Item 1. Business
General
MutualFirst Financial, Inc., a Maryland corporation (“MutualFirst” or the “Company”), is the sole owner of MutualBank (“MutualBank” or the “Bank”). The Bank is an Indiana commercial bank regulated by the Indiana Department of Financial Institutions (“IDFI”) and the Federal Deposit Insurance Corporation (“FDIC”). MutualFirst is a bank holding company subject to regulation by the Board of Governors of the Federal Reserve System (“FRB”). The words “we,” “our” and “us” in this Form 10-K refer to MutualFirst and MutualBank on a consolidated basis, unless indicated otherwise herein.
At December 31, 2019, we had total assets of $2.1 billion, loans of $1.5 billion, deposits of $1.6 billion and stockholders’ equity of $226.8 million. Our executive offices are located at 110 E. Charles Street, Muncie, Indiana 47305-2400. Our common stock is traded on the Nasdaq Global Market under the symbol “MFSF.” For more general information about our business, and other 2019 material transactions and results, see “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation - Overview and Significant Events in 2019.”
Forward-Looking Statements
This Form 10-K contains, and our future filings with the SEC, Company press releases, other public pronouncements, stockholder communications and oral statements made by or with the approval of an authorized executive officer will contain, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements include, but are not limited to:
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statements of our goals, intentions and expectations;
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statements regarding our business plans, prospects, growth and operating strategies;
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statements regarding the asset quality of our loan and investment portfolios; and
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estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, including conditions relating to the Company and Northwest Bancshares, or other effects of the proposed merger of the Company and Northwest Bancshares, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
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the credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and changes in our allowance for loan losses and provision for loan losses that may be impacted by deterioration in the housing and commercial real estate markets;
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changes in general economic conditions, either nationally or in our market areas;
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changes in the monetary and fiscal policies of the U.S. Government, including policies of the Treasury and the FRB;
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changes in the levels of general interest rates and the relative differences between short- and long-term interest rates, deposit interest rates, our net interest margin and funding sources;
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fluctuations in the demand for loans, the number of unsold homes, land and other properties and fluctuations in real estate values in our market areas;
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our ability to successfully integrate into our operations any assets, liabilities, customers, systems, and management personnel acquired and those we may in the future acquire, and our ability to realize related revenue synergies and cost savings within expected time frames or at all and any goodwill charges related thereto;
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decreases in the secondary market for the sale of loans that we originate;
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results of examinations of us by the IDFI, FDIC, FRB or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;
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legislative or regulatory changes that adversely affect our business, including the effect of Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), changes in regulatory policies and principles, changes in regulatory capital requirements or the interpretation of regulatory capital or other rules;
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our ability to attract and retain deposits;
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increases in premiums for deposit insurance;
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management’s assumptions in determining the adequacy of the allowance for loan losses;
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our ability to control operating costs and expenses;
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the use of estimates in determining fair value of certain assets, which estimates may prove to be incorrect and result in significant losses due to declines in valuation;
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difficulties in reducing risks associated with the loans on our balance sheet;
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staffing fluctuations in response to product demand or the implementation of corporate strategies that affect our workforce and potential associated charges;
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a failure or security breach in the computer systems (or the third-party vendors who provide such services) on which we depend;
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our ability to retain members of our senior management team;
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costs and effects of litigation, including settlements and judgments;
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increased competitive pressures among financial services companies;
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changes in consumer spending, borrowing and savings habits;
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the availability of resources to address changes in laws, rules, or regulations or to respond to regulatory actions;
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adverse changes in the securities markets;
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changes in our ability and the cost to access the capital markets;
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inability of key third-party providers to perform their obligations to us;
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changes in tax legislation and accounting policies and practices, as may be adopted by the financial institution regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board;
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other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services and the other risks described elsewhere in this Form 10-K;
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the diversion of management's attention from ongoing business operations and opportunities as a result of the proposed merger with Northwest Bancshares or otherwise;
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the ability to obtain regulatory approvals and satisfy other closing conditions to the merger, including approval by shareholders of the Company; and
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any delay in closing the merger.
Some of these and other factors are discussed in “Item 1A
Item 1A. Risk Factors
The following are certain risk factors that could impact our business, financial results and results of operations. Investing in our common stock involves risks, including those described below. These risk factors should be considered by prospective and current investors in our common stock when evaluating the disclosures in this Annual Report on Form 10-K (particularly the forward-looking statements). These risk factors could cause actual results and conditions to differ materially from those projected in forward-looking statements. If any of the events in the following risks actually occur, or if additional risks and uncertainties not presently known to us or that we believe are immaterial do materialize, then our business, financial condition or results of operations could be materially adversely impacted. In addition, the trading price of our common stock could decline due to any of the events described in these risks.
The previous economic recession was severe in our primary market area of northern and east central Indiana, which is not a high growth market. A return of recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.
Our business activities and earnings are affected by general business conditions in the United States and in our local market area. These conditions are impacted by changes to short-term and long-term interest rates, inflation, unemployment levels, monetary supply, consumer confidence and spending, fluctuations in both debt and equity capital markets, and the strength of the economy in the United States generally and in our primary market area in particular. The economy continues to recover from the recent most severe recession, which caused high unemployment levels, declining real estate values and eroded consumer confidence. The recession also reduced demand for commercial business and real estate loans in our local market. Declines in real estate values and other effects of the recession impacted household and corporate incomes, impairing the ability of our borrowers to repay their loans in accordance with their terms and increasing our non-performing loans, loan charge-offs, provisions for loan losses and foreclosures.
Substantially all of our loans are located in Indiana, which was impacted by the recession more severely than the national average. Our primary market area before the Universal acquisition, which consisted of Allen, Delaware, Elkhart, Grant, Kosciusko, Randolph, St. Joseph and Wabash counties in Indiana and
Berrien county in Michigan, has experienced limited population growth of 0.64% from 2000 through 2010. This data from the census bureau reflects population increases in our northern region market of 2.02% compared to the reduction in population of our central region of 3.04%. The Universal acquisition in 2018 expanded our primary market area into Greene, Hamilton, Jackson, Johnson, Knox, Lawrence and Monroe counties in Indiana. Unemployment levels in our market areas in Indiana historically have been above the state and federal averages but have been below the state and federal level over the last three years. According to data published by the Bureau of Labor Statistics of the United States Department of Labor, the national unemployment rate for the United States at December 31, 2019 was 3.4% (not seasonally adjusted) compared to an average rate of 2.9% (not seasonally adjusted) for our market areas in Indiana. See “Item 1 - Business - Market Area.”
A return of recessionary conditions in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Declines in real estate values and sales volumes and an increase in unemployment levels may result in higher than expected loan delinquencies and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition. Stock prices for financial institution holding companies, including MutualFirst, would be expected to decline substantially, and it would be significantly more difficult to raise capital or borrow in the debt markets.
The anticipated benefits and cost savings of the merger of the Company and Universal Bancorp, which was completed during the first quarter 2018, may not be realized.
The anticipated benefits and cost savings as a result of the merger, depend, in part, on our ability to continue to successfully combine the businesses of MutualFirst and Universal. It continues to be possible that the integration process could result in the loss of key employees or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits and cost savings of the merger. Due to the possibility of future difficulties with the integration process, the anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected.
A substantial portion of our assets consist of various types of loans that carry varying levels of credit and interest rate risk and that are sensitive to changes in the local and national economies.
Loans Secured by Residential Property. At December 31, 2019, $491.5 million, or 33.0% of our total loan portfolio, was secured by one-to-four family residential property, including home equity loans and home equity lines of credit. At December 31, 2019, $13.4 million of loans held for sale was secured by one-to-four family residential property. This type of lending is generally sensitive to regional and local economic conditions that impact the ability of borrowers to meet their loan payment obligations. Although we continue to see recovery in the market areas we serve, the decline in residential real estate values as a result of the last downturn in the Indiana housing markets has reduced the value of the real estate collateral securing these types of loans and increased the risk that we could incur losses if borrowers default on their loans. In addition, borrowers seeking to sell their homes may find that they cannot sell their properties for an amount equal to or greater than the unpaid principal loan balance. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial condition and business operations.
Commercial Real Estate, Construction and Development and Commercial Business Loans. At December 31, 2019, $719.8 million, or 48.3% of our total loan portfolio, consisted of commercial real estate, construction and development and commercial business loans to small and mid-sized businesses, predominantly in our primary market area, which are the types of businesses that have a heightened vulnerability to local economic conditions. At December 31, 2019, our loan portfolio included $49.5 million of commercial construction and development loans, $504.2 million of commercial real estate loans and
$166.0 million of commercial business loans compared to $53.3 million, $485.8 million and $149.4 million for construction and development, commercial real estate and business loans, respectively, at December 31, 2018. Because we have seen growth in the credit risk of the portfolio in 2019 primarily due to the increased percentage of our total loan portfolio in these types of loans, a decline in property values and other market impacts could lead to an increase in non-performing loans. See “Item 1 - Business of MutualBank - Asset Quality - Non-Performing Assets.”
The credit risk related to these types of loans is considered to be greater than the risk related to one-to-four family residential loans because the repayment of commercial real estate loans and commercial business loans typically is dependent on the successful operation and income stream of the borrowers’ business and the real estate securing the loans as collateral, which can be significantly affected by economic conditions. Any delinquent payments or the failure to repay these loans would hurt our earnings. Additionally, commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. Several of our commercial borrowers have more than one commercial real estate or business loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to any one-to-four family residential mortgage loan. Finally, if we foreclose on a commercial real estate loan, our holding period for the collateral, if any, is typically longer than a one-to-four family residential property because there are fewer potential purchasers of the collateral. If loans that are collateralized by real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could require us to increase our provision for loan losses and adversely affect our operating results and financial condition.
Non-Residential Consumer Loans. At December 31, 2019, $277.7 million, or 18.7% of our total loan portfolio, consisted of consumer loans, of which $57.1 million consisted of automobile loans, $213.3 million consisted of boat/RV loans and $7.3 million consisted of other consumer loans, including unsecured lines of credit. Generally, we consider these types of loans to involve a higher degree of risk compared to mortgage loans on one-to-four family, owner-occupied residential properties, particularly in the case of loans that are secured by rapidly depreciable assets, such as automobiles, boats and RVs. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. Although our indirect loans, which totaled $233.3 million at December 31, 2019, were underwritten by a third party using our guidelines, they were primarily originated to customers outside of our normal lending area which presents greater risks than other types of lending activities. As a result of this portfolio of consumer loans, it may become necessary to increase the level of our provision for loan losses, which could negatively impact our earnings and financial condition.
Adjustable Rate Loans. At December 31, 2019, $753.0 million, or 50.6% of our total loan portfolio consisted of adjustable rate loans. Borrowers with adjustable rate loans are exposed to increased monthly payments when the related interest rate adjusts upward under the terms of the loan to the rate computed in accordance with the applicable index and margin. Any rise in prevailing market interest rates may result in increased payments for borrowers who have adjustable-rate loans, increasing the possibility of default. Borrowers seeking to avoid these increased monthly payments by refinancing their loans may no longer be able to find available replacement loans at comparable or lower interest rates. In addition, declining real estate prices may prevent refinancing or a sale of the property, because borrowers have insufficient equity in the real estate. These events, alone or in combination, may contribute to higher delinquency rates and negatively impact our earnings.
