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EX-31.2 - EX-31.2 - MAINSOURCE FINANCIAL GROUPa15-11992_1ex31d2.htm
EX-32.1 - EX-32.1 - MAINSOURCE FINANCIAL GROUPa15-11992_1ex32d1.htm
EX-32.2 - EX-32.2 - MAINSOURCE FINANCIAL GROUPa15-11992_1ex32d2.htm
EX-10.3 - EX-10.3 - MAINSOURCE FINANCIAL GROUPa15-11992_1ex10d3.htm
EX-31.1 - EX-31.1 - MAINSOURCE FINANCIAL GROUPa15-11992_1ex31d1.htm

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015

 

COMMISSION FILE NUMBER 0-12422

 

MAINSOURCE FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)

 

INDIANA

 

35-1562245

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

2105 NORTH STATE ROAD 3 BYPASS, GREENSBURG,

 

 

INDIANA

 

47240

(Address of principal executive offices)

 

(Zip Code)

 

(812) 663-6734

(Registrant’s telephone number, including area code)

 

N/A

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

 

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

 

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

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of August 6, 2015 there were outstanding 21,624,684 shares of common stock, without par value, of the registrant.

 

 

 




 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

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

 

Item 1.  Financial Statements

 

 

 

(Unaudited)

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2015

 

2014

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

52,484

 

$

60,662

 

Money market funds and federal funds sold

 

59,964

 

1,823

 

Cash and cash equivalents

 

112,448

 

62,485

 

Interest bearing time deposits

 

1,670

 

1,915

 

Securities available for sale

 

859,736

 

867,760

 

Loans held for sale

 

7,932

 

8,282

 

Loans, net of allowance for loan losses of $22,473 in 2015 and $23,250 in 2014

 

1,972,574

 

1,934,515

 

FHLB and other stock, at cost

 

11,070

 

13,854

 

Premises and equipment, net

 

60,943

 

60,527

 

Goodwill

 

73,450

 

73,450

 

Purchased intangible assets

 

4,257

 

5,096

 

Cash surrender value of life insurance

 

61,836

 

62,002

 

Due from broker for securities sales

 

44,202

 

 

Interest receivable and other assets

 

30,076

 

32,630

 

Total assets

 

$

3,240,194

 

$

3,122,516

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits

 

 

 

 

 

Noninterest bearing

 

$

568,365

 

$

513,393

 

Interest bearing

 

1,966,702

 

1,954,928

 

Total deposits

 

2,535,067

 

2,468,321

 

Short term borrowings

 

47,009

 

26,349

 

Federal Home Loan Bank (FHLB) advances

 

154,506

 

214,413

 

Subordinated debentures

 

41,239

 

41,239

 

Due to broker for securities purchases

 

86,395

 

 

Other liabilities

 

7,987

 

11,532

 

Total liabilities

 

2,872,203

 

2,761,854

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

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

 

 

 

 

 

Common stock $.50 stated value: Authorized shares - 100,000,000 Issued shares — 22,265,766 in 2015 and 22,222,727 in 2014 Outstanding shares — 21,624,684 in 2015 and 21,687,525 in 2014

 

11,185

 

11,159

 

Treasury stock — 641,082 in 2015 and 535,202 in 2014 at cost

 

(10,878

)

(8,701

)

Additional paid-in capital

 

247,065

 

246,635

 

Retained earnings

 

109,541

 

97,856

 

Accumulated other comprehensive income

 

11,078

 

13,713

 

Total shareholders’ equity

 

367,991

 

360,662

 

Total liabilities and shareholders’ equity

 

$

3,240,194

 

$

3,122,516

 

 

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

 

3



 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands except per share data)

 

 

 

(unaudited)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

21,422

 

$

19,216

 

$

42,818

 

$

38,368

 

Securities

 

5,829

 

6,082

 

11,674

 

12,401

 

Other interest income

 

42

 

22

 

68

 

35

 

Total interest income

 

27,293

 

25,320

 

54,560

 

50,804

 

Interest expense

 

 

 

 

 

 

 

 

 

Deposits

 

894

 

908

 

1,793

 

1,920

 

Federal Home Loan Bank advances

 

733

 

866

 

1,728

 

1,700

 

Subordinated debentures

 

315

 

312

 

624

 

663

 

Other borrowings

 

7

 

17

 

17

 

39

 

Total interest expense

 

1,949

 

2,103

 

4,162

 

4,322

 

Net interest income

 

25,344

 

23,217

 

50,398

 

