Attached files

file filename
EX-32.2 - EX-32.2 - MAINSOURCE FINANCIAL GROUPmsfg-20170331ex322498c3b.htm
EX-32.1 - EX-32.1 - MAINSOURCE FINANCIAL GROUPmsfg-20170331ex3219d59b3.htm
EX-31.2 - EX-31.2 - MAINSOURCE FINANCIAL GROUPmsfg-20170331ex312b555d9.htm
EX-31.1 - EX-31.1 - MAINSOURCE FINANCIAL GROUPmsfg-20170331ex3116ac96e.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, 2017

 

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, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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)

 

Emerging growth company☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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, 2017 there were outstanding 25,548,300 shares of common stock, without par value, of the registrant.

 

 

 


 

MAINSOURCE FINANCIAL GROUP, INC.

 

FORM 10-Q

 

INDEX

 

 

 

2


 

MAINSOURCE FINANCIAL GROUP, INC.

CONSOLIDATED BALANCE SHEETS

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

 

Item 1. Financial Statements

 

 

 

 

 

 

 

 

 

 

 

    

 

(Unaudited)

    

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2017

 

2016

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

72,454

 

$

75,778

 

Money market funds and federal funds sold

 

 

5,033

 

 

10,774

 

Cash and cash equivalents

 

 

77,487

 

 

86,552

 

Interest bearing time deposits

 

 

1,670

 

 

1,960

 

Securities available for sale

 

 

1,022,208

 

 

1,007,540

 

Loans held for sale

 

 

4,370

 

 

12,479

 

Loans, net of allowance for loan losses of $22,369 and $22,499

 

 

2,592,241

 

 

2,629,174

 

FHLB and other stock, at cost

 

 

23,960

 

 

21,693

 

Premises and equipment, net

 

 

76,391

 

 

76,426

 

Goodwill

 

 

101,875

 

 

101,315

 

Purchased intangible assets

 

 

8,305

 

 

7,419

 

Cash surrender value of life insurance

 

 

80,944

 

 

80,539

 

Interest receivable and other assets

 

 

53,024

 

 

55,160

 

Total assets

 

$

4,042,475

 

$

4,080,257

 

Liabilities

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

Noninterest bearing

 

$

812,301

 

$

767,159

 

Interest bearing

 

 

2,342,836

 

 

2,343,712

 

Total deposits

 

 

3,155,137

 

 

3,110,871

 

Other borrowings

 

 

137,197

 

 

209,672

 

Long term Federal Home Loan Bank (FHLB) advances

 

 

229,737

 

 

249,658

 

Subordinated debentures

 

 

41,239

 

 

41,239

 

Other liabilities

 

 

19,386

 

 

19,323

 

Total liabilities

 

 

3,582,696

 

 

3,630,763

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

Preferred stock, no par value

 

 

 

 

 

 

 

Authorized shares — 400,000 

 

 

 

 

 

 

 

Issued shares — 0 

 

 

 

 

 

 

 

Outstanding shares — 0 

 

 

 —

 

 

 —

 

Common stock $.50 stated value:

 

 

 

 

 

 

 

Authorized shares — 100,000,000

 

 

 

 

 

 

 

Issued shares — 24,694,991 and 24,682,189

 

 

 

 

 

 

 

Outstanding shares — 24,148,132 and 24,067,364

 

 

12,524

 

 

12,463

 

Treasury stock — 546,859 and 614,825 shares, at cost

 

 

(9,815)

 

 

(10,909)

 

Additional paid-in capital

 

 

299,076

 

 

299,116

 

Retained earnings

 

 

153,956

 

 

145,745

 

Accumulated other comprehensive income

 

 

4,038

 

 

3,079

 

Total shareholders’ equity

 

 

459,779

 

 

449,494

 

Total liabilities and shareholders’ equity

 

$

4,042,475

 

$

4,080,257

 

 

 

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,

 

 

    

2017

    

2016

 

Interest income

 

 

 

 

 

 

 

Loans, including fees

 

$

27,752

 

$

22,471

 

Securities

 

 

 

 