If our allowance for loan losses is not sufficient to cover actual loan losses or our non-performing assets increase, our earnings will suffer. Increases in our provision for loan losses adversely impact our earnings and operations.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience and evaluate current economic conditions. Management recognizes that significant new growth in loan portfolios, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover actual losses, resulting in additions to our allowance. Additions to our allowance decrease our net income. Our regulators periodically review our allowance for loan losses and may require us to recognize additions to the allowance based on their judgments about information available to them at the time of their review. These increases in our allowance for loan losses or loan charge-offs may have a material adverse effect on our financial condition and results of operations. Our allowance for loan losses was 0.89% of gross loans and 184.92% of non-performing loans at December 31, 2019, compared to 0.89% of gross loans and 145.85% of non-performing loans at December 31, 2018 and 1.05% of gross loans and 235.90% of non-performing loans at December 31, 2017.
At December 31, 2019, our non-performing assets (which consist of non-accrual loans, loans 90 days delinquent and still accruing, non-accrual troubled debt restructurings, foreclosed real estate and other repossessed assets) totaled $9.2 million, which was a decrease of $1.9 million, or a 17.3% decrease in non-performing assets from December 31, 2018. This decrease is primarily due to a $1.5 million decrease in our non-accruing loans at the end of 2019 compared to the end of 2018. Our non-performing assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans or real estate owned. We must reserve for estimated credit losses, which are established through a current period charge to the provision for loan losses, and from time to time, if appropriate, we must write down the value of properties in our real estate owned (“REO”) portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs including taxes, insurance and maintenance related to our REO. Further, the resolution of non-performing assets requires the active involvement of management, potentially distracting them from the overall supervision of our operations and other income-producing activities.
During 2019, we recorded a provision for loan losses of $2.0 million compared to $2.1 million in 2018 and $1.2 million in 2017. We also recorded net loan charge-offs of $1.9 million in 2019, compared to $1.2 million in 2018 and $1.2 million in 2017. The decrease in provision for loan losses was due to management's ongoing evaluation of the adequacy of the allowance for loan loss through an analysis of expected losses, historical net charge offs and qualitative factors. The mix of our existing loan portfolio with commercial and non-real estate consumer loans made up 67.0% of the loan portfolio at the end of 2019 compared to 63.7% at the end of 2018. We did not experience declining trends in the housing, real estate and local business markets; however, if that would return, we would expect increased levels of delinquencies and credit losses to return, which would adversely impact our financial condition and results of operations.
The Financial Accounting Standards Board, or FASB, adopted Accounting Standards Update, or ASU, No. 2016-13 “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” or CECL, on June 16, 2016, which changed the loss model to take into account current expected credit losses. This accounting pronouncement is expected to be applicable to us effective for our fiscal year beginning January 1, 2023. The federal banking regulators, including the Federal Reserve and the FDIC, have adopted a rule that gives a banking organization the option to phase in over a three-year period the day-one adverse effects of CECL on its regulatory capital.
CECL substantially changes how we calculate our allowance for loan and lease losses. The Company was in the process of implementing a third-party software solution to assist in the application of the new standard for implementation in 2023, however this has been put on hold, due to the pending merger of the Company with Northwest Bancshares.
Changes in interest rates could adversely affect our results of operations and financial condition.
Our results of operations and financial condition are affected significantly by changes in interest rates. Our results of operations depend substantially on our net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings. Because interest-bearing liabilities generally reprice or mature more quickly than interest-earning assets, an increase in interest rates generally would tend to result in a decrease in net interest income.
Changes in interest rates also may affect the average life of loans and mortgage-related securities. Decreases in interest rates or continuing low interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce their borrowing costs. Under these circumstances, we have been and continue to be subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable-rate loans. Also, increases in interest rates may extend the life of fixed-rate assets, which could limit the funds we have available to reinvest in higher-yielding alternatives, and may result in customers withdrawing certificates of deposit early so long as the early withdrawal penalty is less than the interest they could receive as a result of the higher market interest rates.
Changes in interest rates also affect the current fair value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates. At December 31, 2019, the fair value of our portfolio of available for sale securities totaled $385.6 million. Gross unrealized gains on these securities totaled $11.9 million, while gross unrealized losses on these securities totaled $1.2 million, resulting in a net unrealized gain of $10.7 million at December 31, 2019.
At December 31, 2019, our interest rate risk analysis indicated that our net portfolio value would decrease by 4.8% if there was an instantaneous parallel 200 basis point increase in market interest rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Asset/Liability Management.”
Our strategies to modify our interest rate risk profile may be difficult to implement.
Our asset/liability management strategies are designed to minimize our interest rate risk sensitivity. One such strategy is to increase the amount of adjustable rate and/or short-term assets. The Bank offers adjustable rate loan products as a means to achieve this strategy. The recent availability of lower rates on fixed-rate loans has generally created a decrease in borrower demand for adjustable rate assets. Additionally, these adjustable-rate assets may prepay. Despite this, at December 31, 2019, 50.6% of our loan portfolio consisted of adjustable-rate loans, compared to 49.7% at December 31, 2018.
We also are managing our liabilities to moderate our interest rate risk sensitivity. Customer demand is primarily for short-term certificates of deposit and transaction accounts. Using short-term liabilities to fund long-term, fixed-rate assets will increase the interest rate sensitivity of any financial institution. When needed, we are utilizing FHLB advances agreements to mitigate the impact of customer demand by lengthening the maturities of these advances or entering into longer term repurchase agreements, depending on liquidity or investment opportunities.
FHLB advances are entered into as liquidity is needed or to fund assets that provide for a spread considered sufficient by management. If we are unable to originate adjustable rate assets at favorable rates or fund loan originations or securities purchases with long-term advances or structured borrowings, we may have difficulty executing this asset/liability management strategy and/or it may result in a reduction in profitability.
OTTI charges in our investment securities portfolio could result in losses and adversely affect our continuing operations. Our securities portfolio may be negatively impacted by fluctuations in market value and interest rates, which may have an adverse effect on our financial condition.
Our securities portfolio may be impacted by fluctuations in market value, potentially reducing accumulated other comprehensive income and/or earnings, which may materially adversely affect our stockholders’ equity, regulatory capital and continuing operations. Fluctuations in market value may be caused by changes in interest rates, lower market prices for securities and limited investor demand, as well as the default rates of specific financial institutions whose securities provide the underlying collateral for these securities and changes in credit risk based on the condition of the issuer. The valuation of our investment securities also is influenced by the implementation of Securities and Exchange Commission and Financial Accounting Standards Board guidance on fair value accounting, which requires us to report our available for sale securities at their estimated fair value. Our stockholders’ equity is periodically adjusted by the amount of change in the estimated fair value of the available for sale securities, net of taxes. At December 31, 2019, the change in unrealized gains on securities available for sale from the level at December 31, 2018 was an increase of $13.9 million. When OTTI is present, the market environment more likely than not limits our ability to mitigate our exposure to valuation changes in these securities by selling them.
Our securities portfolio is evaluated for OTTI on at least a quarterly basis. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. We have not recorded any OTTI since 2011. As of December 31, 2019, we have no securities that are deemed impaired.
If our investments in real estate are not properly valued or sufficiently reserved for to cover actual losses, or if we are required to increase our valuation reserves, our earnings could be reduced.
We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property taken in as REO, and at certain other times during the assets holding period. Our net book value (“NBV”) in the loan at the time of foreclosure and thereafter is compared to the updated market value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset’s NBV over its fair value. If our valuation process is incorrect, the fair value of our investments in real estate may not be sufficient to recover our NBV in such assets, resulting in the need for additional charge-offs. Additional material charge-offs to our investments in real estate could have a material adverse effect on our financial condition and results of operations. Our regulators periodically review our REO and may require us to recognize further charge-offs. Any increase in our charge-offs, as required by our regulator, may have a material adverse effect on our financial condition and results of operations.
We face risks related to covenants in our loan sales to investors and secondary mortgage market conditions.
Our agreements with investors to sell our loans generally contain covenants that require us to repurchase loans under certain circumstances, including some delinquencies, or to return premiums paid by those investors if the loans are paid off early. If we are required to repurchase sold loans under these covenants, they may be deemed troubled loans, with the potential for charge-offs and/or loss provision
changes, which could impact our earnings and asset quality ratios adversely. The Bank was required to repurchase one loan from investors in 2019 and none during 2018.
Our ability to sell loans on the secondary mortgage market is impacted by interest rate changes and investor demand or expected return. If this market becomes less liquid, we may not be able to rely as much on loan sales to reduce our interest rate and credit risk.
We use estimates in determining the fair value of certain assets, such as mortgage servicing rights (“MSRs”). If our estimates prove to be incorrect, we may be required to write down the value of these assets which could adversely affect our earnings.
We sell a portion of our one-to-four family loans in the secondary market. We generally retain the right to service these loans through the Bank. At December 31, 2019, the book value of our MSRs was $2.8 million. We use a financial model that uses, wherever possible, quoted market prices to value our MSRs. This model is complex and also uses assumptions related to interest and discount rates, prepayment speeds, delinquency and foreclosure rates and ancillary fee income. Valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of the model. The primary risk associated with MSRs is that they will lose a substantial portion of their value as a result of higher than anticipated prepayments occasioned by declining interest rates. Conversely, these assets generally increase in value in a rising interest rate environment to the extent that prepayments are slower than anticipated. If prepayment speeds increase more than estimated or delinquency and default levels are higher than anticipated we may be required to write down the value of our MSRs which could have a material adverse effect on our net income and capital levels. The Company obtains independent valuations at least semi-annually to determine if impairment in the asset exists.
Declining economic conditions may adversely impact the fees generated by our asset management and trust business.
To the extent our asset management and trust clients and their assets become adversely impacted by weak economic and stock market conditions, they may choose to withdraw the assets managed by us and/or the value of their assets may decline. Our asset management revenues are based on the value of the assets we manage. If our clients withdraw assets or the value of their assets decline, our revenues from these activities may be adversely affected. These fees totaled $3.7 million and $3.9 million in 2019 and 2018, respectively.
We face significant operational and reputational risks. As a community bank, maintaining our reputation in our market area is critical to the success of our business, and the failure to do so may materially adversely affect our performance. Our business may be adversely affected by an increasing prevalence of fraud and other financial crimes impacting the banking industry.
We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. We operate in many different financial service businesses and rely on the ability of our employees and systems to process a significant number of transactions. Operational risk is the risk of loss from operations, including fraud by employees or outside persons, employees’ execution of incorrect or unauthorized transactions, data processing and technology errors or hacking and breaches of internal control systems. If our reputation is negatively affected, by the actions of our employees, by our inability to conduct our operations in a manner that is appealing to current or prospective customers, or otherwise, our business
and, therefore, our operating results may be materially adversely affected. Our loans to businesses and individuals and our deposit relationships and related transactions are subject to exposure to the risk of loss due to fraud and other financial crimes. Nationally, reported incidents of fraud and other financial crimes have increased. We have experienced an increase in losses due to apparent fraud and other financial crimes. Our policies and procedures designed to prevent such losses may not prevent all such losses. The Company continues to evaluate and implement new technologies; including, but not limited to, systems such as anti-skimming devices, new card technology, and monitoring systems that help to limit these types of instances.
Strong competition within our market area may limit our growth and profitability.
Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have national name recognition, greater resources and lending limits than we do and may offer certain services or prices for services that we do not or cannot provide. Our profitability depends upon our continued ability to successfully compete in our market.
The financial services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a bank holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.
A tightening of credit markets and liquidity risk could impair our ability to fund operations and jeopardize our financial condition.
Liquidity is essential to our business. A tightening of the credit markets and the inability to obtain adequate funding to replace deposits and fund continued loan growth may affect asset growth, our earnings capability and capital levels negatively. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary sources of liquidity are increases in deposit accounts, including brokered deposits, as well as cash flows from loan payments and our securities portfolio. Borrowings, especially from the FHLB and repurchase agreements, also provide us with a source of funds to meet liquidity demands. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms that are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or economy in general. Factors that could detrimentally impact our access to liquidity sources include adverse regulatory action against us or a decrease in the level of our business activity as a result of a downturn in the markets in which our loans are concentrated. Our ability to borrow also could be impaired by factors that are not specific to us, such as a disruption in the financial markets, negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations or continued deterioration in credit markets.
Goodwill and our core deposit premium could be deemed partially or fully impaired in the future, which would reduce our earnings and the values of our intangible assets.
At December 31, 2019, we had goodwill of $22.3 million and a core deposit premium of $2.8 million, due mainly to our 2018 acquisition of Universal. Under GAAP, we are required to periodically assess the value of these intangible assets based on a number of factors to determine if there is partial or full impairment. The factors taken into consideration include the market price of our stock, the net present value of our assets and liabilities and valuation information for similar financial institutions. This evaluation involves a substantial amount of judgment. If actual conditions underlying the factors differ from our assessment, the core deposit intangible and goodwill could be subjected to faster amortization or partial or complete impairment, which would reduce the value of these assets and reduce our earnings, perhaps materially.
We currently hold a significant amount of bank-owned life insurance.
At December 31, 2019, we held $103.1 million of bank-owned life insurance or BOLI on key employees and executives, with a cash surrender value of $60.7 million. These policies are maintained to informally fund various benefit plans. The eventual repayment of the cash surrender value is subject to the ability of the various insurance companies to pay death benefits or to return the cash surrender value to us if needed for liquidity purposes. We continually monitor the financial strength of the various companies with whom we carry these policies. However, any one of these companies could experience a decline in financial strength, which could impair its ability to pay benefits or return our cash surrender value. If we need to liquidate these policies for liquidity purposes, we would be subject to taxation on the increase in cash surrender value and penalties for early termination, both of which would adversely impact earnings.
We may not be able to fully realize our deferred tax asset.
At December 31, 2019, we had a $5.1 million deferred income tax asset based on differences between the financial statement amounts and tax bases of assets and liabilities and reflecting mainly an allowance for loan loss timing difference and NOL carryforward and AMT carryover. The value of our deferred income tax benefit is reviewed regularly under various forecasts and assumptions, including anticipated levels of taxable net income, to determine the likelihood of realizing the benefit. If actual results or subsequent forecasts differ from our current judgments, to the extent that it becomes more likely than not that this benefit will not be fully realized, we would have to write down this asset, which would negatively impact results of operations and reduce our asset size.
Transactions between the Company and its insurance subsidiary MutualFirst Risk Management, Inc. (the “Captive”), may be subject to certain IRS responsibilities and penalties.
The Captive is a Nevada-based, wholly-owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company and the Bank as well as to 14 other third-party insurance captives for which insurance may not be available or economically feasible. The Treasury Department of the United States and the IRS by way of Notice 2016-66 have stated that transactions believed similar in nature to transactions between the Company and the Captive may have the potential for tax avoidance or evasion and may be deemed by the IRS as an abusive tax structure subject to significant penalties, interest and possible criminal prosecution.
If our investment in the FHLBI becomes impaired, our earnings and stockholders’ equity could decrease.
At December 31, 2019, we owned $13.1 million in FHLB stock. We are required to own this stock to be a member of and to obtain advances from the FHLBI. This stock is not marketable and can only be redeemed by our FHLB. The most recent stock buyback initiated by FHLB was in 2015. Our FHLB’s financial condition is linked, in part, to the ten other members of the FHLB System and to accounting
rules and asset quality risks that could materially lower their capital, which would cause our FHLB stock to be deemed impaired, resulting in a decrease in our earnings and assets.
Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and our income.
The Bank and the Company are subject to extensive regulation, supervision and examination by federal and state regulators, which have extensive discretion in connection with their supervisory and enforcement activities, including the ability to impose restrictions on a bank’s operations, reclassify assets, determine the adequacy of a bank’s allowance for loan losses and determine the level of deposit insurance premiums assessed. Because our business is highly regulated, the applicable laws and regulations are subject to frequent change. Any change in these laws, regulations and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums, could have a material impact on our operations. See “Item 1 - How We Are Regulated.”
In response to the last financial crisis, Congress took actions that are intended to strengthen confidence and encourage liquidity in financial institutions, and the FDIC has taken actions to increase insurance coverage on deposit accounts. The Dodd-Frank Act created the CFPB.
The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets, their service providers and certain non-depository entities such as debt collectors and consumer reporting agencies. In the case of banks, such as the Bank, with total assets of less than $10 billion, this examination and enforcement authority is held by the institution’s primary federal banking regulator (the FDIC, in the case of the Bank).
The CFPB has finalized a number of significant rules that could have a significant impact on our business and the financial services industry more generally. In particular, the CFPB has adopted rules impacting nearly every aspect of the lifecycle of a residential mortgage loan. The CFPB has also issued guidance which could significantly affect the automotive financing industry by subjecting indirect auto lenders, such as the Bank, to regulation as creditors under the Equal Credit Opportunity Act, which would make indirect auto lenders monitor and control certain credit policies and procedures undertaken by auto dealers.
In the last economic downturn, federal and state banking regulators were active in responding to concerns and trends identified in examinations and have issued many formal enforcement orders requiring capital ratios in excess of regulatory requirements. The FDIC and IDFI regulate the activities in which the Bank may engage primarily for the protection of depositors and not for the protection or benefit of stockholders. In addition, new laws and regulations may increase our costs of regulatory compliance and of doing business and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge and our ongoing operations, costs and profitability. Regulatory changes regarding card interchange fee income do not currently apply to us but could change in the future. Further, legislative proposals limiting our rights as a creditor could result in credit losses or increased expense in pursuing our remedies as a creditor.
Increases in deposit insurance premiums and special FDIC assessments will negatively impact our earnings.
The Dodd-Frank Act established 1.35% of total insured deposits as the minimum reserve ratio for the FDIC Deposit Insurance Fund effective September 30, 2020. On September 30, 2018, the Deposit Insurance Fund Reserve Ratio reached 1.36%. The FDIC must offset the requirement that the minimum reserve ratio reach 1.35% on institutions with assets less than $10 billion. To implement the offset requirement, FDIC regulations require that institutions with assets of $10 billion or more pay a surcharge during a temporary period and smaller institutions will receive credits whenever the reserve ratio reaches
1.38%. The FDIC notified the Bank of its individual credit amount in January 2019 and would apply credits each quarter that the reserve ratio is at least 1.38%, up to the full amount of a small bank’s credit or assessment, whichever is less. The FDIC reserve ratio exceeded the Deposit Insurance Fund reserve ratio as of June 30, 2019 and September 30, 2019 and applied credits to the Bank's assessment for the quarters. In addition to the statutory minimum ratio, the FDIC must set a designated reserve ratio or DRR, which may exceed the statutory minimum. The FDIC has set 2.0% as the DRR.
As required by the Dodd-Frank Act, the FDIC has adopted final regulations under which insurance premiums are based on an institution’s total assets minus its tangible equity instead of its deposits. Primarily as a result of the Small Bank Assessment Credits, we saw a decrease in our deposit insurance premiums in 2019. The insurance costs were $413,000, $898,000 and $724,000 for the years ended December 31, 2019, 2018 and 2017, respectively. Our future deposit insurance premiums should increase, back to historical levels, once the credits have been fully utilized, and may further increase if the FDIC determines that it will not meet the required or anticipated minimum reserve ratios discussed, which could have a negative impact on our earnings.
Our accounting policies and methods impact how we report our financial condition and results of operations. Application of these policies and methods may require management to make estimates about matters that are uncertain.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. Our management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report our financial condition and results of operations. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which might be reasonable under the circumstances yet might result in our reporting materially different amounts than would have been reported under a different alternative. These accounting policies are critical to presenting our financial condition and results of operations. They may require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions.
Our controls and procedures may be ineffective.
We regularly review and update our internal controls, disclosure controls and procedures and corporate governance policies and procedures. As a result, we may incur increased costs to maintain and improve our controls and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of our controls or procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations or financial condition.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and cause
existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. Though the third-party vendors providing key components of our business infrastructure have been carefully chosen by us, we cannot control their actions, and their failures may impact the Bank’s ability to provide services to its customers and cause us to incur significant expense. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our reputation, financial condition and results of operations.
We may elect or be compelled to seek additional capital in the future, but that capital may not be available when it is needed or on terms acceptable to us.
We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. In addition, we may elect to raise more capital to support our business or to finance acquisitions, if any, or we may otherwise elect or be required to raise additional capital. Should we be required by regulatory authorities to raise additional capital, we may seek to do so through the issuance of, among other things, our common stock or preferred stock. The issuance of additional shares of common stock or convertible securities to new stockholders would be dilutive to our current stockholders.
Our ability to raise additional capital, if needed, will depend on conditions in the capital markets, economic conditions and a number of other factors, many of which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed, or if the terms of such a capital raise are not advantageous, it may have a material adverse effect on our financial condition, results of operations and prospects.
There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the market price of our common stock.
We are not restricted from issuing additional common stock or preferred stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or preferred stock or any substantially similar securities. The market value of our common stock could decline as a result of sales by us of a large number of shares of common stock or preferred stock or similar securities in the market or the perception that such sales could occur.
Our board of directors is authorized to allow us to issue additional common stock, as well as classes or series of preferred stock, generally without any action on the part of the stockholders. In addition, the board has the power, generally without stockholder approval, to set the terms of any such classes or series of preferred stock that may be issued, including voting rights, dividend rights and preferences over the common stock with respect to dividends or upon the liquidation, dissolution or winding-up of our business and other terms. If we issue additional preferred stock in the future that has a preference over the common stock with respect to the payment of dividends or upon liquidation, dissolution or winding-up, or if we issue additional preferred stock with voting rights that dilute the voting power of the common stock, the rights of holders of the common stock or the market value of the common stock could be adversely affected.
Anti-takeover provisions could negatively impact our stockholders.
Provisions in our charter and bylaws, the corporate law of the State of Maryland and federal regulations could delay, defer or prevent a third party from acquiring us, despite the possible benefit to our stockholders, or otherwise adversely affect the market price of any class of our equity securities, including
our common stock. These provisions include: a prohibition on voting shares of common stock beneficially owned in excess of 10% of total shares outstanding, supermajority voting requirements for certain business combinations with any person who beneficially owns more than 10% of our outstanding common stock; the election of directors to staggered terms of three years; advance notice requirements for nominations for election to our board of directors and for proposing matters that stockholders may act on at stockholder meetings, a requirement that only directors may fill a vacancy in our board of directors, supermajority voting requirements to remove any of our directors and the other provisions of our charter. Our charter also authorizes our board of directors to issue preferred stock, and preferred stock could be issued as a defensive measure in response to a takeover proposal. In addition, pursuant to federal and state laws and regulations, as a general matter, no person or company, acting individually or in concert with others, may acquire more than 10% of our common stock without prior approval from our regulators.