46,482

 

Provision for loan losses

 

 

750

 

 

1,500

 

Net interest income after provision for loan losses

 

25,344

 

22,467

 

50,398

 

44,982

 

Non-interest income

 

 

 

 

 

 

 

 

 

Mortgage banking

 

2,609

 

1,662

 

4,464

 

2,978

 

Trust and investment product fees

 

1,254

 

1,146

 

2,460

 

2,416

 

Service charges on deposit accounts

 

5,498

 

5,307

 

10,119

 

9,892

 

Net realized gains/(loss) on securities (includes $63 and $315 accumulated other comprehensive income (AOCI) reclassifications for realized net gains on available-for-sale securities in 2015 and includes ($4) and ($4) accumulated other comprehensive income reclassifications for realized net (losses) on available-for-sale securities in 2014)

 

63

 

(4

)

315

 

(4

)

Increase in cash surrender value of life insurance

 

308

 

323

 

621

 

650

 

Interchange income

 

2,228

 

2,024

 

4,189

 

3,759

 

Gain/(loss) on sale and write-down of OREO

 

(33

)

39

 

(44

)

(38

)

Other income

 

942

 

635

 

2,136

 

708

 

Total non-interest income

 

12,869

 

11,132

 

24,260

 

20,361

 

Non-interest expense

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

14,534

 

13,699

 

28,511

 

27,272

 

Net occupancy

 

2,030

 

1,773

 

4,212

 

3,912

 

Equipment

 

2,826

 

2,391

 

5,558

 

4,899

 

Intangibles amortization

 

419

 

432

 

839

 

864

 

Telecommunications

 

442

 

424

 

880

 

868

 

Stationery printing and supplies

 

286

 

272

 

592

 

559

 

FDIC assessment

 

435

 

365

 

810

 

800

 

Marketing

 

903

 

760

 

1,465

 

1,358

 

Collection expense

 

250

 

394

 

506

 

831

 

Prepayment penalty on FHLB advance

 

 

 

2,364

 

 

Consultant expense

 

250

 

350

 

500

 

700

 

Interchange expense

 

715

 

540

 

1,290

 

1,061

 

Other expenses

 

2,630

 

2,394

 

5,220

 

4,884

 

Total non-interest expense

 

25,720

 

23,794

 

52,747

 

48,008

 

Income before income tax

 

12,493

 

9,805

 

21,911

 

17,335

 

Income tax expense (includes $21 and $107 income tax expense from AOCI reclassification items in 2015 and ($1) and ($1) income tax expense from AOCI reclassification items in 2014)

 

2,833

 

2,051

 

4,588

 

3,356

 

Net income

 

$

9,660

 

$

7,754

 

$

17,323

 

$

13,979

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.13

 

$

0.10

 

$

0.26

 

$

0.20

 

Net income per common share — basic

 

$

0.45

 

$

0.38

 

$

0.80

 

$

0.68

 

Net income per common share — diluted

 

$

0.44

 

$

0.38

 

$

0.79

 

$

0.68

 

 

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

 

4



 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar amounts in thousands)

 

 

 

(unaudited)

 

(unaudited)

 

 

 

Three months ended

 

Six months ended

 

 

 

June 30,

 

June 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net income

 

$

9,660

 

$

7,754

 

$

17,323

 

$

13,979

 

Other comprehensive income/(loss):

 

 

 

 

 

 

 

 

 

Unrealized holding gains/(losses) on securities available for sale

 

(9,291

)

9,289

 

(3,679

)

17,636

 

Reclassification adjustment for (gains)/losses included in net income

 

(63

)

4

 

(315

)

4

 

Tax effect

 

3,181

 

(3,058

)

1,359

 

(5,979

)

Other comprehensive income/(loss)

 

(6,173

)

6,235

 

(2,635

)

11,661

 

Comprehensive income

 

$

3,487

 

$

13,989

 

$

14,688

 

$

25,640

 

 

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

 

5



 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

 

 

 

(unaudited)
Six months ended
June 30

 

 

 

2015

 

2014

 

Operating Activities

 

 

 

 

 

Net income

 

$

17,323

 

$

13,979

 

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

 

 

 

 

 

Provision for loan losses

 

 

1,500

 

Depreciation expense

 

3,124

 

2,891

 

Securities amortization, net

 

1,432

 

967

 

Stock based compensation expense

 

415

 

384

 

Stock portion of director retainer fee expense

 

160

 

180

 

Amortization of purchased intangible assets

 

839

 

864

 

