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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the quarterly period ended March 31, 2015
  OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  For the transition period from  ___________________  to  ___________________

 

Commission File Number 000-27905

 

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

 

Maryland   35-2085640
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
110 E. Charles Street, Muncie, Indiana   47305-2419
(Address of principal executive offices)   (Zip Code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
Common Stock, par value $.01 per share Nasdaq Global Market

 

Securities Registered Pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

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

 

Large accelerated filer  ¨ Accelerated filer  x Non-accelerated filer  ¨ Smaller reporting company  ¨
    (Do not check if smaller
    reporting company)
 

 

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

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date. As of May 6, 2015, there were 7,374,702 shares of the registrant’s common stock outstanding. 

 

 
 

 

MutualFirst Financial, Inc.

 

Form 10-Q Quarterly Report for the Period Ended March 31, 2015

 

Table of Contents

 

  Page
  Number
PART I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
  Consolidated Condensed Balance Sheets 1
  Consolidated Condensed Statements of Income 2
  Consolidated Condensed Statements of Comprehensive Income 3
  Consolidated Condensed Statement of Stockholders’ Equity 4
  Consolidated Condensed Statements of Cash Flows 5
  Notes to Unaudited Consolidated Condensed Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 48
     
Item 4. Controls and Procedures 51
     
PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 52
     
Item 1A. Risk Factors 52
     
Item 2. Unregistered Sales of Equity Changes in Securities and Use of Proceeds 52
     
Item 3. Defaults Upon Senior Securities 52
     
Item 4. Mine Safety Disclosure 52
     
Item 5. Other Information 52
     
Item 6. Exhibits 53
     
Signature Page   56
     
Exhibits   58

 

 
 

 

MutualFirst Financial, Inc.

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

  

   March 31,   December 31, 
   2015   2014 
   (Unaudited)     
Assets          
Cash and due from banks  $6,222   $7,475 
Interest-bearing demand deposits   12,445    22,100 
Cash and cash equivalents   18,667    29,575 
Investment securities available for sale   267,503    260,806 
Loans held for sale   10,771    6,140 
Loans, net of allowance for loan losses of $13,217 and $13,168, at March 31, 2015 and December 31, 2014, respectively   1,010,390    1,003,518 
Premises and equipment, net   31,034    30,939 
Federal Home Loan Bank stock   11,964    11,964 
Investment in limited partnerships   502    527 
Deferred tax asset   13,259    13,575 
Cash value of life insurance   51,289    51,002 
Goodwill   1,800    1,800 
Core deposit and other intangibles   965    1,105 
Other assets   11,954    12,472 
Total assets  $1,430,098   $1,423,423 
           
Liabilities and Stockholders' Equity          
Liabilities          
Deposits          
Noninterest-bearing  $163,435   $154,178 
Interest-bearing   922,690    925,142 
Total deposits   1,086,125    1,079,320 
Federal Home Loan Bank advances   187,542    192,442 
Other borrowings   9,995    10,174 
Other liabilities   15,957    14,735 
Total liabilities   1,299,619    1,296,671 
           
Commitments and Contingencies          
           
Stockholders' Equity          
Common stock, $.01 par value          
Authorized - 20,000,000 shares          
Issued and outstanding - 7,369,702 and 7,236,002 shares at March 31, 2015 and December 31, 2014, respectively   74    72 
Additional paid-in capital   76,510    74,916 
Retained earnings   50,982    49,386 
Accumulated other comprehensive income   2,913    2,378 
Total stockholders' equity   130,479    126,752 
Total liabilities and stockholders' equity  $1,430,098   $1,423,423 

 

See notes to consolidated condensed financial statements 

 

1
 

 

MutualFirst Financial, Inc.

Consolidated Condensed Statements of Income
(Unaudited)

(In Thousands, Except Share and Per Share Data)

 

   Three Months Ended 
   March 31, 
   2015   2014 
Interest and Dividend Income          
Loans receivable  $10,866   $10,766 
Investment securities   1,670    1,767 
Federal Home Loan Bank stock   140    200 
Deposits with financial institutions   7    5 
Total interest and dividend income   12,683    12,738 
           
Interest Expense          
Deposits   1,372    1,701 
Federal Home Loan Bank advances   665    474 
Other   128    144 
Total interest expense   2,165    2,319 
           
Net Interest Income   10,518    10,419 
Provision for loan losses   -    350 
Net Interest Income After Provision for Loan Losses   10,518    10,069 
           
Non-interest Income          
Service fee income   1,358    1,341 
Net realized gain on sales of available-for-sale securities   240    150 
Commissions   1,121    1,082 
Net gains on sales of loans   906    104 
Net servicing fees (expense)   68    (24)
Increase in cash value of life insurance   288    267 
Loss on sale of other real estate and repossessed assets   (82)   (62)
Other income   118    143 
Total non-interest income   4,017    3,001 
           
Non-interest Expenses          
Salaries and employee benefits   6,530    5,873 
Net occupancy expenses   603    670 
Equipment expenses   453    458 
Data processing fees   444    406 
Advertising and promotion   333    301 
ATM and debit card expenses   335    290 
Deposit insurance   232    270 
Professional fees   530    438 
Software subscriptions and maintenance   427    416 
Other real estate and repossessed assets   127    135 
Other expenses   1,004    990 
Total non-interest expenses   11,018    10,247 
           
Income Before Income Tax   3,517    2,823 
Income tax expense   1,036    803 
           
Net Income Available to Common Shareholders  $2,481   $2,020 
           
Earnings Per Share          
Basic  $0.34   $0.28 
Diluted  $0.33   $0.27 
Dividends Per Share  $0.12   $0.06 

 

See notes to consolidated condensed financial statements

 

2
 

 

MutualFirst Financial, Inc. 

Consolidated Condensed Statements of Comprehensive Income
(Unaudited) 

(In Thousands)

 

   Three Months Ended 
   March 31, 
   2015   2014 
Net Income  $2,481   $2,020 
Other Comprehensive Income          
Net unrealized holding gain on securities available-for-sale   1,040    2,681 
Net unrealized gain on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income   -    634 
Reclassification adjustment for realized gains included in net income   (240)   (150)
Net unrealized gain on derivative used for cash flow hedges   15    32 
    815    3,197 
Income tax expense related to other comprehensive income   (280)   (1,098)
Other comprehensive income, net of tax   535    2,099 
           
Comprehensive Income  $3,016   $4,119 

 

See notes to consolidated financial statements

  

3
 

 

MutualFirst Financial, Inc. 

Consolidated Condensed Statement of Stockholders’ Equity
For the Period Ended March 31, 2015 

(Unaudited) 

(In Thousands, Except Share and Per Share Data)

 

   Common Stock   Additional
Paid-in Capital
Common
   Retained
Earnings
   Accumulated Other
Comprehensive Income
(Loss)
   Total 
Balances December 31, 2014   72    74,916    50,171    2,378    127,537 
Cumulative effect of change in accounting                         
principle for low income housing tax credits, net of tax of $270             (785)        (785)
Balance, beginning of period - as adjusted   72    74,916    49,386    2,378    126,752 
Net income             2,481         2,481 
Other comprehensive income, net of taxes                  535    535 
Stock options, exercised   2    1,309              1,311 
Tax benefit on stock options        285              285 
Cash dividends, common stock ($.12 per share)             (885)        (885)
Balances March 31, 2015  $74   $76,510   $50,982   $2,913   $130,479 

 

See notes to consolidated condensed financial statements

 

4
 

 

MutualFirst Financial, Inc. 

Consolidated Condensed Statements of Cash Flows
(Unaudited) 

(In Thousands, Except Share and Per Share Data)

 

   Three Months Ended 
   March 31, 
   2015   2014 
Operating Activities          
Net income  $2,481   $2,020 
Items not requiring cash          
Provision for loan losses   -    350 
Depreciation and amortization   1,098    1,030 
Deferred income tax   35    435 
Loans originated for sale   (30,922)   (2,650)
Proceeds from sales of loans held for sale   27,110    3,061 
Gain on sale of loans held for sale   (906)   (104)
Gain on sale of securities, available for sale   (240)   (150)
Loss on sale of other real estate and repossessed assets   82    62 
Change in          
Interest receivable and other assets   350    21 
Interest payable and other liabilities   1,358    602 
Cash value of life insurance   (288)   (267)
Other equity adjustments   -    138 
Other adjustments   37    - 
Net cash provided by operating activities   195    4,548 
           
Investing Activities          
Purchases of securities, available for sale   (21,510)   (24,119)
Proceeds from maturities and paydowns of securities, available for sale   8,075    6,967 
Proceeds from sales of securities, available for sale   7,539    15,508 
Net change in loans   (7,425)   544 
Purchases of premises and equipment   (527)   (383)
Proceeds from real estate owned sales   604    1,278 
Net cash used in investing activities   (13,244)   (205)
           
Financing Activities          
Net change in          
Noninterest-bearing, interest-bearing demand and savings deposits   18,073    16,334 
Certificates of deposit   (11,268)   (24,457)
Proceeds from FHLB advances   85,800    117,800 
Repayments of FHLB advances   (90,700)   (116,600)
Repayments of other borrowings   (190)   (190)
Cash dividends   (885)   (427)
Stock options exercised   1,311    34 
Net cash provided by (used in) financing activities   2,141    (7,506)
Net Change in Cash and Cash Equivalents   (10,908)   (3,163)
Cash and Cash Equivalents, Beginning of Period   29,575    25,285 
Cash and Cash Equivalents, End of Period  $18,667   $22,122 
           
Additional Cash Flows Information          
Interest paid  $2,141   $2,275 
Income tax paid   800    500 
Transfers from loans to foreclosed real estate   266    360 
Mortgage servicing rights capitalized   87    39 

 

See notes to consolidated condensed financial statements

  

5
 

  

MutualFirst Financial, Inc. 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited) 

(In Thousands, Except Share and Per Share Data)

  

Note 1:  Basis of Presentation

 

The consolidated condensed financial statements include the accounts of MutualFirst Financial, Inc. (MutualFirst or the “Company”), its wholly owned subsidiary MutualBank, an Indiana commercial bank (“Mutual” or the “Bank”), Mutual’s wholly owned subsidiaries, First MFSB Corporation, Mishawaka Financial Services, Summit Service Corp. and the wholly owned subsidiary of Summit Service Corp., Summit Mortgage Inc. (“Summit”), Mutual Federal Investment Company (“MFIC”), and MFIC majority owned subsidiary, Mutual Federal REIT, Inc. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

Certain information and note disclosures normally included in the Company’s annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K annual report for the year ended December 31, 2014, filed with the Securities and Exchange Commission on March 13, 2015.

 

The interim consolidated condensed financial statements at and for the three months ended March 31, 2015 and 2014, have not been audited by independent accountants, but in the opinion of management, reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for such periods. The results of operations for the period are not necessarily indicative of the results to be expected for the full year.

 

The Consolidated Condensed Balance Sheet of the Company as of December 31, 2014 has been derived from the Audited Consolidated Balance Sheet of the Company as of that date.

  

6
 

 

Note 2: Earnings Per Share

 

Earnings per share were computed as follows:

  

   Three Months Ended March 31, 
   2015   2014 
   Income   Weighted-
Average
Shares
   Per-
Share
Amount
   Income   Weighted-
Average
Shares
   Per-
Share
Amount
 
Basic Earnings Per Share                              
Net income  $2,481    7,313,725   $0.34   $2,020    7,118,853   $0.28 
Effect of Dilutive Securities                              
Stock options   -    194,968         -    234,191      
Diluted Earnings Per Share                              
Net income available and assumed conversions  $2,481    7,508,693   $0.33   $2,020    7,353,044   $0.27 

  

Options to purchase 37,161 and 44,161 shares of common stock were outstanding at March 31, 2015 and 2014, respectively, but were not included in the computation of diluted EPS because the options’ exercise price was greater than the average market price of the common shares.

  

Note 3: Impact of Accounting Pronouncements

 

In February 2015, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-01, Income Statement – Extraordinary and Unusual Items. The objective of the update was to simplify the income statement presentation requirements by eliminating the concept of extraordinary items.