These provisions may discourage potential takeover attempts, discourage bids for our common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of, our common stock. These provisions could also discourage proxy contests and make it more difficult for holders of our common stock to elect directors other than the candidates nominated by our board of directors.
The voting limitation provision in our charter could limit your voting rights as a holder of our common stock.
Our charter provides that any person or group who acquires beneficial ownership of our common stock in excess of 10% of the outstanding shares may not vote the excess shares. Accordingly, if you acquire beneficial ownership of more than 10% of the outstanding shares of our common stock, your voting rights with respect to the common stock will not be commensurate with your economic interest in the Company.
We rely on dividends from MutualBank for substantially all of the Company’s revenue.
MutualFirst’s primary source of revenue is dividends from the Bank. In certain instances, the IDFI must be notified of dividends made from the Bank to the Company and may choose to limit Bank dividends. If the Bank is unable to pay dividends, MutualFirst may not be able to service its debt, pay its other obligations or pay dividends on the Company’s common stock, which could have a material adverse impact on our financial condition or the value of your investment in our common stock.
Our common stock trading volume may not provide adequate liquidity for investors.
Our common stock is listed on the Nasdaq Global Market. However, the average daily trading volume in our common stock is less than that of many larger financial services companies. A public trading market having the desired depth, liquidity and orderliness depends on the presence of a sufficient number of willing buyers and sellers for our common stock at any given time. This presence is impacted by general economic and market conditions and investors’ views of our Company. Because our trading volume is limited, any significant sales of our shares could cause a decline in the price of our common stock.
Our directors and executive officers have the ability to influence stockholder actions in a manner that may be adverse to the personal investment objectives of our stockholders.
As of December 31, 2019, our directors and executive officers as a group beneficially owned 1,634,375 shares, or 19.0%, of our common stock (including immediately exercisable options for 11,500 shares). In addition, our employee stock ownership and 401(k) plan controlled 3.7% of our common stock on that date. Due to this significant collective ownership of or control over our common stock, our directors and executive officers may be able to influence the outcome of director elections or block significant transactions, such as a merger or acquisition, or any other matter that might otherwise be favored by
other stockholders and could prevent any stockholder action requiring a supermajority vote under our articles of incorporation.
We will be subject to business uncertainties and contractual restrictions while the merger with Northwest Bancshares is pending.
Uncertainty about the effect of the merger on employees and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is completed, and could cause customers and others who deal with us to seek to change existing business relationships with us. Our employee retention and recruitment may be particularly challenging prior to the effective time of the merger, as employees and prospective employees may experience uncertainty about their future roles with the combined company.
The pursuit of the merger and the preparation for the integration may place a significant burden on management and internal resources. Any significant diversion of management attention away from ongoing business and any difficulties encountered in the transition and integration process could affect our financial results. In addition, the merger agreement requires that we operate in the usual, regular and ordinary course of business and restricts us from taking certain actions prior to the effective time of the merger or termination of the merger agreement without Northwest Bancshares’ consent in writing. These restrictions may prevent us from pursuing attractive business opportunities that may arise prior to the completion of the merger.
Failure to complete the merger could negatively impact our stock price and future business and financial results.
We have already incurred substantial expenses in connection with the merger. If the merger is not completed, our ongoing business may be adversely affected and will be subject to several risks, including the following:
·
if the merger agreement is terminated under specified circumstances, we will be required to pay Northwest Bancshares an $11.0 million termination fee;
·
we will be required to pay certain costs relating to the merger, whether or not the merger is completed, such as legal, accounting, financial advisory and printing fees;
·
under the merger agreement, we are subject to certain restrictions on the conduct of our business prior to completing the merger, which may adversely affect our operating results; and
·
matters relating to the merger may require substantia l commitments of time and resources by our management which could otherwise have been devoted to other opportunities that may have been beneficial to us as an independent company.
In addition, if the merger is not completed, we may experience negative reactions from the financial markets and from our customers and employees. We also could be subject to litigation related to any failure to complete the merger or to enforcement proceedings to perform our obligations under the merger agreement. If the merger is not completed, some or all of the risks described above may materialize and may materially affect our business, financial results and stock price.
Litigation relating to the merger could result in significant costs, management distraction, and/or a delay of, or injunction against, the merger.
On December 23, 2019, a purported Company stockholder filed a lawsuit against us and the members of our Board of Directors in the United States District Court for the District of Maryland, captioned Shiva Stein v. MutualFirst Financial, Inc. et al., Docket No. 1:19-cv-03625. The plaintiff generally alleges that the registration statement filed with the SEC on December 20, 2019 contains materially misleading omissions
or misrepresentations in violation of Section 14(a) and section 20{a) of the Exchange Act, and Rule 14a-9 promulgated thereunder. The plaintiff seeks injunctive relief, unspecified damages, and an award of attorneys' fees and expenses.
On January 3, 2020, a purported Company stockholder filed a lawsuit against us, the members of our Board of Directors and Northwest Bancshares in the United States District Court for the District of Delaware making similar allegations.
The outcomes of these actions are uncertain and could result in additional costs to us and/or Northwest Bancshares, including costs associated with the indemnification of our directors and officers. Other plaintiffs may also file lawsuits against us and/or Northwest Bancshares and/or their directors and officers in connection with the merger. The defense or settlement of any lawsuits or claims relating to the merger may have an adverse effect on the business, financial condition and results of operations of the Company.
If the actions remain unsolved, they could prevent or delay the completion of the merger. One of the conditions to the consummation of the merger is the absence of any order that would have the effect of preventing the completion of the merger or the bank merger or of any suit, action or other proceeding that is pending or threatened by any governmental entity that seeks to restrain or prohibit the merger or the bank merger. Consequently, if the lawsuit s are not dismissed or a settlement or other resolution is not reached in these or any other lawsuits that are filed or in any regulatory proceeding, or these plaintiffs or any other claimants secure injunctive or other relief or a regulatory authority issues an order or other directive preventing the consummation of the merger or the bank merger, then such injunctive or other relief may prevent the merger from becoming effective in a timely manner or at all.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2.
Item 2. Properties
At December 31, 2019 we had 39 full service offices. Subsequent to year-end we have closed three of the full-service offices throughout our footprint. Our offices are located throughout Indiana. At December 31, 2019, we owned our home office in Muncie, Indiana and all but twelve of our financial center offices. We lease offices in central and northern Indiana for our trust and brokerage services, financial center offices in central, northern and southern Indiana and loan origination offices in northwestern Indiana and southwest Michigan. The net book value of our investment in premises and equipment was approximately $24.5 million at December 31, 2019. We believe that our current facilities are adequate to meet our present and immediately foreseeable needs. See Note 8 of the Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K.
Item 3.
Item 3. Legal Proceedings
From time to time, we are involved as plaintiff or defendant in various legal actions arising in the normal course of business. We do not anticipate incurring any material liability as a result of such litigation. While the ultimate outcome of pending proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing us in such proceedings, that the resolution of these proceedings should not have a material adverse effect on our consolidated financial position or results of operation or cashflows.
In addition, on December 23, 2019, a purported Company stockholder filed a lawsuit against us and the members of our Board of Directors in the United States District Court for the District of Maryland, captioned Shiva Stein v. MutualFirst Financial, Inc. et al., Docket No. 1:19-cv-03625. The plaintiff
generally alleges that the registration statement filed with the SEC on December 20, 2019 contains materially misleading omissions or misrepresentations in violation of Section 14{a) and section 20{a) of the Exchange Act, and Rule 14a-9 promulgated thereunder. The plaintiff seeks injunctive relief, unspecified damages, and an award of attorneys' fees and expenses.
On January 3, 2020, a purported Company stockholder filed a lawsuit against us, the members of our Board of Directors and Northwest Bancshares in the United States District Court for the District of Delaware making similar allegations.
The Company and Northwest Bancshares are reviewing the complaints and have not yet formally responded. Although the ultimate outcome of these actions cannot be predicted with certainty, we believe that these lawsuits are without merit and intend to defend against these actions vigorously.
Item 4.
Item 4. Mine Safety Disclosure
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The common stock of MutualFirst Financial, Inc. is traded under the symbol “MFSF” on the Nasdaq Global Market. The table below shows the high and low closing prices for our common stock for the periods indicated. This information was provided by the Nasdaq.
At December 31, 2019, there were 8,607,953 shares of common stock outstanding and approximately 3,100 common stockholders of record.
Our common stock cash dividend payout policy is continually reviewed by management and the Board of Directors. During 2019, the Company paid total common stock dividends of $0.80 per share, up from $0.74 per share in 2018. Future common stock dividend payments will depend upon a number of factors, including capital requirements, regulatory limitations, the Company’s financial condition, results of operations, debt service on Company borrowings and the Bank’s ability to pay dividends to the Company. The Company relies significantly upon dividends from the Bank to accumulate earnings for payment of cash dividends to our common stockholders.
On January 18, 2019, the Company announced that its Board of Directors had authorized the repurchase of up to approximately 430,000 shares of common stock, or 5% of its then-outstanding shares over a one-year period. These stock repurchases may be made from time-to-time in open market or negotiated transactions as deemed appropriate by the Company and will depend on market conditions. As of December 31, 2019, the Company had repurchased 136,471 shares under this plan at a weighted average price per share of $31.23 for a total of $4.3 million. There were 293,529 remaining shares that may be repurchased under the current authorization. The following table provides detail on the stock repurchases during the fourth quarter 2019.
Information regarding our equity compensation plans is included in Part III, Item 12 of this Form 10-K.
Shareholder Performance Graph Presentation
The following graph and related discussion are being furnished solely to accompany this Annual Report on Form 10-K pursuant to Item 201(e) of Regulation S-K and shall not be deemed to be “soliciting materials” or to be “filed” with the SEC (other than as provided in Item 201) nor shall this information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained therein, except to the extent that the Company specifically incorporates it by reference into a filing.
The following graph shows a comparison of stockholder return on MutualFirst Financial Inc.’s common stock with the cumulative total returns for: 1) the Nasdaq Composite® (U.S.) Index; and 2) the SNL U.S. Bank and Thrift Index, which was compiled by SNL Financial LC of Charlottesville, Virginia. The graph assumes an initial investment of $100 and reinvestment of dividends. The graph is historical only and may not be indicative of possible future performance.
Item 6.
Item 6. Selected Financial and Other Data
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following information is only a summary and you should read it in conjunction with our consolidated financial statements and accompanying notes contained in Item 8 of this Form 10-K.