Amortization of mortgage servicing rights

 

735

 

491

 

Recovery of valuation allowance on mortgage servicing rights

 

(150

)

 

Earnings on cash surrender value of life insurance policies

 

(621

)

(650

)

Gain on life insurance benefit

 

(307

)

 

Securities (gains)/losses, net

 

(315

)

4

 

Loss on sale and write-down of OREO

 

44

 

38

 

Gain on loans sold

 

(2,786

)

(1,729

)

Loans originated for sale

 

(123,492

)

(68,871

)

Proceeds from loan sales

 

137,984

 

71,253

 

Prepayment penalty on FHLB advance

 

2,364

 

 

Change in other assets and liabilities

 

(840

)

(214

)

Net cash provided/(used) by operating activities

 

35,909

 

21,087

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Net change in short term investments

 

245

 

(980

)

Purchases of securities available for sale

 

(107,171

)

(19,473

)

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

 

69,938

 

52,902

 

Proceeds from sales of securities available for sale

 

82,339

 

21,972

 

Proceeds from sale of OREO

 

942

 

2,258

 

Proceeds from life insurance benefit

 

1,094

 

588

 

Loan originations and payment, net

 

(49,778

)

(36,013

)

Purchases of premises and equipment

 

(3,540

)

(969

)

Proceeds from redemption of FHLB stock

 

2,784

 

4

 

Net cash provided/(used) by investing activities

 

(3,147

)

20,289

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net change in deposits

 

66,746

 

55,717

 

Net change in short term borrowings

 

20,660

 

(7,859

)

Repayment of FHLB advances

 

(417,271

)

(588,434

)

Proceeds from FHLB advances

 

355,000

 

520,000

 

Proceeds from exercise of stock options, including tax benefit

 

252

 

60

 

Purchase of treasury shares

 

(2,548

)

(319

)

Repayment of subordinated debentures, net

 

 

(5,000

)

Cash dividends on common stock

 

(5,638

)

(4,090

)

Net cash provided/(used) by financing activities

 

17,201

 

(29,925

)

Net change in cash and cash equivalents

 

49,963

 

11,451

 

Cash and cash equivalents, beginning of year

 

62,485

 

61,320

 

Cash and cash equivalents, end of period

 

$

112,448

 

$

72,771

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

Interest paid

 

$

4,237

 

$

4,547

 

Income taxes paid

 

2,265

 

2,250

 

Supplemental non cash disclosure

 

 

 

 

 

Loan balances transferred to loans held for sale

 

$

11,356

 

$

 

Loan balances transferred to foreclosed real estate

 

363

 

1,899

 

Due to broker for securities purchases

 

86,395

 

 

Due from broker for securities sales

 

44,202

 

 

 

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

 

6



 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

 

NOTE 1 - BASIS OF PRESENTATION

 

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

 

Adoption of New Accounting Standards

 

In June 2014, the FASB issued ASU No. 2014-11 “Transfers and Servicing (Topic 860) — Repurchase to Maturity Transactions, Repurchase Financings, and Disclosures.” ASU 2014-11 aligns the accounting for repurchase to maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. Going forward, these transactions would all be accounted for as secured borrowings. ASU 2014-11 is effective for the first interim or annual period beginning after December 15, 2014. In addition the disclosure of certain transactions accounted for as sales is effective for the first interim or annual period beginning on or after December 15, 2014, and the disclosure for transactions accounted for as secured borrowings is required for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. See Note 6 for related disclosures. This ASU had no material impact on the financial statements.

 

NOTE 2 - STOCK PLANS AND STOCK BASED COMPENSATION

 

On January 19, 2015, the Board of Directors adopted and approved the MainSource Financial Group, Inc. 2015 Stock Incentive Plan (the “2015 Plan”) which was effective following the approval of the Plan by the Company’s shareholders at the 2015 Annual Meeting of Shareholders held on April 29, 2015.  The 2015 Plan provides for the grant of incentive stock options, non-qualified stock options, stock appreciation rights, share awards of restricted stock performance share units and other equity based awards.  Incentive stock options may be granted only to employees.  An aggregate of 1,000,000 shares of common stock are reserved for issuance under the 2015 Plan.  Shares issuable under the 2015 Plan may be authorized and unissued shares of common stock or treasury shares.  The 2015 Plan is in addition to, and not in replacement of, a similar plan adopted in 2007.  The 2007 Stock Incentive Plan (the “2007 Plan”) provided for the grant of incentive stock options, nonstatutory stock options, stock bonuses and restricted stock awards. An aggregate of 650,000 shares of common stock were reserved for issuance under the 2007 Stock Incentive Plan. However, no further awards of stock or options will be made under the 2007 Plan following shareholder approval of the 2015 Plan.  The 2007 Plan was in replacement of a similar plan adopted in 2003, the 2003 Stock Option Plan (the “2003 Plan”).  Any stock or option awards that were previously issued under the 2007 Plan or 2003 Plan have not been terminated as a result of the adoption of the 2015 Plan, but will continue in accordance with the applicable plan terms and the agreements pursuant to which such stock or option awards were issued.

