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EX-31.2 - EX-31.2 - MAINSOURCE FINANCIAL GROUPmsfg-20160331ex31280a69b.htm
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EX-32.1 - EX-32.1 - MAINSOURCE FINANCIAL GROUPmsfg-20160331ex3215e0715.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 MARCH 31, 2016

 

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  No 

 

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  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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer 

 

 

 

Non-accelerated filer

 

Smaller reporting company 

(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  No 

 

As of May 9, 2016 there were outstanding 21,634,691 shares of common stock, without par value, of the registrant.

 

 

 


 

MAINSOURCE FINANCIAL GROUP, INC.

 

FORM 10-Q

 

INDEX

 

PART I. FINANCIAL INFORMATION

    

 

 

 

 

Item 1. Financial Statements 

 

 

 

 

Consolidated Balance Sheets 

 

 

 

 

Consolidated Statements of Income 

 

 

 

 

Consolidated Statements of Comprehensive Income 

 

 

 

 

Consolidated Statements of Cash Flows 

 

 

 

 

Notes to Consolidated Financial Statements 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

34 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

40 

 

 

 

Item 4. Controls and Procedures 

 

41 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

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

 

42 

 

 

 

Item 6. Exhibits 

 

42 

 

 

 

Signatures 

 

44 

 

 

2


 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

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

 

Item 1. Financial Statements

 

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2016

 

2015

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

56,906

 

$

56,104

 

Money market funds and federal funds sold

 

 

15,096

 

 

11,474

 

Cash and cash equivalents

 

 

72,002

 

 

67,578

 

Interest bearing time deposits

 

 

1,715

 

 

1,960

 

Securities available for sale

 

 

937,719

 

 

925,279

 

Loans held for sale

 

 

5,514

 

 

7,533

 

Loans, net of allowance for loan losses of $21,079 and $22,020

 

 

2,138,918

 

 

2,133,372

 

FHLB and other stock, at cost

 

 

14,583

 

 

11,300

 

Premises and equipment, net

 

 

64,380

 

 

62,973

 

Goodwill

 

 

75,953

 

 

75,953

 

Purchased intangible assets

 

 

4,334

 

 

4,662

 

Cash surrender value of life insurance

 

 

62,753

 

 

62,451

 

Interest receivable and other assets

 

 

36,405

 

 

32,347

 

Total assets

 

$

3,414,276

 

$

3,385,408

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest bearing

 

$

647,187

 

$

641,439

 

Interest bearing

 

 

1,997,657

 

 

2,009,336

 

Total deposits

 

 

2,644,844

 

 

2,650,775

 

Other borrowings

 

 

31,159

 

 

28,363

 

Federal Home Loan Bank (FHLB) advances

 

 

285,557

 

 

269,488

 

Subordinated debentures

 

 

41,239

 

 

41,239

 

Other liabilities

 

 

17,273

 

 

14,183

 

Total liabilities

 

 

3,020,072

 

 

3,004,048

 

 

 

 

 

 

 

 

 

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 — 22,290,617 and 22,266,107

 

 

 

 

 

 

 

Outstanding shares — 21,627,452 and 21,579,575

 

 

11,222

 

 

11,201

 

Treasury stock — 663,165 and 686,532 shares, at cost

 

 

(11,412)

 

 

(11,812)

 

Additional paid-in capital

 

 

247,869

 

 

247,629

 

Retained earnings

 

 

127,243

 

 

121,718

 

Accumulated other comprehensive income

 

 

19,282

 

 

12,624

 

Total shareholders’ equity

 

 

394,204

 

 

381,360

 

Total liabilities and shareholders’ equity

 

$

3,414,276

 

$

3,385,408

 

 

 

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 

 

 

 

March 31,

 

 

    

2016

    

2015

 

Interest income

 

 

 

 

 

 

 

Loans, including fees

 

$

22,471

 

$

21,396

 

Securities

 

 

 

 

 

 

 

Taxable

 

 

3,246

 

 

2,940

 

Tax exempt

 

 

2,987

 

 

2,905

 

Other interest income

 

 

42

 

 

26

 

Total interest income

 

 

28,746

 

 

27,267

 

Interest expense

 

 

 

 

 

 

 

Deposits

 

 

918

 

 

899

 

Federal Home Loan Bank advances

 

 

1,100

 

 

995

 

Subordinated debentures

 

 

343

 

 

309

 

Other borrowings

 

 

13

 

 

10

 

Total interest expense

 

 

2,374

 

 

2,213

 

Net interest income

 

 

26,372

 

