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Table of Contents

 

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2015

 

COMMISSION FILE NUMBER 0-12422

 

MAINSOURCE FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

INDIANA

 

35-1562245

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

2105 NORTH STATE ROAD 3 BYPASS, GREENSBURG,

 

 

INDIANA

 

47240

(Address of principal executive offices)

 

(Zip Code)

 

(812) 663-6734

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report.)

 

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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

 

As of May 8, 2015 there were outstanding 21,668,720 shares of common stock, without par value, of the registrant.

 

 

 




Table of Contents

 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands except share and per share data)

 

Item 1.  Financial Statements

 

 

 

(Unaudited)

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2015

 

2014

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

59,451

 

$

60,662

 

Money market funds and federal funds sold

 

10,099

 

1,823

 

Cash and cash equivalents

 

69,550

 

62,485

 

Interest bearing time deposits

 

1,670

 

1,915

 

Securities available for sale

 

871,080

 

867,760

 

Loans held for sale

 

20,706

 

8,282

 

Loans, net of allowance for loan losses of $22,638 in 2015 and $23,250 in 2014

 

1,946,825

 

1,934,515

 

FHLB and other stock, at cost

 

13,854

 

13,854

 

Premises and equipment, net

 

60,660

 

60,527

 

Goodwill

 

73,450

 

73,450

 

Purchased intangible assets

 

4,676

 

5,096

 

Cash surrender value of life insurance

 

61,528

 

62,002

 

Interest receivable and other assets

 

28,831

 

32,630

 

Total assets

 

$

3,152,830

 

$

3,122,516

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Noninterest bearing

 

$

550,497

 

$

513,393

 

Interest bearing

 

1,924,737

 

1,954,928

 

Total deposits

 

2,475,234

 

2,468,321

 

Other borrowings

 

20,518

 

26,349

 

Federal Home Loan Bank (FHLB) advances

 

235,480

 

214,413

 

Subordinated debentures

 

41,239

 

41,239

 

Other liabilities

 

11,428

 

11,532

 

Total liabilities

 

2,783,899

 

2,761,854

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

Preferred stock, no par value: Authorized shares - 400,000; Issued shares - 0 Outstanding shares — 0 Aggregate liquidation preference — $0

 

 

 

 

 

Common stock $.50 stated value: Authorized shares - 100,000,000 Issued shares — 22,245,067 in 2015 and 22,222,727 in 2014 Outstanding shares — 21,694,815 in 2015 and 21,687,525 in 2014

 

11,173

 

11,159

 

Treasury stock — 550,252 in 2015 and 535,202 in 2014 at cost

 

(9,020

)

(8,701

)

Additional paid-in capital

 

246,829

 

246,635

 

Retained earnings

 

102,698

 

97,856

 

Accumulated other comprehensive income

 

17,251

 

13,713

 

Total shareholders’ equity

 

368,931

 

360,662

 

Total liabilities and shareholders’ equity

 

$

3,152,830

 

$

3,122,516

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3



Table of Contents

 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands except per share data)

 

 

 

(unaudited)

 

 

 

Three months ended
March 31,

 

 

 

2015

 

2014

 

Interest income

 

 

 

 

 

Loans, including fees

 

$

21,325

 

$

19,108

 

Securities

 

5,845

 

6,319

 

Other interest income

 

26

 

13

 

Total interest income

 

27,196

 

25,440

 

Interest expense

 

 

 

 

 

Deposits

 

899

 

1,012

 

Federal Home Loan Bank advances

 

995

 

834

 

Subordinated debentures

 

309

 

351

 

Other borrowings

 

10

 

22

 

Total interest expense

 

2,213

 

2,219

 

Net interest income

 

24,983

 

23,221

 

Provision for loan losses

 

 

750

 

Net interest income after provision for loan losses

 

24,983

 

22,471

 

Non-interest income

 

 

 

 

 

Mortgage banking

 

1,855

 

1,316

 

Trust and investment product fees

 

1,206

 

1,270

 

Service charges on deposit accounts

 

4,621

 

4,585

 

Net realized gains on securities (includes $252 accumulated other comprehensive income reclassifications for unrealized net gains on available-for-sale securities in 2015)

 

252

 

 

Increase in cash surrender value of life insurance

 

313

 

327

 

Interchange income

 

1,961

 

1,735

 

(Loss) on sale and write-down of OREO

 

(11

)

(77

)

Other income

 

1,265

 

117

 

Total non-interest income

 

11,462

 

9,273

 

Non-interest expense

 

 

 

 

 

Salaries and employee benefits

 

13,977

 

13,573

 