Reconciliation of Non-GAAP Financial Measures
The annual report on Form 10-K contains financial information determined by methods other than in accordance with U.S. generally accepted accounting principles (“GAAP”). Non-GAAP financial measures, specifically tangible common equity, tangible assets, tangible book value per common share and return on average tangible common equity are used by management to measure the strength of its capital and its ability to generate earnings on tangible capital invested by its shareholders. Although the Company believes these non-GAAP measures provide a greater understanding of its business, they should not be considered a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of these non-GAAP financial measures to the most directly compared GAAP financial measures are included in the following table.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
Overview and Significant Events in 2019
MutualFirst is a Maryland corporation and a bank holding company headquartered in Muncie, Indiana, with operations in Allen, Delaware, Elkhart, Grant, Greene, Hamilton, Jackson, Johnson, Knox, Kosciusko, Lawrence, Monroe, Randolph, St. Joseph and Wabash counties in Indiana. It owns MutualBank, an Indiana commercial bank with 39 financial centers in Indiana, trust offices in Fishers and Crawfordsville, Indiana and a loan origination office in New Buffalo, Michigan. The Bank has a subsidiary, Summit Mortgage, Inc., that operates a mortgage banking firm in Fort Wayne, Indiana. MutualFirst also owns MutualFirst Risk Management, a captive insurance company based in Nevada and Mutual Risk Advisors, an information security consulting firm based in Indiana.
MutualBank is an Indiana commercial bank subject to regulation, supervision and examination by the IDFI and the FDIC. MutualFirst is a bank holding company subject to examination, supervision and regulation by the FRB, which is subjected to regulatory capital requirements similar to those imposed on the Bank. For more details on these regulations see “Item 1. Business - How We Are Regulated.”
At December 31, 2019, we had $2.1 billion in assets, $1.5 billion in loans, $1.6 billion in deposits and $226.8 million in stockholders’ equity. The Bank’s total risk-based capital ratio at December 31, 2019 was 13.9%, exceeding the 10.0% requirement for a well-capitalized institution. The ratio of average tangible common equity increased to 9.89% as of year-end 2019 compared to 8.72% at year-end 2018. For the year ended December 31, 2019, net income available to common shareholders was $23.8 million, or $2.77 per basic and $2.74 per diluted share, compared with net income available to common shareholders of $18.9 million, or $2.25 per basic and $2.21 per diluted share for 2018. Net income for 2019 includes $1.0 million of one-time merger related expenses, net of tax, related to the merger with and into Northwest Bancshares. Net income for 2018 includes $1.9 million of one-time merger and system conversion expenses, net of tax, related to the acquisition of Universal. The details of our 2019 performance are set forth below and in our Consolidated Audited Financial Statements contained in Item 8 of this Form 10-K, as well as details regarding the acquisition are discussed in Note 2.
Key aspects of our 2019 operations include:
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Commercial loan balances at December 31, 2019 increased $31.3 million, or 4.5% in 2019.
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Non-real estate consumer loan balances increased $10.6 million, or 4.0% in 2019 primarily due to growth in indirect lending.
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Mortgage loans sold in 2019 of $232.8 million increased compared to mortgage loans sold in 2018 of $122.3 million.
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Deposits increased $34.3 million, or 2.3% in 2019.
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Tangible book value per common share was $23.43 as of December 31, 2019 compared to $20.51 as of December 31, 2018.
·
Net interest income increased $1.2 million in 2019 compared to 2018.
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Net interest margin for 2019 was 3.35% compared to 3.47% in 2018. Tax equivalent net interest margin was 3.43% for 2019 compared to 3.55% in 2018.
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Provision for loan losses decreased by $170,000 to $2.0 million in 2019 compared to $2.1 million in 2018.
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Non-interest income increased $5.3 million in 2019 compared to 2018.
·
Non-interest expense increased $2.4 million in 2019 compared to 2018.
Our principal business consists of attracting retail deposits from the general public, including some brokered deposits, and investing those funds primarily in loans secured by first mortgages on owner-occupied, one-to-four family residences, a variety of consumer loans, loans secured by commercial real estate and commercial business loans. Funds not invested in loans generally are invested in investment
securities, including mortgage-backed and mortgage-related securities and agency and municipal bonds. We also obtain funds from FHLB advances and other borrowings.
MutualWealth is the wealth management division of the Bank providing a variety of fee-based financial services, including trust, investment, insurance, broker advisory, retirement plan and private banking services, in the Bank’s market area. MutualWealth produces non-interest income for the Bank that is tied primarily to the market value of the portfolios being managed. As of December 31, 2019, MutualWealth had $513.5 million of fiduciary assets and generated $3.8 million in commission income during 2019.
MutualFinancial Services is the brokerage division of the Bank providing a variety of fee-based financial services related to securities and investment transactions. MutualFinancial Services produces non-interest income for the Bank that is tied primarily to the volume of the transactions being processed. During 2019, MutualFinancial Services generated $967,000 in commission income.
Our results of operations depend primarily on the level of our net interest income, which is the difference between interest income on interest-earning assets, such as loans, mortgage-backed securities and investment securities, and interest expense on interest-bearing liabilities, primarily deposits and borrowings. The structure of our interest-earning assets versus the structure of interest-bearing liabilities, along with the shape of the yield curve, has a direct impact on our net interest income. Historically, our interest-earning assets have been longer term in nature (i.e., fixed-rate mortgage loans) and interest-bearing liabilities have been shorter term (i.e., certificates of deposit, regular savings accounts, etc.). This structure would impact net interest income favorably in a decreasing rate environment, assuming a normally shaped yield curve, as the rates on interest-bearing liabilities would decrease more rapidly than rates on the interest-earning assets. Conversely, in an increasing rate environment, assuming a normally shaped yield curve, net interest income would be impacted unfavorably as rates on interest-earning assets would increase at a slower rate than rates on interest-bearing liabilities.
The Company continues to reduce the impact of interest rate changes on its net interest income by shortening the term of its interest-earning assets to better match the terms of our interest-bearing liabilities and by selling long-term fixed rate loans and increasing the term of certain liabilities. See “Item 7A
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Asset and Liability Management and Market Risk
Our Risk When Interest Rates Change. The rates of interest we earn on assets and pay on liabilities generally is established contractually for a period of time. Market interest rates change over time. Accordingly, our results of operations, like those of other financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of our assets and liabilities. The risk associated with changes in interest rates and our ability to adapt to these changes is known as interest rate risk and is one of our most significant market risks.
Management continues to evaluate options to mitigate interest rate risk in an increasing interest rate environment during this cycle of extremely low interest rates. This includes shortening assets and lengthening liabilities when possible.
How We Measure Our Risk of Interest Rate Changes. As part of our attempt to manage our exposure to changes in interest rates, we monitor our interest rate risk. In monitoring interest rate risk, we continually analyze and manage assets and liabilities based on their payment streams and interest rates, the timing of their maturities and their sensitivity to actual or potential changes in market interest rates. In order to minimize the potential for adverse effects of material and prolonged changes in interest rates on our results of operations, the Bank’s board of directors establishes asset and liability management policies to better match the maturities and repricing terms of our interest-earning assets and interest-bearing liabilities.
These asset and liability policies are implemented by the Asset and Liability Management Committee, which is chaired by the Chief Financial Officer and is comprised of members of our senior management team. The purpose of the Asset and Liability Management Committee is to communicate, coordinate and control asset/liability management issues consistent with our business plan and board-approved policies. The committee establishes and monitors the volume and mix of assets and funding sources taking into account relative costs and spreads, interest rate sensitivity and liquidity needs. The objective of these actions is to manage assets and funding sources consistent with liquidity, capital adequacy, growth, risk and profitability goals. The Asset and Liability Management Committee generally meets monthly to review, among other things, economic conditions and interest rate outlook, current and projected liquidity needs and capital position, anticipated changes in the volume and mix of assets and liabilities and interest rate risk exposure limits versus current projections pursuant to a net present value of portfolio equity analysis and income simulations. At each meeting, the Asset and Liability Management Committee recommends appropriate strategy changes based on this review. The Chief Financial Officer is responsible for reviewing and reporting on the effects of the policy implementations and strategies to the Board of Directors, at least quarterly.
In order to manage our assets and liabilities and achieve the desired liquidity, credit quality, interest rate risk, profitability and capital targets, we have sought to:
·
originate and purchase adjustable rate mortgage loans and commercial business loans;
·
originate shorter-duration consumer loans,
·
manage our deposits to establish stable deposit relationships,
·
acquire longer-term borrowings at fixed rates, when appropriate, to offset the negative impact of longer-term fixed rate loans in our loan portfolio, and
·
limit the percentage of long-term fixed-rate loans in our portfolio.
Depending on the level of general interest rates, the relationship between long and short-term interest rates, market conditions and competitive factors, the Asset and Liability Management Committee may increase our interest rate risk position somewhat in order to maintain our net interest margin and improve
earnings. We will continue to increase our emphasis on the origination of relatively short-term and/or adjustable rate loans. In addition, in an effort to avoid an increase in the percentage of long-term, fixed-rate loans in our portfolio, during 2019 we sold in the secondary market $232.8 million of primarily fixed rate, one-to-four family mortgage loans with a term to maturity of 15 years or greater, which was 77.3% of all such loans originated by the Bank and its subsidiaries during the year.
If past rate movements are an indication of future changes, they usually are neither instantaneous nor do a majority of core deposits reprice at the same level as rates change. The following chart reflects the Bank’s percentage change in net interest income, over a one year time period, and net portfolio value (NPV) assuming an instantaneous parallel rate shock in a range from down 100 basis points to up 400 basis points as of December 31, 2019.
The following chart indicates the Company’s percentage change in net interest income and NPV assuming rate movements that are not instantaneous but change gradually over one year.
The analyses indicate that net interest income and NPV would decline in an instantaneous upward or downward rate shock. While our balance sheet is slightly liability sensitive, the model does not take into consideration any rates below zero. Since deposit rates are close to the floor, there would be limited opportunity to reprice deposits in a downward rate environment.
As with any method of measuring interest rate risk, certain shortcomings are inherent in the method of analysis presented in the chart. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if interest rates change, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the tables. Therefore, the Company also considers potential interest rate shocks that are not immediate parallel shocks in various rate scenarios. Management currently believes that interest rate risk is managed appropriately in more practical rate shock scenarios than those in the chart above.
Item 8.
Item 8. Financial Statements and Supplementary Data
MutualFirst Financial, Inc.
Report of Independent Registered Public Accounting Firm and
Consolidated Financial Statements
December 31, 2019, 2018 and 2017
Report of Independent Registered Public Accounting Firm
To the Stockholders, Board of Directors and Audit Committee
MutualFirst Financial, Inc.
Muncie, Indiana
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of MutualFirst Financial, Inc. (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2019 and the related notes (collectively referred to as the "financial statements"). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 12, 2020, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 1978.
/s/ BKD, LLP
Indianapolis, Indiana
March 12, 2020
MutualFirst Financial, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
See Notes to Consolidated Financial Statements
MutualFirst Financial, Inc.
Consolidated Statements of Income
(In Thousands, Except Share and Per Share Data)
See Notes to Consolidated Financial Statements
MutualFirst Financial, Inc.
Consolidated Statements of Comprehensive Income
(In Thousands)
See Notes to Consolidated Financial Statements
MutualFirst Financial, Inc.
Consolidated Statements of Stockholders’ Equity
(In Thousands, Except Share and Per Share Data)
See Notes to Consolidated Financial Statements
			 		
MutualFirst Financial, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
MutualFirst Financial, Inc.