 

The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity may also apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. An entity that prospectively applies this ASU should disclose both the nature and the amount of an item included in income from continuing operations after adoption that adjusts an extraordinary item previously classified and presented before the date of adoption, if applicable. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

 

In August 2014, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. The update provides U.S. Generally Accepted Accounting Principles (GAAP) guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and about related footnote disclosures. For each reporting period, management will be required to evaluate whether there are conditions or events that raise substantial doubt about a company’s ability to continue as a going concern within one year from the date the financial statements are issued.

 

7
 

  

The amendments in this update are effective for annual reporting periods ending after December 15, 2016, and for annual and interim periods thereafter. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

 

In August 2014, FASB, issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The objective of this Update is to reduce diversity in practice by addressing the classification of foreclosed mortgage loans that are fully or partially guaranteed under government programs. Currently, some creditors reclassify those loans to real estate as with other foreclosed loans that do not have guarantees; others reclassify the loans to other receivables. The amendments affect creditors that hold government-guaranteed mortgage loans, including those guaranteed by the FHA and the VA.

 

The amendments in this update are effective for annual reporting periods ending after December 15, 2015 and interim periods beginning after December 15, 2015. An entity should adopt the amendments in this Update using either a prospective transition method or a modified retrospective transition method. For prospective transition, an entity should apply the amendments in this Update to foreclosures that occur after the date of adoption. For the modified retrospective transition, an entity should apply the amendments in the Update by means of a cumulative-effect adjustment (through a reclassification to a separate other receivable) as of the beginning of the annual period of adoption. Prior periods should not be adjusted. However, a reporting entity must apply the same method of transition as elected under ASU No. 2014-04. Early adoption, including adoption in an interim period, is permitted if the entity already has adopted Update 2014-04. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

 

In June 2014, (FASB) issued (ASU) 2014-12 “Compensation – Stock Compensation.” This update defines the accounting treatment for share-based payments and “resolves the diverse accounting treatment of those awards in practice.” The new requirement mandates that “a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.” Compensation cost will now be recognized in the period in which it becomes likely that the performance target will be met.

 

The amendments in this update are effective for annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

 

In June 2014, FASB, issued ASU 2014-11 “Transfers and Servicing.” This update addresses the concerns of stakeholders’ by changing the accounting practices surrounding repurchase agreements. The new guidance changes the “accounting for repurchase-to-maturity transactions and linked repurchase financings to secured borrowing accounting, which is consistent with the accounting for other repurchase agreements.”

 

The amendments in this update are effective for annual reporting periods beginning after December 15, 2015. Early adoption is prohibited. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

 

8
 

  

In May 2014, FASB, in joint cooperation with IASB, issued ASU 2014-09 “Revenue from Contracts with Customers.” The topic of Revenue Recognition had become broad, with several other regulatory agencies issuing standards which lacked cohesion. The new guidance establishes a “common framework” and “reduces the number of requirements to which an entity must consider in recognizing revenue” and yet provides improved disclosures to assist stakeholders reviewing financial statements.

 

The amendments in this update are effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. The Company will adopt the methodologies prescribed by this ASU by the date required, and does not anticipate that the ASU will have a material effect on its financial position or results of operations.

 

Recently the FASB and the Internal Accounting Standards Board (IASB) (the Boards) have published for public comment revised Exposure Drafts outlining proposed changes to the accounting for leases. The proposals aim to improve the quality and comparability of financial reporting by providing greater transparency about leverage, the assets an organization uses in its operations and the risks to which it is exposed from entering into leasing transactions. Under existing accounting standards, a majority of leases are not reported on a lessee’s balance sheet. The amounts involved can be substantial. Additionally, the existing accounting models for leases require lessees and lessors to classify their leases as either capital leases (e.g., a lease of equipment for nearly all of its economic life) or operating leases (e.g., a lease of office space for 10 years) and to account for those leases differently.

 

For capital leases, a lessee recognizes lease assets and liabilities on the balance sheet. For operating leases, a lessee does not recognize lease assets or liabilities on the balance sheet. The existing standards have been criticized for failing to meet the needs of users of financial statements because they do not always provide a complete representation of leasing transactions. In response to this criticism, in 2006 the Boards initiated a joint project to improve the financial reporting of leasing activities under International Financial Reporting Standards (IFRSs) and U.S. GAAP. The Boards have developed an approach to lease accounting that would require a lessee to recognize assets and liabilities for the rights and obligations created by leases. A lessee would recognize assets and liabilities for leases of more than 12 months.

 

Stakeholders have informed the Boards that there are a wide variety of lease transactions with different economics. To better reflect those differing economics, the revised Exposure Drafts propose a dual approach to the recognition, measurement, and presentation of expenses and cash flows arising from a lease. For most real estate leases, a lessee would report a straight-line lease expense in its income statement. For most other leases, such as equipment or vehicles, a lessee would report amortization of the asset separately from interest on the lease liability. The Boards are also proposing disclosures that should enable investors and other users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases.

 

The leases project is a converged effort between the Boards. The revised Exposure Drafts for both organizations are nearly identical. The differences between the two proposals are primarily related to existing differences between U.S. GAAP and IFRS and decisions the FASB made related to nonpublic entities.

 

The Boards are also proposing changes to how equipment and vehicle lessors would account for leases that are off balance sheet. Those changes would provide greater transparency about such lessors’ exposure to credit risk and asset risk.

 

Comments were due by September 13, 2013.

  

9
 

  

Note 4: Investment Securities

 

The amortized costs and approximate fair values, together with gross unrealized gains and losses on securities, are as follows:

  

   March 31, 2015 
   Amortized Cost   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Fair Value 
Available for Sale Securities                    
Mortgage-backed securities                    
Government-sponsored agencies  $111,487   $3,073   $(23)  $114,537 
Collateralized mortgage obligations                    
Government-sponsored agencies   91,280    1,346    (427)   92,199 
Municipal obligations   38,150    2,180    (96)   40,234 
Corporate obligations   21,770    69    (1,306)   20,533 
Total investment securities  $262,687   $6,668   $(1,852)  $267,503 

 

   December 31, 2014 
   Amortized Cost   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Fair Value 
Available for Sale Securities                    
Mortgage-backed securities                    
Government-sponsored agencies  $110,452   $2,927   $(89)  $113,290 
Collateralized mortgage obligations                    
Government-sponsored agencies   97,325    1,270    (836)   97,759 
Federal agencies   4    -    -    4 
Municipal obligations   27,246    2,013    (7)   29,252 
Corporate obligations   21,763    44    (1,306)   20,501 
Total investment securities  $256,790   $6,254   $(2,238)  $260,806 

 

The amortized cost and fair value of securities available for sale at March 31, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Available for Sale 
Description Securities  Amortized Cost   Fair Value 
Security obligations due          
One to five years  $14,618   $14,670 
Five to ten years   6,493    6,698 
After ten years   38,809    39,399 
    59,920    60,767 
Mortgage-backed securities          
Government-sponsored agencies   111,487    114,537 
Collateralized mortgage obligations          
Government-sponsored agencies   91,280    92,199 
Totals  $262,687   $267,503 

  

10
 

  

Proceeds from sales of securities available for sale for the three months ended March 31, 2015 and 2014 were $7.5 million and $15.5 million, respectively. Gross gains of $240,000 and $315,000, respectively, were recognized on those sales. Gross losses of $0 and $165,000, respectively, were recognized on those sales as well.

 

All mortgage-backed securities and collateralized-mortgage obligations held by the Company as of March 31, 2015 were in government-sponsored or federal agency securities.

 

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at March 31, 2015 and December 31, 2014 was $69.8 million and $67.5 million, which is approximately 26.1 percent and 25.9 percent of the Company’s investment portfolio at those dates.

 

Based on our evaluation of available evidence, including recent changes in market interest rates, management believes the declines in fair value for these securities, for the periods presented, are temporary.

 

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

 

During the first three months of 2015 and 2014, the Bank determined that its security holdings had no other-than-temporary impairment.

 

The following tables show the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2015 and December 31, 2014:

  

   March 31, 2015 
   Less than 12 Months   12 Months or More   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
Available for Sale                              
Mortgage-backed securities                              
Government-sponsored agencies  $18,351   $(23)  $-   $-   $18,351   $(23)
Collateralized mortgage obligations                              
Government-sponsored agencies   11,688    (26)   26,540    (401)   38,228    (427)
Municipal obligations   5,592    (92)   634    (4)   6,226    (96)
Corporate obligations   -    -    6,996    (1,306)   6,996    (1,306)
Total temporarily impaired securities  $35,631   $(141)  $34,170   $(1,711)  $69,801   $(1,852)

 

11
 

  

   December 31, 2014 
   Less than 12 Months   12 Months or More   Total 
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
Available for Sale                              
Mortgage-backed securities                              
Government-sponsored agencies  $1,069   $(9)  $19,580   $(80)  $20,649   $(89)
Collateralized mortgage obligations                              
Government-sponsored agencies   5,075    (40)   34,159    (796)  $39,234   $(836)
Municipal obligations   -    -    631    (7)   631    (7)
Corporate obligations   -    -    6,995    (1,306)   6,995    (1,306)
Total temporarily impaired securities  $6,144   $(49)  $61,365   $(2,189)  $67,509   $(2,238)

  

Mortgage-Backed Securities (MBS) and Collateralized Mortgage Obligations (CMO)

 

The unrealized losses on the Company’s investment in MBSs and CMOs were caused by interest rate changes. The Company expects to recover the amortized cost basis over the term of the securities. Because (1) the decline in market value is attributable to changes in interest rates and not credit quality, (2) the Company does not intend to sell the investments and (3) it is more likely than not the Company will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company does not consider any of these investments to be other-than-temporarily impaired at March 31, 2015.

 

Municipals

 

The decrease in unrealized losses on the Company’s investments in securities of state and political subdivisions were caused by changes in interest rates.  The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments.  The Company does not intend to sell the investment and it is more likely than not that the Company will not be required to sell these investments before recovery of its new, lower amortized cost basis, which may be at maturity.  The Corporation does not consider these investment securities to be other-than-temporarily impaired at March 31, 2015.

 

Corporate Obligations

 

The Company’s unrealized losses on investments in corporate obligations primarily relates to an investment in a pooled trust preferred security. The unrealized losses were primarily caused by (1) a decrease in performance and regulatory capital resulting from exposure to subprime mortgages and (2) a sector downgrade by several industry analysts. The Company currently expects some of the securities to settle at a price less than the amortized cost basis of the investment (that is, the Company expects to recover less than the entire amortized cost basis of the security). The Company has recognized a loss equal to the credit loss for these securities, establishing a new, lower amortized cost basis. The credit loss was calculated by comparing expected discounted cash flows based on performance indicators of the underlying assets in the security to the carrying value of the investment. Because the Company does not intend to sell these investments and it is likely that the Company will not be required to sell the investments before recovery of its new, lower amortized cost basis, which may be at maturity, it does not consider the remainder of these investments to be other-than-temporarily impaired at March 31, 2015.

 

12
 

 

Other-Than-Temporary Impairment (OTTI)

 

Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or whether it will be evaluated for impairment under the accounting guidance for investments in debt and equity securities.

 

The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt securities within the scope of the guidance for investments in debt and equity securities. For securities that are a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model. For securities where the security is not a beneficial interest in securitized financial assets, the Company uses debt and equity securities impairment accounting model.

 

The Company conducts periodic reviews to identify and evaluate each investment security to determine whether an other-than-temporary impairment has occurred. Economic models are used to determine whether an other-than-temporary impairment has occurred on these securities. While all securities are considered, the securities primarily impacted by other-than-temporary impairment testing are private-label mortgage-backed securities and trust preferred securities.

 

MutualFirst Financial uses market-based yield indicators as a baseline for determining appropriate discount rates, and then adjusts the resulting discount rates on the basis of its credit and structural analysis of specific trust preferred securities. The primary focus is on the returns a fixed income investor would require in order to allocate capital on a risk adjusted basis. There is currently 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 make adjustments as necessary to reflect this additional risk.

 

Credit Losses Recognized on Investments

 

Certain debt securities have experienced fair value deterioration due to credit losses, as well as due to other market factors, but are not otherwise other-than-temporarily impaired.

 

The following table provides information about debt securities for which only a credit loss was recognized in income and other losses are recorded in other comprehensive income.