 

25,054

 

Provision for loan losses

 

 

500

 

 

 —

 

Net interest income after provision for loan losses

 

 

25,872

 

 

25,054

 

Non-interest income

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

4,682

 

 

4,621

 

Interchange income

 

 

2,635

 

 

1,961

 

Mortgage banking

 

 

1,790

 

 

1,855

 

Trust and investment product fees

 

 

1,210

 

 

1,206

 

Increase in cash surrender value of life insurance

 

 

302

 

 

313

 

Net realized gains on securities (includes $17 and $252 accumulated other comprehensive income (AOCI) reclassifications for realized net gains on available for sale securities)

 

 

17

 

 

252

 

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

 

 

149

 

 

(11)

 

Other income

 

 

804

 

 

1,194

 

Total non-interest income

 

 

11,589

 

 

11,391

 

Non-interest expense

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

14,860

 

 

13,977

 

Net occupancy

 

 

2,261

 

 

2,182

 

Equipment

 

 

3,063

 

 

2,732

 

Intangibles amortization

 

 

328

 

 

420

 

Telecommunications

 

 

369

 

 

438

 

Stationery printing and supplies

 

 

307

 

 

306

 

FDIC assessment

 

 

420

 

 

375

 

Marketing

 

 

654

 

 

562

 

Collection expense

 

 

252

 

 

256

 

Prepayment penalty on FHLB advance

 

 

 —

 

 

2,364

 

Consultant expense

 

 

136

 

 

250

 

Interchange expense

 

 

813

 

 

575

 

Other expenses

 

 

2,694

 

 

2,590

 

Total non-interest expense

 

 

26,157

 

 

27,027

 

Income before income tax

 

 

11,304

 

 

9,418

 

Income tax expense (includes $6 and $86 income tax expense from AOCI reclassification items)

 

 

2,538

 

 

1,755

 

Net income attributable to common shareholders

 

$

8,766

 

$

7,663

 

Net income per common share:

 

 

 

 

 

 

 

Basic

 

$

0.41

 

$

0.35

 

Diluted

 

$

0.40

 

$

0.35

 

Dividend per share

 

$

0.15

 

$

0.13

 

 

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)

 

 

 

Three months ended 

 

 

 

March 31,

 

 

    

2016

    

2015

 

Net income

 

$

8,766

 

$

7,663

 

Other comprehensive income:

 

 

 

 

 

 

 

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

 

 

10,259

 

 

5,612

 

Reclassification adjustment for (gains) included in net income

 

 

(17)

 

 

(252)

 

Tax effect

 

 

(3,584)

 

 

(1,822)

 

Other comprehensive income

 

 

6,658

 

 

3,538

 

Comprehensive income

 

$

15,424

 

$

11,201

 

 

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)

 

 

 

Three months ended 

 

 

 

March 31,

 

 

    

2016

    

2015

 

Operating Activities

 

 

 

 

 

 

 

Net income

 

$

8,766

 

$

7,663

 

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

 

 

 

 

 

 

 

Provision for loan losses

 

 

500

 

 

 —

 

Depreciation expense

 

 

1,709

 

 

1,551

 

Amortization of mortgage servicing rights

 

 

286

 

 

355

 

Securities amortization, net

 

 

1,170

 

 

646

 

Amortization of purchased intangible assets

 

 

328

 

 

420

 

Earnings on cash surrender value of life insurance policies

 

 

(302)

 

 

(313)

 

Gain on life insurance benefit

 

 

 —

 

 

(297)

 

Securities gains, net

 

 

(17)

 

 

(252)

 

Gain on loans sold

 

 

(1,413)

 

 

(1,298)

 

Loans originated for sale

 

 

(42,816)

 

 

(57,395)

 

Proceeds from loan sales

 

 

46,248

 

 

57,625

 

Stock based compensation expense

 

 

197

 

 

195

 

Stock portion of director retainer fee expense

 

 

89

 

 

90

 

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

 

 

(149)

 

 

11

 

Change in other assets and liabilities

 

 

(4,887)

 

 

1,031

 

Net cash provided by operating activities

 

 

9,709

 

 

10,032

 

Investing Activities

 

 

 

 

 

 

 

Net change in short term investments

 

 

245

 

 

245

 

Purchases of securities available for sale

 

 

(35,903)

 

 

(66,979)

 

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

 

 

28,317

 

 

29,783

 

Proceeds from sales of securities available for sale

 

 

4,235

 

 

38,842

 

Loan originations and payments, net

 

 

(6,583)

 

 