 

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

 

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

 

7



 

The following table summarizes stock option activity:

 

 

 

Six Months Ended
June 30, 2015

 

 

 

Shares

 

Weighted
Average
Exercise Price

 

Outstanding, beginning of year

 

377,790

 

$

13.46

 

Granted

 

 

 

Exercised

 

(22,500

)

9.80

 

Forfeited or expired

 

(37,100

)

20.27

 

Outstanding, period end

 

318,190

 

$

12.91

 

Options exercisable at period end

 

230,738

 

$

12.42

 

Fully vested and expected to vest

 

313,114

 

$

12.88

 

 

The following table details stock options outstanding:

 

 

 

June 30,
2015

 

December 31,
2014

 

Stock options vested and currently exercisable:

 

 

 

 

 

Number

 

230,738

 

288,938

 

Weighted average exercise price

 

$

12.42

 

$

13.24

 

Aggregate intrinsic value

 

$

2,199

 

$

2,219

 

Weighted average remaining life (in years)

 

3.8

 

3.8

 

 

The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the market price of our common stock as of the reporting date. The Company recorded $42 and $85 in stock compensation expense during the three and six months ended June 30, 2015 and $41 and $82 in stock compensation expense during the three and six months ended June 30, 2014 to salaries and employee benefits. There were no options granted in the first or second quarters of 2015 and 29,389 options granted in the first quarter of 2014 and 1,938 granted in the second quarter of 2014.  The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. This model requires the input of subjective assumptions that will usually have a significant impact on the fair value estimate. Expected volatilities are based on historical volatility of the Company’s stock, and other factors. Expected dividends are based on dividend trends and the market price of the Company’s stock price at grant. The Company uses historical data to estimate option exercises within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

 

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

 

Year

 

(in thousands)

 

July 2015 - December 2015

 

$

108

 

2016

 

93

 

2017

 

38

 

 

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

 

8



 

determined by multiplying the award amount by the closing price of a share of Company common stock on the grant date. The restricted stock awards vest as follows — 100% on the third anniversary of the date of grant. A total of 28,955 shares of common stock were granted in the first quarter of 2015 at a weighted average cost of $19.57 per share.

 

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

 

 

 

Restricted
Shares

 

Weighted Average
Grant Date
Fair Value

 

Nonvested at January 1, 2015

 

91,923

 

$

14.88

 

Granted

 

28,955

 

19.57

 

Vested

 

(18,248

)

12.71

 

Forfeited

 

 

 

Nonvested at June 30, 2015

 

102,630

 

$

16.59

 

 

As of June 30, 2015, there was $1,027 of total unrecognized compensation costs related to nonvested restricted stock awards granted under the 2007 Plan that will be recognized over the remaining vesting period of approximately 1.6 years. The recognized compensation costs related to the 2007 Plan was $152 and $68 for the three month periods ending June 30, 2015 and 2014 respectively and $304 and $302 for the six month periods ending June 30, 2015 and 2014 respectively.

 

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

 

Performance 

 

Payout

 

Threshold

 

0

%

Target

 

100

%

Superior

 

150

%

 

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

 

Performance Measure 

 

Weight

 

Evaluated
vs.

 

Return on Assets

 

50

%

Peer

 

Total Shareholder Return

 

25

%

Peer

 

Earnings Per Share

 

25

%

Goal

 

 

The value of the awards was determined by multiplying the award amount by the closing price of a share of Company common stock on the grant date. The performance share units are earned over the three year period of the award. A total of 16,205 performance share units were granted in the second quarter of 2015 at a weighted average cost of $19.57 per share.  Compensation expense is recognized over the three year performance period of the awards based on the fair value of the stock at the issue date and the anticipated achievement level of the target performance.  Quarterly, the performance measures will be reevaluated and adjustments made to the expense recorded in the financial statements, if needed, to reflect the new revised achievement levels. $26 of expense was recognized on these awards in the second quarter and first six months of 2015.  A total of $291 will be expensed in future periods if the Target level is achieved.