 

   Accumulated Credit Losses 
   Three Months Ended 
   March 31, 
   2015   2014 
Credit losses on debt securities held          
Beginning of period  $109   $1,205 
Reductions related to actual losses incurred   -    - 
As of March 31,  $109   $1,205 

  

13
 

 

Pooled Trust Preferred Securities. The Company has invested in pooled trust preferred securities. At March 31, 2015, the current book balance of our pooled trust preferred securities was $3.8 million. The original par value of these securities was $4.0 million prior to the OTTI write-downs in 2011 and earlier, based on valuations by a third party. OTTI taken on trust preferred securities previously was the result of deterioration in the performance of the underlying collateral. The deterioration was the result of increased defaults and deferrals of dividend payments in that year, creating credit impairment along with weakening financial performance of performing collateral, increasing the risk of future deferrals of dividends and defaults. No additional OTTI was determined in the first three months of 2015. All pooled trust preferred securities owned by the Bank are exempt from the Volcker Rule.

 

The following table provides additional information related to the Bank’s investment in pooled trust preferred securities as of March 31, 2015:

 

Deal Name  Class  Original
Par
   Book
Value
   Fair Value   Unrealized
gain (loss)
   Realized
Losses 
YTD
   Lowest
Current
Rating
  Number of
Banks /
Insurance
Cos.
Currently
Performing
  Total
Number
of Banks
and
Insurance
Cos. In
Issuance
(Unique)
  Actual
Deferrals/
Defaults
(as a % of
original
collateral)
   Total
Projected
Defaults
 (as a % of
performing
collateral)
(1)
   Excess
subordination
(after taking
into account
best estimate
of future
deferrals/
 defaults) (2)
 
   (Dollars in Thousands)
Alesco Preferred Funding IX  A2A   1,000    911    548    (363   -   BB+  42  51   10.04%   12.95%   55.14%
U.S. Capital Funding I  B1   3,000    2,891    1,974    (917)   -   B3  28  33   9.44%   7.02%   10.33%
      $4,000   $3,802   $2,522   $(1,280  $-                         

 

 

(1)A 10% recovery is applied to all projected defaults by depository institutions. A 15% recovery is applied to all projected defaults by insurance companies. No recovery is applied to current defaults.
(2)Excess subordination represents the additional defaults in excess of both current and projected defaults that the CDO can absorb before the bond experiences any credit impairment. Excess subordinated percentage is calculated by (a) determining what percentage of defaults a deal can experience before the bond has credit impairment, and (b) subtracting from this default breakage percentage both total current and expected future default percentages.

  

14
 

 

Note 5: Accumulated Other Comprehensive Income (Loss)

 

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

 

   March 31,   December 31, 
   2015   2014 
Net unrealized gain on securities available-for-sale  $5,733   $4,933 
Net unrealized loss on securities available-for-sale for which a portion of an other-than-temporary impairment has been recognized in income   (917)   (917)
Net unrealized loss on derivative used for cash flow hedges   (94)   (109)
Net unrealized gain relating to defined benefit plan liability   (109)   (109)
    4,613    3,798 
Tax expense   1,700    1,420 
Net of tax amount  $2,913   $2,378 

  

The following table presents the reclassification adjustments out of accumulated other comprehensive income (loss) that were included in net income in the Consolidated Statements of Income for the three months ended March 31, 2015 and 2014.

 

   Amount Reclassified from
Accumulated Other
Comprehensive Income For the
Three Months Ended March
31,
    
Details about Accumulated Other Comprehensive
Income Components
  2015   2014   Affected Line Item in the Statements of
Income
Unrealized gains on available-for-sale securities             
Realized securities gains reclassified into income  $240   $150   Non-interest income - net realized gains on sale of available-for-sale securities
Related income tax expense   (82)   (51)  Income tax expense
              
Total reclassifications for the period, net of tax  $158   $99    

  

Note 6: Fair Values of Financial Instruments

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

 

Level 1Quoted prices in active markets for identical assets or liabilities

 

Level 2Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

  

15
 

  

Level 3Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities

 

Items Measured at Fair Value on a Recurring Basis

 

Following is a description of the valuation methodologies and inputs used for instruments measured at fair value on a recurring basis and recognized in the accompanying comparative balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.

 

Available-for-Sale Securities

 

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The Company uses a third-party provider to provide market prices on its securities. Pooled trust preferred securities prices are evaluated by a third party. Level 1 securities include marketable equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include mortgage-backed, collateralized mortgage obligations, small business administration, marketable equity, municipal, federal agency and certain corporate obligation securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include certain corporate obligation securities.

 

Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on investment securities relationship to other benchmark quoted investment securities. Any investment security not valued based upon the methods above are considered Level 3.

  

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and level within the ASC 820 fair value hierarchy in which the fair value measurements fall:

  

       Fair Value Measurements Using 
   Fair Value   Level 1   Level 2   Level 3 
March 31, 2015                    
Mortgage-backed securities                    
Government sponsored agencies  $114,537   $-   $114,537   $- 
Collateralized mortgage obligations                    
Government sponsored agencies   92,199    -    92,199    - 
Municipal obligations   40,234    -    40,234    - 
Corporate obligations   20,533    -    18,011    2,522 
Available-for-sale securities  $267,503   $-   $264,981   $2,522 

 

16
 

 

       Fair Value Measurements Using 
   Fair Value   Level 1   Level 2   Level 3 
December 31, 2014                    
Mortgage-backed securities                    
Government sponsored agencies  $113,290   $-   $113,290   $- 
Collateralized mortgage obligations                    
Government sponsored agencies   97,759    -    97,759    - 
Federal agencies   4    -    4    - 
Municipal obligations   29,252    -    29,252    - 
Corporate obligations   20,501    -    17,979    2,522 
Available-for-sale securities  $260,806   $-   $258,284   $2,522 

 

The following is a reconciliation of the beginning and ending balances for the three months ended March 31, 2015 and 2014 of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:

 

   2015   2014 
Beginning balance  $2,522   $3,336 
Total realized and unrealized gains (losses)          
Included in net income   -    - 
Included in other comprehensive income (loss)   -    714 
Purchases, sales, issuances and settlements   -    (7)
Ending balance  $2,522   $4,043 
Total gains or losses for the period included in net income attributable to the change in unrealized gains or losses related to assets still held at the reporting date  $0   $0 

  

Items Measured at Fair Value on a Non-Recurring Basis

 

From time to time, certain assets may be recorded at fair value on a non-recurring basis. These non-recurring fair value adjustments typically are a result of the application of lower of cost or fair value accounting or a write-down occurring during the period. The following is a description of the valuation methodologies used for certain assets that are recorded at fair value.

 

Other Real Estate Owned

 

The fair value of real estate is generally determined based on appraisals by qualified licensed appraisers. The appraisers typically determine the value of the real estate by utilizing an income or market valuation approach. If an appraisal is not available, the fair value may be determined by using a cash flow analysis.

 

Other real estate owned is classified within Level 3 of the fair value hierarchy.

 

The following table presents the fair value measurement of assets measured at fair value on a nonrecurring basis and the level within the ASC 820 fair value hierarchy in which the fair value measurements fall.

  

17
 

  

No assets to be measured at fair value on a nonrecurring basis per ASC 820 required a value adjustment as of March 31, 2015.

 

       Fair Value Measurements Using 
   Fair Value   Level 1   Level 2   Level 3 
December 31, 2014                    
Other real estate owned  $1,280   $-   $-   $1,280 

 

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

 

March 31, 2015   Fair
Value
  Valuation Technique   Unobservable Inputs   Range   
Trust Preferred Securities   $  2,522    Discounted cash flow   Discount rate    8.0  %
              Constant prepayment rate    2.0  %
              Cumulative projected prepayments    40.0  %
              Probability of default   1.7 - 1.8 %
              Projected cures given deferral   0 - 15.0 %
              Loss severity    34.2 - 39.8 %

 

December 31, 2014   Fair
Value
  Valuation Technique   Unobservable Inputs   Range   
Trust Preferred Securities   $  2,522    Discounted cash flow   Discount rate    8.0  %
              Constant prepayment rate    2.0  %
              Cumulative projected prepayments    40.0  %
              Probability of default   1.7 - 1.8 %
              Projected cures given deferral   0 - 15.0 %
              Loss severity    34.2 - 39.8 %
Other real estate owned    $  1,280    Third party valuations   Discount to reflect realizable value less estimated selling costs    24.4 - 36.7 %

 

18
 

  

The following methods and assumptions were used to estimate the fair value of all other financial instruments recognized in the accompanying balance sheets at amounts other than fair value:

 

Cash and Cash Equivalents - The fair value of cash and cash-equivalents approximates carrying value.

 

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

 

Loans - The fair value for loans is estimated using discounted cash flow analyses using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

 

FHLB Stock - Fair value of FHLB stock is based on the price at which it may be resold to the FHLB.

 

Interest Receivable/Payable - The fair values of interest receivable/payable approximate carrying values.

 

Deposits - The fair values of noninterest-bearing, interest-bearing demand and savings accounts are equal to the amount payable on demand at the balance sheet date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on such time deposits.

 

FHLB Advances - The fair value of these borrowings is estimated using a discounted cash flow calculation, based on current rates for similar debt for periods comparable to the remaining terms to maturity of these advances.

 

Other Borrowings - The fair value of these borrowings is estimated using discounted cash flow analyses using interest rates for similar financial instruments.

 

Off-Balance Sheet Commitments - Commitments include commitments to purchase and originate mortgage loans, commitments to sell mortgage loans, and standby letters of credit and are generally of a short-term nature. The fair values of such commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these instruments is insignificant.

 

The estimated fair values of the Company’s financial instruments not carried at fair value in the consolidated balance sheets as of the dates noted below are as follows:

  

           Fair Value Measurements Using 
March 31, 2015  Carrying
Amount
   Fair Value   Level 1   Level 2   Level 3 
Assets                         
Cash and cash equivalents  $18,667   $18,667   $18,667   $-   $- 
Loans held for sale   10,771    10,888    -    10,888    - 
Loans, net   1,010,390    1,017,968    -    -    1,017,968 
FHLB stock   11,964    11,964    -    11,964    - 
Interest receivable   3,656    3,656    -    3,656    - 
Liabilities                         
Deposits   1,086,125    1,087,595    696,191    -    391,404 
FHLB advances   187,542    188,031    -    188,031    - 
Other borrowings   9,995    10,090    -    10,090    - 
Interest payable   247    247    -    247    - 

 

19
 

  

           Fair Value Measurements Using 
December 31, 2014  Carrying
Amount
   Fair Value   Level 1   Level 2   Level 3 
Assets                         
Cash and cash equivalents  $29,575   $29,575   $29,575   $-   $- 
Loans held for sale   6,140    6,220    -    6,220    - 
Loans, net   1,003,518    1,006,233    -    -    1,006,233 
FHLB stock   11,964    11,964    -    11,964    - 
Interest receivable   3,730    3,730    -    3,730    - 
Liabilities                         
Deposits   1,079,320    1,050,295    648,314    -    401,981 
FHLB advances   192,442    191,995    -    191,995    - 
Other borrowings   10,174    10,283    -    10,283    - 
Interest payable   223    223    -    223    - 

 

Note 7: Loans and Allowance

 

Classes of loans at March 31, 2015 and December 31, 2014 include:

  

   March 31,   December 31, 
   2015   2014 
Real estate          
Commercial  $202,282   $198,019 
Commercial construction and development   36,119    33,102 
Consumer closed end first mortgage   509,834    517,063 
Consumer open end and junior liens   69,671    71,073 
    817,906    819,257 
Other loans          
Consumer loans          
Auto   14,879    14,712 
Boat/RVs   100,879    94,761 
Other   4,921    5,184 
Commercial and industrial   88,110    88,474 
    208,789    203,131 
Total loans   1,026,695    1,022,388 
Undisbursed loans in process   (6,720)   (9,285)
Unamortized deferred loan costs, net   3,632    3,583 
Allowance for loan losses   (13,217)   (13,168)
Net loans  $1,010,390   $1,003,518 

  

20
 

 

The risk characteristics of each loan portfolio segment are as follows:

 

Commercial

 

Real estate

 

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

 

Construction and Development

 

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates and financial analyses of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

 

Commercial and Industrial

 

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

 

21
 

 

Consumer Real Estate and Other Consumer Loans

 

With respect to residential loans that are secured by consumer closed end first mortgages and are primarily owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires PMI if that ratio is exceeded. Consumer open end and junior lien loans are typically secured by a subordinate interest in 1-4 family residences, and other consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

 

Nonaccrual Loans and Past Due Loans

 

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in managements’ opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions, but never greater than 90 days past due.

