Vice President, Treasurer and Chief Financial Officer |
128 |
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
MutualFirst Financial, Inc.
Muncie, Indiana
Opinion on the Internal Control over Financial Reporting
We have audited MutualFirst Financial's (the "Company") internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company and our report dated March 15, 2018, expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
129 |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BKD, LLP | |
Indianapolis, Indiana | |
March 15, 2018 |
130 |
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 December 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
Item 10. Directors, Executive Officers and Corporate Governance
Directors
Information concerning the Company’s directors is incorporated herein by reference from the Company’s definitive proxy statement for its Annual Meeting of Stockholders to be held in May 2018, a copy of which will be filed with the SEC not later than 120 days after the close of the fiscal year.
Executive Officers
Information concerning the executive officers of the Company who are directors is incorporated herein by reference from the Company’s definitive proxy statement for its Annual Meeting of Stockholders to be held in May 2018, a copy of which will be filed with the SEC not later than 120 days after the close of the fiscal year.
The business experience of each of our other current executive officers for at least the past five years is set forth below.
Christopher D. Cook. Age 44 years. Mr. Cook, a certified public accountant, has served as Senior Vice President, Treasurer and Chief Financial Officer of MutualFirst and MutualBank since May 2010. Mr. Cook began his career with MutualBank in 1996. Since that time he has served as Profitability Analyst, Assistant Treasurer, Controller and Director of Finance.
Sharon L. Ferguson . Age 62 years. Ms. Ferguson has served as Senior Vice President of Risk Management of the Bank since February 2009. From April 2008 until February 2009, she served as Senior Vice President of Consumer Banking. From September 2007 to April 2008 she served as Vice President of Retail Products. From October 2005 until September 2007 she served as Assistant Vice President, Retail Products Manager. Prior to October 2005 she served as Assistant Vice President, Consumer Lending and Deposits Manager. She has been with the Bank since March 1998.
Christopher L. Caldwell. Age 52 years. Mr. Caldwell has served as Senior Vice President of Business Banking of MutualBank since December 2012. Beginning in 2008, he served as Vice President/Senior Business Banker for the Central Region of MutualBank. From 2006 to 2008, he served as Regional Head of Commercial Lending for Delaware and Randolph counties. Prior to that he was Vice President of Commercial Lending. Mr. Caldwell is a graduate of the ABA Stonier Graduate School of Banking and serves as Secretary of the MutualBank Charitable Foundation. He has been with the Bank since 2005.
Audit Committee Matters and Audit Committee Financial Expert
The Board of Directors of the Company has a standing Audit/Compliance Committee, which has been established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of that committee are Directors Linn A. Crull (Chairman), Wilbur R. Davis, Jerry D. McVicker, Edward J. Levy and Richard J. Lashley, all of whom are considered independent under applicable Nasdaq listing standards. The Board of Directors has determined that Mr. Crull, Mr. Levy and Mr. Lashley are each considered to be an “audit committee financial expert” as defined in applicable SEC rules. Additional information concerning the audit committee of the Company’s Board of Directors is incorporated herein by reference from the Company’s definitive proxy statement for its Annual Meeting of Stockholders to be held in May 2018, a copy of which will be filed with the SEC not later than 120 days after the close of the fiscal year.
131 |
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, and persons who own more than 10% of a registered class of the Company’s equity securities, to file with the SEC reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
To the Company’s knowledge, based solely on its review of the Section 16 reports filed by its directors and executive officers and written representations from those directors and executive officers, all Section 16(a) filing requirements applicable to the Company’s executive officers and directors during the fiscal year ended December 31, 2017, were met.
Code of Ethics
The Company adopted a written Code of Ethics based upon the standards set forth under Item 406 of Regulation S-K of the Securities Exchange Act. The Code of Ethics applies to all of the Company’s directors, officers and employees. A copy of the Company’s updated Code of Ethics is being filed with the SEC as Exhibit 14 to this Annual Report on Form 10-K. You may obtain a copy of the Code of Ethics on our website at www.bankwithmutual.com at “About Us – Investor Relations – Corporate Overview - Governance Documents - Code of Ethics,” or free of charge from the Company by writing to our Corporate Secretary at MutualFirst Financial, Inc., 110 E. Charles Street, Muncie, Indiana 47305-2400 or by calling (765) 747-2800.
