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EX-32.1 - EX-32.1 - MAINSOURCE FINANCIAL GROUPmsfg-20160930ex3218dbf09.htm
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EX-31.1 - EX-31.1 - MAINSOURCE FINANCIAL GROUPmsfg-20160930ex3116406dc.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 SEPTEMBER 30, 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 November 8, 2016 there were outstanding 24,033,881 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 

 

39 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

 

49 

 

 

 

Item 4. Controls and Procedures 

 

49 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

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

 

50 

 

 

 

Item 6. Exhibits 

 

50 

 

 

 

Signatures 

 

51 

 

 

2


 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

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

 

Item 1. Financial Statements

 

 

 

 

 

 

 

 

 

 

 

    

 

(Unaudited)

    

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

62,809

 

$

56,104

 

Money market funds and federal funds sold

 

 

17,520

 

 

11,474

 

Cash and cash equivalents

 

 

80,329

 

 

67,578

 

Interest bearing time deposits

 

 

1,960

 

 

1,960

 

Securities available for sale

 

 

1,025,048

 

 

925,279

 

Loans held for sale

 

 

6,977

 

 

7,533

 

Loans, net of allowance for loan losses of $21,828 and $22,020

 

 

2,563,079

 

 

2,133,372

 

FHLB and other stock, at cost

 

 

21,537

 

 

11,300

 

Premises and equipment, net

 

 

76,436

 

 

62,973

 

Goodwill

 

 

100,889

 

 

75,953

 

Purchased intangible assets

 

 

7,762

 

 

4,662

 

Cash surrender value of life insurance

 

 

80,083

 

 

62,451

 

Interest receivable and other assets

 

 

49,843

 

 

32,347

 

Total assets

 

$

4,013,943

 

$

3,385,408

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest bearing

 

$

705,428

 

$

641,439

 

Interest bearing

 

 

2,418,600

 

 

2,009,336

 

Total deposits

 

 

3,124,028

 

 

2,650,775

 

Other borrowings

 

 

108,076

 

 

28,363

 

Federal Home Loan Bank (FHLB) advances

 

 

259,638

 

 

269,488

 

Subordinated debentures

 

 

41,239

 

 

41,239

 

Other liabilities

 

 

21,354

 

 

14,183

 

Total liabilities

 

 

3,554,335

 

 

3,004,048

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

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 — 24,676,409 and 22,266,107

 

 

 

 

 

 

 

Outstanding shares — 24,033,381 and 21,579,575

 

 

12,430

 

 

11,201

 

Treasury stock — 643,028 and 686,532 shares, at cost

 

 

(11,105)

 

 

(11,812)

 

Additional paid-in capital

 

 

298,649

 

 

247,629

 

Retained earnings

 

 

137,852

 

 

121,718

 

Accumulated other comprehensive income

 

 

21,782

 

 

12,624

 

Total shareholders’ equity

 

 

459,608

 

 

381,360

 

Total liabilities and shareholders’ equity

 

$

4,013,943

 

$

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)

 

(Unaudited)

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2016

 

2015

    

2016

    

2015

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

26,782

 

$

22,040

 

$

73,810

 

$

64,858

 

Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

4,009

 

 

3,010

 

 

10,488

 

 

8,780

 

Tax exempt

 

 

3,023

 

 

3,035

 

 

9,009

 

 

8,939

 

Other interest income

 

 

43

 

 

28

 

 

166

 

 

96

 

Total interest income

 

 

33,857

 

 

28,113

 

 

93,473

 

 

82,673

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,066

 

 

915

 

 

3,094

 

 

2,708

 

Federal Home Loan Bank advances

 

 

1,093

 

 

773

 

 

3,282

 

 

2,501

 

Subordinated debentures

 

 

355

 

 

318

 

 

1,051

 

 

942

 

Other borrowings

 

 

353

 

 

19

 

 

486

 

 

36

 

Total interest expense

 

 

2,867

 

 

2,025

 

 

7,913

 

 

6,187

 

Net interest income

 

 

30,990

 

 

26,088

 

 

85,560

 

 

76,486

 

Provision for loan losses

 

 

150

 

 

800

 

 

855

 

 

800

 

Net interest income after provision for loan losses

 

 

30,840

 

 

25,288

 

 

84,705

 

 

75,686

 

Non-interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

5,696

 

 

6,102

 

 

15,597

 

 

16,221

 

Interchange income

 

 

2,877

 

 

2,256

 

 

8,317

 

 

6,445

 

Mortgage banking

 

 

2,602

 

 

2,270

 

 

7,135

 

 

6,734

 

Trust and investment product fees

 

 

1,163

 

 

1,204

 

 

3,626

 

 

3,664

 

Increase in cash surrender value of life insurance

 

 

410

 

 

310

 

 

1,056

 

 