 

In the second quarter of 2015, members of the Board of Directors received their entire annual retainer in restricted Company stock for the following Board year ended with the 2016 annual meeting of shareholders. The 2015 award vests quarterly for all directors who remained on the Board of Directors on the vesting date, with 25% of the award vesting on each of May 1, August 1, and November 1, 2015, and February 1, 2016. The value of the 2015 retainer award was determined by multiplying the award amount by the closing price of the stock on the issuance date.

 

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

 

Quarter

 

Shares

 

Price per Share

 

2015

2Q

 

14,084

 

$

19.89

 

 

A total of $70 and $91 was recognized as other expense in the second quarter of 2015 and 2014 respectively for these grants and $160 and $180 was recognized in the first six months of 2015 and 2014 respectively.

 

In late 2014, the Company announced a stock repurchase program pursuant to which the Company may repurchase up to 5.0% of its outstanding shares of common stock, or approximately 1,085,000 shares.  During the first quarter of 2015, the Company repurchased 27,400 shares at a total cost of $520.  In the second quarter of 2015, the Company repurchased 93,685 shares at a total cost of $1,883.

 

9



 

NOTE 3 - SECURITIES

 

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

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

As of June 30, 2015

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

U. S. government agency

 

$

573

 

$

8

 

$

(1

)

$

580

 

State and municipal

 

335,150

 

15,404

 

(1,247

)

349,307

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

233,746

 

2,198

 

(580

)

235,364

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

266,267

 

2,854

 

(1,852

)

267,269

 

Equity securities

 

4,689

 

 

 

4,689

 

Other securities

 

2,527

 

 

 

2,527

 

Total available for sale

 

$

842,952

 

$

20,464

 

$

(3,680

)

$

859,736

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

 

 

Cost

 

Gains

 

Losses

 

Value

 

As of December 31, 2014

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

U. S. government agency

 

$

652

 

$

10

 

$

(1

)

$

661

 

State and municipal

 

316,048

 

18,603

 

(353

)

334,298

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

178,534

 

4,071

 

(433

)

182,172

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

344,556

 

2,743

 

(3,862

)

343,437

 

Equity securities

 

4,689

 

 

 

4,689

 

Other securities

 

2,503

 

 

 

2,503

 

Total available for sale

 

846,982

 

$

25,427

 

$

(4,649

)

$

867,760

 

 

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

 

 

 

Available
for Sale

 

June 30, 2015

 

Amortized Cost

 

Fair Value

 

Within one year

 

$

15,187

 

$

15,330

 

One through five years

 

52,997

 

54,926

 

Six through ten years

 

136,512

 

142,797

 

After ten years

 

133,554

 

139,361

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

233,746

 

235,364

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

266,267

 

267,269

 

Equity securities

 

4,689

 

4,689

 

Total available for sale securities

 

$

842,952

 

$

859,736

 

 

Proceeds from sales of securities available for sale were $82,339 and $21,972 for the six months ended June 30, 2015 and 2014, respectively. Gross gains of $1,312 and $542 and gross losses of $997 and $546 were realized on these sales during 2015 and 2014, respectively.

 

Proceeds from sales of securities available for sale were $43,497 and $21,972 for the three months ended June 30, 2015 and 2014, respectively. Gross gains of $1,060 and $542 and gross losses of $997 and $546 were realized on these sales during 2015 and 2014, respectively.

 

Below is a summary of securities with unrealized losses as of June 30, 2015 and December 31, 2014 presented by length of time the securities have been in a continuous unrealized loss position.

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

June 30, 2015
Description of securities

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

U.S. government agency

 

$

769

 

$

(1

)

$

 

$

 

$

769

 

$

(1

)

State and municipal

 

66,024

 

(1,163

)

1,630

 

(84

)

67,654

 

(1,247

)

Mortgage-backed securities-residential (GSE’s)

 

71,000

 

(580

)

 

 

71,000

 

(580

)

Collateralized mortgage obligations (GSE’s)

 

48,044

 

(395

)

66,513

 

(1,457

)

114,557

 

(1,852

)

Other securities

 

 

 

 

 

 

 

Total temporarily impaired

 

$

185,837

 

$

(2,139

)

$

68,143

 

$

(1,541

)

$

253,980

 

$

(3,680

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014
Description of securities

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

Fair Value

 

Unrealized
Losses

 

U.S government agency

 