 

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 and generally only after six months of satisfactory performance.

 

Nonaccrual loans, segregated by class of loans, as of March 31, 2015 and December 31, 2014 are as follows:

 

 

   March 31,   December 31, 
   2015   2014 
Real estate          
Commercial  $1,913   $2,023 
Commercial construction and development   187    209 
Consumer closed end first mortgage   3,922    3,499 
Consumer open end and junior liens   593    658 
Consumer loans          
Auto   3    - 
Boat/RVs   142    191 
Other   33    27 
Commercial and industrial   610    605 
   $7,403   $7,212 

  

Nonaccrual commercial and industrial and consumer closed end first mortgage loans increased due to three new loans that went on non-accrual during the quarter. Management continues to monitor these and all other nonaccrual loans.

 

22
 

  

An age analysis of the Company’s past due loans, segregated by class of loans, as of March 31, 2015 and December 31, 2014 are as follows:

  

   March 31, 2015 
   30-59
Days Past
Due
   60-89
Days Past
Due
   90 Days
or More
Past Due
   Total Past
Due
   Current   Total
Loans
Receivable
   Total
Loans 90
Days or
More and
Accruing
 
Real estate                                   
Commercial  $445   $-   $711   $1,156   $201,126   $202,282   $- 
Commercial construction and development   -    -    53    53    36,066    36,119    - 
Consumer closed end first mortgage   4,775    561    2,762    8,098    501,736    509,834    97 
Consumer open end and junior liens   688    41    75    804    68,867    69,671    - 
Consumer loans                                   
Auto   8    2    3    13    14,866    14,879    - 
Boat/RVs   433    136    133    702    100,177    100,879    - 
Other   37    -    33    70    4,851    4,921    - 
Commercial and industrial   104    -    459    563    87,547    88,110    - 
   $6,490   $740   $4,229   $11,459   $1,015,236   $1,026,695   $97 

  

   December 31, 2014 
   30-59
Days Past
Due
   60-89
Days Past
Due
   90 Days
or More
Past Due
   Total Past
Due
   Current   Total
Loans
Receivable
   Total
Loans 90
Days or
More and
Accruing
 
Real estate                                   
Commercial  $1,308   $848   $325   $2,481   $195,538   $198,019   $- 
Commercial construction and development   -    -    209    209    32,893    33,102    - 
Consumer closed end first mortgage   8,144    1,220    2,160    11,524    505,539    517,063    226 
Consumer open end and junior liens   969    130    27    1,126    69,947    71,073    - 
Consumer loans                                   
Auto   65    -    -    65    14,647    14,712    - 
Boat/RVs   775    158    115    1,048    93,713    94,761    - 
Other   92    27    14    133    5,051    5,184    - 
Commercial and industrial   1,066    176    441    1,683    86,791    88,474    - 
   $12,419   $2,559   $3,291   $18,269   $1,004,119   $1,022,388   $226 

  

Impaired Loans

 

Loans are considered impaired in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

 

Interest on impaired loans is recorded based on the performance of the loan. All interest received on impaired loans that are on nonaccrual is accounted for on the cash-basis method until qualifying for return to accrual. Interest is accrued per the contract for impaired loans that are performing.

 

23
 

 

The following tables present impaired loans as of and for the three month periods ended March 31, 2015 and 2014 and the year ended December 31, 2014. There were no loans with a specific valuation allowance as of March 31, 2015 and December 31, 2014.

 

   March 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  $5,225   $5,225   $-   $5,079   $56 
Commercial construction and development   851    1,628    -    891    7 
Consumer closed end first mortgage   1,138    1,138    -    1,138    - 
Consumer open end and junior liens   476    476    -    238    - 
Commercial and industrial   702    733    -    730    1 
                          
Total  $8,392   $9,200   $-   $8,076   $64 

 

   December 31, 2014 
   Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment
in Impaired
Loans
   Interest
Income
Recognized
 
Loans without a specific valuation allowance                         
Real estate                         
Commercial  $4,933   $4,933   $-   $3,776   $161 
Commercial construction and development   931    1,860    -    1,323    30 
Consumer closed end first mortgage   1,138    1,138    -    1,142    8 
Consumer open end and junior liens   -    -    -    100    3 
Commercial and industrial   758    789    -    923    12 
                          
Total  $7,760   $8,720   $-   $7,264   $214 

 

24
 

  

   March 31, 2014 
   Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment
in Impaired
Loans
   Interest
Income
Recognized
 
Loans without a specific valuation allowance                         
Real estate                         
Commercial  $2,952   $2,952   $-   $3,050   $32 
Commercial construction and development   1,230    3,154    -    1,262    8 
Consumer closed end first mortgage   856    856    -    1,045    2 
Consumer open end and junior liens   250    250         250    1 
Commercial and industrial   736    736    -    750    - 
                          
Loans with a specific valuation allowance                         
Real estate                         
Commercial construction and development   344    371    165    344    - 
Commercial and industrial   424    624    170    424    5 
                          
Total   6,792    8,943    335    7,125    48 

 

The following information presents the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of March 31, 2015.

 

Commercial Loan Grades

 

Definition of Loan Grades. Loan grades are numbered 1 through 8. Grades 1-4 are "pass" credits, grade 5 [Special Mention] loans are "criticized" assets, and grades 6 [Substandard], 7 [Doubtful] and 8 [Loss] are "classified" assets. The use and application of these grades by the Bank conform to the Bank's policy and regulatory definitions.

 

Pass. Pass credits are loans in grades prime through fair. These are at least considered to be credits with acceptable risks and would be granted in the normal course of lending operations.

 

Special Mention. Special mention credits have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credits or in the Bank’s credit position at some future date. If weaknesses cannot be identified, classifying as special mention is not appropriate. Special mention credits are not adversely classified and do not expose the Bank to sufficient risk to warrant an adverse classification. No apparent loss of principal or interest is expected.

 

Substandard. Substandard credits are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged. Financial statements normally reveal some or all of the following:  poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Credits so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss of the deficiencies are not corrected.

 

Doubtful. A doubtful extension of credit has all the weaknesses inherent in a substandard asset with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. Doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded Substandard.  

 

25
 

 

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.

 

26
 

 

March 31, 2015
Commercial Credit Exposure Credit Risk Profile
Internal Rating  Real Estate   Construction
and
Development
   Commercial
and Industrial
 
Pass  $191,788   $33,611   $85,313 
Special Mention   3,181    1,713    355 
Substandard   7,313    795    2,023 
Doubtful   -    -    419 
Total  $202,282   $36,119   $88,110 

 

Consumer Credit Exposure Credit Risk Profile
Internal Rating  Closed End
First
Mortgage
   Real Estate Open
End and Junior
Liens
   Auto   Boat/RV   Other 
Pass  $502,729   $68,943   $14,869   $100,628   $4,881 
Special Mention   -    -    -    -    - 
Substandard   7,105    728    10    251    40 
Total  $509,834   $69,671   $14,879   $100,879   $4,921 

 

December 31, 2014
Commercial Credit Exposure Credit Risk Profile
Internal Rating  Real Estate   Construction
and
Development
   Commercial
and Industrial
 
Pass  $187,436   $30,422   $84,746 
Special Mention   3,316    1,721    439 
Substandard   7,267    959    2,848 
Doubtful   -    -    441 
Total  $198,019   $33,102   $88,474 

 

Consumer Credit Exposure Credit Risk Profile
Internal Rating  Closed End
First
Mortgage
   Real Estate Open
End and Junior
Liens
   Auto   Boat/RV   Other 
Pass  $509,765   $70,299   $14,704   $94,377   $5,125 
Special Mention   -    -    -    -    - 
Substandard   7,298    774    8    384    59 
Total  $517,063   $71,073   $14,712   $94,761   $5,184 

 

27
 

 

Allowance for Loan Losses.

 

We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated losses inherent in the loan portfolio.  Our methodology for assessing the appropriateness of the allowance consists of several key elements, including the general allowance and specific allowances for identified problem loans and portfolio segments.  In addition, the allowance incorporates the results of measuring impaired loans as provided in FASB ASC 310, Receivables.  These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans. The general allowance is calculated by applying loss factors to outstanding loans based on the internal risk evaluation of such loans or pools of loans. Changes in risk evaluations of both performing and nonperforming loans affect the amount of the general allowance. Loss factors are based on our historical loss experience as well as on significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date.

 

The appropriateness of the allowance is reviewed by management based upon its evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as credit quality trends (including trends in non-performing loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments and recent loss experience in particular segments of the portfolio that existed as of the balance sheet date and the impact that such conditions were believed to have had on the collectability of the loan.  Senior management reviews these conditions quarterly in discussions with our senior credit officers.  To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment.  Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the loss related to this condition is reflected in the general allowance for loan losses.  The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments.

 

The allowance for loan losses is based on estimates of losses inherent in the loan portfolio.  Actual losses can vary significantly from the estimated amounts.  Our methodology as described permits adjustments to any loss factor used in the computation of the general allowance in the event that, in management’s judgment, significant factors which affect the collectability of the portfolio as of the evaluation date are not reflected in the loss factors.  By assessing the probable incurred losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon any more recent information that has become available.  

 

The following table details activity in the allowance for loan losses by portfolio segment for the three month periods ended March 31, 2015 and 2014 and year ended December 31, 2014.  Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other segments.

 

28
 

 

   Three Months Ended March 31, 2015 
   Commercial   Mortgage   Consumer   Total 
Allowance for loan losses:                    
Balance, beginning of year  $7,085   $3,471   $2,612   $13,168 
Provision charged (credited) to expense   (396)   188    208    - 
Losses charged off   -    (93)   (117)   (210)
Recoveries   205    1    53    259 
Balance, end of period  $6,894   $3,567   $2,756   $13,217 
Ending balance:                    
Individually evaluated for impairment  $-   $-   $-   $- 
Collectively evaluated for impairment   6,894    3,567    2,756    13,217 
Total allowance for loan losses  $6,894   $3,567   $2,756   $13,217 
                     
Loans:                    
Ending balance                    
Individually evaluated for impairment  $6,778   $1,138   $476   $8,392 
Collectively evaluated for impairment   319,733    508,696    189,874    1,018,303 
Total Loans  $326,511   $509,834   $190,350   $1,026,695 

 

   Year Ended December 31, 2014 
   Commercial   Mortgage   Consumer   Total 
Allowance for loan losses:                    
Balance, beginning of year  $8,148   $3,124   $2,140   $13,412 
Provision charged (credited) to expense   (1,273)   888    1,235    850 
Losses charged off   (289)   (572)   (1,021)   (1,882)
Recoveries   499    31    258    788 
Balance, end of period  $7,085   $3,471   $2,612   $13,168 
Ending balance:                    
Individually evaluated for impairment  $-   $-   $-   $- 
Collectively evaluated for impairment   7,085    3,471    2,612    13,168 
Total allowance for loan losses  $7,085   $3,471   $2,612   $13,168 
                     
Loans:                    
Ending balance                    
Individually evaluated for impairment  $6,622   $1,138   $-   $7,760 
Collectively evaluated for impairment   312,973    515,925    185,730    1,014,628 
Total Loans  $319,595   $517,063   $185,730   $1,022,388 

 

29
 

 

   Three Months Ended March 31, 2014 
   Commercial   Mortgage   Consumer   Total 
Allowance for loan losses:                    
Balance, beginning of period  $8,148   $3,124   $2,140   $13,412 
Provision charged (credited) to expense   (265)   257    358    350 
Losses charged off   -    (80)   (367)   (447)
Recoveries   16    4    35    55 
Balance, end of period  $7,899   $3,305   $2,166   $13,370 
Ending balance:                    
Individually evaluated for impairment  $335   $-   $-   $335 
Collectively evaluated for impairment   7,564    3,305    2,166    13,035 
Total allowance for loan losses  $7,899   $3,305   $2,166   $13,370 
                     
Loans:                    
Ending balance                    
Individually evaluated for impairment  $5,686   $856   $250   $6,792 
Collectively evaluated for impairment   285,721    523,364    170,373    979,458 
Total Loans  $291,407   $524,220   $170,623   $986,250 

 

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

 

For all loan portfolio segments except consumer real estate and other consumer loans, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

 

The Company charges-off consumer real estate and other consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 180 days past due, charge-off of unsecured open-end loans when the loan is 180 days past due, and charge-down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged-off.