931

 

Net realized gains on securities (includes $23 and $144 accumulated other comprehensive income (AOCI) reclassifications for realized net gains on available for sale securities in 2016 and $45 and $360 in 2015)

 

 

23

 

 

45

 

 

144

 

 

360

 

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

 

 

67

 

 

(19)

 

 

253

 

 

(63)

 

Other income

 

 

1,076

 

 

1,176

 

 

3,113

 

 

3,312

 

Total non-interest income

 

 

13,914

 

 

13,344

 

 

39,241

 

 

37,604

 

Non-interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

16,686

 

 

14,674

 

 

47,430

 

 

43,185

 

Net occupancy

 

 

2,412

 

 

2,064

 

 

6,877

 

 

6,276

 

Equipment

 

 

3,315

 

 

2,823

 

 

9,493

 

 

8,381

 

Intangibles amortization

 

 

302

 

 

431

 

 

999

 

 

1,270

 

Telecommunications

 

 

459

 

 

410

 

 

1,256

 

 

1,290

 

Stationery printing and supplies

 

 

263

 

 

302

 

 

809

 

 

894

 

FDIC assessment

 

 

395

 

 

435

 

 

1,250

 

 

1,245

 

Marketing

 

 

780

 

 

948

 

 

2,523

 

 

2,413

 

Collection expense

 

 

174

 

 

263

 

 

596

 

 

769

 

Prepayment penalty on FHLB advance

 

 

 —

 

 

 —

 

 

 —

 

 

2,364

 

Acquisition related expenses

 

 

601

 

 

617

 

 

6,964

 

 

617

 

Consultant expense

 

 

156

 

 

250

 

 

428

 

 

750

 

Interchange expense

 

 

830

 

 

696

 

 

2,558

 

 

1,986

 

Other expenses

 

 

2,568

 

 

2,722

 

 

8,012

 

 

7,942

 

Total non-interest expense

 

 

28,941

 

 

26,635

 

 

89,195

 

 

79,382

 

Income before income tax

 

 

15,813

 

 

11,997

 

 

34,751

 

 

33,908

 

Income tax expense (includes $8 and $50 income tax expense from AOCI reclassification items in  2016 and $16 and $126 in 2015)

 

 

4,117

 

 

2,886

 

 

8,172

 

 

7,474

 

Net income attributable to common shareholders

 

$

11,696

 

$

9,111

 

$

26,579

 

$

26,434

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.49

 

$

0.42

 

$

1.17

 

$

1.22

 

Diluted

 

$

0.48

 

$

0.42

 

$

1.15

 

$

1.21

 

Dividend per share

 

$

0.15

 

$

0.14

 

$

0.45

 

$

0.40

 

 

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 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2016

 

2015

    

2016

    

2015

 

Net income

 

$

11,696

 

$

9,111

 

$

26,579

 

$

26,434

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(4,616)

 

 

6,723

 

 

14,232

 

 

3,044

 

Reclassification adjustment for (gains) included in net income

 

 

(23)

 

 

(45)

 

 

(144)

 

 

(360)

 

Tax effect

 

 

1,624

 

 

(2,271)

 

 

(4,930)

 

 

(912)

 

Other comprehensive income

 

 

(3,015)

 

 

4,407

 

 

9,158

 

 

1,772

 

Comprehensive income

 

$

8,681

 

$

13,518

 

$

35,737

 

$

28,206

 

 

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)

 

 

 

Nine months ended

 

 

 

September 30,

 

 

    

2016

    

2015

 

Operating Activities

 

 

 

 

 

 

 

Net income

 

$

26,579

 

$

26,434

 

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

 

 

 

 

 

 

 

Provision for loan losses

 

 

855

 

 

800

 

Depreciation expense

 

 

5,390

 

 

4,733

 

Amortization of mortgage servicing rights

 

 

1,068

 

 

1,034

 

(Recovery)/additional impairment of valuation allowance on mortgage servicing rights

 

 

175

 

 

(175)

 

Securities amortization, net

 

 

3,792

 

 

2,332

 

Amortization of purchased intangible assets

 

 

999

 

 

1,270

 

Earnings on cash surrender value of life insurance policies

 

 

(1,056)

 

 

(931)

 

Gain on life insurance benefit

 

 

 —

 

 

(307)

 

Securities gains, net

 

 

(144)

 

 

(360)

 

Gain on loans sold

 

 

(4,512)

 

 

(4,381)

 

Loans originated for sale

 

 

(185,098)

 

 

(183,802)

 

Proceeds from loan sales

 

 

190,166

 

 

191,644

 

Stock based compensation expense

 

 

713

 

 

633

 

Stock portion of director retainer fee expense

 

 

282

 

 

230

 

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

 

 

(253)

 

 

63

 

Prepayment penalty on FHLB advance

 