Nomination Procedures
There have been no material changes to the procedures by which stockholders may recommend nominees to the Company’s Board of Directors.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by reference from the Company’s definitive proxy statement for its Annual Meeting of Stockholders to be held in May 2018, a copy of which will be filed with the SEC not later than 120 days after the close of the fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the Company’s definitive proxy statement for its Annual Meeting of Stockholders to be held in May 2018, a copy of which will be filed with the SEC not later than 120 days after the close of the fiscal year.
132 |
Equity Compensation Plan Information. The following table summarizes our equity compensation plans as of December 31, 2017.
Plan Category |
Number of securities to be
issued upon exercise of outstanding options, warrants and rights |
Weighted-average
exercise price of outstanding options, warrants and rights |
Number of securities
remaining available for future issuance under equity compensation plan |
|||||||||
Equity compensation plans approved by security holders | 239,400 | $ | 7.78 | 58,003 | (1) | |||||||
Equity compensation plans not approved by security holders | - | $ | - | - |
(1) These shares are available for future grants under the Company's 2008 stock option plan.
Item 13. Certain Relationships and Related Transactions
Information required by this item concerning certain relationships and related transactions, our independent directors and our audit and nominating committee charters is incorporated herein by reference from the Company’s definitive proxy statement for its Annual Meeting of Stockholders to be held in May 2018, which will be filed no later than 120 days after the close of the fiscal year.
Item 14. Principal Accountant Fees and Services
Information required by this item concerning principal accountant fees and services is incorporated herein by reference from the Company’s definitive proxy statement for its Annual Meeting of Stockholders to be held in May 2018, a copy of which will be filed with the SEC not later than 120 days after the close of the fiscal year.
133 |
Item 15. Exhibits and Financial Statement Schedules
(a)(1) List of Financial Statements
The following are contained in Item 8 of this Form 10-K:
Annual Report Section |
Report of Independent Registered Public Accounting Firm |
Consolidated Balance Sheets at December 31, 2017 and 2016 |
Consolidated Statements of Income for the Years Ended December 31, 2017, 2016 and 2015 |
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015 |
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015 |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015 |
Notes to Consolidated Financial Statements, December 31, 2017, 2016 and 2015 |
(a)(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable.
(a)(3) Exhibits:
134 |
135 |
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 |
(b) Exhibits - See list in (a)(3) and the Exhibit Index following the signature page.
(c) Financial Statements Schedules - None
136 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MutualFirst Financial, Inc. | |||
Date: March 15, 2018 | By: | /s/David W. Heeter | |
David W. Heeter, President and Chief Executive Officer | |||
(Duly Authorized Representative) |
137 |
POWER OF ATTORNEY
We, the undersigned officers and directors of MutualFirst Financial, Inc., hereby severally and individually constitute and appoint David W. Heeter the true and lawful attorneys and agents of each of us to execute in the name, place and stead of each of us (individually and in any capacity stated below) any and all amendments to this Annual Report on Form 10-K and all instruments necessary or advisable in connection therewith and to file the same with the Securities and Exchange Commission, each of said attorneys and agents to have the power to act with or without the others and to have full power and authority to do and perform in the name and on behalf of each of the undersigned every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any of the undersigned might or could do in person, and we hereby ratify and confirm our signatures as they may be signed by our said attorneys and agents or each of them to any and all such amendments and instruments. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/David W. Heeter | /s/Wilbur R. Davis | |
David W. Heeter, President and Director | Wilbur R. Davis, Chairman of the Board | |
(Principal Executive Officer) | Date: March 15, 2018 | |
Date: March 15, 2018 | ||
/s/Patrick C. Botts | /s/Linn A. Crull | |
Patrick C. Botts, Director | Linn A. Crull, Director | |
Date: March 15, 2018 | Date: March 15, 2018 | |
/s/James D. Rosema | /s/William V. Hughes | |
James D. Rosema, Director | William V. Hughes, Director | |
Date: March 15, 2018 | Date: March 15, 2018 | |
/s/Jerry D. McVicker | /s/James R. Schrecongost | |
Jerry D. McVicker, Director | James R. Schrecongost, Director | |
Date: March 15, 2018 | Date: March 15, 2018 | |
/s/Edward C. Levy | /s/Michael J. Marien | |
Edward C. Levy, Director | Michael J. Marien, Director | |
Date: March 15, 2018 | Date: March 15, 2018 | |
/s/Charles J. Viater | /s/Richard J. Lashley | |
Charles J. Viater, Director | Richard J. Lashley, Director | |
Date: March 15, 2018 | Date: March 15, 2018 | |
/s/Christopher D. Cook | ||
Christopher D. Cook, Senior Vice President | ||
Treasurer and Chief Financial Officer | ||
( Principal Financial and Accounting Officer) | ||
Date: March 15, 2018 |
138 |
139 |
EXHIBIT 10.16
Director Fee Arrangements in 2017
Each director of MutualFirst Financial, Inc. (the “Company”) also is a director of MutualBank. In 2017, each non-employee director received an annual fee of $34,000 for serving on MutualBank’s Board of Directors as well as a Board meeting fee of $400 per Audit Committee meeting attended and $200 for all other committee meetings attended. In addition to this annual fee, Wilbur R. Davis received a $10,000 annual fee for serving as Chairman of the Board of Directors, Linn Crull received a $5,000 annual fee for serving as Chairman of the Audit Committee, Jerry McVicker received a $3,000 annual fee for serving as Chairman of the Compensation Committee and William Hughes received a $3,000 annual fee for serving as Chairman of the Wealth Management Committee. Directors are not compensated for their service on the Company’s Board of Directors.