Net occupancy

 

2,182

 

2,139

 

Equipment

 

2,732

 

2,508

 

Intangibles amortization

 

420

 

432

 

Telecommunications

 

438

 

444

 

Stationery printing and supplies

 

306

 

287

 

FDIC assessment

 

375

 

435

 

Marketing

 

562

 

598

 

Collection expense

 

256

 

437

 

Prepayment penalty on FHLB advance

 

2,364

 

 

Consultant expense

 

250

 

350

 

Interchange expense

 

575

 

521

 

Other expenses

 

2,590

 

2,490

 

Total non-interest expense

 

27,027

 

24,214

 

Income before income tax

 

9,418

 

7,530

 

Income tax expense (includes $86 income tax expense from reclassification items in 2015)

 

1,755

 

1,305

 

Net income

 

$

7,663

 

$

6,225

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.13

 

$

0.10

 

Net income per common share — basic and diluted

 

$

0.35

 

$

0.30

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4



Table of Contents

 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar amounts in thousands except per share data)

 

 

 

(unaudited)

 

 

 

Three months ended

 

 

 

March 31,

 

 

 

2015

 

2014

 

Net income

 

$

7,663

 

$

6,225

 

Other comprehensive income:

 

 

 

 

 

Unrealized holding gains on securities available for sale

 

5,612

 

8,347

 

Reclassification adjustment for (gains) included in net income

 

(252

)

 

Tax effect

 

(1,822

)

(2,921

)

Other comprehensive income

 

3,538

 

5,426

 

Comprehensive income

 

$

11,201

 

$

11,651

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5



Table of Contents

 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

 

 

 

(unaudited)
Three months ended
March 31

 

 

 

2015

 

2014

 

Operating Activities

 

 

 

 

 

Net income

 

$

7,663

 

$

6,225

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan losses

 

 

750

 

Depreciation expense

 

1,551

 

1,444

 

Securities amortization, net

 

646

 

487

 

Stock based compensation expense

 

195

 

275

 

Stock portion of director retainer fee expense

 

90

 

89

 

Amortization of purchased intangible assets

 

420

 

432

 

Amortization of mortgage servicing rights

 

355

 

242

 

Earnings on cash surrender value of life insurance policies

 

(313

)

(327

)

Gain on life insurance benefit

 

(297

)

 

Securities gains, net

 

(252

)

 

Loss on sale and write-down of OREO

 

11

 

77

 

Gain on loans sold

 

(1,298

)

(849

)

Loans originated for sale

 

(57,395

)

(27,785

)

Proceeds from loan sales

 

57,625

 

31,387

 

Change in other assets and liabilities

 

1,031

 

2,186

 

Net cash provided/(used) by operating activities

 

10,032

 

14,633

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Net change in short term investments

 

245

 

(980

)

Purchases of securities available for sale

 

(66,979

)

(9,056

)

Proceeds from calls, maturities, and payments on securities available for sale

 

29,783

 

26,918

 

Proceeds from sales of securities available for sale

 

38,842

 

 

Proceeds from sale of OREO

 

632

 

867

 

Proceeds from life insurance benefit

 

1,084

 

588

 

Loan originations and payment, net

 

(23,822

)

(17,402

)

Purchases of premises and equipment

 

(1,684

)

(745

)

Proceeds from redemption of FHLB stock

 

 

1

 

Net cash provided/(used) by investing activities

 

(21,899

)

191

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net change in deposits

 

6,913

 

25,197

 

Net change in other borrowings

 

(5,831

)

1,270

 

Repayment of FHLB advances

 

(143,933

)

(333,434

)

Proceeds from FHLB advances

 

165,000

 

310,000

 

Proceeds from exercise of stock options, including tax benefit

 

124

 

60

 

Purchase of treasury shares

 

(520

)

 

Repayment of subordinated debentures, net

 

 

(5,000

)

Cash dividends on common stock

 

(2,821

)

(2,042

)

Net cash provided/(used) by financing activities

 

18,932

 

(3,949

)

Net change in cash and cash equivalents

 

7,065

 

10,875

 

Cash and cash equivalents, beginning of year

 

62,485

 

61,320

 

Cash and cash equivalents, end of period

 

$

69,550

 

$

72,195

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Interest paid

 

$

2,258

 

$

2,302

 

Income taxes paid

 

 

300

 

Supplemental non cash disclosure

 

 

 

 

 

Loan balances transferred to loans held for sale

 

$

11,356

 

$

 

Loan balances transferred to foreclosed real estate

 

156

 

665

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6



Table of Contents

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands except share and per share data)

 

NOTE 1 - BASIS OF PRESENTATION

 