 

 

 

Taxable

 

 

4,176

 

 

3,246

 

Tax exempt

 

 

3,212

 

 

2,987

 

Other interest income

 

 

66

 

 

42

 

Total interest income

 

 

35,206

 

 

28,746

 

Interest expense

 

 

 

 

 

 

 

Deposits

 

 

970

 

 

918

 

Federal Home Loan Bank advances

 

 

1,074

 

 

1,100

 

Subordinated debentures

 

 

381

 

 

343

 

Other borrowings

 

 

494

 

 

13

 

Total interest expense

 

 

2,919

 

 

2,374

 

Net interest income

 

 

32,287

 

 

26,372

 

Provision for loan losses

 

 

 —

 

 

500

 

Net interest income after provision for loan losses

 

 

32,287

 

 

25,872

 

Non-interest income

 

 

 

 

 

 

 

Service charges on deposit accounts

 

 

4,791

 

 

4,682

 

Interchange income

 

 

3,054

 

 

2,635

 

Mortgage banking

 

 

2,392

 

 

1,790

 

Trust and investment product fees

 

 

1,197

 

 

1,210

 

Increase in cash surrender value of life insurance

 

 

405

 

 

302

 

Net realized gains on securities (includes $13 and $17 accumulated other comprehensive income (AOCI) reclassifications for realized net gains on available for sale securities

 

 

13

 

 

17

 

Gain on sale and write-down of OREO

 

 

122

 

 

149

 

Other income

 

 

1,022

 

 

804

 

Total non-interest income

 

 

12,996

 

 

11,589

 

Non-interest expense

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

17,717

 

 

14,860

 

Net occupancy

 

 

2,429

 

 

2,261

 

Equipment

 

 

3,384

 

 

3,063

 

Intangibles amortization

 

 

304

 

 

328

 

Telecommunications

 

 

371

 

 

369

 

Stationery printing and supplies

 

 

299

 

 

307

 

FDIC assessment

 

 

324

 

 

420

 

Marketing

 

 

765

 

 

654

 

Collection expense

 

 

231

 

 

252

 

Interchange expense

 

 

797

 

 

813

 

Other expenses

 

 

2,808

 

 

2,830

 

Total non-interest expense

 

 

29,429

 

 

26,157

 

Income before income tax

 

 

15,854

 

 

11,304

 

Income tax expense (includes $5 and $6 income tax expense from AOCI reclassification items)

 

 

3,781

 

 

2,538

 

Net income attributable to common shareholders

 

$

12,073

 

$

8,766

 

Net income per common share:

 

 

 

 

 

 

 

Basic

 

$

0.50

 

$

0.41

 

Diluted

 

$

0.49

 

$

0.40

 

Dividend per share

 

$

0.16

 

$

0.15

 

 

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,

 

 

    

2017

    

2016

 

Net income

 

$

12,073

 

$

8,766

 

Other comprehensive income:

 

 

 

 

 

 

 

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

 

 

1,488

 

 

10,259

 

Reclassification adjustment for (gains) included in net income

 

 

(13)

 

 

(17)

 

Tax effect

 

 

(516)

 

 

(3,584)

 

Other comprehensive income

 

 

959

 

 

6,658

 

Comprehensive income

 

$

13,032

 

$

15,424

 

 

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,

 

 

    

2017

    

2016

 

Operating Activities

 

 

 

 

 

 

 

Net income

 

$

12,073

 

$

8,766

 

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

 

 

 

 

 

 

 

Provision for loan losses

 

 

 —

 

 

500

 

Depreciation expense

 

 

931

 

 

1,709

 

Amortization of mortgage servicing rights

 

 

341

 

 

286

 

Securities amortization, net

 

 

955

 

 

1,170

 

Amortization of purchased intangible assets

 

 

304

 

 

328

 

Earnings on cash surrender value of life insurance policies

 

 

(405)

 

 

(302)

 

Securities gains, net

 

 

(13)

 

 

(17)

 

Gain on loans sold

 

 

(1,417)

 

 

(1,413)

 

Loans originated for sale

 