$

122

 

$

(1

)

$

 

$

 

$

122

 

$

(1

)

State and municipal

 

16,659

 

(147

)

13,340

 

(206

)

29,999

 

(353

)

Mortgage-backed securities-residential (GSE’s)

 

24,925

 

(51

)

32,541

 

(382

)

57,466

 

(433

)

Collateralized mortgage obligations (GSE’s)

 

21,775

 

(114

)

150,094

 

(3,748

)

171,869

 

(3,862

)

Other securities

 

 

 

 

 

 

 

Total temporarily impaired

 

$

63,481

 

$

(313

)

$

195,975

 

$

(4,336

)

$

259,456

 

$

(4,649

)

 

10



 

Other-Than-Temporary-Impairment

 

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

 

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

 

When OTTI occurs under either model, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

 

As of June 30, 2015, the Company’s securities portfolio consisted of 999 securities, 188 of which were in an unrealized loss position.  Unrealized losses on state and municipal securities of $1,247 have not been recognized into income because management has the ability to hold for a period of time sufficient to allow for any anticipated recovery in fair value and it is unlikely that management will be required to sell the securities before their anticipated recovery. The decline in value is primarily attributable to changes in interest rates. The Company monitors the financial condition of these issuers. The fair value of these debt securities is expected to recover as the securities approach their maturity date.

 

At June 30, 2015, almost all of the mortgage-backed securities held by the Company were issued by U.S. government-sponsored entities and agencies, primarily Fannie Mae and Freddie Mac, institutions which the government has affirmed its commitment to support. Because the decline in fair value of approximately $580 is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2015.

 

The Company’s collateralized mortgage obligation securities portfolio includes agency collateralized mortgage obligations with a market value of $114,557 which had unrealized losses of approximately $1,852 at June 30, 2015. The Company monitors to insure it has adequate credit support and as of June 30, 2015, the Company believes there is no OTTI and does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery. All securities are investment grade.

 

11



 

NOTE 4 - LOANS AND ALLOWANCE

 

Loans were as follows:

 

 

 

June 30,
2015

 

December 31,
2014

 

Commercial

 

 

 

 

 

Commercial and industrial

 

$

339,460

 

$

275,646

 

Agricultural

 

32,823

 

46,784

 

Commercial Real Estate

 

 

 

 

 

Farm

 

76,361

 

76,849

 

Hotel

 

56,661

 

74,962

 

Construction and development

 

78,899

 

61,640

 

Other

 

652,325

 

666,417

 

Residential

 

 

 

 

 

1-4 family

 

430,750

 

435,336

 

Home equity

 

280,007

 

274,159

 

Consumer

 

 

 

 

 

Direct

 

47,233

 

45,360

 

Indirect

 

528

 

612

 

Total loans

 

1,995,047

 

1,957,765

 

Allowance for loan losses

 

(22,473

)

(23,250

)

Net loans

 

$

1,972,574

 

$

1,934,515

 

 

The Company purchased some financing receivables in the fourth quarter of 2014. The investment by portfolio class at June 30, 2015 is as follows.  These loans are included in the above table and all other tables below in the recorded investment amount.

 

Commercial and industrial

 

$

23,413

 

Construction and development

 

2,746

 

Other real estate

 

88,537

 

1-4 family

 

31,512

 

Home equity

 

14,943

 

Direct

 

1,385

 

 

 

$

162,536

 

 

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

 

Activity in the allowance for loan losses for the three months ended June 30, 2015 and 2014 was as follows:

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan loss

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2015

 

$

3,675

 

$

14,718

 

$

3,328

 

$

917

 

$

22,638

 

Provision charged to expense

 

1,718

 

(2,944

)

600

 

626

 

 

Losses charged off

 

(20

)

(379

)

(711

)

(803

)

(1,913

)

Recoveries

 

21

 

1,294

 

47

 

386

 

1,748

 

Balance, June 30, 2015

 

$

5,394

 

$

12,689

 

$

3,264

 

$

1,126

 

$

22,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan loss

 

 

 

 

 

 

 

 

 

 

 

Balance, April 1, 2014

 

$

3,009

 

$

20,439

 

$

3,196

 

$

603

 

$

27,247

 

Provision charged to expense

 

149

 

(393

)

718

 

276

 

750

 

Losses charged off

 

(3

)

(4,047

)

(834

)

(628

)

(5,512

)

Recoveries

 

46

 

995

 

30

 

311

 

1,382

 

Balance, June 30, 2014

 