The significant accounting policies followed by MainSource Financial Group, Inc. (“Company”) for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. The consolidated interim financial statements have been prepared according to accounting principles generally accepted in the United States of America and in accordance with the instructions for Form 10-Q. The interim statements do not include all information and footnotes normally included in the annual financial statements. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported have been included in the accompanying unaudited consolidated financial statements and all such adjustments are of a normal recurring nature. Some items in prior period financial statements were reclassified to conform to current presentation. It is suggested that these consolidated financial statements and notes be read in conjunction with the financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Adoption of New Accounting Standards

 

In January 2014, the FASB amended existing guidance (ASU No. 2014-1, Investments-Equity Method and Joint Ventures (Topic 323) - Accounting for Investments in Qualified Affordable Housing Projects) to eliminate the effective yield election and to permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional method if certain conditions are met. The amendments in this update became effective for interim and annual periods beginning after December 15, 2014 and did not have a material impact on the Company’s consolidated financial statements.

 

In January 2014, the FASB issued ASU No. 2014-04 “Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans Upon Foreclosure.” ASU 2014-04 clarifies when an in substance repossession or foreclosure occurs and requires interim and annual disclosures of the amount of foreclosed residential real estate property and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. ASU 2014-04 became effective for interim and annual periods beginning after December 15, 2014 and is included in the current period financial statements.  See NOTE 5 in the Consolidated Financial Statements.

 

NOTE 2 - STOCK PLANS AND STOCK BASED COMPENSATION

 

On January 19, 2015, the Board of Directors adopted and approved the MainSource Financial Group, Inc. 2015 Stock Incentive Plan (“the 2015 Plan”) which was effective following the approval of the Plan by the Company’s shareholders at the 2015 Annual Meeting of Shareholders held on April 30, 2015.  The 2015 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, share awards of restricted stock performance share units and other equity based awards.  Incentive stock options may be granted only to employees.  An aggregate of 1,000,000 shares of common stock are reserved for issuance under the 2015 Plan.  Shares issuable under the 2015 Plan may be authorized and unissued shares of common stock or treasury shares.  The 2015 Plan is in addition to, and not in replacement of, a similar plan adopted in 2007 (the “2007 Plan”).  The 2007 Stock Incentive Plan provided for the grant of incentive stock options, nonstatutory stock options, stock bonuses and restricted stock awards. An aggregate of 650,000 shares of common stock were reserved for issuance under the 2007 Stock Incentive Plan. However, no further awards of stock or options will be made under the 2007 Plan following shareholder approval of the 2015 Plan.  The 2007 Plan was in replacement of a similar plan adopted in 2003 (the “2003 Plan”).  Any stock or option awards that were previously issued under the 2007 Plan or 2003 Plan have not been terminated as a result of the adoption of the 2015 Plan, but will continue in accordance with the applicable plan terms and the agreements pursuant to which such stock or option awards were issued.

 

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. Employee and management options are tracked separately. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

 

All share-based payments to employees, including grants of employee stock options, are recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values.  For options with graded vesting, the Company values the stock option grants and recognizes compensation expense as if each vesting portion of the award was a single award.

 

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Table of Contents

 

The following table summarizes stock option activity:

 

 

 

Three Months Ended
March 31, 2015

 

 

 

Shares

 

Weighted
Average
Exercise Price

 

Outstanding, beginning of year

 

377,790

 

$

13.46

 

Granted

 

 

 

Exercised

 

(12,350

)

10.07

 

Forfeited or expired

 

(35,700

)

20.57

 

Outstanding, period end

 

329,740

 

$

12.80

 

Options exercisable at period end

 

240,888

 

$

12.29

 

Fully vested and expected to vest

 

323,564

 

$

12.77

 

 

The following table details stock options outstanding:

 

 

 

March 31,
2015

 

December 31,
2014

 

Stock options vested and currently exercisable:

 

 

 

 

 

Number

 

240,888

 

288,938

 

Weighted average exercise price

 

$

12.29

 

$

13.24

 

Aggregate intrinsic value

 

$

1,769

 

$

2,219

 

Weighted average remaining life (in years)

 

4.0

 

3.8

 

 

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date. The Company recorded $43 in stock compensation expense during the three month ended March 31, 2015 and $41 in stock compensation expense during the three months ended March 31, 2014 to salaries and employee benefits. There were no options granted in the first quarter of 2015 and 29,389 options granted in the first quarter of 2014.  The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. Expected volatilities are based on historical volatility of the Company’s stock, and other factors. Expected dividends are based on dividend trends and the market price of the Company’s stock price at grant. The Company uses historical data to estimate option exercises within the valuation model. 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.