Consolidated Statements of Cash Flows (continued)
(In Thousands)
See Notes to Consolidated Financial Statements
			 		
Note 1: Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of MutualFirst Financial, Inc. (Company) and its wholly owned subsidiaries, MFBC Statutory Trust I, MutualFirst Risk Management, Inc., Mutual Risk Advisors, Inc., and MutualBank (Bank) and the Bank’s wholly owned subsidiaries, Mishawaka Financial Services, Inc., Mutual Federal Investment Company and the wholly owned subsidiary of Mutual Federal Investment Company, Mutual Federal REIT, Inc. and Summit Service Corp. and their wholly owned subsidiary, Summit Mortgage, Inc., conform to accounting principles generally accepted in the United States of America and reporting practices followed by the banking industry. The more significant of the policies are described below.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, goodwill, valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, loan servicing rights, valuation of deferred tax assets, other-than-temporary impairments (OTTI) and fair value of financial instruments.
The Bank generates mortgage, consumer and commercial loans and receives deposits from customers located primarily in north, central and southern Indiana. The Bank’s loans are generally secured by specific items of collateral including real property, consumer assets and business assets. Mutual Federal Investment Company invests in various investment securities and loans through Mutual Federal REIT, Inc.
Consolidation - The consolidated financial statements include the accounts of the Company, the Bank, and the Bank’s subsidiaries, after elimination of all material intercompany transactions.
Cash Equivalents - The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2019 and 2018, cash equivalents consisted primarily of money market accounts with brokers and checking accounts with government sponsored entities.
At December 31, 2019, the Company’s cash accounts exceeded federally insured limits by approximately $4.7 million. Included in this amount are uninsured accounts of approximately $3.8 million at the Federal Reserve Bank of Chicago and Federal Home Loan Bank of Indianapolis.
Interest-bearing time deposits - The fair value of interest-bearing time deposits approximates carrying value.
Derivative Instruments - The Company occasionally enters into derivative financial instruments as part of its interest rate risk strategies. These derivative financial instruments consist primarily of interest rate swaps. These instruments are carried at the fair value of the derivatives and reflects the estimated amounts that would have been received to terminate these contracts at the reporting date based upon pricing or valuation models applied to current market information.
The Company offers interest rate derivative products (e.g. interest rate swaps) to certain of its high-quality commercial borrowers. This product allows customers to enter into an agreement with the Company to swap their variable rate loan to a fixed rate. These derivative products are designed to reduce, eliminate or modify the risk of changes in the borrower’s interest rate. The extension of credit incurred through the execution of these derivative products is subject to the same approvals and rigorous underwriting standards as the related
traditional credit product. The Company limits its risk exposure to these products by entering into a mirror-image, offsetting swap agreement with a separate, well-capitalized and rated counterparty. These transactions are ratified by the Asset Liability Committee. By using these interest rate swap arrangements, the Company is also better insulated from the interest rate risk associated with underwriting fixed-rate loans. These derivative products do not qualify for hedge accounting. The derivatives are recorded on the balance sheet at fair value and changes in fair value of both the customer and the offsetting swap agreements are recorded (and essentially offset) in non-interest income.
Investment Securities - Certain debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. At December 31, 2019 and 2018, no securities were classified as held to maturity. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income, net of tax. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. When the Company does not intend to sell a debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, it recognizes the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. For held to maturity debt securities, the amount of an other-than-temporary impairment recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairment is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.
The Company’s consolidated statement of income reflects the full impairment (that is, the differences between the security’s amortized cost basis and fair value) on debt securities that the Company intends to sell or would more likely than not be required to sell before the expected recovery of the amortized cost basis. For available for sale and held to maturity debt securities that management has no intent to sell and believes that it more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment is recognized in earnings, while the noncredit loss is recognized in accumulated other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as projected based on cash flow projections.
For equity securities, when the Company has decided to sell an impaired available for sale security and does not expect the fair value of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other than temporary even if a decision to sell has not been made.
Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers the length of time and extent that fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.
Loans held for sale are carried at the lower of aggregate cost or market. Market is determined using the aggregate method. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income based on the difference between estimated sales proceeds and aggregate cost.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.
The accrual of interest on mortgage, consumer and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Discounts and premiums on purchased residential real estate and commercial loans is amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method.
Acquisition accounting and acquired loans - We account for our acquisitions under FASB ASC Topic 805, Business Combinations, which requires the use of the acquisition method of accounting. All identifiable assets acquired, including loans, are recorded at fair value. No allowance for loan losses related to the acquired loans is recorded on the acquisition date as the fair value methodology prescribed in FASB ASC Topic 820, Fair Value Measurements. The fair value estimates associated with the loans include estimates related to expected prepayments and the amount and timing of undiscounted expected principal, interest and other cash flows.
Allowance for loan losses - The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the inability to collect a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
We maintain an allowance for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on ongoing, quarterly assessments of the estimated losses inherent in the loan portfolio. Our methodology for assessing the appropriateness of the allowance consists of several key elements, including the general allowance and specific allowances for identified problem loans and portfolio segments. In addition, the allowance incorporates the results of measuring impaired loans as provided in ASC 310, Receivables. These accounting standards prescribe the measurement methods, income recognition and disclosures related to impaired loans.
The general allowance is calculated by applying loss factors to outstanding loans based on the internal risk evaluation of such loans or pools of loans. Changes in risk evaluations of both performing and nonperforming loans affect the amount of the general allowance. Loss factors are based on our historical loss experience as well as on significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior three years. Management believes the three year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed.
The appropriateness of the allowance is reviewed by management based upon its evaluation of then-existing economic and business conditions affecting our key lending areas and other conditions, such as credit quality trends (including trends in non-performing loans expected to result from existing conditions), collateral values, loan volumes and concentrations, specific industry conditions within portfolio segments and recent loss experience in particular segments of the portfolio that existed as of the balance sheet date and the impact
that such conditions were believed to have had on the collectability of the loan. Senior management reviews these conditions quarterly in discussions with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the loss related to this condition is reflected in the general allowance for loan losses. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments.
The allowance for loan losses is based on estimates of losses inherent in the loan portfolio. Actual losses can vary significantly from the estimated amounts. Our methodology as described permits adjustments to any loss factor used in the computation of the general allowance in the event that, in management’s judgment, significant factors which affect the collectability of the portfolio as of the evaluation date are not reflected in the loss factors. By assessing the probable incurred losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon any more recent information that has become available.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the ability to collect the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent.
Groups of loans with similar risk characteristics are collectively evaluated for impairment based on the group’s historical loss experience adjusted for changes in trends, conditions and other relevant factors that affect repayment of the loans. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.
Premises and equipment are carried at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based principally on the estimated useful lives of the assets which range from 3
to 50 years. Maintenance and repairs are expensed as incurred while major additions and improvements are capitalized. Gains and losses on dispositions are included in current operations.
Federal Home Loan Bank stock is a required investment for institutions that are members of the Federal Home Loan Bank (FHLB) system. The required investment in the common stock is based on a predetermined formula, carried at cost and is evaluated for impairment.
Mortgage-servicing assets are recognized separately when rights are acquired through purchase or through sale of financial assets. Under the servicing assets and liabilities accounting guidance, servicing rights resulting from the sale or securitization of loans originated by the Company are initially measured at fair value at the date of transfer. The Company subsequently measures each class of servicing asset using the amortization method. Under the amortization method, servicing rights are amortized in proportion to and over the period of estimated net servicing income. The amortized assets are assessed for impairment based on fair value at each reporting date.
Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. These variables change from quarter to quarter as market conditions and projected interest rates change, and may have an adverse impact on the value of the mortgage servicing right and may result in a reduction to noninterest income.
Each class of separately recognized servicing assets subsequently measured using the amortization method are evaluated and measured for impairment. Impairment is determined by stratifying rights into tranches based on predominant characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the carrying amount of the servicing assets for that tranche. The valuation allowance is adjusted to reflect changes in the measurement of impairment after the initial measurement of impairment. Changes in valuation allowances are reported with net servicing fees on the income statement. Fair value in excess of the carrying amount of servicing assets for that stratum is not recognized.
Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal or a fixed amount per loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.
Intangible assets are being amortized on an accelerated basis over periods ranging from three to 15 years. Such assets are periodically evaluated as to the recoverability of their carrying value.
Goodwill is maintained by applying the provisions of ASC 350, Intangibles - Goodwill and Other. For purchase acquisitions, the Corporation is required to record the assets acquired, including identified intangible assets, and the liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques that may include estimates of attrition, inflation, asset growth rates or other relevant factors. In addition, the determination of the useful lives for which an intangible asset will be amortized is subjective.
Under ASC 350, the Corporation is required to evaluate goodwill for impairment on an annual basis, as well as on an interim basis, if events or changes indicate that the asset may be impaired, indicating that the carrying value may not be recoverable. The Corporation has elected to test for goodwill impairment as of November 30 of each year and has determined that no impairment exists.
Income taxes are accounted for in accordance with income tax accounting guidance. The income tax accounting guidance results in two components of income tax expense: current and deferred. Current
income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the balance sheet method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred tax assets are evaluated on a quarterly basis for recoverability based on all available evidence. This process involves significant management judgment about assumptions that are subject to change from period to period based on changes in tax laws or variances between our future projected operating performance and our actual results. We are required to establish a valuation allowance for deferred tax assets if we determine, based on available evidence at the time the determination is made, that it is more likely than not that some portion or all of the deferred tax assets will not be realized. In determining the more-likely-than-not criterion, we evaluate all positive and negative available evidence as of the end of each reporting period. Future adjustments to the deferred tax asset valuation allowance, if any, will be determined based upon changes in the expected realization of the net deferred tax assets. The realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income in either the carry back or carry forward periods under applicable tax laws. Due to significant estimates utilized in establishing the valuation allowance and the potential for changes in facts and circumstances, it is reasonably possible that we will be required to record adjustments to the valuation allowance in the near term if estimates of future taxable income during the carry forward period are reduced. Such a charge could have a material adverse effect on our results of operations, financial condition, and capital position.
Uncertain tax positions are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
The Company files consolidated income tax returns with its subsidiaries.
Revenue Recognition The Company recognizes revenues as they are earned based on contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured. The Company’s principal source of revenue is interest income from loans and leases and investment securities. The Company also earns noninterest income from various banking and financial services offered primarily through the Bank and its subsidiaries.
Interest Income - The largest source of revenue for the Company is interest income which is primarily recognized on an accrual basis according to nondiscretionary formulas in written contracts, such as loan and lease agreements or investment securities contracts.
Noninterest Income - The Company earns noninterest income through a variety of financial and transaction services provided to business and consumer clients such as trust and wealth advisory, deposit account, debit card, and mortgage banking. Revenue is recorded for noninterest income based on the contractual terms for the service or transaction performed. In certain circumstances, noninterest income is reported net of associated expenses.
Earnings per share is computed based upon the weighted-average common and common equivalent shares outstanding during each year.
Comprehensive income consists of net income and other comprehensive income, net of applicable income taxes. Other comprehensive income includes unrealized gains (losses) on available for sale securities, unrealized gains (losses) on available for sale securities for which a portion of an other-than-temporary impairment has been recognized in income, unrealized and realized gains and losses in derivative financial instruments and changes in the funded status of defined benefit pension plans.
Stock options - The Company has stock-based employee compensation plans, which are described more fully in Note 24 of these Notes to Consolidated Financial Statements.