$

3,201

 

$

16,994

 

$

3,110

 

$

562

 

$

23,867

 

 

Activity in the allowance for loan losses for the six months ended June 30, 2015 and 2014 and the recorded investment of loans and allowances by portfolio segment and impairment method as of June 30, 2015 and December 31, 2014 were as follows:

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan loss

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2015

 

$

2,977

 

$

15,605

 

$

3,501

 

$

1,167

 

$

23,250

 

Provision charged to expense

 

2,491

 

(3,949

)

773

 

685

 

 

Losses charged off

 

(127

)

(437

)

(1,205

)

(1,500

)

(3,269

)

Recoveries

 

53

 

1,470

 

195

 

774

 

2,492

 

Balance, June 30, 2015

 

$

5,394

 

$

12,689

 

$

3,264

 

$

1,126

 

$

22,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan loss

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2014

 

$

3,291

 

$

20,210

 

$

3,409

 

$

699

 

$

27,609

 

Provision charged to expense

 

(14

)

 

963

 

551

 

1,500

 

Losses charged off

 

(149

)

(4,655

)

(1,377

)

(1,371

)

(7,552

)

Recoveries

 

73

 

1,439

 

115

 

683

 

2,310

 

Balance, June 30, 2014

 

$

3,201

 

$

16,994

 

$

3,110

 

$

562

 

$

23,867

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

As of June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Ending Balance individually evaluated for impairment

 

$

812

 

$

733

 

$

177

 

$

 

$

1,722

 

Ending Balance collectively evaluated for impairment

 

4,582

 

11,956

 

3,087

 

1,126

 

20,751

 

Total ending allowance balance

 

$

5,394

 

$

12,689

 

$

3,264

 

$

1,126

 

$

22,473

 

Loans

 

 

 

 

 

 

 

 

 

 

 

Ending Balance individually evaluated for impairment

 

$

2,199

 

$

9,887

 

$

10,726

 

$

206

 

$

23,018

 

Ending Balance collectively evaluated for impairment

 

370,084

 

854,359

 

700,031

 

47,555

 

1,972,029

 

Total ending loan balance excludes $5,903 of accrued interest

 

$

372,283

 

$

864,246

 

$

710,757

 

$

47,761

 

$

1,995,047

 

 

12



 

 

As of December 31, 2014

 

Commercial

 

Commercial
Real Estate

 

Residential

 

Consumer

 

Total

 

Ending Balance individually evaluated for impairment

 

$

162

 

$

705

 

$

183

 

$

 

$

1,050

 

Ending Balance collectively evaluated for impairment

 

2,815

 

14,900

 

3,318

 

1,167

 

22,200

 

Total ending allowance balance

 

$

2,977

 

$

15,605

 

$

3,501

 

$

1,167

 

$

23,250

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

 

 

 

Ending Balance individually evaluated for impairment

 

$

705

 

$

24,722

 

$

10,662

 

$

220

 

$

36,309

 

Ending Balance collectively evaluated for impairment

 

321,725

 

855,146

 

698,833

 

45,752

 

1,921,456

 

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

 

$

322,430

 

$

879,868

 

$

709,495

 

$

45,972

 

$

1,957,765

 

 

The allowance for loans collectively evaluated for impairment consists of reserves on groups of similar loans based on historical loss experience adjusted for other factors, as well as reserves on certain loans that are classified but determined not to be impaired based on an analysis which incorporates probability of default with a loss given default scenario. The reserves on these loans totaled $2,650 at June 30, 2015 and $2,426 at December 31, 2014.

 

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

 

The following tables present loans individually evaluated for impairment by class of loans as of June 30, 2015 and December 31, 2014.  Performing troubled debt restructurings totaling $2,842 and $7,499 were excluded as allowed by ASC 310-40.

 

June 30, 2015

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Allowance
for Loan
Losses Allocated

 

With an allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,338

 

$

1,316

 

$

812

 

Agricultural

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

 

 

 

Hotel

 

 

 

 

Construction and development

 

 

 

 

Other

 

1,890

 

1,808

 

733

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

1,523

 

1,445

 

172

 

Home Equity

 

163

 

163

 

5

 

Consumer

 

 

 

 

 

 

 

Direct

 

 

 

 

Subtotal — impaired with allowance recorded

 

4,914

 

4,732

 

1,722

 

With no related allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial & industrial

 

1,170

 

883

 

 

 

Agricultural

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

716

 

462

 

 

 

Hotel

 

 

 

 

 

Construction and development

 