 

Unrecognized stock option compensation expense related to unvested awards for the remainder of 2015 and beyond is estimated as follows:

 

Year

 

(in thousands)

 

April 2015 - December 2015

 

$

134

 

2016

 

93

 

2017

 

38

 

 

During 2014 and the first quarter of 2015, the Executive Compensation Committee of the Board of Directors of the Company granted restricted stock awards to certain executive officers and other employees pursuant to the Company’s LTIP. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at the issue date. The value of the awards was

 

8



Table of Contents

 

determined by multiplying the award amount by the closing price of a share of Company common stock on the grant date. The restricted stock awards vest as follows — 100% on the third anniversary of the date of grant. A total of 11,171 shares of common stock were granted in the first quarter of 2015 at a weighted average cost of $19.57 per share.

 

A summary of changes in the Company’s nonvested restricted shares for 2015 follows:

 

 

 

Restricted
Shares

 

Weighted Average
Grant Date
Fair Value

 

Nonvested at January 1, 2015

 

91,923

 

$

14.88

 

Granted

 

11,171

 

19.57

 

Vested

 

 

 

Forfeited

 

 

 

Nonvested at March 31, 2015

 

103,094

 

$

15.39

 

 

As of March 31, 2015, there was $832 of total unrecognized compensation costs related to nonvested restricted stock awards granted under the 2007 Plan that will be recognized over the remaining vesting period of approximately 1.4 years. The recognized compensation costs related to the 2007 Plan was $152 and $234 for the first three months of 2015 and 2014 respectively.

 

Additionally, in the first quarter of 2015, the Committee granted performance share units to certain executive officers pursuant to the Company’s LTIP, subject to the approval of the 2015 Plan by the Company’s shareholders at the 2015 Annual Meeting of Shareholders held on April 29, 2015.  The Committee established performance measures, goals and payout calibration for the Performance Share Units. At the end of each three-year performance period, the Committee will certify the results of the performance measures and goals and will pay the earned awards out in cash or shares of Company common stock. Dividends earned during each three-year performance period will be accrued and paid at the end of the performance period, based upon the final number of shares earned.  The performance measures and goals are based on financial and shareholder measures, and are evaluated relative to internal goals and the performance of the Company’s peers. Once the performance measures and goals were established, the Committee established threshold, target and superior levels of performance. The LTIP payout of shares will begin once the Company achieves the pre-established threshold (thus, no payout will occur if the performance is equal to or below the threshold). Each executive’s target payout is achieved once the performance equals the target level, and the maximum payout is achieved once the performance equals the superior level (with interpolation between discrete points).

 

Performance 

 

Payout

 

Threshold

 

0

%

Target

 

100

%

Superior

 

150

%

 

The grant of Performance Share Units by the Committee will be evidenced by an award agreement between the executive and the Company which provides that each executive will receive shares of Company stock when the Company’s actual performance as compared to its peers and long-term goals exceeds certain thresholds, determined as of December 31, 2017, provided the executive remains employed by the Company on such date. The executive’s eligibility for the payout of shares is determined based on the following measures:

 

Performance Measure 

 

Weight

 

Evaluated
vs.

 

Return on Assets

 

50

%

Peer

 

Total Shareholder Return

 

25

%

Peer

 

Earnings Per Share

 

25

%

Goal

 

 

The value of the awards was determined by multiplying the award amount by the closing price of a share of Company common stock on the grant date. The performance share units are earned over the three year period of the award. A total of 11,171 shares of performance share units were granted in the first quarter of 2015 at a weighted average cost of $19.57 per share.  Compensation expense is recognized over the three year performance period of the awards based on the fair value of the stock at the issue date and the anticipated achievement level of the target performance.  Quarterly, the performance measures will be reevaluated and adjustments made to the expense recorded in the financial statements, if needed, to reflect the new revised achievement levels.  No expense was recognized on these awards in the first quarter of 2015.  A total of $219 will be expensed in future periods if the Target level is achieved.

 

In the second quarter of 2014, members of the Board of Directors received their entire annual retainer in restricted Company stock for the following Board year ended with the 2015 annual meeting of shareholders. The 2014 award vested quarterly for all directors who remained on the Board of Directors on the vesting date, with 25% of the award vesting on each of May 1, August 1, and November 1, 2014, and February 1, 2015. The value of the 2014 retainer award was determined by multiplying the award amount by the closing price of the stock on the issuance date.