 

(47,958)

 

 

(42,816)

 

Proceeds from loan sales

 

 

57,484

 

 

46,248

 

Stock based compensation expense

 

 

259

 

 

197

 

Stock portion of director retainer fee expense

 

 

100

 

 

89

 

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

 

 

(122)

 

 

(149)

 

Change in other assets and liabilities

 

 

900

 

 

(4,887)

 

Net cash provided by operating activities

 

 

23,432

 

 

9,709

 

Investing Activities

 

 

 

 

 

 

 

Net change in short term investments

 

 

290

 

 

245

 

Purchases of securities available for sale

 

 

(47,392)

 

 

(35,903)

 

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

 

 

30,157

 

 

28,317

 

Proceeds from sales of securities available for sale

 

 

3,100

 

 

4,235

 

Loan originations and payments, net

 

 

36,492

 

 

(6,583)

 

Purchases of premises and equipment

 

 

(896)

 

 

(3,116)

 

Proceeds from sale of OREO

 

 

655

 

 

735

 

Proceeds from redemption of restricted stock

 

 

204

 

 

 —

 

Purchase of restricted stock

 

 

(2,471)

 

 

(3,283)

 

Cash received/(paid) from business acquisitions, net

 

 

(1,400)

 

 

 —

 

Net cash used by investing activities

 

 

18,739

 

 

(15,353)

 

Financing Activities

 

 

 

 

 

 

 

Net change in deposits

 

 

44,266

 

 

(5,931)

 

Net change in other borrowings

 

 

(70,808)

 

 

2,796

 

Proceeds from FHLB advances

 

 

 —

 

 

260,000

 

Repayment of FHLB advances

 

 

(19,921)

 

 

(243,931)

 

Cash dividends on common stock

 

 

(3,862)

 

 

(3,241)

 

Purchase of treasury shares

 

 

(242)

 

 

(95)

 

Repayment on term debt

 

 

(1,667)

 

 

 —

 

Proceeds from exercise of stock options

 

 

998

 

 

470

 

Net cash provided by financing activities

 

 

(51,236)

 

 

10,068

 

Net change in cash and cash equivalents

 

 

(9,065)

 

 

4,424

 

Cash and cash equivalents, beginning of period

 

 

86,552

 

 

67,578

 

Cash and cash equivalents, end of period

 

$

77,487

 

$

72,002

 

Supplemental cash flow information

 

 

 

 

 

 

 

Interest paid

 

$

3,168

 

$

2,368

 

Income taxes paid

 

 

 —

 

 

851

 

Supplemental non cash disclosure

 

 

 

 

 

 

 

Loan balances transferred to foreclosed real estate

 

 

441

 

 

537

 

 

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, 2016.

 

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

In May 2014, the FASB issued ASU No. 2014-09 “Revenue from Contracts with Customers (Topic 606 )” ASU 2014-09 says that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. On July 9, 2015, the FASB approved amendments deferring the effective date by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application. Early application is permitted but not before the original public entity effective date, i.e ., annual periods beginning after December 15, 2016. The Company has determined that ASU No 2014-09 will not have a significant impact on its financial statements as a significant portion of the Company’s revenue is scoped out of the standard.

 

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.  The Company currently has prepared a worksheet of all of its leases and will reviewing them during the next two years to determine the impact on the Company’s financial statements

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 previously allotted 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.  The Company implemented this ASU in the first quarter of 2017.  The impact of this ASU resulted in a $274 reduction in income tax expense for the first quarter of 2017.  The Company has also elected to recognize forfeitures as they occur.  There was no cumulative adjustment to retained earnings to account for these forfeitures as the estimated forfeiture rate previously used was minimal.

 

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 as far as it can reasonably estimate.  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 has captured loan level

7


 

loss data since 2011.  The Company will be starting its segregation of loans during 2017.  The Company anticipates that its allowance for loan losses will increase with the adoption of this standard.

 

In January 2017, the FASB issued (ASU) No. 2017-04 “Intangibles – Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.”   ASU 2017-04 eliminate Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. The guidance is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. ASU 2017-04 should be adopted on a prospective basis. The Company has assessed ASU 2017-04 and does not expect it to have a material impact on its accounting and disclosures.