Note 2: Business Combinations
Universal Bancorp
On February 28, 2018, the Company completed the 100% acquisition of Universal Bancorp (“Universal”). Universal and BloomBank, a wholly-owned subsidiary of Universal, merged with and into the Company and the Bank, respectively. BloomBank was headquartered in Bloomfield, Indiana and had 13 retail financial center offices serving counties in central and southern Indiana. Under terms of the merger agreement, shareholders of Universal received fixed consideration of 15.6 shares of MutualFirst common stock and $250.00 in cash for each share of Universal common stock. The Company issued approximately 1.2 million shares of common stock, which was valued at approximately $42.3 million. Based upon the February 28, 2018 closing price of $35.70 per share of MutualFirst common stock, the transaction had an implied valuation of approximately $61.3 million. The Company incurred approximately $340,000 and $2.4 million in pretax expenses related to the acquisition during 2019 and 2018, respectively. These expenses are classified in the non-interest expense section of the income statement, primarily in salaries and employee benefits, professional fees and other expenses. As a result of the acquisition, the Company was able to increase both its deposit and loan base and expects to reduce costs through economies of scale. Goodwill resulted from this transaction due to the expected synergies and economies of scale.
Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired, liabilities assumed and related deferred tax impacts, which were based on assumptions that were subject to change as management evaluated, the purchase price for the Universal acquisition is detailed in the following table. If, prior to the end of the one-year measurement period for finalizing the purchase price allocation, information became available which indicated adjustments were required to the purchase price allocation, such adjustments would be
recorded in the reporting period in which the adjustment amounts were determined. The first quarter of 2019 was the final period allowing for measurement period adjustments. There were no measurement period adjustments in 2019. Measurement period adjustments were calculated as if the accounting had been completed as of the acquisition date.
Of the total purchase price, $4.5 million was allocated to a core deposit intangible that is being amortized over its estimated life of 15 years. Of the remaining purchase price, $20.5 million was allocated to goodwill, which is not deductible for tax purposes. Loans acquired had a fair value of $252.4 million. The contractual principal at the acquisition date was $257.0 million. The $4.6 million is accreted into income for the performing loans or utilized for charging off non-performing loans.
Definitive Merger Agreement
On a Form 8-K filed on October 29, 2019, MutualFirst announced it had entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Northwest Bancshares, Inc. (“Northwest Bancshares”). Pursuant to the Merger Agreement, at the closing of the merger MutualFirst will merge with and into Northwest Bancshares, with Northwest Bancshares as the surviving entity. Immediately thereafter, Mutual will merge with and into Northwest Bank, the wholly owned subsidiary of Northwest Bancshares, with Northwest Bank as the surviving entity. 		
Under the terms of the Merger Agreement, each share of common stock of MutualFirst will be converted into the right to receive 2.4 shares of Northwest Bancshares’s common stock, for total consideration valued at approximately $346 million at the date of the announcement.
The Merger Agreement has been approved by the Boards of Directors of Northwest Bancshares and MutualFirst. Completion of the transaction is subject to customary closing conditions, including the receipt of required regulatory approvals and the approval of stockholders of MutualFirst. The parties anticipate completing the Merger during the second quarter 2020.
MutualFirst has also agreed not to (i) solicit proposals relating to alternative business combination transactions involving MutualFirst or Mutual or (ii) subject to certain exceptions, enter into discussions or an
agreement concerning, or to provide confidential information in connection with, any proposals for alternative business combination transactions involving MutualFirst or Mutual.
Note 3: Impact of Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board ("FASB") issued Account Standards Update ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This guidance is effective for fiscal years beginning after December 15, 2020. Early adoption is permitted. This ASU is not expected to have a significant impact on the Company's financial statements.
In March 2019, the FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements. These amendments align the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance. Finally, the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early application is permitted. An entity should apply the amendments as of the date that it first applied Topic 842, using the same transition methodology in accordance with paragraph 842-10-65-1(c). The Company adopted Topic 842 on January 1, 2019 and applied the amendments in ASU 2019-01 as of the same date and it did not have a material impact on its accounting and disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. These amendments modify the disclosure requirements in Topic 820 as follows:
·
Removal of the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements.
·
For investments in certain entities that calculate net asset value, an entity is required to disclose the timing of liquidation of an investee’s assets and the date when restrictions from redemption might lapse only if the investee has communicated the timing to the entity or announced the timing publicly; and the amendments clarify that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.
·
Additional disclosure of the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
The guidance is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU No. 2018-13 and delay adoption of the additional disclosures until their effective date. The Company has assessed adoption of ASU 2018-13 and it will not have a material effect on the Company's consolidated financial statements.
In June 2016, the Financial Accounting Standards Board issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements. Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. The ASU is intended to provide financial statement users with useful information about the expected credit losses on financial instruments and other commitments to extend credit.
·
The ASU requires financial assets measured at amortized cost (primarily loans) be presented at the amount net of a valuation allowance for credit losses, and that the income statement include the measurement of credit losses for newly recognized financial assets as well as changes in expected losses on previously recognized financial assets. The provisions of this ASU do not specify the method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. The new model will be based on relevant information including past events, historical experience, current conditions, and reasonable and supportive forecasts that affect the collectability of the asset. The provisions of this ASU differ from current U.S. generally accepted accounting principles (“GAAP”) in that current U.S. GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.
·
This ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down.
This ASU was originally effective for the Company for interim and annual periods beginning in the first quarter of 2020, but on October 16, 2019, FASB approved a final ASU delaying the effective date for smaller reporting companies (as defined by the SEC), such as the Company. In November 2019, the FASB issued ASU No. 2019-10 which delayed the effective date of this ASU 2016-13 for the Company until fiscal years beginning after December 15, 2022. In November 2019, FASB issued ASU 2019-11, Codification Improvements to Financial Instruments - Credit Losses (Topic 326). This ASU clarifies guidance around how to report expected recoveries in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset, but later determines that the write-off, or portion of the amount, will be recovered. This ASU permits organizations to record expected recoveries on Purchased Credit Deteriorated (PCD) financial assets, also. The ASU reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities, as well. This ASU is effective for the Company for fiscal years after December 15, 2022. Early adoption is permitted. The Company was in the process of implementing a third-party software solution to assist in the application of the new standard for implementation in 2023, however this has been put on hold, due to the pending merger of the Company with Northwest Bancshares.
In February 2016, the FASB issued ASU 2016-02, Leases. The objective of the amendment is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. These changes will increase transparency among companies by recognizing lease assets and liabilities on the balance sheet and disclosing additional information about lease arrangements. The amendments in this update were effective for annual and interim periods beginning in the first quarter of 2019. The Company has operating leases in place for some locations as well as equipment. In July 2018, the FASB issued ASU 2018-10, which provides narrow-scope improvements to the lease standard and ASU 2018-11, which allows entities to choose an additional transition method, under which an entity initially applies the new lease standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under this transitional method, the entity shall recognize and measure the leases that exist at the adoption date and the prior comparative periods are not adjusted. The Company adopted this ASU as of January 1, 2019 using the transitional method. The new standard provides a number of optional practical expedients in transition. The Company has elected the practical expedients that allowed the Company to retain the classifications of existing leases, not re-assess if existing leases have initial direct costs and hindsight when determining the lease term and assessment of impairment. The Company adopted ASU 2016-02 on January 1, 2019 and recorded a right-of-use asset and lease liability of $3.6 million, based on the present value of the expected remaining lease payments.
Note 4: Restriction on Cash
The Bank is required to maintain reserve funds in cash and/or on deposit with the Federal Reserve Bank of Chicago. The reserve requirement at December 31, 2019 was $3.5 million.
Note 5: Investment Securities
The amortized costs and approximate fair values, together with gross unrealized gains and losses on securities, are as follows:
All mortgage-backed securities and collateralized-mortgage obligations held by the Company as of December 31, 2019 were in government-sponsored and federal agency securities.
Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. Total fair value of these investments at December 31, 2019 and 2018 was $64.4 million and $206.9 million, which is approximately 16.7% and 55.8% of the Company’s investment portfolio at those dates.
Based on our evaluation of available evidence, including recent changes in market interest rates, management believes the fair value for the securities at less than historical cost for the periods presented are temporary.
Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.
During 2019 and 2018, the Bank determined that its security holdings had no other-than-temporary impairment.
The following tables show the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2019 and 2018:
Mortgage-Backed Securities (MBS) and Collateralized Mortgage Obligations (CMO)
The unrealized losses on the Company’s investment in CMOs and MBSs were caused by interest rate changes and illiquidity. The Company expects to recover the amortized cost basis over the term of the securities. Because (1) the decline in market value is attributable to changes in interest rates and illiquidity and not credit quality, (2) the Company does not intend to sell the investments and (3) it is more likely than not the Company will not be required to sell the investments before recovery of their amortized cost bases, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2019.
Municipal Obligations
The unrealized losses on the Company’s investments in securities of state and political subdivisions were caused by changes in interest rates and illiquidity. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the par value of the investments. At December 31, 2019, the Company does not intend to sell the investments and it is not more likely than not that the Company will not be required to sell these investments. The Company does not consider any of these investment securities to be other-than-temporarily impaired at December 31, 2019.
Corporate Obligations
The Company’s unrealized loss on investments in corporate obligations primarily relates to an investment in a pooled trust preferred security. The unrealized losses were primarily due to illiquidity.
Other-Than-Temporary Impairment
Upon acquisition of a security, the Company decides whether it is within the scope of the accounting guidance for beneficial interests in securitized financial assets or whether it will be evaluated for impairment under the accounting guidance for investments in debt and equity securities.
The accounting guidance for beneficial interests in securitized financial assets provides incremental impairment guidance for a subset of the debt securities within the scope of the guidance for investments in debt and equity securities. For securities that are a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial asset impairment model. For securities that are not a beneficial interest in securitized financial assets, the Company uses debt and equity securities impairment model.
The Company conducts periodic reviews to identify and evaluate each investment security to determine whether an other-than-temporary impairment has occurred. Economic models are used to determine whether an other-than-temporary impairment has occurred on these securities. While all securities are considered, the securities primarily impacted by other-than-temporary impairment testing are private-label mortgage-backed securities and trust preferred securities.
The Bank’s trust preferred securities valuation was prepared by an independent third party. Their approach to determining fair value involved several steps including:
·
Detailed credit and structural evaluation of each piece of collateral in the trust preferred securities;
·
Collateral performance projections for each piece of collateral in the trust preferred security;
·
Terms of the trust preferred structure, as laid out in the indenture; and
·
Discounted cash flow modeling.
The Company uses market-based yield indicators as a baseline for determining appropriate discount rates, and then adjusts the resulting discount rates on the basis of its credit and structural analysis of specific trust preferred securities. The primary focus is on the returns a fixed income investor would require in order to allocate capital on a risk adjusted basis. There is currently no active market for pooled trust preferred securities; however, the Company looks principally to market yields for stand-alone trust preferred securities issued by banks, thrifts and insurance companies for which there is an active and liquid market. The next step is to make a series of adjustments to reflect the differences that exist between these products (both credit and structural) and, most importantly, to reflect idiosyncratic credit performance differences (both actual and projected) between these products and the underlying collateral in the specific trust preferred security. Importantly, as part of the analysis described above, MutualFirst considers the fact that structured instruments frequently exhibit leverage not present in stand-alone instruments, and makes adjustments as necessary to reflect this additional risk.