 

For all awards, other expense is recognized over the three month period of the awards based on the fair value of the stock at the issue dates. Shares awarded by quarter were as follows:

 

Quarter

 

Shares

 

Price per Share

 

2014

2Q

 

21,780

 

$

16.53

 

 

A total of $90 and $89 was recognized as other expense in the first three months of 2015 and 2014 respectively for these grants.

 

In late 2014, the Company announced a stock repurchase program pursuant to which up to 5.0% of the Corporation’s outstanding shares of common stock, or approximately 1,085,000 shares, may be repurchased.  During the first quarter of 2015, the Company repurchased 27,400 shares at a total cost of $520.

 

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Table of Contents

 

NOTE 3 - SECURITIES

 

The amortized cost and fair value of securities available for sale and related unrealized gains/losses recognized in accumulated other comprehensive income was as follows:

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

As of March 31, 2015

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

U. S. government agency

 

$

615

 

$

12

 

$

 

$

627

 

State and municipal

 

316,838

 

19,529

 

(149

)

336,218

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

191,365

 

4,626

 

(238

)

195,753

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

328,897

 

4,076

 

(1,718

)

331,255

 

Equity securities

 

4,689

 

 

 

4,689

 

Other securities

 

2,538

 

 

 

2,538

 

Total available for sale

 

$

844,942

 

$

28,243

 

$

(2,105

)

$

871,080

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

As of December 31, 2014

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

U. S. government agency

 

$

652

 

$

10

 

$

(1

)

$

661

 

State and municipal

 

316,048

 

18,603

 

(353

)

334,298

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

178,534

 

4,071

 

(433

)

182,172

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

344,556

 

2,743

 

(3,862

)

343,437

 

Equity securities

 

4,689

 

 

 

4,689

 

Other securities

 

2,503

 

 

 

2,503

 

Total available for sale

 

846,982

 

$

25,427

 

$

(4,649

)

$

867,760

 

 

The amortized cost and fair value of the investment securities portfolio are shown by expected maturity.  Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.  Securities not due at a single maturity or with no maturity are shown separately.

 

 

 

Available
for Sale

 

March 31, 2015

 

Amortized Cost

 

Fair Value

 

Within one year

 

$

16,791

 

$

16,975

 

One through five years

 

55,259

 

57,346

 

Six through ten years

 

138,847

 

147,077

 

After ten years

 

109,094

 

117,985

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

191,365

 

195,753

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

328,897

 

331,255

 

Equity securities

 

4,689

 

4,689

 

Total available for sale securities

 

$

844,942

 

$

871,080

 

 

Proceeds from sales of securities available for sale were $38,842 and $0 for the three months ended March 31, 2015 and 2014, respectively. Gross gains of $252 and $0 and gross losses of $0 and $0 were realized on these sales during 2015 and 2014, respectively.

 

Below is a summary of securities with unrealized losses as of March 31, 2015 and December 31, 2014 presented by length of time the securities have been in a continuous unrealized loss position.

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

March 31, 2015
Description of securities

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

State and municipal

 

$

1,659

 

$

(53

)

$

13,230

 

$

(96

)

$

14,889

 

$

(149

)

Mortgage-backed securities-residential (GSE’s)

 

3,563

 

(46

)

28,137

 

(192

)

31,700

 

(238

)

Collateralized mortgage obligations (GSE’s)

 

110,217

 

(1,629

)

31,067

 

(89

)

141,284

 

(1,718

)

Other securities

 

 

 

 

 

 

 

Total temporarily impaired

 

$

115,439

 

$

(1,728

)

$

72,434

 

$

(377

)

$

187,873

 

$

(2,105

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014
Description of securities

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

U.S government agency

 

$

122

 

$

(1

)

$

 

$

 

$

122

 

$

(1

)

State and municipal

 

16,659

 

(147

)

13,340

 

(206

)

29,999

 

(353

)

Mortgage-backed securities-residential (GSE’s)

 

24,925

 

(51

)

32,541

 

(382

)

57,466

 

(433

)

Collateralized mortgage obligations (GSE’s)

 

21,775

 

(114

)

150,094

 

(3,748

)

171,869

 

(3,862

)

Other securities

 

 

 

 

 

 

 

Total temporarily impaired

 

$

63,481

 

$

(313

)

$

195,975

 

$

(4,336

)

$

259,456

 

$

(4,649

)

 

10



Table of Contents

 

Other-Than-Temporary-Impairment

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The investment securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Investment securities are generally evaluated for OTTI under ASC 320. However, certain purchased beneficial interests, including non-agency mortgage-backed securities, asset-backed securities, and collateralized debt obligations, that had credit ratings at the time of purchase of below AA are evaluated using the model outlined in ASC 325-10.