MutualBank maintains deferred compensation arrangements with some directors that previously allowed them to defer all or a portion of their Board fees in order to receive income when they are no longer active directors. Previously deferred amounts earn interest at the rate of 10 percent per year.
EXHIBIT 14
CODE OF BUSINESS CONDUCT AND ETHICS
PART I
OVERVIEW
Introduction
MutualFirst Financial, Inc. ('the "Corporation") and MutualBank are character-driven. As we strive for success, we will exercise the highest standard of ethics. The following Code of Business Conduct and Ethics identifies critical responsibilities regarding your association with our Corporation.
Purpose of the Code
This Code of Business Conduct and Ethics is intended to deter wrongdoing and to promote:
• | Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
• | Avoidance of conflicts of interest, or the appearance of conflicts, including appropriate disclosure to supervisors of any material transaction or relationship that reasonably could be expected to give rise to a conflict; |
• | Full, fair, accurate, timely and understandable disclosure in documents the Corporation files with, or submits to, the SEC and in all public communications made by the Corporation; |
• | Compliance with applicable governmental laws, rules and regulations; |
• | Prompt internal reporting to designated persons of violations of the Code; and |
• | Accountability for adherence to the Code. |
Application of the Code
The Code applies to all MutualFirst Financial, Inc. (the "Corporation") and MutualBank directors and employees, including subsidiary and affiliate employees. The Code applies to all employee decisions and activities within the scope of employment, or when representing the Corporation in any capacity. A copy of the Code will be included in the orientation package provided to new employees. Following review of the Code, new employees will be asked to sign a written confirmation that they have reviewed the Code in its entirety and agree to adhere to its provisions. Existing employees will be asked to review the Code annually. All Corporation officers and directors should be familiar with the requirements of the Code, and should encourage employees to apply the Code to their daily activities and decisions, and to seek guidance from the appropriate individuals when additional information or explanation is needed.
Copies of the Code may be obtained from several sources, including the Company Intranet (SharePoint) and the Corporation's Human Resources Department.
Obtaining Guidance
If you need additional explanation regarding a particular provision of the Code, or if you need guidance in a specific situation, including whether a conflict or potential conflict of interest may exist, please contact your immediate supervisor. If you are uncomfortable speaking to your immediate supervisor, or if you require additional guidance after having consulted with your supervisor, you are encouraged to contact one of the following individuals:
Dianne Harris, VP, Internal Audit Manager, (765) 747-2819 or e-mail dianne.harris@bankwithmutual.com. Dorothy Douglass, VP, Human Resources, (765) 747-2847 or e-mail dorothy.douglass@bankwithmutual.com. Sharon Ferguson, SVP, Chief Risk Officer, (765) 747-2940 or e-mail sharon.ferguson@bankwithmutual.com .
Reporting Violations of the Code
Any known or suspected violation of the Code, including actions or failures to act, must be promptly reported to your supervisor or the person listed above. This includes violations or possible violations involving you, another employee (including officers) or a director. Any violation of law, rule or regulation applicable to the Corporation and /or corporate policy is also a violation of this Code. Violations of the Code may result in disciplinary action including, in severe situations, immediate termination of employment.