 

 

 

 

 

 

Other

 

6,461

 

4,775

 

 

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

7,424

 

6,449

 

 

 

Home Equity

 

2,960

 

2,669

 

 

 

Consumer

 

 

 

 

 

 

 

Direct

 

217

 

206

 

 

 

Indirect

 

 

 

 

 

Subtotal — impaired with allowance recorded

 

18,948

 

15,444

 

 

Total impaired loans

 

$

23,862

 

$

20,176

 

$

1,722

 

 

 

 

 

 

 

 

 

December 31, 2014

 

Unpaid
Principal
Balance

 

Recorded
Investment

 

Allowance
for Loan
Losses Allocated

 

With an allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial and industrial

 

$

82

 

$

64

 

$

12

 

Agriculture

 

397

 

150

 

150

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

76

 

76

 

21

 

Hotel

 

 

 

 

Construction and development

 

 

 

 

Other

 

979

 

889

 

684

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

1,543

 

1,478

 

178

 

Home Equity

 

167

 

167

 

5

 

Consumer

 

 

 

 

 

 

 

Direct

 

 

 

 

Indirect

 

 

 

 

Subtotal — impaired with allowance recorded

 

3,244

 

2,824

 

1,050

 

With no related allowance recorded

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

Commercial & industrial

 

761

 

491

 

 

 

Agricultural

 

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

864

 

616

 

 

 

Hotel

 

11,423

 

11,377

 

 

 

Construction and development

 

84

 

78

 

 

 

Other

 

5,848

 

4,186

 

 

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

7,325

 

6,400

 

 

 

Home Equity

 

2,847

 

2,618

 

 

 

Consumer

 

 

 

 

 

 

 

Direct

 

238

 

213

 

 

 

Indirect

 

7

 

7

 

 

 

Subtotal — impaired with allowance recorded

 

29,397

 

25,986

 

 

Total impaired loans

 

$

32,641

 

$

28,810

 

$

1,050

 

 

13



 

The following tables present the average balance of impaired loans and interest income and cash basis interest recognized for the six months ending June 30, 2015 and June 30, 2014, excluding performing troubled debt restructurings as allowed by ASC 310-40.

 

Six months ended June 30, 2015

 

Average
Balance
Impaired Loans

 

Interest
Income
Recognized

 

Cash Basis
Income
Recognized

 

Commercial

 

 

 

 

 

 

 

Commercial & Industrial

 

$

1,289

 

$

6

 

$

6

 

Agricultural

 

50

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

450

 

4

 

4

 

Hotel

 

4,750

 

 

 

Construction and development

 

26

 

47

 

47

 

Other

 

5,668

 

55

 

55

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

7,772

 

35

 

35

 

Home Equity

 

2,100

 

8

 

8

 

Consumer

 

 

 

 

 

 

 

Direct

 

140

 

10

 

10

 

Indirect

 

2

 

4

 

4

 

 

 

$

22,247

 

$

169

 

$

169

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2014

 

Average
Balance
Impaired Loans

 

Interest
Income
Recognized

 

Cash Basis
Income
Recognized

 

Commercial

 

 

 

 

 

 

 

Commercial & Industrial

 

$

287

 

$

8

 

$

8

 

Agricultural

 

137

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

945

 

 

 

Hotel

 

3,850

 

 

 

Construction and development

 

398

 

 

 

Other

 

11,324

 

71

 

71

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

8,258

 

5

 

5

 

Home Equity

 

2,460

 

7

 

7

 

Consumer

 

 

 

 

 

 

 

Direct

 

330

 

5

 

5

 

Indirect

 

7

 

1

 

1

 

 

 

$

27,996

 

$

97

 

$

97

 

 

The following tables present the average balance of impaired loans and interest income and cash basis interest recognized for the three months ending June 30, 2015 and June 30, 2014, excluding performing troubled debt restructurings as allowed by ASC 310-40.

 

Three months ended June 30, 2015

 

Average
Balance
Impaired Loans

 

Interest
Income
Recognized

 

Cash Basis
Income
Recognized

 

Commercial

 

 

 

 

 

 

 

Commercial & Industrial

 

$

1,656

 

$

4

 

$

4

 

Agricultural

 

 

 

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

328

 

 

 

Hotel

 

1,437

 

 

 

Construction and development

 

 

 

 

Other

 

5,964

 

30

 

30

 

Residential

 

 

 

 

 

 

 

1-4 Family

 

7,720

 

14

 

14

 

Home Equity

 

1,758