 

In determining OTTI under ASC 320, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the entity has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

 

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall 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. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total 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 total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

 

As of March 31, 2015, the Company’s securities portfolio consisted of 1,058 securities, 70 of which were in an unrealized loss position.  Unrealized losses on state and municipal securities of $149 have not been recognized into income because management has the ability to hold for a period of time sufficient to allow for any anticipated recovery in fair value and it is unlikely that management will be required to sell the securities before their anticipated recovery. The decline in value is primarily attributable to temporary illiquidity and the financial crisis affecting these markets and not necessarily the expected cash flows of the individual securities. The Company monitors the financial condition of these issuers. The fair value of these debt securities is expected to recover as the securities approach their maturity date.

 

At March 31, 2015, almost all of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value of approximately $238 is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2015.

 

The Company’s collateralized mortgage obligation securities portfolio includes agency collateralized mortgage obligations with a market value of $141,284 which had unrealized losses of approximately $1,718 at March 31, 2015. The Company monitors to insure it has adequate credit support and as of March 31, 2015, the Company believes there is no OTTI and does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. All securities are investment grade.

 

11



Table of Contents

 

NOTE 4 - LOANS AND ALLOWANCE

 

Loans were as follows:

 

 

 

March 31,
2015

 

December 31,
2014

 

Commercial

 

 

 

 

 

Commercial and industrial

 

$

287,524

 

$

275,646

 

Agricultural

 

45,514

 

46,784

 

Commercial Real Estate

 

 

 

 

 

Farm

 

74,172

 

76,849

 

Hotel

 

62,742

 

74,962

 

Construction and development

 

75,942

 

61,640

 

Other

 

669,394

 

666,417

 

Residential

 

 

 

 

 

1-4 family

 

435,667

 

435,336

 

Home equity

 

273,276

 

274,159

 

Consumer

 

 

 

 

 

Direct

 

44,675

 

45,360

 

Indirect

 

557

 

612

 

Total loans

 

1,969,463

 

1,957,765

 

Allowance for loan losses

 

(22,638

)

(23,250

)

Net loans

 

$

1,946,825

 

$

1,934,515

 

 

The Company purchased some financing receivables in the fourth quarter of 2014. The investment by portfolio class at March 31, 2015 is as follows.  These loans are included in the above table and all other tables below in the recorded investment amount. No allowance for loan losses is provided for these loans at March 31, 2015.

 

Commercial and industrial

 

$

23,050

 

Construction and development

 

2,886

 

Other real estate

 

96,571

 

1-4 family

 

34,536

 

Home equity

 

15,359

 

Direct

 

1,508

 

 

 

$

173,910

 

 

The Company also purchased some credit impaired loans during 2014. These loans had a net balance of under $1,000 so additional disclosures were not made due to their immateriality.

 

Activity in the allowance for loan losses for the three months ended March 31, 2015 and 2014 and the recorded investment of loans and allowances by portfolio segment and impairment method as of March 31, 2015 and December 31, 2014 were as follows:

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan loss

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2015

 

$

2,977

 

$

15,605

 

$

3,501

 

$

1,167

 

$

23,250

 

Provision charged to expense

 

773

 

(1,005

)

173

 

59

 

 

Losses charged off

 

(107

)

(58

)

(494

)

(697

)

(1,356

)

Recoveries

 

32

 

176

 

148

 

388

 

744

 

Balance, March 31, 2015

 

$

3,675

 

$

14,718

 

$

3,328

 

$

917

 

$

22,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan loss

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2014

 

$

3,291

 

$

20,210

 

$

3,409

 

$

699

 

$

27,609

 

Provision charged to expense

 

(163

)

393

 

245

 

275

 

750

 

Losses charged off

 

(146

)

(608

)

(543

)

(743

)

(2,040

)

Recoveries

 

27

 

444

 

85

 

372

 

928

 

Balance, March 31, 2014

 

$

3,009

 

$

20,439

 

$

3,196

 

$

603

 

$

27,247

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

As of March 31, 2015

 

 

 

 

 

 

 

 

 

 

 

Ending Balance individually evaluated for impairment

 

$

130

 

$

675

 

$

179

 

$

 

$

984

 

Ending Balance collectively evaluated for impairment

 

3,545

 

14,043

 

3,149

 

917

 

21,654

 

Total ending allowance balance

 

$

3,675

 

$

14,718

 

$

3,328

 

$

917

 

$

22,638

 

Loans

 

 

 

 

 

 

 

 

 

 

 

Ending Balance individually evaluated for impairment

 

$

1,113

 

$

13,297

 

$

10,421

 