 

 —

 

 

2,364

 

Change in other assets and liabilities

 

 

(7,520)

 

 

2,072

 

Net cash provided by operating activities

 

 

31,436

 

 

43,653

 

Investing Activities

 

 

 

 

 

 

 

Net change in short term investments

 

 

 —

 

 

(45)

 

Purchases of securities available for sale

 

 

(186,209)

 

 

(284,755)

 

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

 

 

100,835

 

 

104,182

 

Proceeds from sales of securities available for sale

 

 

85,738

 

 

139,547

 

Loan originations and payments, net

 

 

(73,574)

 

 

(101,145)

 

Purchases of premises and equipment

 

 

(12,179)

 

 

(5,543)

 

Proceeds from sale of OREO

 

 

3,185

 

 

1,352

 

Proceeds from redemption of restricted stock

 

 

3,090

 

 

2,784

 

Purchase of restricted stock

 

 

(4,676)

 

 

 —

 

Proceeds from sale of portfolio loans

 

 

 —

 

 

11,356

 

Proceeds from life insurance benefit

 

 

 —

 

 

1,094

 

Cash received/(paid) from bank/branch acquisitions, net

 

 

(11,289)

 

 

57,083

 

Net cash used by investing activities

 

 

(95,079)

 

 

(74,090)

 

Financing Activities

 

 

 

 

 

 

 

Net change in deposits

 

 

28,558

 

 

40,251

 

Net change in other borrowings

 

 

59,713

 

 

13,090

 

Proceeds from FHLB advances

 

 

420,000

 

 

585,000

 

Repayment of FHLB advances

 

 

(442,006)

 

 

(546,361)

 

Proceeds from line of credit

 

 

30,000

 

 

 —

 

Cash dividends on common stock

 

 

(10,445)

 

 

(8,659)

 

Purchase of treasury shares

 

 

(333)

 

 

(3,280)

 

Repayment on line of credit

 

 

(10,000)

 

 

 —

 

Proceeds from exercise of stock options, including tax benefit

 

 

907

 

 

264

 

Net cash provided by financing activities

 

 

76,394

 

 

80,305

 

Net change in cash and cash equivalents

 

 

12,751

 

 

49,868

 

Cash and cash equivalents, beginning of period

 

 

67,578

 

 

62,485

 

Cash and cash equivalents, end of period

 

$

80,329

 

$

112,353

 

Supplemental cash flow information

 

 

 

 

 

 

 

Interest paid

 

$

8,330

 

$

6,233

 

Income taxes paid

 

 

3,005

 

 

3,285

 

Supplemental non cash disclosure

 

 

 

 

 

 

 

Loan balances transferred to foreclosed real estate

 

 

1,547

 

 

1,164

 

Loan balances transferred to loans held for sale

 

 

 —

 

 

11,356

 

Due to broker for securities purchases

 

 

 —

 

 

86,395

 

Due from broker for securities sales

 

 

 —

 

 

44,202

 

 

See NOTE 12 regarding non-cash transactions included in acquisitions.

 

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 August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 adds or clarifies guidance on the presentation and classification of eight specific types of cash receipts and cash payments in the statement of cash flows, with the intent of reducing diversity in practice. This ASU 2016-15 is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Entities must apply the guidance retrospectively to all periods presented; however, entities may apply prospectively if retrospective application is impracticable. The Company is currently assessing the impact that the adoption of ASU 2016-15 will have on its consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13 “Financial Instruments (Topic 326) Measurement of Credit Losses on Financial Instrument”  ( “CECL”).  ASU 2016-13 requires an allowance for expected credit losses on financial assets be recognized as early as day one of the instrument.  This ASU departs from the incurred loss model which means the probability threshold is removed.  It considers more forward-looking information and requires the entity to estimate its credit losses over the life of the asset.  This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted.  The Company will be evaluating the impact of this ASU over the next several years.

 

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 was a 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. 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

7


 

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.

 

The following table summarizes stock option activity:

 

 

 

 

 

 

 

 

 

    

Nine Months Ended

 

 

 

September 30, 2016

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Exercise

 

Options 

 

Shares

    

Price

 

Outstanding, beginning of year

 

310,665

 

$

12.83

 

Granted

 

 —

 

 

 —

 

Exercised

 

(59,625)

 

 

14.20

 

Forfeited or expired

 

(12,125)

 

 

12.16

 

Outstanding at end of period

 

238,915

 

$

12.52

 

Exercisable at end of period

 

198,065

 

$

11.99

 

Fully vested and expected to vest

 

237,727

 

$

12.50

 

 

The following table details stock options outstanding:

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2016

 

2015

 

Stock options vested and currently exercisable:

 

 

 

 

 

 

 

Number

 

 

198,065

 

 

269,415

 

Weighted average exercise price

 