 

30
 

 

Information on non-performing assets, excluding performing restructured loans, is provided below:

 

   March 31, 
   2015   2014 
Non-performing assets          
Non-accrual loans  $7,403   $7,646 
Accruing loans delinquent 90 days or more and past due   97    206 
Total non-performing loans   7,500    7,852 
Other real estate owned   2,490    7,193 
Other repossessed assets   367    454 
Total non-performing assets  $10,357   $15,499 

 

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 March 31, 2015, the Company had a number of loans that were modified in troubled debt restructurings. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.

 

31
 

 

The following tables describe troubled debts restructured during the three month periods ended March 31, 2015 and 2014:

 

   Three Months Ended March 31, 2015 
   No. of Loans   Pre-Modification
Outstanding
Recorded
Balance
   Post-Modification
Outstanding
Recorded Balance
 
Real estate               
Commercial   2   $1,172   $1,170 
Commercial construction and development   1    155    134 
Consumer closed end first mortgage   3    156    154 
Commercial and industrial   1    88    83 

 

   Three Months Ended March 31, 2014 
   No. of Loans   Pre-Modification
Outstanding
Recorded
Balance
   Post-Modification
Outstanding
Recorded Balance
 
Real estate               
Consumer closed end first mortgage   3   $381   $394 

 

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

 

Newly restructured loans by type for the three months ended March 31, 2015 and 2014 are as follows:

 

   Three Months Ended March 31, 2015 
   Interest Only   Term   Combination   Total
Modification
 
Real Estate                    
Commercial  $-   $1,170   $-   $1,170 
Commercial construction and development   -    -    134    134 
Consumer closed end first mortgage   -    -    154    154 

 

   Three Months Ended March 31, 2014 
   Interest Only   Term   Combination   Total
Modification
 
Real Estate                    
Consumer closed end first mortgage  $-   $-   $394   $394 

 

32
 

 

Defaults of any loans modified as troubled debt restructurings made in the three months ended March 31, 2014 are listed in the table below. There were no defaults on loans modified as troubled debt restructurings made in the three months ended March 31, 2015. Defaults are defined as any loans that become 90 days past due.

 

   Three Months Ended March 31, 2014 
   No. of Loans   Post-Modification
Outstanding Recorded
Balance
 
Real Estate          
Consumer closed end first mortgage   2   $92 
Consumer open end and junior liens   1    23 

 

Note 8:  Change in Accounting Principle

 

The Company makes certain equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (LIHTC) pursuant to Section 42 of the Internal Revenue Code. Mutual has investments in eight Indiana limited partnerships within Indiana and contiguous states. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of additional affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity.

 

Mutual is a limited partner in each Low Income Housing Tax Credit Partnership. A separate unrelated third party is the general partner. Each limited partnership is managed by the general partner, who exercises full and exclusive control over the affairs of the limited partnership. Duties entrusted to the general partner of each limited partnership include, but are not limited to: investment in operating companies, company expenditures, investment of excess funds, borrowing funds, employment of agents, disposition of fund property, prepayment and refinancing of liabilities, votes and consents, contract authority, disbursement of funds, accounting methods, tax elections, bank accounts, insurance, litigation, cash reserve, and use of working capital reserve funds. Except for limited rights granted to consent to certain transactions, the limited partner(s) may not participate in the operation, management, or control of the limited partnership’s business, transact any business in the limited partnership’s name or have any power to sign documents for or otherwise bind the limited partnership. In addition, the general partner may only be removed by the limited partner(s) in the event the general partner fails to comply with the terms of the agreement and/or is negligent in performing its duties.

 

The Company believes the general partner of each limited partnership has the power to direct the activities which most significantly affect the performance of each partnership; therefore, Mutual has determined that it is not the primary beneficiary of any LIHTC partnership. The Company uses the proportional amortization method to account for a majority of its investments in these entities. These investments are included in accrued income and other assets.

 

During the 2015 first quarter, Mutual adopted ASU 2014-01. The amendments are required to be applied retrospectively to all periods presented. As a result of these changes, the Bank recorded a cumulative-effective adjustment to beginning retained earnings. The Company believes the application of the proportional amortization method aligns the accounting more closely with the economics of the transaction and therefore provides more transparency to the financial reporting.

 

33
 

 

The following table summarizes the balance sheet and income statement amounts impacted by the change at the dates or for the periods indicated:

 

   December 31, 
   2014 
Investment in limited partnerships     
As previously reported  $1,582 
As reported under the new guidance   527 
Deferred tax asset     
As previously reported   13,305 
As reported under the new guidance   13,575 
Retained earnings     
As previously reported   50,171 
As reported under the new guidance   49,386 

 

   Three Months Ended 
   March 31, 
   2014 
Non-interest income     
As previously reported  $2,873 
As reported under the new guidance   3,001 
Income tax expense     
As previously reported   732 
As reported under the new guidance   803 
Net income     
As previously reported   1,963 
As reported under the new guidance   2,020 
Basic Earnings Per Share     
As previously reported   0.28 
As reported under the new guidance   0.28 
Diluted Earnings Per Share     
As previously reported   0.27 
As reported under the new guidance   0.27 

 

34
 

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

 

The following should be read in conjunction with the Management’s Discussion and Analysis in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the SEC on March 13, 2015.

 

MutualFirst is a Maryland corporation and a bank holding company headquartered in Muncie, Indiana, with operations in Allen, Delaware, Elkhart, Grant, Kosciusko, Randolph, St. Joseph and Wabash counties in Indiana. It owns MutualBank, an Indiana commercial bank with 30 bank branches in Indiana, trust offices in Carmel and Crawfordsville, Indiana and a loan origination office in New Buffalo, Michigan. MutualBank’s wholly owned subsidiary, Summit Service Corp, owns Summit Mortgage, a mortgage banking company located in Ft. Wayne, Indiana. The Company is subject to examination, supervision and regulation by the FRB, and the Bank is subject to regulation, supervision and examination by the IDFI and the FDIC.

 

Our principal business consists of attracting retail and commercial deposits from the general public and businesses, including some brokered deposits, and investing those funds primarily in loans secured by consumer closed end first mortgages and consumer open end and junior liens on owner-occupied, one- to four-family residences, a variety of other consumer loans, loans secured by commercial real estate, commercial construction and development and commercial and industrial loans. Funds not invested in loans generally are invested in investment securities, including mortgage-backed, mortgage-related securities, and municipals. We also obtain funds from FHLB advances and other borrowings.

 

Our results of operations depend primarily on the level of our net interest income, which is the difference between interest income on interest-earning assets, such as loans, mortgage-backed securities and investment securities, and interest expense on interest-bearing liabilities, primarily deposits and borrowings. The structure of our interest-earning assets versus the structure of interest-bearing liabilities, along with the shape of the yield curve, has a direct impact on our net interest income. Historically, our interest-earning assets have been longer term in nature (i.e., fixed-rate mortgage loans) and interest-bearing liabilities have been shorter term (i.e., certificates of deposit, regular savings accounts, etc.). This structure would impact net interest income favorably in a decreasing rate environment, assuming a normally shaped yield curve, as the rates on interest-bearing liabilities would decrease more rapidly than rates on interest-earning assets. Conversely, in an increasing rate environment, assuming a normally shaped yield curve, net interest income would be impacted unfavorably as rates on interest-earning assets would increase at a slower rate than rates on interest-bearing liabilities.

 

First Quarter Highlights. At March 31, 2015, we had $1.4 billion in assets, $1.0 billion in loans, $1.1 billion in deposits and $130.5 million in stockholders’ equity. The Company’s total risk-based capital ratio at March 31, 2015 was 13.5%, exceeding the 10.0% requirement for a well-capitalized institution. Tangible common equity, as a percentage of tangible assets, increased to 9.0% as of March 31, 2015 compared to 8.7% and 8.1% at December 31, 2014 and March 31, 2014, respectively. For the quarter ended March 31, 2015, net income available to common shareholders was $2.5 million, or $0.34 per basic and $0.33 per diluted share, compared with net income available to common shareholders of $2.0 million, or $0.28 per basic and $0.27 per diluted share for the quarter ended March 31, 2014.

 

Financial highlights for the first quarter ended March 31, 2015 included:

 

·Increased the common stock dividend by 20%.
·Strong loan growth in strategic areas. Non-real estate consumer loans grew at an annualized rate of 21.0% and commercial loans grew at an annualized rate of 8.7%.

 

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·Net recoveries totaled $49,000 for the first quarter of 2015; compared to net charge offs of $392,000, or 0.16% of loans on an annualized basis, for the first quarter of 2014.
·Core deposits continued to increase. Core transactional deposit accounts increased $18.1 million to 64.1% of total deposits.
·Net interest income increased $99,000 compared to the first quarter of 2014.
·Non-interest income for the quarter ended March 31, 2015 increased $1.0 million compared to the first quarter of 2014 primarily due to an increase in gains on sale of loans.

 

The Management’s Discussion and Analysis in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, contains a summary of our management’s new strategic plan for 2015-2019. The financial highlights of our strategic progress during the quarter include: increasing commercial and non-real estate consumer lending by $12.9 million since year-end 2014; core deposits increased to 64.1%, from 62.8% at year-end 2014, and non-interest income increased $1.0 million compared to the same period in 2014.

 

Critical Accounting Policies

 

Note 1 to the Consolidated Financial Statements in Item 8 of the Form 10-K for the year ended December 31, 2014 contains a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include determining the allowance for loan losses, the valuation of foreclosed assets, mortgage servicing rights, valuation of intangible assets and securities, deferred tax asset and income tax accounting.

 

The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. A worsening or protracted economic decline would increase the likelihood of additional losses due to credit and market risk and could create the need for additional loss reserves.

 

Allowance for Loan Losses. The allowance for loan losses is a significant estimate that can and does change based on management’s assumptions about specific borrowers and current general economic and business conditions, among other factors. Management reviews the adequacy of the allowance for loan losses on at least a quarterly basis. The evaluation by management includes consideration of past loss experience, changes in the composition of the loan portfolio, the current condition and amount of loans outstanding, identified problem loans and the probability of collecting all amounts due.

 

Foreclosed Assets. Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. Management estimates the fair value of the properties based on current appraisal information. Fair value estimates are particularly susceptible to significant changes in the economic environment, market conditions, and real estate market. A worsening or protracted economic decline would increase the likelihood of a decline in property values and could create the need to write down the properties through current operations.

 

Mortgage Servicing Rights. Mortgage servicing rights (“MSRs”) associated with loans originated and sold, where servicing is retained, are capitalized and included in other assets in the consolidated balance sheet. The value of the capitalized servicing rights represents the fair value of the right to service loans in the portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as a reduction in loan servicing fee income.

 

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Goodwill and Intangible Assets. MutualFirst periodically assesses the impairment of its goodwill and the recoverability of its core deposit intangible. Impairment is the condition that exists when the carrying amount exceeds its implied fair value. If actual external conditions and future operating results differ from MutualFirst’s judgments, impairment and/or increased amortization charges may be necessary to reduce the carrying value of these assets to the appropriate value.

 

Securities. Under FASB Codification Topic 320 (ASC 320), Investments-Debt and Equity Securities, investment securities must be classified as held-to-maturity, available-for-sale or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held-to-maturity and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity. Securities not classified as held-to-maturity are classified as available-for-sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and do not affect earnings until realized.

 

The fair values of the Company’s securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of the Company’s fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities.

 

The Company evaluates all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if an other-than-temporary impairment (“OTTI”) exists pursuant to guidelines established in ASC 320. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the ability and intent of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

 

If management determines that an investment experienced an OTTI, management must then determine the amount of the OTTI to be recognized in earnings. If management does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment. If management intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. Any subsequent recoveries related to the value of these securities are recorded as an unrealized gain (as other comprehensive income (loss) in stockholders’ equity) and not recognized in income until the security is ultimately sold.

 

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The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time.