 

In March 2017, the FASB issued (ASU) No. 2017-08 "Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20).  ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date.  ASU 2017-08 is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption is permitted.  The Company elected to adopt this ASU in the first quarter of 2017.  The impact of this adoption on the Company’s earnings was minimal.

 

 

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 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Weighted

    

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

Weighted

 

Remaining

 

 

 

 

 

 

 

 

Average

 

Contractual

 

Aggregate

 

 

 

 

 

Exercise

 

Term

 

Intrinsic

 

Options 

 

Shares

 

Price

 

(years)

 

Value

 

Outstanding, beginning of year

 

193,114

 

$

12.09

 

 

 

 

 

 

Granted

 

 —

 

 

 —

 

 

 

 

 

 

Exercised

 

(75,297)

 

 

13.25

 

 

 

 

 

 

Forfeited or expired

 

 —

 

 

 —

 

 

 

 

 

 

Outstanding at end of period

 

117,817

 

$

11.34

 

4.7

 

$

2,544

 

Exercisable at end of period

 

106,413

 

$

10.82

 

4.4

 

$

2,353

 

 

The following table details stock options outstanding:

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2017

 

2016

 

Stock options vested and currently exercisable:

 

 

 

 

 

 

 

Number

 

 

106,413

 

 

181,710

 

Weighted average exercise price

 

$

10.82

 

$

11.83

 

Aggregate intrinsic value

 

$

2,353

 

$

4,101

 

Weighted average remaining life (in years)

 

 

4.4

 

 

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 $8 and $22 in stock compensation expense during the three months ended March 31, 2017 and 2016 respectively to salaries and employee benefits. There were no options granted in the first quarter of 2017 or 2016. 

 

Unrecognized stock option compensation expense related to unvested awards for the remainder of 2017 is estimated as follows:

 

 

 

 

 

 

Year

    

(in thousands)

 

April 2017 - December 2017

 

$

22

 

 

During 2016 and the first quarter of 2017, 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 12,802 and 24,152 shares of common stock were granted in the first quarters of 2017 and 2016 at a weighted average cost of $34.99 and $21.47 per share, respectively.

 

A summary of changes in the Company’s nonvested restricted shares for 2017 follows:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

Restricted

 

Grant Date

 

 

    

Shares

    

Fair Value

 

Nonvested at January 1, 2017

 

104,319

 

$

20.03

 

Granted

 

12,802

 

 

34.99

 

Vested

 

(18,322)

 

 

16.13

 

Forfeited

 

 —

 

 

 —

 

Nonvested at March 31, 2017

 

98,799

 

$

22.69

 

 

9


 

As of March 31, 2017, there was $1,382 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 2.4 years. The recognized compensation costs related to the plans were $202 and $149 for the three month periods ending March 31, 2017 and 2016, respectively.

 

Additionally, in the first quarters of 2017 and 2016, 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, 2018 or 2019, 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 6,528 performance share units were granted in the first quarter of 2017 at a weighted average cost of $35.04 per share.  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.  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.  $49 and $26 of expense was recognized on these awards for the three month periods ending March 31, 2017 and 2016.  A total of $524 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 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.

 

10


 

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 $100 and $89 was recognized as other expense in the first quarter of 2017 and 2016 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, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agency

 

$

383

 

$

 3

 

$

 —

 

$

386

 

State and municipal

 

 

367,296

 

 

11,714

 

 

(2,377)

 

 

376,633

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

 

437,264

 

 

1,250

 

 

(4,439)

 

 

434,075

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

 

199,857

 

 

1,436

 

 

(1,452)

 

 

199,841

 

Equity securities

 

 

4,670

 

 

 —

 

 

 —

 

 

4,670

 

Other securities

 

 

6,526

 

 

77

 

 

 —

 

 

6,603

 

         Total available for sale

 

$

1,015,996

 

$

14,480

 

$

(8,268)

 

$

1,022,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Gross

    