$

194

 

$

25,025

 

Ending Balance collectively evaluated for impairment

 

331,925

 

868,953

 

698,522

 

45,038

 

1,944,438

 

Total ending loan balance excludes $5,838 of accrued interest

 

$

333,038

 

$

882,250

 

$

708,943

 

$

45,232

 

$

1,969,463

 

 

12



Table of Contents

 

As of December 31, 2014

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Ending Balance individually evaluated for impairment

 

$

162

 

$

705

 

$

183

 

$

 

$

1,050

 

Ending Balance collectively evaluated for impairment

 

2,815

 

14,900

 

3,318

 

1,167

 

22,200

 

Total ending allowance balance

 

$

2,977

 

$

15,605

 

$

3,501

 

$

1,167

 

$

23,250

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

Ending Balance individually evaluated for impairment

 

$

705

 

$

24,722

 

$

10,662

 

$

220

 

$

36,309

 

Ending Balance collectively evaluated for impairment

 

321,725

 

855,146

 

698,833

 

45,752

 

1,921,456

 

Total ending loan balance excludes $5,605 of accrued interest

 

$

322,430

 

$

879,868

 

$

709,495

 

$

45,972

 

$

1,957,765

 

 

The allowance for loans collectively evaluated for impairment consists of reserves on groups of similar loans based on historical loss experience adjusted for other factors, as well as reserves on certain loans that are classified but determined not to be impaired based on an analysis which incorporates probability of default with a loss given default scenario. The reserves on these loans totaled $2,268 at March 31, 2015 and $2,426 at December 31, 2014.

 

The recorded investment in loans excludes accrued interest receivable due to immateriality.

 

The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2015 and December 31, 2014.  Performing troubled debt restructurings totaling $7,268 and $7,499 were excluded as allowed by ASC 310-40.

 

March 31, 2015

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Allowance
for Loan
Losses Allocated

 

With an allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and industrial

 

$

357

 

$

336

 

$

130

 

Agricultural

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

76

 

76

 

22

 

Hotel

 

 

 

 

Construction and development

 

 

 

 

Other

 

1,938

 

1,831

 

653

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

1,532

 

1,454

 

174

 

Home Equity

 

165

 

165

 

5

 

Consumer

 

 

 

 

 

 

 

Direct

 

 

 

 

Subtotal — impaired with allowance recorded

 

4,068

 

3,862

 

984

 

With no related allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial & industrial

 

1,062

 

777

 

 

 

Agricultural

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

858

 

607

 

 

 

Hotel

 

 

 

 

 

Construction and development

 

 

 

 

 

 

 

Other

 

5,187

 

3,515

 

 

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

7,084

 

6,092

 

 

 

Home Equity

 

2,981

 

2,710

 

 

 

Consumer

 

 

 

 

 

 

 

Direct

 

207

 

194

 

 

 

Indirect

 

 

 

 

 

Subtotal — impaired with allowance recorded

 

17,379

 

13,895

 

 

 

Total impaired loans

 

$

21,447

 

$

17,757

 

$

984

 

 

 

 

 

 

 

 

 

December 31, 2014

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Allowance
for Loan
Losses Allocated

 

With an allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and industrial

 

$

82

 

$

64

 

$

12

 

Agriculture

 

397

 

150

 

150

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

76

 

76

 

21

 

Hotel

 

 

 

 

Construction and development

 

 

 

 

Other

 

979

 

889

 

684

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

1,543

 

1,478

 

178

 

Home Equity

 

167

 

167

 

5

 

Consumer

 

 

 

 

 

 

 

Direct

 

 

 

 

Indirect

 

 

 

 

Subtotal — impaired with allowance recorded

 

3,244

 

2,824

 

1,050

 

With no related allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial & industrial

 

761

 

491

 

 

 

Agricultural

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

864

 

616

 

 

 

Hotel

 

11,423

 

11,377

 

 

 

Construction and development

 

84

 

78

 

 

 

Other

 

5,848

 

4,186

 

 

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

7,325

 

6,400

 

 

 

Home Equity

 

2,847

 

2,618

 

 

 

Consumer

 

 

 

 

 

 

 

Direct

 

238

 

213

 

 

 

Indirect

 

7

 

7

 

 

 

Subtotal — impaired with allowance recorded

 

29,397

 

25,986

 

 

Total impaired loans

 

$

32,641

 

$

28,810

 

$

1,050

 

 

13



Table of Contents

 

The following tables present the average balance of impaired loans and interest income and cash basis interest recognized for the quarters ending March 31, 2015 and March 31, 2014, excluding performing troubled debt restructurings as allowed by ASC 310-40.