 

Deferred Tax Asset. The Company has evaluated its deferred tax asset to determine if it is more likely than not that the asset will be utilized in the future. The Company’s most recent evaluation has determined that, except for the amounts represented by the valuation allowance as in Note 15 to the Consolidated Financial Statements in Item 8 of the for 10-K for the year ended December 31, 2014, the Company will more likely than not be able to utilize the remaining deferred tax asset. As of year-end 2014, the Company has generated average positive pre-tax pre-provision earnings of $15.5 million, or 1.1% of pre-tax pre-provision ROA over the previous five years. This level of earnings would be sufficient to utilize portions of the operating losses, tax credit carryforwards and temporary tax differences over the allowable periods. The analysis as of March 31, 2015, supports no additional valuation reserve is needed.

 

The valuation allowances established are the result of net operating losses for state franchise tax purposes totaling $33.6 million and capital losses realized on the sale of investment securities as well as the recognition of other than temporary impairment on investment securities where the loss, while recognized for financial statement purposes, has not yet been realized.

 

At the end of 2014, the Company had $144,000 in capital losses, a decrease from $548,000 in capital losses in 2013 as capital gains from the sale of available for sale securities were generated. The Company has avoided and will continue to avoid taking any book tax benefit on future capital losses without capital gains to offset the current capital losses. See Note 15 to the Consolidated Financial Statements in Item 8 of the Form 10-K for the year ended December 31, 2014.

 

Income Tax Accounting. We file a consolidated federal income tax return. The provision for income taxes is based upon income in our consolidated financial statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.

 

Forward-Looking Statements

 

This Form 10-Q contains and our future filings with the SEC, Company press releases, other public pronouncements, stockholder communications and oral statements made by or with the approval of an authorized executive officer, will contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements include, but are not limited to: (i) statements of our goals, intentions and expectations; (ii) statements regarding our business plans, prospects, growth and operating strategies; (iii) statements regarding the asset quality of our loan and investment portfolios; and (iv) estimates of our risks and future costs and benefits. These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. The Company does not undertake and specifically declines any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of unanticipated events.

 

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The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements: (i) the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets; (ii) changes in general economic conditions, either nationally or in our market areas; (iii) changes in the levels of general interest rates and the relative differences between short- and long-term interest rates, deposit interest rates, our net interest margin and funding sources; (v) fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas; (vi) decreases in the secondary market for the sale of loans that we originate; (vii) results of examinations of us by the IDFI, FDIC, FRB or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our reserve for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings; (viii) legislative or regulatory changes that adversely affect our business including the effect of Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act”), changes in regulatory policies and principles, or the interpretation of regulatory capital or other rules, including changes that increase our capital requirements; (ix) our ability to attract and retain deposits; (x) increases in premiums for deposit insurance; (xi) management’s assumptions in determining the adequacy of the allowance for loan losses; (xii) our ability to control operating costs and expenses; (xiii) the use of estimates in determining fair value of certain of our assets, which estimates may prove to be incorrect and result in significant declines in valuation; (xiv) difficulties in reducing risks associated with the loans on our balance sheet; (xv) staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges; (xvi) a failure or security breach in the computer systems on which we depend; (xvii) our ability to retain key members of our senior management team; (xviii) costs and effects of litigation, including settlements and judgments; (xix) our ability to successfully integrate any assets, liabilities, customers, systems, and management personnel we may in the future acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames and any goodwill charges related thereto; (xx) increased competitive pressures among financial services companies; (xxi) changes in consumer spending, borrowing and savings habits; (xxii) the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions; (xxiii) adverse changes in the securities markets; (xxiv) inability of key third-party providers to perform their obligations to us; (xv) changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board; and (xvi) other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this report.

 

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The Company wishes to advise readers that these factors could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. 

 

Financial Condition

 

General. Total assets at March 31, 2015 were $1.4 billion, reflecting a $6.7 million increase since December 31, 2014, primarily as a result of a $6.9 million increase in net loans and a $6.7 million increase in available-for-sale securities. Average interest-earning assets increased $16.3 million, or 1.3%, to $1.3 billion for the three months ended March 31, 2015 compared to the year-end December 31, 2014, reflecting an increase in the loan portfolio. Average interest-bearing liabilities decreased by $2.2 million, or .2% to $1.12 billion for the three months ended March 31, 2015 reflecting a decrease in term deposits. Average stockholders’ equity increased by $9.3 million or 7.8% for the three months ended March 31, 2015.

 

Loans. Our gross loan portfolio, excluding loans held for sale, increased $4.3 million at March 31, 2015 to $1.0 billion. The following table reflects the changes in the gross amount of loans, excluding loans held for sale, by type during the three month period:

 

   At         
   March 31,   December 31,   Amount   Percent 
   2015   2014   Change   Change 
   (Dollars in thousands) 
Real estate                    
Commercial  $202,282   $198,019   $4,263    2.15%
Commercial construction and development   36,119    33,102    3,017    9.11 
Consumer closed end first mortgage   509,834    517,063    (7,229)   (1.40)
Consumer open end and junior liens   69,671    71,073    (1,402)   (1.97)
Total real estate loans   817,906    819,257    (1,351)   (0.16)
                     
Consumer loans                    
Auto   14,879    14,712    167    1.12 
Boat/RV   100,879    94,761    6,118    6.46 
Other   4,921    5,184    (263)   (5.07)
Total consumer other   120,679    114,657    6,022    5.25 
Commercial and industrial   88,110    88,474    (364)   (0.41)
Total other loans   208,789    203,131    5,658    2.79 
                     
Total Loans  $1,026,695   $1,022,388   $4,307    0.42%

 

The Bank’s strategy to increase commercial and consumer loans remains a primary focus as we continued to see growth in these areas during the first three months of 2015 as commercial and non-real estate consumer loans grew by $12.9 million. We continue to seek opportunities to provide sound commercial borrowers opportunities for new loans to meet their growing demands, refinance loans currently served by other financial institutions and build relationships with commercial clients in our footprint. The increase in the commercial and other consumer portfolios was partially offset by an $8.6 million decrease in the consumer real estate portfolios during the period. Lower rates have allowed consumers to refinance their mortgage loans; however recently we have seen a significant decrease in those activities. The Bank continues to sell longer term fixed-rate mortgage loans to reduce related interest rate risk.

 

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Delinquencies and Non-performing Assets. As of March 31, 2015, our total loans delinquent 30-to-89 days were $7.2 million or 0.7% of total loans, compared to $15.0 million or 1.5% of total loans at the end of 2014.

 

At March 31, 2015, our non-performing assets totaled $10.4 million or 0.72% of total assets, compared to $10.7 million or 0.75% of total assets at December 31, 2014. This $386,000, or 3.6% decrease was primarily due to a reduction in foreclosed assets. The table below sets forth the amounts and categories of non-performing assets at the dates indicated.

 

   At         
   March 31,   December 31,   Amount   Percent 
   2015   2014   Change   Change 
   (Dollars in thousands) 
Non-accruing loans  $7,403   $7,212   $191    2.65%
Accruing loans delinquent 90 days   97    226    (129)   (57.08)
Foreclosed assets   2,857    3,305    (448)   (13.56)
Total  $10,357   $10,743   $(386)   (3.59)%

 

Our non-performing assets continued to decrease in the first quarter of 2015 as local economic conditions strengthened. The Bank continues to diligently monitor and write down loans that appear to have irreversible weakness. The Bank works to ensure possible problem loans have been identified and steps have been taken to reduce loss by restructuring loans to improve cash flow or by increasing collateral. In addition to the decrease in non-performing assets, the Company has seen improvement during the quarter in total classified assets. Total classified assets decreased by 7.0% from $26.5 million at December 31, 2014 to $24.6 million at March 31, 2015.

 

At March 31, 2015, foreclosed commercial real estate totaled $1.1 million and consisted of two commercial properties in our existing lending footprint. The Bank has seen a decrease in this area as overall real estate owned sales volumes are up. At March 31, 2015, the Bank had 26 residential properties with a book value of $1.4 million. Two properties, one commercial construction and development and the other residential real estate, account for $1.3 million of the total REO balance. As of March 31, 2015, the Bank also held $367,000 in other repossessed assets, such as autos, boats, RVs and horse trailers.

 

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Allowance for Loan Losses. Allowance for loan losses decreased $153,000 to $13.2 million at March 31, 2015 as reflected below:

 

   At and For the Three Months Ended 
   March 31, 
   2015   2014 
   (Dollars in thousands) 
Balance at beginning of period  $13,168   $13,412 
Charge-offs   210    447 
Recoveries   259    55 
Net charge-offs (recoveries)   (49)   392 
Provisions charged to operations   -    350 
Balance at end of period  $13,217   $13,370 
           
Ratio of net charge-offs (recoveries) during the period to average loans outstanding during the period   (0.02)%   0.16%
           
Allowance as a percentage of non-performing loans   176.25%   170.28%
Allowance as a percentage of total loans (end of period)   1.29%   1.37%

 

The allowance for loan losses increased by $49,000 to $13.2 million as of March 31, 2015 as compared to December 31, 2014. The allowance for loan losses to non-performing loans as of March 31, 2015 was 176.3% compared to 177.0% as of December 31, 2014. The allowance for loan losses to total loans as of March 31, 2015 was 1.29%, compared to 1.30% as of December 31, 2014.

 

Deposits. Deposits increased by $6.8 million in the first quarter of 2015. This increase was primarily due to increases in core accounts of $18.1 million, partially offset by a decline in certificates of deposit of $11.3 million. Core deposits increased to 64% of the Bank’s total deposits as of March 31, 2015 compared to 63% as of December 31, 2014 and 60% as of March 31, 2014.

 

   At 
   March 31, 2015   December 31, 2014 
   Amount   Weighted
Average
Rate
   Amount   Weighted
Average
Rate
 
   (Dollars in thousands) 
Type of Account:                    
Non-interest Checking  $163,435    0.00%  $154,178    0.00%
Interest-bearing NOW   254,142    0.22    253,042    0.23 
Savings   129,951    0.01    124,051    0.01 
Money Market   148,663    0.22    146,847    0.23 
Certificates of Deposit   389,934    1.15    401,202    1.17 
Total  $1,086,125    0.50%  $1,079,320    0.52%

 

Borrowings. Total borrowings decreased to $197.5 million at March 31, 2015, down $5.1 million, or 2.5%, since year-end 2014 primarily due to a $4.9 million decrease in FHLB advances. Other borrowings, consisting of a bank loan and subordinated debenture, decreased $179,000 to $10.0 million at March 31, 2015 due to regular loan payments.

 

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The Company has a $1.0 million revolving line of credit expiring in December 2017. At March 31, 2015, there were no amounts borrowed against this line. The line is collateralized by the Bank’s stock. The rate on this line of credit is the three month LIBOR plus 2.75%.

 

In 2013, the Company borrowed $7.6 million from First Tennessee Bank, N.A. to refinance existing long-term debt. The loan was originated at a variable rate of LIBOR plus 2.80%; however the Company entered into an interest rate swap that fixed the rate of the note at 3.915% for the term of the note. The balance of the loan at March 31, 2015 was $5.9 million and it matures in December 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 $4.1 million at March 31, 2015 due to the purchase accounting adjustment in the acquisition. These securities mature 30 years from the date of issuance, or September 15, 2035. The securities bore a fixed rate of interest of 6.22% through July 2010 and thereafter were to reset quarterly at the prevailing three-month LIBOR rate plus 170 basis points. In December 2009, the Company entered into a cash flow hedge with FTN Financial to fix the floating portion of the issued trust preferred security at 5.15% for the next five years starting on September 15, 2010. The Company has had the right to redeem the trust preferred securities, in whole or in part, without penalty, since establishing the cash flow hedge.

 

Stockholders’ Equity. Stockholders’ equity was $130.5 million at March 31, 2015, an increase of $3.7 million from December 31, 2014. The increase was a result of net income of $2.5 million, an increase of $1.3 million due to exercising of stock options and an increase in unrealized gains on the investment portfolio of $526,000. These increases were partially offset by dividend payments of $885,000 to common shareholders. The Company’s tangible book value per share as of March 31, 2015 increased to $17.33 compared to $17.03 as of December 31, 2014 and the tangible common equity ratio was 8.95% as of March 31, 2015 compared to 8.68% as of December 31, 2014. The Company’s and the Bank’s risk-based capital ratios were well in excess of “well-capitalized” levels as defined by all regulatory standards as of March 31, 2015.

 

Comparison of Results of Operations for the Three Months Ended March 31, 2015 and 2014.