Concerns regarding questionable accounting, internal accounting controls or auditing matters may be directed to the Chairman of the Audit Committee, Linn Crull, at (765) 284-3384 or Dianne Harris, VP, Internal Audit Manager (765) 747-2819 or e-mail dianne.harris@bankwithmutual.com.
Violations may be reported anonymously to the bank's employee fraud and ethics hotline at 1-800-401-8004 or http://www.lighthouse-services.com/bankwithmutual.
All concerns or complaints will be promptly investigated and appropriate action taken. The Internal Audit Manager will document the results of the investigation in a report to the Board of Directors in order to ensure a fair process is utilized in determining whether a violation of the Code has occurred. No person expressing concerns or complaints will be subject to any disciplinary or other adverse action by the Corporation absent a knowingly false report.
All concerns or complaints may be made anonymously and will remain confidential. Please provide sufficient information to allow us to properly investigate your concerns. The Corporation will retain a record of all concerns and complaints, and the results of its investigations, for five years.
PART II
PRINCIPLES AND STANDARDS OF CONDUCT
One of the most valued assets of the Corporation is its reputation for integrity as determined by the personal conduct of its directors, officers and staff, and how that conduct may be perceived by the public. The ethical management of both personal and business affairs is most important to all directors and employees in order to avoid situations that might lead to a conflict, or even suspicion of a conflict, between personal interest and responsibility to the Corporation. Your position should never be used directly or indirectly for private gain, for advancement of personal interests or to obtain favors or benefits for oneself, customers, or suppliers.
The following is a statement of policy regarding standards of conduct expected from directors and employees of the Corporation and its subsidiaries in their treatment of confidential information, personal investments, gifts and fees, and outside activities.
Confidential and Insider Information
Confidentiality is a fundamental principle of the financial services business. I n the course of performing your duties, you may acquire confidential information. Confidential information includes all non-public information that might be of use to competitors or harmful to the Corporation or its customers, if disclosed. Confidential information, in any form, obtained through business or personal contacts with customers, prospective customers, suppliers, or other employees shall be used solely for the Corporation's purposes. Information reflecting favorably or adversely upon the current or future value of any business enterprise should not be used in any manner for personal gain or for advantage to a third party. This information must not be revealed to unauthorized persons or discussed with others within the Corporation unless their duties require this information. The use of confidential information submitted to us through any source about one customer to further the private interests of another customer is unethical and may be illegal.
Some specific examples of confidential information include:
• |
The identity of customers and potential customers and their personal, business and financial information;
|
• | Information regarding the Corporation's Strategic Business Plan; |
• | Non-public business and financial information of the Corporation; personal information regarding any employee of the Corporation; |
• | Personal or non- public business information regarding any supplier, vendor or agent of the Corporation; |
• | Information related to, including the identity of, potential candidates for mergers and acquisitions; |
• | Information regarding the Corporation's sales strategies, plans or proposals; |
• | Information related to computer software programs, whether proprietary or standard; |
• | Information related to documentation systems, information databases, customized hardware or other information systems and technological developments; |
• | Manuals, processes, policies, procedures, compositions, opinion letters, ideas, innovations, inventions, formulas and other proprietary information belonging to the Corporation or related to the Corporation's activities; |
• | Security information, including without limitation, policies and procedures, passwords, personal identification numbers (PINs) and electronic access keys; |
• | Communications by, to and from regulatory agencies; and |
• | Certain communications with or from attorneys for the Corporation, whether internal or external. |
This caution on confidential information does not preclude releasing certain customer information when authorized by the customer or to the government when appropriate. The guidance of your supervisor should be sought in all such cases. Disclosure of confidential information to attorneys, accountants and other professionals working on behalf of the Corporation, as well as regulatory examiners, may also be appropriate.
Personal Investments and Financial Affairs
Directors and employees of the Corporation, like any other individuals, may make personal investments in corporate stock, real estate, etc. Such investments, however, shall not be made as a result of confidential information that is also material inside information obtained through your position with the Corporation. Particular care should be taken with original or new stock issues. Confidential information about the Corporation and its customers and suppliers acquired by directors and employees in the course of their duties is to be used solely for the Corporation's purposes, and not as a basis for personal investment by directors and employees or their immediate families. In making personal investments, all directors and employees should be guided by a keen awareness of potential conflict. In addition, personal investments should not influence a director's or employee's judgment or action in the conduct of the Corporation's business.