(23,822)

 

Purchases of premises and equipment

 

 

(3,116)

 

 

(1,684)

 

Proceeds from sale of OREO

 

 

735

 

 

632

 

Purchase of restricted stock

 

 

(3,283)

 

 

 —

 

Proceeds from life insurance benefit

 

 

 —

 

 

1,084

 

Net cash used by investing activities

 

 

(15,353)

 

 

(21,899)

 

Financing Activities

 

 

 

 

 

 

 

Net change in deposits

 

 

(5,931)

 

 

6,913

 

Net change in other borrowings

 

 

2,796

 

 

(5,831)

 

Proceeds from FHLB advances

 

 

260,000

 

 

165,000

 

Repayment of FHLB advances

 

 

(243,931)

 

 

(143,933)

 

Cash dividends on common stock

 

 

(3,241)

 

 

(2,821)

 

Purchase of treasury shares

 

 

(95)

 

 

(520)

 

Proceeds from exercise of stock options, including tax benefit

 

 

470

 

 

124

 

Net cash provided by financing activities

 

 

10,068

 

 

18,932

 

Net change in cash and cash equivalents

 

 

4,424

 

 

7,065

 

Cash and cash equivalents, beginning of period

 

 

67,578

 

 

62,485

 

Cash and cash equivalents, end of period

 

$

72,002

 

$

69,550

 

Supplemental cash flow information

 

 

 

 

 

 

 

Interest paid

 

$

2,368

 

$

2,258

 

Income taxes paid

 

 

851

 

 

 —

 

Supplemental non cash disclosure

 

 

 

 

 

 

 

Loan balances transferred to foreclosed real estate

 

 

537

 

 

156

 

Loan balances transferred to loans held for sale

 

 

 —

 

 

11,356

 

 

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, 2015.

 

Adoption of New Accounting Standards and Newly-Issued, Not Yet Effective Accounting Standards

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805) – Simplifying the Accounting for Measurement-Period Adjustments.”   ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.  It also requires that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.  This ASU requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.  ASU 2016-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. This ASU should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU with earlier application permitted for financial statements that have not been issued.  The Company will be implementing this ASU with the acquisition of Cheviot Financial Corp in the second quarter of 2016.  (See Note 12 – Acquisitions).

 

In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 is intended to improve the recognition and measurement of financial instruments by requiring equity investments to be measured at fair value with changes in fair value recognized in net income; requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured and amortized at cost on the balance sheet; and requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. ASU 2016-01 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. The Company will be assessing the impact of ASU 2016-01 over the next several years.

 

In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842).”  ASU 2016-02 requires lessees and lessors to classify leases as either capital leases or operating leases.  ASU 2016-02 also requires lessees to recognize assets and liabilities for all leases with the exception of short term leases.  There are  new disclosure requirements for these leases which will provide users of financial statements with information to understand the amount, timing, and uncertainty of cash flows arising from leases.  ASU 2016-02 will become effective for fiscal years beginning after December 15, 2018,

7


 

including interim periods within those fiscal years.  Early adoption is permitted.  The Company will be assessing the impact of ASU 2016-02 over the next several years.

 

In March 2016, the FASB issued (ASU) No. 2016-09 “Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting.” ASU 2016-09 requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. ASU 2016-09 is effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted. The Company is assessing the impact of ASU 2016-09 on its accounting and disclosures.

 

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 2015 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.  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 director 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.

 

8


 

The following table summarizes stock option activity:

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 2016

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Exercise

 

Options (restated for stock dividends and splits)

 

Shares

    

Price

 

Outstanding, beginning of year

 

310,665

 

$

12.83

 

Granted

 

 —

 

 

 —

 

Exercised

 

(28,075)

 

 

15.20

 

Forfeited or expired

 

(2,625)

 

 

18.04

 

Outstanding at end of year

 

279,965

 

$

12.54

 

Exercisable at year end

 

238,715

 

$

12.10

 

Fully vested and expected to vest

 

277,754

 

$

12.52

 

 

The following table details stock options outstanding:

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2016

 

2015

 

Stock options vested and currently exercisable:

 

 

 

 

 

 

 

Number

 

 

238,715

 

 

269,415

 

Weighted average exercise price

 

$

12.10

 

$

12.48

 

Aggregate intrinsic value

 

$

2,145

 

$

2,801

 

Weighted average remaining life (in years)

 

 

3.7

 

 

3.6

 

 

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 $22 and $43 in stock compensation expense during the three months ended March 31, 2016 and 2015, respectively to salaries and employee benefits. There have been no options granted in the first quarter of 2016 or 2015. 