 

General. Net income available to common shareholders for the three months ended March 31, 2015 was $2.5 million, or $0.34 basic and $0.33 diluted earnings per common share compared to net income available to common shareholders of $2.0 million, or $0.28 basic and $0.27 diluted earnings per common share for the three months ended March 31, 2014. Annualized return on assets was 0.70% and return on average tangible common equity was 7.91% for the first quarter of 2015 compared to 0.58% and 7.18% respectively, for the same period of last year. 

 

Interest Income. Total interest income decreased $55,000, or 0.4%, to $12.68 million during the three months ended March 31, 2015 from $12.74 million during the same period in 2014, reflecting a 13 basis point decrease in the average yield on interest-earning assets during the quarter ended March 31, 2015. This decrease was primarily due to the decrease in rates in our loan portfolio in combination with a decrease in dividends on FHLB stock due to a one-time supplemental dividend paid in the first quarter 2014 that was not repeated.

 

Interest Expense. Interest expense decreased $154,000, or 6.6%, to $2.2 million during the three months ended March 31, 2015 compared to $2.3 million during the three months ended March 31, 2014. The primary reason for this decrease was a decline of six basis points in the average rate paid on interest-bearing liabilities from 0.83% as of March 31, 2014 to 0.77% at March 31, 2015, which was primarily due to continued re-pricing of deposit accounts and a changing mix of the deposits to a larger amount of transaction accounts as a percentage of interest-bearing liabilities.

 

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Net Interest Income. Net interest income before the provision for loan losses increased $99,000 for the quarter ended March 31, 2015 compared to the same period in 2014. The increase was a result of an increase in earning assets of $35.5 million partially offset by a decline in the net interest margin from 3.26% in the first quarter of 2014 to 3.20% in the first quarter of 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. There was no provision for loan losses in the first quarter of 2015 compared to $350,000 during last year’s comparable period. The decrease was due to management’s ongoing evaluation of the adequacy of the allowance for loan losses and was impacted by net recoveries of $49,000 in the first quarter of 2015 compared to net charge offs of $392,000 in the first quarter of 2014. Non-performing loans to total loans at March 31, 2015 were 0.73% compared to 0.80% as of March 31, 2014. Non-performing assets to total assets were 0.72% at March 31, 2015 compared to 1.12% at March 31, 2014.

 

Non-Interest Income. Non-interest income increased by $1.0 million to $4.0 million in the first quarter of 2015 compared to $3.0 million in the first quarter of 2014.

 

   Three Months Ended   Amount   Percent 
   3/31/2015   3/31/2014   Change   Change 
   (Dollars in thousands) 
Non-Interest Income:                    
Service fee income  $1,358   $1,341   $17    1.27%
Net realized gain on sale of available-for-sale securities   240    150    90    60.00 
Commissions   1,121    1,082    39    3.60 
Net gains on sales of loans   906    104    802    771.15 
Net servicing fees   68    (24)   92    (383.33)
Increase in cash value of life insurance   288    267    21    7.87 
Gain (loss) on sale of other real estate and repossessed assets   (82)   (62)   (20)   32.26 
Other income   118    143    (25)   (17.48)
Total  $4,017   $3,001   $1,016    33.86%

 

Non-interest income increased as gains on sales of loans improved primarily due to an increase in sold loans in the first quarter of 2015 due to the acquisition of Summit Mortgage, Inc. in August 2014. Gain on sale of investments increased in the first quarter of 2015 compared to the first quarter of 2014 by $90,000. Commission income also increased by $39,000 when comparing the first quarter of 2015 to the first quarter of 2014. Commission income comes from trust, wealth management, and brokerage business lines. Service fee income on deposit accounts increased primarily due to an increasing level of checking accounts and increasing interchange income, primarily offset by declining overdraft fee revenue.

 

44
 

 

Non-Interest Expense. Non-interest expenses increased $771,000 to $11.0 million for the first quarter 2015. 

 

   Three Months Ended   Amount   Percent 
   3/31/2015   3/31/2014   Change   Change 
   (Dollars in thousands) 
Non-Interest Expense:                    
Salaries and employee benefits  $6,530   $5,873   $657    11.19%
Net occupancy expenses   603    670    (67)   (10.00)
Equipment expenses   453    458    (5)   (1.09)
Data processing fees   444    406    38    9.36 
Advertising and promotion   333    301    32    10.63 
ATM expense   335    290    45    15.52 
Deposit insurance   232    270    (38)   (14.07)
Professional fees   530    438    92    21.00 
Software subscriptions and maintenance   427    416    11    2.64 
Other real estate and repossessed assets   127    135    (8)   (5.93)
Other expenses   1,004    990    14    1.41 
Total  $11,018   $10,247   $771    7.52%

  

The increase in non-interest expense compared to the first quarter of 2014 was a result of an increase in salaries and benefits primarily as a result of the acquisition of Summit Mortgage in the third quarter of 2014. Summit Mortgage, acquired in August 2014, accounted for $516,000 of the total increased non-interest expenses. The increase in professional fees was primarily a result of a threatened proxy contest costing the Company $153,000 in expenses.

 

Income Tax Expense. Income tax expense for the first quarter 2015 increased by $233,000 compared to the same period in 2014. The Company’s effective tax rate increased to 29.5% for the three months ended March 31, 2015 compared to 28.4% for the three months ended March 31, 2014 due to an increase in non-taxable income in combination with a decrease in low income housing credits as a percentage of net income.

 

Liquidity

 

We are required to have enough cash and investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound operation. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, we have maintained liquid assets above levels believed to be adequate to meet the requirements of normal operations, including potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is maintained. Since 2011, we have maintained higher levels of liquidity as we grew our deposits and marketable equity securities and received paydowns within our loan portfolio.

 

Liquidity management involves the matching of cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs and the ability of the Company to manage those requirements. The Company strives to maintain an adequate liquidity position by managing the balances and maturities of interest-earning assets and interest-bearing liabilities so that the balance it has in short-term investments at any given time will cover adequately any reasonably anticipated, immediate need for funds. Additionally, the Bank maintains relationships with correspondent banks, which could provide funds on short-term notice if needed. Our liquidity, represented by cash and cash-equivalents and investment securities, is a product of our operating, investing and financing activities.

 

45
 

 

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 March 31, 2015, our ratio was 26.4%. The Company is currently in excess of the minimum liquidity ratio set by the Board due to a larger than historical investment portfolio. Management continues to seek to utilize liquidity off of the investment portfolio to fund loan growth over the next few years as demand for loans increases. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer term basis, we maintain a strategy of investing in various lending products and investment securities, including mortgage-backed securities. The Bank uses its sources of funds primarily to meet its ongoing commitments, pay maturing deposits, fund deposit withdrawals and fund loan commitments.

 

We 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 March 31, 2015, on a consolidated basis, the Company had $286.2 million in cash and investment securities available for sale and $10.8 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 March 31, 2015, the Bank had the ability to borrow an additional $108.8 million in FHLB advances. In addition, we have historically sold 15- and 30-year long-term, fixed-rate mortgage loans in the secondary market in order to reduce interest rate risk and to create another source of liquidity. The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its own operating expenses (many of which are paid to the Bank), the Company is responsible for paying amounts owed on its trust preferred securities, any dividends declared to its common stockholders, and interest and principal on outstanding debt. The Company’s primary source of funds is Bank dividends, the payment of which is subject to regulatory limits. At March 31, 2015, the Company, on an unconsolidated basis, had $2.8 million in cash, interest-bearing deposits and liquid investments generally available for its cash needs.

 

Our liquidity, represented by cash and cash equivalents and investment securities, is a product of our operating, investing and financing activities. Our primary sources of funds are deposits, amortization, prepayments and maturities of outstanding loans and mortgage-backed securities, maturities of investment securities and other short-term investments and funds provided from operations. While scheduled payments from the amortization of loans and mortgage-backed securities and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. In addition, we invest excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements. We also generate cash through borrowings. We utilize FHLB advances to leverage our capital base and provide funds for our lending and investment activities, and to enhance our interest rate risk management.

 

We use our sources of funds primarily to meet ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. At March 31, 2015, the approved outstanding loan commitments, including unused lines of credit, amounted to $253.1 million. Certificates of deposit scheduled to mature in one year or less at March 31, 2015, totaled $167.0 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.

 

46
 

 

Off-Balance Sheet Activities

 

In the normal course of operations, the Bank engages in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. We also have off-balance sheet obligations to repay borrowings and deposits. For the quarter ended March 31, 2015, we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows. At March 31, 2015, the Bank had $100.8 million in commitments to make loans, $6.8 million in undisbursed portions of closed loans, $143.0 million in unused lines of credit and $2.5 million in standby letters of credit. In addition, on a consolidated basis, at March 31, 2015, the Company had $197.5 million in outstanding non-deposit borrowings, of which $27.7 million is due in the next twelve months.

 

Capital Resources

 

The Bank is subject to minimum capital requirements imposed by the FDIC. See ‘Item 1 - Business- How We Are Regulated - Regulatory Capital Requirements.” The FDIC may require the Bank to have additional capital above the specific regulatory levels if it believes the Bank is subject to increased risk due to asset problems, high interest rate risk and other risks. The Company is subject to minimum capital requirements imposed by the FRB, which are substantially similar to those imposed on the Bank, including guidelines for bank holding companies to be considered well-capitalized. The FDIC and FRB have issued revisions to these capital requirements, which would increase the levels required, particularly if the Bank and the Company want to continue paying dividends or executive bonuses. These new rules started being phased in January.

 

At March 31, 2015, the Bank’s regulatory capital exceeded the FDIC regulatory requirements, and the Bank was well-capitalized under regulatory prompt corrective action standards. In addition, at March 31, 2015, the Company’s capital levels exceeded the FRB’s requirements, and the Company was considered well-capitalized under FRB guidelines. Consistent with our goals to operate a sound and profitable organization, our policy is for the Bank to maintain well-capitalized status.

 

47
 

 

Our capital ratios at March 31, 2015 are reflected below:

 

   Actual Capital
Levels
   Minimum Regulatory
Capital Levels
   Minimum Required To
be Considered Well-
Capitalized
 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
Leverage Capital Level(1):                              
MutualFirst Consolidated  $123,137    8.7%  $56,535    4.0%  $N/A    N/A%
MutualBank   125,384    8.9    56,400    4.0    70,500    5.0 
Common Equity Tier 1 CapitalLevel (2) :                              
MutualFirst Consolidated  $122,910    12.2%  $43,500    4.5%  $65,434    6.5%
MutualBank   125,384    12.5    45,287    4.5    65,414    6.5 
Tier 1 Risk-Based Capital Level (3) :                              
MutualFirst Consolidated  $123,137    12.2%  $60,400    6.0%  $80,534    8.0%
MutualBank   125,384    12.5    60,382    6.0    80,509    8.0 
Total Risk-Based Capital Level (4) :                              
MutualFirst Consolidated  $135,728    13.5%  $80,534    8.0%  $100,667    10.0%
MutualBank   137,971    13.7    80,509    8.0    100,637    10.0 

 

(1) Tier 1 Capital to Assets for Leverage Ratio of $1.4 billion for the Bank and Company at March 31, 2015.

(2) Common Equity Tier 1 Capital to Risk-Weighted Assets of $1.0 billion for the Bank and Company at March 31, 2015.

(3) Tier 1 Capital to Risk-Weighted Assets.

(4) Total Capital to Risk-Weighted Assets.

 

Impact of Inflation

 

The effects of price changes and inflation can vary substantially for most financial institutions. While management believes that inflation affects the economic value of total assets, it believes that it is difficult to assess the overall impact. Management believes this to be the case due to the fact that generally neither the timing nor the magnitude of the inflationary changes in the consumer price index (“CPI”) coincides with changes in interest rates. For example, the price of one or more of the components of the CPI may fluctuate considerably and thereby influence the overall CPI without having a corresponding effect on interest rates or upon the cost of those goods and services normally purchased by us. In years of high inflation and high interest rates, intermediate and long-term interest rates tend to increase, thereby adversely impacting the market values of investment securities, mortgage loans and other long-term fixed rate loans. In addition, higher short-term interest rates caused by inflation tend to increase the cost of funds. In other years, the opposite may occur.

 

Item 3 Quantitative and Qualitative Disclosures About Market Risk

 

Information about the Company’s asset and liability management and market and interest-rate risks is included in Item 7A of the Form 10-K for the year ended December 31, 2014, filed with the SEC on March 13, 2015.