It is expected that all directors and employees will conduct their personal financial affairs in a manner that will not reflect adversely upon the Corporation or on their personal standing in the community.
Director and employee checking account overdrafts are not acceptable. All overdrafts will be addressed through the Progressive Discipline Policy.
Material Inside Information
Generally, material inside information is defined as any information that is confidential in nature, and that a reasonable investor would likely consider important in deciding whether to buy, sell, or hold the Corporation's stock. The following types of information, if not generally known or publicly disclosed, should be considered material inside information and treated according to the provisions of this Code and the Corporation's Insider Trading Guidelines:
• | Proposals or plans for mergers and acquisitions; |
• | Earnings estimates or results, whether for the month, quarter or year; |
• | Changes in dividends; |
• | New product innovation, development or implementation; |
• | Major litigation, adverse regulatory proceeding or material threat of either event; |
• | Significant operational issues, including changes in non- performing assets; |
• | Significant expansion of operations, whether geographic or otherwise, or the curtailment of current or future planned operations; and |
• | Any other information which, if known, would likely influence the decisions of investors. |
Gifts and Fees
It is illegal for anyone to offer or promise anything of value to an employee, officer, director or agent of a financial institution with the intent to influence or reward the person in connection with any business or transaction of the financial institution. It is also illegal for an employee, officer, director or agent of a financial institution to solicit or accept anything of value from any person intending to be influenced or rewarded in connection with any business or transaction of the financial institution.
No employee or director of the Corporation shall accept anything of value from a customer of the Corporation or a vendor to the Corporation with the following exceptions:
• | Gifts based on a family relationship or gifts of a reasonable value based on a personal relationship where that relationship is the obvious motivating factor for the gift; |
• | Advertising or promotional material with a value of less than $200; |
• | Gifts with a value of less than $200 related to commonly recognized events such as a promotion, religious holiday, wedding or retirement; |
• | Acceptance of customary hospitality (business luncheons, dinners, golf outings, ball games, etc.) where it is directly related to Corporation activities and provided that the expense would be paid for by the Corporation if not paid for by another party. Any entertainment beyond that scope or of a frequent nature (more than twice a year by the same party) must be pre authorized by the Chief Executive Officer; |
• | Discounts or rebates on merchandise or services that do not exceed those available to other customers of the merchant; or |
• | Awards for recognition of service or accomplishment from civic, charitable, educational or religious organizations. |
If an employee or director receives or anticipates receiving a benefit from a Corporation customer or vendor and is unsure whether acceptance of the gift is in compliance with this policy, a written disclosure should be made to the Chief Executive Officer. The Board of Directors may approve the acceptance of the benefit if the acceptance is otherwise consistent with this policy.
Directors, employees and their immediate families should never borrow personally from customers or suppliers unless these entities are engaged directly in the lending business, and then only under normal conditions with respect to interest rates, terms, security, and repayment programs that are available to any borrower.
Use of Corporation Assets
The use of corporation assets is restricted to business of the corporation. All directors, officers and employees share the responsibility to protect corporate assets. Using corporation assets for individual benefit is prohibited.
Outside Activities
Outside activities that might constitute a conflict of interest or interfere with performance, or compromise a director's or employee's position, are to be avoided. Employee activities such as full-time outside employment; the rendering of investment, legal or accounting services; membership on corporate boards of directors; seeking of an elective political position; or appointment to government bodies should be reviewed and approved by the Chief Executive Officer prior to such undertakings. As in the past, we continue to encourage active participation on the part of directors, officers and employees in service clubs and organizations fostering the betterment of the community, and the active use of various social memberships in maintaining a proper image of our organization within the community. Involvement if political activities should be vetted i n advance with management. Any staff licensed or associated with a broker-dealer may be subject to additional restrictions.
Compliance with Laws, Rules and Regulations
All directors and employees of the Corporation are required to comply with the requirements of this Code, all policies of the Corporation and applicable laws, rules and regulations. Di rectors and employees must also comply with the procedures implementing and effectuating the Corporation's policies. Failure to comply with the Corporation's policies and procedures may result in disciplinary action including, in severe situations, immediate termination of employment.
All directors, officers and employees have a responsibility to ensure the corporation is free of any discrimination and harassment as defined in policy.