 

March 31, 2015

 

Average
Balance
Impaired Loans

 

Interest
Income
Recognized

 

Cash Basis
Income
Recognized

 

Commercial

 

 

 

 

 

 

 

Commercial & Industrial

 

$

834

 

$

2

 

$

2

 

Agricultural

 

75

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

444

 

4

 

4

 

Hotel

 

7,126

 

 

 

Construction and development

 

38

 

47

 

47

 

Other

 

5,210

 

25

 

25

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

7,712

 

21

 

21

 

Home Equity

 

1,734

 

4

 

4

 

Consumer

 

 

 

 

 

 

 

Direct

 

106

 

4

 

4

 

Indirect

 

4

 

3

 

3

 

 

 

$

23,283

 

$

110

 

$

110

 

 

 

 

 

 

 

 

 

March 31, 2014

 

Average
Balance
Impaired Loans

 

Interest
Income
Recognized

 

Cash Basis
Income
Recognized

 

Commercial

 

 

 

 

 

 

 

Commercial & Industrial

 

$

282

 

$

4

 

$

4

 

Agricultural

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

990

 

 

 

Hotel

 

 

 

 

Construction and development

 

558

 

 

 

Other

 

11,955

 

48

 

48

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

8,766

 

4

 

4

 

Home Equity

 

2,316

 

1

 

1

 

Consumer

 

 

 

 

 

 

 

Direct

 

449

 

3

 

3

 

Indirect

 

10

 

1

 

1

 

 

 

$

25,326

 

$

61

 

$

61

 

 

14



Table of Contents

 

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2015 and December 31, 2014:

 

 

 

Non-accrual

 

Past due over
90 days and
still accruing

 

 

 

March 31, 2015

 

December 31,
2014

 

March 31, 2015

 

December 31,
2014

 

Commercial

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,062

 

$

479

 

$

 

$

 

Agricultural

 

 

150

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

 

Farm

 

682

 

692

 

 

 

 

 

Hotel

 

 

 

 

 

 

 

 

Construction and development

 

 

78

 

 

 

 

 

Other

 

3,863

 

3,744

 

 

 

 

 

Residential

 

 

 

 

 

 

 

 

 

1-4 Family

 

6,258

 

6,428

 

 

 

 

 

Home Equity

 

1,952

 

1,841

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

Direct

 

160

 

177

 

 

 

 

 

Indirect

 

 

7

 

 

 

 

 

Total

 

$

13,977

 

$

13,596

 

$

 

$

 

 

The following tables present the aging of the recorded investment in past due loans as of March 31, 2015 and December 31, 2014 by class of loans:

 

March 31, 2015

 

Total
Loans

 

30-59 Days
Past Due

 

60-89 Days
Past Due

 

Greater than
90 Days
Past Due

 

Total
Past Due

 

Loans Not
Past Due

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

287,524

 

$

101

 

$

 

$

626

 

$

727

 

$

286,797

 

Agricultural

 

45,514

 

 

 

 

 

45,514

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Farm

 

74,172

 

 

 

327

 

327

 

73,845

 

Hotel

 

62,742

 

 

 

 

 

62,742

 

Construction and development

 

75,942

 

 

 

 

 

75,942

 

Other

 

669,394

 

728

 

432

 

1,999

 

3,159

 

666,235

 

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

1-4 Family

 

435,667

 

5,827

 

696

 

2,927

 

9,450

 

426,217

 

Home Equity

 

273,276

 

532

 

315

 

1,466

 

2,313

 

270,963

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct

 

44,675

 

66

 

22

 

137

 

225

 

44,450

 

Indirect

 

557

 

 

2

 

 

2

 

555

 

Total — excludes $5,838 of accrued interest

 

$

1,969,463

 

$

7,254

 

$

1,467

 

$

7,482

 

$

16,203

 

$

1,953,260

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

Total
Loans

 

30-59 Days
Past Due

 

60-89 Days
Past Due

 

Greater than
90 Days
Past Due

 

Total
Past Due

 

Loans Not
Past Due

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

275,646

 

$

441

 

$

75

 

$

210

 

$

726

 

$

274,920

 

Agricultural

 

46,784

 

 

 

 

 

46,784

 

Commercial Real Estate

 

 

 

 

 

 

 

 

 

 

 

 

 

Farm

 

76,849

 

 

 

327

 

327

 

76,522

 

Hotel

 

74,962

 

 

 

 

 

74,962

 

Construction and development

 

61,640

 

 

78

 

 

78

 

61,562

 

Other

 

666,417

 

933

 

755

 

1,919

 

3,607