$

11.99

 

$

12.48

 

Aggregate intrinsic value

 

$

2,567

 

$

2,801

 

Weighted average remaining life (in years)

 

 

3.3

 

 

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 $21 and $64 in stock compensation expense during the three and nine months ended September 30, 2016 and $48 and $133 in stock compensation expense during the three and nine months ended September 30 2015 to salaries and employee benefits. There were no options granted in the first nine months 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)

 

October 2016 - December 2016

 

$

22

 

2017

 

 

35

 

 

During 2015 and the first and second quarters 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 and 16,000 shares of common stock were granted in the first and second quarters of 2016 at a weighted average cost of $21.47 and $22.57 

8


 

per share, respectively.  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 2016 follows:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

Restricted

 

Grant Date

 

 

    

Shares

    

Fair Value

 

Nonvested at January 1, 2016

 

101,631

 

$

16.57

 

Granted

 

40,152

 

 

21.91

 

Vested

 

(30,048)

 

 

13.75

 

Forfeited

 

(500)

 

 

16.55

 

Nonvested at September 30, 2016

 

111,235

 

$

19.26

 

 

As of September 30, 2016, there was $1,089 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 2.1 years. The recognized compensation costs related to the plans were $160 and $512 for the three month and nine periods ending September 30, 2016 and $143 and $447 for the three and nine months periods ending September 30, 2015.

 

Additionally, in the first quarter of 2016 and the second quarter of 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 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

9


 

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.  $55 and $137 of expense was recognized on these awards for the three and nine month periods ending September 30, 2016 and $27 and $53 of expense was recognized in the three and nine months periods ending September 30, 2015.  A total of $447 will be expensed in future periods if the Target level is achieved.

 

In the second quarter of 2016, members of the Board of Directors received their entire annual retainer in restricted Company stock for the following Board year ended with the 2017 annual meeting of shareholders. The 2016 award vests quarterly for all directors who remain on the Board of Directors on the vesting dates, with 25% of the award vesting on each of May 1, August 1, and November 1, 2016, and February 1, 2017. The value of the 2016 retainer award was determined by multiplying the award amount by the closing price of the stock on the date of the 2016 annual meeting of shareholders.  Additional shares were granted in June 2016 to a new director who joined the Board following the Company’s acquisition of Cheviot Financial Corp.  The shares granted were pro-rated based on the new director’s 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

 

2016

 

1Q

 

358

 

 

19.89

 

2016

 

2Q

 

17,976

 

 

21.89

 

 

A total of $103 and $70 was recognized as other expense in the third quarter of 2016 and 2015 respectively for these grants and $282 and $230 was recognized in the first nine months of 2016 and 2015 respectively.

 

10


 

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 September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agency

 

$

426

 

$

10

 

$

 —

 

$

436

 

State and municipal

 

 

339,261

 

 

20,529

 

 

(93)

 

 

359,697

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

 

446,989

 

 

9,478

 

 

(3)

 

 

456,464

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

 

192,100

 

 

3,664

 

 

(145)

 

 

195,619

 

Equity securities

 

 

6,233

 

 

 —

 

 

 —

 

 

6,233

 

Other securities

 

 

6,529

 

 

70

 

 

 —

 

 

6,599

 

         Total available for sale

 

$

991,538

 

$

33,751

 

$

(241)

 

$

1,025,048

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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

 

 

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

 

$

11,347

 

$

11,456

 

One through five years

 

 

70,884

 

 

74,840

 

Six through ten years

 

 

112,190

 

 

119,436

 

After ten years

 

 

151,795

 

 

161,000

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

 

446,989

 

 

456,464

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

 

192,100

 

 

195,619

 

Equity securities

 

 

6,233

 

 

6,233

 

Total available for sale securities

 

$

991,538

 

$

1,025,048

 

 

Proceeds from sales of securities available for sale were $85,738 and $139,547 for the nine months ended September 30, 2016 and 2015, respectively. Gross gains of $144 and $1,515 and gross losses of $0 and $1,155 were realized on these sales during 2016 and 2015, respectively.  Income taxes on these net gains were $50 and $126 in 2016 and 2015.

 

11


 

Proceeds from sales of securities available for sale were $7,615 and $57,208 for the three months ended September 30, 2016 and 2015, respectively. Gross gains of $23 and $203 and gross losses of $0 and $158 were realized on these sales during 2016 and 2015, respectively.  Income taxes on these net gains were $8 and $16 in 2016 and 2015.

 

Below is a summary of securities with unrealized losses as of September 30, 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

 

September 30, 2016

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

Description of securities

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

 

U. S. government agency

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

State and municipal

 

 

10,825

 

 

(93)

 

 

 —

 

 

 —

 

 

10,825

 

 

(93)

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

 

10,175

 

 

(3)