 

Unrecognized stock option compensation expense related to unvested awards for the remainder of 2016 and beyond is estimated as follows:

 

 

 

 

 

 

Year

    

(in thousands)

 

April 2016 - December 2016

 

$

64

 

2017

 

 

35

 

 

During 2015 and the first quarter of 2016, 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 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 for employees vest as follows — 100% on the third anniversary of the date of grant. A total of 24,152 shares of common stock were granted in the first quarter of 2016 at a weighted average cost of $21.47 per share.  A total of 11,171 shares of common stock were granted in the first quarter of 2015 at a weighted average cost of $19.57 per share.

 

9


 

A summary of changes in the Company’s nonvested restricted shares for 2016 follows:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

Restricted

 

Grant Date

 

 

    

Shares

    

Fair Value

 

Nonvested at January 1, 2016

 

101,631

 

$

16.57

 

Granted

 

24,152

 

 

21.47

 

Vested

 

(1,000)

 

 

13.67

 

Forfeited

 

 

 

 

Nonvested at March 31, 2016

 

124,783

 

$

17.54

 

 

As of March 31, 2016, there was $908 of total unrecognized compensation costs related to nonvested restricted stock awards granted under the 2015 Plan that will be recognized over the remaining vesting period of approximately 1.9 years. The recognized compensation costs related to the plans were $149 and $152 for the three month periods ending March 31, 2016 and 2015 respectively.

 

Additionally, in the first quarters of 2016 and 2015, the Committee voted to grant performance share units to certain executive officers pursuant to the Company’s LTIP.  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 or 2018, 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:

 

 

 

 

 

 

 

 

 

 

 

 

Evaluated

 

Performance Measure

    

Weight

    

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 16,152 performance share units were granted in the first quarter of 2016 at a weighted average cost of $21.41 per share.  A total of 11,171 performance share units were granted in the first quarter of 2015 at a weighted average cost of $19.57 per share.  Compensation expense is recognized over the three year performance period of the awards based on the fair value of the stock at the issue date and the anticipated achievement level of the target performance.  Quarterly, the performance measures will be reevaluated and adjustments made to the expense recorded in the financial statements, if needed, to reflect the new revised achievement levels.  $26 and $0 of expense was recognized on these awards in the first quarter of 2016 and 2015.  A total of $557 will be expensed in future periods if the Target level is achieved.

10


 

 

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 date of the 2015 annual meeting of shareholders.  Due to the addition of two new directors to the Board of Directors during the second half of 2015 and the first quarter of 2016, additional shares were granted to these individuals upon their joining the Board of Directors.  The shares granted were based on each new director’s pro rata time on the Board.

 

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

 

2015

 

4Q

 

1,341

 

 

19.89

 

2016

 

1Q

 

358

 

 

19.89

 

 

A total of $89 and $90 was recognized as other expense in the first quarter of 2016 and 2015 respectively.

 

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

 

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

As of March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agency

 

$

473

 

$

13

 

$

 —

 

$

486

 

State and municipal

 

 

329,661

 

 

19,779

 

 

(35)

 

 

349,405

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

 

348,661

 

 

6,337

 

 

 —

 

 

354,998

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

 

218,048

 

 

3,851

 

 

(281)

 

 

221,618

 

Equity securities

 

 

4,689

 

 

 —

 

 

 —

 

 

4,689

 

Other securities

 

 

6,523

 

 

 —

 

 

 —

 

 

6,523

 

         Total available for sale

 

$

908,055

 

$

29,980

 

$

(316)

 

$

937,719

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

As of December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agency

 

$

499

 

$

5

 

$

 —

 

$

504

 

State and municipal

 

 

332,999

 

 

17,802

 

 

(68)

 

 

350,733

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

 

332,525

 

 

2,199

 

 

(644)

 

 

334,080

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

 

228,621

 

 

1,966

 

 

(1,838)

 

 

228,749

 

Equity securities

 

 

4,689

 

 

 —

 

 

 —

 

 

4,689

 

Other securities

 

 

6,524

 

 

 —

 

 

 —

 

 

6,524

 

Total available for sale

 

$

905,857

 

$

21,972

 

$

(2,550)

 

$

925,279

 

 

11


 

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

 

 

 

Amortized Cost

 

Fair Value

 

Within one year

 

$

13,327

 

$

13,451

 

One through five years

 

 

50,056

 

 

52,486

 

Six through ten years

 

 

129,180

 

 

137,543

 

After ten years

 

 

144,094

 

 

152,934

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

 

348,661

 

 

354,998

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

 

218,048

 

 

221,618

 

Equity securities

 

 

4,689

 

 

4,689

 

Total available for sale securities

 

$

908,055

 

$

937,719

 

 

Proceeds from sales of securities available for sale were $4,235 and $38,842 for the three months ended March 31, 2016 and 2015, respectively. Gross gains of $17 and $252 and gross losses of $0 and $0 were realized on these sales during 2016 and 2015, respectively.