Accounting Practices
All employees are expected to observe and comply with generally accepted accounting principles, the system of internal controls and disclosure controls and procedures established by the Corporation requiring that corporate books and records accurately and fairly reflect in reasonable detail the financial condition and results of operations of the Corporation. Corporation policies are intended to promote full, fair, accurate, timely and understandable disclosure in reports and documents filed with or submitted to the SEC and in the Corporation's public statements. In furtherance of these requirements, employees must practice the following:
• | No false, misleading or artificial entries shall be made on corporate books, records and reports for any reason. |
• | No undisclosed or unrecorded corporate funds or assets shall be established for any purpose. |
• | No payments from corporate funds or other assets shall be approved or be made with the intention or understanding that any part of such payment will be used for any purpose other than that described by the documents supporting the payment. All payments must be supported with appropriately approved purchase orders, invoices or receipts, expense reports or other customary documents, all in accordance with established policy. |
PART Ill
ADMINISTRATION AND WAIVERS
Administration
This Code will be administered and monitored by the Corporation's Human Resources Department. General questions and requests for additional information on this Code should be directed to the department, telephone number, and/or e-mail address listed in Part I.
Waivers
Any requests for waivers of the Code for employees who are not executive officers should be directed through your supervisor to the Internal Audit Manager or the Chief Executive Officer. Requests for waivers for directors and executive officers should be directed to the Board of Directors through the Corporate Secretary. Only a majority of the Board of Directors may waive the applicability of the Code for a director or executive officer. Any waiver granted to directors or executive officers, including the principal accounting officer, and the reasons for granting the waiver, and any change in the Code applicable to directors and executive officers, including the principal accounting officer, must be promptly disclosed to the public as required by law or the NASDAQ Stock Market.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent | Subsidiary |
Percentage
of Ownership |
State of
Incorporation or Organization |
|||
MutualFirst Financial, Inc. | MutualBank | 100% | Indiana | |||
MFBC Statutory Trust I | 100% | Indiana | ||||
MutualFirst Risk Management, Inc. | 100% | Nevada | ||||
Mutual Risk Advisors, Inc. | 100% | Indiana | ||||
MutualBank | Mutual Federal Investment Company | 100% | Nevada | |||
Mishawaka Financial Services, Inc. | 100% | Indiana | ||||
Summit Service Corp | 100% | Indiana | ||||
Mutual Federal Investment Company | Mutual Federal REIT, Inc. | 100% | Maryland | |||
Summit Service Corp | Summit Mortgage, Inc. | 100% | Indiana |
EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement of MutualFirst Financial, Inc. on Form S-3 (File No. 333-156881) and on Form S-8 (File Nos. 333-156882 and 333-53600) of our reports dated March 15, 2018, on our audits of the consolidated financial statements and financial statement schedules of MutualFirst Financial, Inc. as of December 31, 2017 and 2016, and for the three years ended December 31, 2017, which report is included in this Annual Report on From 10-K. We also consent to the incorporation by reference on our report dated March 15, 2018, on our audit of the internal control over financial reporting of MutualFirst Financial, Inc. as of December 31, 2017, which report is included in this Annual Report on Form 10-K.
BKD, LLP | |
Indianapolis, Indiana | |
March 15, 2018 |
EXHIBIT 31.1
CERTIFICATIONS
I, David W. Heeter, certify that:
1. | I have reviewed this annual report on Form 10-K 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: March 15, 2018 | By: | /s/ David W. Heeter |
David W. Heeter | ||
President and Chief Executive Officer |
EXHIBIT 31.2
CERTIFICATIONS
I, | Christopher D. Cook, certify that: |
1. | I have reviewed this annual report on Form 10-K 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: March 15, 2018 | By: | /s/ Christopher D. Cook |
Christopher D. Cook | ||
Senior Vice President, Treasurer and Chief Financial Officer | ||
(Principal Financial and Accounting Officer) |
EXHIBIT 32
SECTION 1350 CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned certifies in the capacity indicated below that this Annual Report on Form 10-K of MutualFirst Financial, Inc. (the “Company”) for the year ended December 31, 2017 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended , and that information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods presented in the financial statements included in such report.
Date: March 15, 2018 | By: | /s/ David W. Heeter |
David W. Heeter | ||
President and Chief Executive Officer | ||
Date: March 15, 2018 | By: | /s/ Christopher D. Cook |
Christopher D. Cook | ||
Senior Vice President, Treasurer and Chief Financial Officer |