Gross

    

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

As of December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. government agency

 

$

951

 

$

 4

 

$

 —

 

$

955

 

State and municipal

 

 

361,335

 

 

10,799

 

 

(2,848)

 

 

369,286

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

 

450,006

 

 

1,253

 

 

(4,629)

 

 

446,630

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

 

179,314

 

 

1,514

 

 

(1,427)

 

 

179,401

 

Equity securities

 

 

4,670

 

 

 —

 

 

 —

 

 

4,670

 

Other securities

 

 

6,527

 

 

71

 

 

 —

 

 

6,598

 

Total available for sale

 

$

1,002,803

 

$

13,641

 

$

(8,904)

 

$

1,007,540

 

 

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

 

$

15,973

 

$

16,266

 

One through five years

 

 

80,903

 

 

84,512

 

Six through ten years

 

 

102,654

 

 

107,190

 

After ten years

 

 

174,675

 

 

175,654

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

 

437,264

 

 

434,075

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

 

199,857

 

 

199,841

 

Equity securities

 

 

4,670

 

 

4,670

 

Total available for sale securities

 

$

1,015,996

 

$

1,022,208

 

 

 

Proceeds from sales of securities available for sale were $3,100 and $4,235 for the three months ended March 31, 2017 and 2016, respectively. Gross gains of $14 and $17 and gross losses of $1 and $0 were realized on these sales during 2017 and 2016, respectively.  Income taxes on these net gains were $5 and $6 in 2017 and 2016.

 

Below is a summary of securities with unrealized losses as of March 31, 2017 and December 31, 2016 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, 2017

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

Description of securities

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

 

U. S. government agency

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

State and municipal

 

 

73,729

 

 

(2,377)

 

 

 —

 

 

 —

 

 

73,729

 

 

(2,377)

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

 

310,779

 

 

(4,439)

 

 

 —

 

 

 —

 

 

310,779

 

 

(4,439)

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

 

94,141

 

 

(1,231)

 

 

8,150

 

 

(221)

 

 

102,291

 

 

(1,452)

 

Other securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total temporarily impaired

 

$

478,649

 

$

(8,047)

 

$

8,150

 

$

(221)

 

$

486,799

 

$

(8,268)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less than 12 months

 

12 months or longer

 

Total

 

December 31, 2016

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

 

 

 

Unrealized

 

Description of securities

    

Fair Value

    

Losses

    

Fair Value

    

Losses

    

Fair Value

    

Losses

 

U. S. government agency

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

State and municipal

 

 

95,822

 

 

(2,848)

 

 

 —

 

 

 —

 

 

95,822

 

 

(2,848)

 

Mortgage-backed securities-residential (Government Sponsored Entity)

 

 

335,668

 

 

(4,629)

 

 

 —

 

 

 —

 

 

335,668

 

 

(4,629)

 

Collateralized mortgage obligations (Government Sponsored Entity)

 

 

77,694

 

 

(1,202)

 

 

8,518

 

 

(225)

 

 

86,212

 

 

(1,427)

 

Other securities

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total temporarily impaired

 

$

509,184

 

$

(8,679)

 

$

8,518

 

$

(225)

 

$

517,702

 

$

(8,904)

 

 

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, 2017, the Company’s securities portfolio consisted of 981 securities, 202 of which were in an unrealized loss position.  Unrealized losses on state and municipal securities of $2,377 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, 2017, 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 $4,439 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, 2017.

 

The Company’s collateralized mortgage obligation securities portfolio includes agency collateralized mortgage obligations with a market value of $102,291 which had unrealized losses of approximately $1,452 at March 31, 2017. 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, 2017, 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,

 

 

 

2017

 

2016

 

Commercial

 

 

 

 

 

 

 

Commercial and industrial

 

$

458,019

 

$

461,092

 

Agricultural

 

 

70,147

 

 

73,467

 

Commercial Real Estate

 

 

 

 

 

 

 

Farm

 

 

108,037

 

 

111,807

 

Hotel

 

 

101,685

 

 

91,213

 

Construction and development

&nbs