 

Below is a summary of securities with unrealized losses as of March 31, 2016 and December 31, 2015 presented by length of time the securities have been in a continuous unrealized loss position.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

March 31, 2016

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

Description of securities

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

 

U. S. government agency

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

State and municipal

 

 

4,428

 

 

(24)

 

 

622

 

 

(11)

 

 

5,050

 

 

(35)

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

 

 —

 

 

 —

 

 

42,245

 

 

(281)

 

 

42,245

 

 

(281)

 

Other securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total temporarily impaired

 

$

4,428

 

$

(24)

 

$

42,867

 

$

(292)

 

$

47,295

 

$

(316)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

December 31, 2015

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

Description of securities

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

 

U. S. government agency

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

State and municipal

 

$

4,802

 

 

(33)

 

 

1,367

 

 

(35)

 

 

6,169

 

 

(68)

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

 

168,950

 

 

(644)

 

 

 —

 

 

 —

 

 

168,950

 

 

(644)

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

 

53,324

 

 

(591)

 

 

52,061

 

 

(1,247)

 

 

105,385

 

 

(1,838)

 

Other securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total temporarily impaired

 

$

227,076

 

$

(1,268)

 

$

53,428

 

$

(1,282)

 

$

280,504

 

$

(2,550)

 

 

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.

 

12


 

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

 

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

 

As of March 31, 2016, the Company’s securities portfolio consisted of 966 securities, 19 of which were in an unrealized loss position.  Unrealized losses on state and municipal securities of $35 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 March 31, 2016, 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 is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2016.

 

The Company’s collateralized mortgage obligation securities portfolio includes agency collateralized mortgage obligations with a market value of $42,245 which had unrealized losses of approximately $281 at March 31, 2016. As noted above, the decline in fair value is attributable to changes in interest rates and illiquidity and not credit quality. The Company monitors to insure it has adequate credit support and as of March 31, 2016, 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.

 

13


 

NOTE 4 - LOANS AND ALLOWANCE

 

Loans were as follows:

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2016

 

2015

 

Commercial

 

 

 

 

 

 

 

Commercial and industrial

 

$

375,427

 

$

380,960

 

Agricultural

 

 

65,010

 

 

64,704

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

 

106,825

 

 

97,916

 

Hotel

 

 

76,898

 

 

72,193

 

Construction and development

 

 

58,076

 

 

77,394

 

Other

 

 

693,118

 

 

678,381

 

Residential

 

 

 

 

 

 

 

1-4 family

 

 

441,446

 

 

438,808

 

Home equity

 

 

284,980

 

 

288,265

 

Consumer

 

 

 

 

 

 

 

Direct

 

 

57,779

 

 

56,312

 

Indirect

 

 

438

 

 

459

 

Total loans

 

 

2,159,997

 

 

2,155,392

 

Allowance for loan losses

 

 

(21,079)

 

 

(22,020)

 

Net loans

 

$

2,138,918

 

$

2,133,372

 

 

The Company purchased some financing receivables in the fourth quarter of 2014 and the third quarter of 2015. The investment by portfolio class at March 31, 2016 is as follows.  These loans are included in the above table and all other tables below in the recorded investment amount.

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2016

 

2015

 

Commercial and industrial

 

$

7,957

 

$

9,406

 

Construction and development

 

 

3,356

 

 

3,666

 

Other real estate

 

 

74,155

 

 

81,831

 

1-4 family

 

 

44,526

 

 

46,967

 

Home equity

 

 

17,353

 

 

19,076

 

Direct

 

 

2,547

 

 

2,818

 

 

 

$

149,894

 

$

163,764

 

 

The remaining discount on the above loans was $1,973 and $2,198 at March 31, 2016 and December 31, 2015 respectively.

 

Activity in the allowance for loan losses for the three months ended March 31, 2016 and 2015 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Commercial

    

 

 

    

 

 

    

 

 

 

2016

 

Commercial

 

Real Estate

 

Residential

 

Consumer

 

Total

 

Allowance for loan losses