 

48
 

 

 

Asset and Liability Management and Market Risk

 

Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally is established contractually for a period of time. Market interest rates change over time. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is one of our most significant market risks.

 

Management continues to evaluate options to mitigate interest rate risk in an increasing interest rate environment during this cycle of extremely low interest rates. This includes shortening assets and lengthening liabilities when possible.

 

How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest rates, we monitor our interest rate risk. In monitoring interest rate risk, we continually analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities and their sensitivity to actual or potential changes in market interest rates. In order to minimize the potential for adverse effects of material and prolonged changes in interest rates on our results of operations, the Bank’s board of directors establishes asset and liability management policies to better match the maturities and repricing terms of our interest-earning assets and interest-bearing liabilities.

 

These asset and liability policies are implemented by the Asset and Liability Management Committee, which is chaired by the Chief Financial Officer and is comprised of members of our senior management team. The purpose of the Asset and Liability Management Committee is to communicate, coordinate and control asset/liability management issues consistent with our business plan and board-approved policies. The committee establishes and monitors the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objective of these actions is to manage assets and funding sources consistent with liquidity, capital adequacy, growth, risk and profitability goals. The Asset and Liability Management Committee generally meets monthly to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to a net present value of portfolio equity analysis and income simulations. At each meeting, the Asset and Liability Management Committee recommends appropriate strategy changes based on this review. The Chief Financial Officer is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the Board of Directors, at least quarterly.

 

In order to manage our assets and liabilities and achieve the desired liquidity, credit quality, interest rate risk, profitability and capital targets, we have sought to:

 

·originate and purchase adjustable rate mortgage loans and commercial business loans;

 

·originate shorter-duration consumer loans,

 

·manage our deposits to establish stable deposit relationships,

 

·acquire longer-term borrowings at fixed rates, when appropriate, to offset the negative impact of longer-term fixed rate loans in our loan portfolio, and

 

·limit the percentage of long-term fixed-rate loans in our portfolio.

 

Depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Asset and Liability Management Committee may increase our interest rate risk position somewhat in order to maintain our net interest margin and improve earnings. We will continue to increase our emphasis on the origination of relatively short-term and/or adjustable rate loans. In addition, in an effort to avoid an increase in the percentage of long-term, fixed-rate loans in our portfolio, during the first three months of 2015 we sold in the secondary market $26.2 million of primarily fixed rate, one- to four-family mortgage loans with a term to maturity of 15 years or greater.

 

49
 

  

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 income and capital assuming an immediate parallel rate shock in a range from down 100 basis points to up 400 basis points as of March 31, 2015.

 

   Percentage Change in 
   Net Interest Income   Capital 
Rate Shock:        
Up 400 basis points   (8.2)%   11.4%
Up 300 basis points   (5.3)%   9.8%
Up 200 basis points   (2.7)%   8.5%
Up 100 basis points   (0.6)%   5.7%
Down 100 basis points   (4.7)%   (17.4)%

 

The following chart indicates the Company’s percentage change in net interest income and capital assuming rate movements that are not instantaneous, but change over a period of time, and a majority of core deposits changing at a percentage of the rate shock instead of the full amount of the rate shock.

 

   Percentage Change in 
   Net Interest Income   Capital 
Rate Shock:          
Up 400 basis points   (3.6)%   14.1%
Up 300 basis points   (3.4)%   11.2%
Up 200 basis points   (2.7)%   9.1%
Up 100 basis points   (1.4)%   5.8%
Down 100 basis points   (5.6)%   (17.4)%

 

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. 

 

50
 

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain a system of disclosure controls and (as defined in sec Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) that is designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported accurately and within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate. An evaluation of the Company’s disclosure controls and procedures as of March 31, 2015, was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management preceding the filing date of this annual report. Our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2015, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including our Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

The Company does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within MutualFirst have been detected. These inherent limitations include the realities that judgment in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.

 

51
 

 

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 March 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 

PART II.OTHER INFORMATION

  

Item 1.Legal Proceedings

 

None.

 

Item 1A.Risk Factors

 

There are no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

None. 

 

Item 3.Defaults Upon Senior Securities.

 

None.

 

Item 4.Mine Safety Disclosures.

 

Not applicable.

 

Item 5.Other Information.

 

None.

 

52
 

 

 Item 6. Exhibits.

 

Regulation

S-K

Exhibit

Number

  Document  

Reference

to Prior

Filing or

Exhibit

Number

Attached

Hereto

3.1   Articles of Incorporation   b
3.1a   Articles Supplementary to Charter   p
3.2   Articles Supplementary for the Series A Preferred Stock   c
3.3   Articles Supplementary for the SBLF Preferred Stock   a
3.4   Amended Bylaws   k
3.4a   Amended and Restated Bylaws   q
3.5   Articles Supplementary to the Company’s Charter re: term of appointed directors   l
4.1   Form of Common Stock Certificate   b
4.2   Form of Certificate for the Series A Preferred Stock   c
4.3   Form of Certificate for the SBLF Preferred Stock   a
9   Voting Trust Agreement   None
10.1   Employment Agreement with David W. Heeter   e
10.2   Employment Agreement with Patrick C. Botts   e
10.3   Form of Supplemental Retirement Plan Income Agreements for Patrick C. Botts and David W. Heeter   f
10.4   Named Executive Officer Salaries and Bonus Arrangements for 2013   n
10.5   Form of Director Shareholder Benefit Program Agreement, as amended, for Jerry D. McVicker   g
10.6   Form of Agreements for Executive Deferred Compensation Plan for Patrick C. Botts and David W. Heeter   f
10.7   Registrant’s 2001 Stock Option and Incentive Plan   h
10.8   Registrant’s 2001 Recognition and Retention Plan   h
10.9   Director Fee Arrangements for 2013   10.9
10.10   Director Deferred Compensation Plan   i
10.11   MutualFirst Financial, Inc. 2008 Stock Option and Incentive Plan   d
10.12   MFB Corp. 2002 Stock Option Plan   d
10.13   MFB Corp. 1997 Stock Option Plan   d
10.14   Employment Agreement with Charles J. Viater   e
10.15   Salary Continuation Agreement with Charles J. Viater   d
10.16   Loan Agreement with First Tennessee Bank National Association dated December 21, 2009.   m
10.17   Form of Incentive Stock Option Agreement for 2008 Stock Option and Incentive Plan   j
10.18   Form of Non-Qualified Stock Option Agreement for 2008 Stock Option and Incentive Plan   j

 

 

53
 

  

10.19   Small Business Lending Fund - Securities Purchase Agreement, dated August 25, 2011, between MutualFirst  Financial, Inc. and the Secretary of the Treasury, with respect to the issuance and sale of the SBLF Preferred Stock   a
10.20   Repurchase Agreement dated August 25, 2011, between MutualFirst Financial, Inc. and the United States Department of the Treasury, with respect to the repurchase and redemption of the TARP Preferred Stock   a
10.21   Employment Agreement with Christopher D. Cook.   e
10.22   Agreement with Richard J. Lashley and PL Capital Group   q
11   Statement re computation of per share earnings   None
12   Statements re computation of ratios   None
14   Code of Ethics   o
16   Letter re change in certifying accountant   None
18   Letter re change in accounting principles   None
21   Subsidiaries of the registrant   21
22   Published report regarding matters submitted to vote of security holders   None
23   Consents of experts and counsel   23
24   Power of Attorney   None
31.1   Rule 13(a)-14(a) Certification (Chief Executive Officer)   31.1
31.2   Rule 13(a)-14(a) Certification (Chief Financial Officer)   31.2
32   Section 1350 Certification   32
101   Financial Statements from the Company’s Form 10-K for the year ended December 31, 2014, formatted in Extensive Business Reporting Language (XBRL); (i) Consolidated Condensed Balance Sheets as of December 31, 2014 and 2013; (ii) Consolidated Condensed Statements of Income for the Years Ended December 31, 2014, 2013 and 2012; (iii) Consolidated Condensed Statements of Comprehensive Income for the Years Ended December 31, 2014, 2013 and 2012; (iv) Consolidated Condensed Statement of Stockholders’ Equity for the Years Ended December 31, 2014, 2013 and 2012 (v) Consolidated Condensed Statements of Cash Flows for the Years Ended December 31, 2014, 2013 and 2012; and (vi) Notes to Consolidated Financial Statements, December 31, 2014, 2013 and 2012, as follows:    
    101.INS XBRL Instance Document   101.INS
    101.SCH XBRL Taxonomy Extension Schema Document   101.SCH
    101.CAL XBRL Taxonomy Extension Calculation Linkbase Document   101.CAL
    101.DEF XBRL Taxonomy Extension Definition Linkbase Document   101.DEF
    101.LAB XBRL Taxonomy Extension Labels Linkbase Document   101.LAB
    101.PRE XBRL Taxonomy Extension Presentation Linkbase Document   101.PRE

   
a Filed as an exhibit to the Company’s Form 8-K filed on August 26, 2011 and incorporated herein by reference.
b Filed as an exhibit to the Company’s Form S-1 registration statement filed on September 16, 1999 and incorporated herein by reference.
c Filed as an exhibit to the Company’s Form 8-K filed on December 23, 2008 and incorporated herein by reference.

 

54
 

  

d Filed as an Exhibit to the Company’s Annual Report on Form 10-K filed on March 23, 2009 and incorporated herein by reference.
e Filed as an exhibit to the Company’s Form 10-Q filed on November 14, 2012 and incorporated herein by reference.
f Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on March 30, 2001 and incorporated herein by reference.
g Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on April 2, 2002 and incorporated herein by reference.
h Filed as an Appendix to the Company’s Form S-4/A Registration Statement filed on October 19, 2001 and incorporated herein by reference.
i Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on March 16, 2007 and incorporated herein by reference.
j Filed as an exhibit to the Company’s Form 10-K filed on March 23, 2010 and incorporated herein by reference.
k Filed as an exhibit to the Company’s Form 8-K filed on October 15, 2007 and incorporated herein by reference.
l Filed as an exhibit to the Company’s Form 8-K filed on July 15, 2008 and incorporated herein by reference.
m Filed as an exhibit to the Company’s Form 8-K filed on December 24, 2009 and incorporated herein by reference.
n Filed as an exhibit to the Company’s Form 8-K filed on February 15, 2012 and incorporated herein by reference.
o Filed as an exhibit to the Company’s Annual Report on Form 10-K filed on March 15, 2004 and incorporated herein by reference.
p Filed as an exhibit to the Company’s Form 8-K filed on July 15, 2008 and incorporated herein by reference.
q Filed as an exhibit to the Company’s Form 8-K filed on February 27, 2015 and incorporated herein by reference.

 

(b) Exhibits - See list in (a)(3) and the Exhibit Index following the signature page.

 

(c) Financial Statements Schedules - None

 

55
 

 

SIGNATURES

 

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

 

Date:  May 11, 2015 By: /s/David W. Heeter
    David W. Heeter
    President and Chief Executive Officer
     
Date:  May 11, 2015 By: /s/Christopher D. Cook
    Christopher D. Cook
    Senior Vice President, Treasurer and Chief Financial
Officer

  

56
 

 

INDEX TO EXHIBITS

 

Number Description
   
31.1 Rule 13(a)-14(a) Certification (Chief Executive Officer)
   
31.2 Rule 13(a)-14(a) Certification (Chief Financial Officer)
   
32 Section 1350 Certification
   
101 Financial Statements from the Company’s Form 10-Q for the three months ended March 31, 2015 and year ended December 31, 2014, formatted in Extensive Business Reporting Language (XBRL); (i) Consolidated Condensed Balance Sheets as of March 31, 2015 and 2014; (ii) Consolidated Condensed Statements of Income for the Three Months Ended March 31, 2015 and 2014; (iii) Consolidated Condensed Statement of Stockholders’ Equity for the Period Ended March 31, 2015; (iv) Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2015 and 2014; and (vi) Notes to Consolidated Financial Statements Three Months Ended March 31, 2015 and 2014, as follows:
  101.INS XBRL Instance Document
  101.SCH XBRL Taxonomy Extension Schema Document
  101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
  101.DEF XBRL Taxonomy Extension Definition Linkbase Document
  101.LAB XBRL Taxonomy Extension Labels Linkbase Document
  101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

57