The default and recovery probabilities for each piece of collateral were formed based on the evaluation of the collateral credit and a review of historical industry default data and current/near-term operating conditions. For collateral that has already defaulted, the Company assumed no recovery. For collateral that was in deferral, the Company assumed a recovery of 10% of par for banks, thrifts or other depository institutions and 15% of par for insurance companies. Although the Company conservatively assumed that the majority of the deferring collateral continues to defer and eventually defaults, we also recognize there is a possibility that some deferring collateral may become current at some point in the future.
The amortized cost and fair value of securities available for sale at December 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
The carrying value of securities pledged as collateral, to secure swap position was $2.7 million as of December 31, 2019. The Company did not have securities pledged as collateral as of December 31, 2018.
Proceeds from sales of securities available for sale during 2019, 2018 and 2017 were $30.8 million, $67.0 million and $34.6 million, respectively. Gross gains of $1.0 million, $892,000 and $776,000 in 2019, 2018 and 2017 were recognized on those sales. Gross losses of $5,000, $88,000 and $68,000 were recognized on those sales in 2019, 2018 and 2017, respectively.
Note 6: Loans and Allowance
Classes of loans at December 31, 2019 and 2018 include:
Year-end non-accrual loans, segregated by class of loans, were as follows:
Nonaccrual Loans and Past Due Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when the loan is greater than 90 days past due, the borrower, in management’s opinion, may be unable to meet payment obligations as they become due or when required by regulatory provisions.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments are reasonably assured and generally only after six months of satisfactory performance.
An age analysis of the Company’s past due loans, segregated by class of loans, as of December 31, 2019 and 2018 are as follows:
Impaired Loans
Loans are considered impaired in accordance with the impairment accounting guidance (ASC 310-10-35-16), when, based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could
include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.
Interest on impaired loans is recorded based on the performance of the loan. All interest received on impaired loans that are on nonaccrual status is accounted for on the cash-basis method until qualifying for return to accrual status. Interest is accrued per the contract for impaired loans that are performing.
The following tables present impaired loans as of December 31, 2019, 2018 and 2017:
The following information presents the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of December 31, 2019 and 2018.
Commercial Loan Grades
Definition of Loan Grades. Loan grades are numbered 1 through 8. Grades 1-4 are "pass" credits, grade 5 [Special Mention] loans are "criticized" assets, and grades 6 [Substandard], 7 [Doubtful] and 8 [Loss] are
"classified" assets. The use and application of these grades by the Bank conform to the Bank’s policy and regulatory definitions.
Pass. Pass credits are loans in grades prime through fair. These are at least considered to be credits with acceptable risks and would be granted in the normal course of lending operations.
Special Mention. Special mention credits have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credits or in the Bank’s credit position at some future date. If weaknesses cannot be identified, classifying as special mention is not appropriate. Special mention credits are not adversely classified and do not expose the Bank to sufficient risk to warrant an adverse classification. No apparent loss of principal or interest is expected.
Substandard. Substandard credits are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged. Financial statements normally reveal some or all of the following: poor trends, lack of earnings and cash flow, excessive debt, lack of liquidity, and the absence of creditor protection. Credits so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful. A doubtful extension of credit has all the weaknesses inherent in a substandard asset with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors include proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans. Doubtful classification for an entire credit should be avoided when collection of a specific portion appears highly probable with the adequately secured portion graded Substandard.
Retail Loan Grades
Pass. Pass credits are loans that are currently performing as agreed and are not troubled debt restructurings.
Special Mention. Special mention credits have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credits or in the Bank’s credit position at some future date. If weaknesses cannot be identified, classifying as special mention is not appropriate. Special mention credits are not adversely classified and do not expose the Bank to sufficient risk to warrant an adverse classification. No apparent loss of principal or interest is expected.
Substandard. Substandard credits are loans that have reason to be considered to have a weakness and placed on non-accrual. This would include all retail loans over 90 days and troubled debt restructurings.
Allowance for Loan Losses
The risk characteristics of each loan portfolio segment are as follows:
Commercial Loans
Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.
Commercial construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analyses of absorption and lease rates and financial analyses of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.
Commercial business loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Residential and Consumer
With respect to residential loans that are secured by one-to-four family residences and are primarily owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance (PMI) if that ratio is exceeded. Consumer open end and junior lien loans are typically secured by a subordinate interest in one-to-four family residences, and other consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
The following tables detail activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2019, 2018 and 2017. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses on other segments.
The following tables provide a breakdown of the allowance for loan losses and loan portfolio balances by segment as of December 31, 2019, 2018 and 2017.
Troubled Debt Restructurings
Certain categories of impaired loans include loans that have been modified in a troubled debt restructuring that involves granting economic concessions to borrowers who have experienced financial difficulties. These concessions typically result from our loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Modifications of terms for our loans and their inclusion as troubled debt restructurings are based on individual facts and circumstances.
When we modify loans in a troubled debt restructuring, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan agreement, or we use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded investment in the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a specific reserve or a charge-off to the allowance.
Loans retain their accrual status at the time of their modification. As a result, if a loan is on nonaccrual at the time it is modified, it stays as nonaccrual until a period of satisfactory performance, generally six months, is obtained. If a loan is on accrual at the time of the modification, the loan is evaluated to determine the collection of principal and interest is reasonably assured and generally stays on accrual.
At December 31, 2019 and 2018, the Company had a number of loans that were modified in troubled debt restructurings and impaired. The modification of terms of such loans included one or a combination of the following: an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan.
The following tables describe troubled debts restructured during the years ended December 31, 2019, 2018 and 2017.
The impact on the allowance for loan losses was insignificant as a result of these modifications.
Newly restructured loans by type for the years ended December 31, 2019, 2018 and 2017 are as follows:
Defaults of any loans modified as troubled debt restructurings made in the years ended December 31, 2019, 2018 and 2017, respectively, are listed in the tables below. Defaults are defined as any loans that become 90 days past due.
At December 31, 2019 and 2018, the Company had residential real estate owned as a result of foreclosure totaling $805,000 and $541,000, respectively. At December 31, 2019 and 2018, real estate in the process of foreclosure was $1.9 million and $833,000, respectively.
Note 7: Related Party Transactions
The Bank has entered into transactions with certain directors, executive officers and significant shareholders of the Company and Bank and their affiliates or associates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.
The aggregate amount of loans, as defined, to such related parties was as follows:
Note 8: Premises and Equipment
Major classifications of premises and equipment are as follows:
Note 9: Core Deposit and Other Intangibles
The carrying basis of recognized intangible assets at December 31, 2019 and 2018, were:
Amortization expense for the years ended December 31, 2019, 2018 and 2017, was $779,000, $1.1 million and $264,000, respectively. Estimated amortization expense for the remaining life is:
Note 10: Goodwill
Goodwill is recorded on the acquisition date of an entity. During the measurement period ended first quarter 2019, the Company could record subsequent adjustments to goodwill for provisional amounts recorded at the acquisition date. The Universal acquisition on February 28, 2018 resulted in $20.5 million of goodwill, which included a measurement period adjustment of a $1.6 million reduction recorded during the second and fourth quarters of 2018 of $1.4 million and $200,000, respectively. No additional measurement period adjustments were recorded during 2019. Details regarding the acquisition are discussed in Note 2 of these Notes to Consolidated Financial Statements.
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 were:
Goodwill is tested for impairment on an annual basis as of November 30, or whenever events or changes in circumstances indicate the carrying amount of goodwill exceeds its implied fair value. The Company’s fair value exceeded the Company’s carrying value; therefore, it was concluded goodwill is not impaired. No events or changes in circumstances have occurred since the annual impairment test that would suggest it was more likely than not goodwill impairment existed. For additional details related to impairment testing, see the “Goodwill” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included as Item 7 of this Annual Report on Form 10-K.
Note 11: Accounting for Certain Loans Acquired in a Transfer
The Company acquired loans in the acquisition of Universal and a few of the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.
Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. The Company acquired two loans with evidence of credit deterioration recorded at a fair value of $313,000. Both loans were paid off as of December 31, 2018.
The following table presents the carrying amounts of the acquired loans included in the balance sheet amounts of loans receivable as of December 31, 2019 and 2018.
Accretable yield, or income expected to be collected as of December 31, 2019 and 2018 were $1.7 million and $2.8 million, respectively.
Note 12: Derivative Financial Instruments
The Company has certain interest rate derivative positions that are not designated as hedging instruments. Derivative assets and liabilities are recorded at fair value on the Consolidated Balance Sheet and do not take into account the effects of master netting agreements. Master netting agreements allow the Company to settle all derivative contracts held with a single counterparty on a net basis, and to offset net derivative positions with related collateral, where applicable. These derivative positions relate to transactions in which the Company enters into an interest rate swap with a client while at the same time entering into an offsetting interest rate swap with another financial institution. In connection with each transaction, the Company agrees to pay interest to the client on a notional amount at a variable interest rate and receive interest from the client on the same notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. The transaction allows the client to effectively convert a variable rate loan to a fixed rate. Because the terms of the swaps with the customers and the other financial institution offset each other, with the only difference being counterparty credit risk, changes in the fair value of the underlying derivative contracts are not materially different and do not significantly impact the Company’s Consolidated Statements of Income. The notional amount of customer-facing swaps as of December 31,
2019 and 2018 was approximately $33.3 million and $21.1 million, respectively. During the year ended December 31, 2019 and 2018, the Company did not recognize any net gains or losses related to the changes in fair value of these swaps. Additionally, the Company recognized income for the related swap fees of $164,000 during 2019 and no swap fee income was recognized during 2018.
The following table shows the amounts of derivative financial instruments at December 31, 2019 and 2018.
Note 13: Deposits
Deposits were comprised of the following at December 31, 2019 and 2018:
At December 31, 2019 and 2018, total deposits that meet or exceed the FDIC’s standard deposit insurance amount of $250,000 were $439.2 million and $419.8 million, respectively.
Certificates maturing in years ending December 31 are as follows:
Note 14: Federal Home Loan Bank Advances
FHLB advances maturing in years ending December 31 are as follows:
At December 31, 2019, the Company had pledged $434.6 million in qualifying first mortgage loans as collateral for advances and outstanding letters of credit. Advances, at interest rates from 0.69% to 5.00% at December 31, 2019, were subject to restrictions or penalties in the event of prepayment.
At December 31, 2019, the Company had a total of $71.5 million in putable and $42.0 million in symmetrical advances with Federal Home Loan Bank. The call dates for these advances range from 2020 through 2024 even though maturity dates extend beyond those dates.
Note 15: Other Borrowings
Other borrowings consisted of the following component as of December 31:
The Company assumed $5.0 million in subordinated debentures as the result of the acquisition of MFB Corp. in 2008. In 2005, MFB Corp. had formed MFBC Statutory Trust I (MFBC), as a wholly owned business trust, to sell trust preferred securities. The proceeds from the sale of these trust preferred securities were used by the trust to purchase an equivalent amount of subordinated debentures from the acquired company. The junior subordinated debentures are the sole assets of MFBC and are fully and unconditionally guaranteed by the Company. The junior subordinated debentures and the trust preferred securities pay interest and dividends, respectively, on a quarterly basis. The rate resets quarterly at the prevailing three-month LIBOR rate plus 170 basis points, which was 3.59% at December 31, 2019. The Company has the right to redeem the trust preferred securities, in whole or in part, without penalty. These securities mature on September 15, 2035. The net balance of the securities as of December 31, 2019 was $4.3 million due to the fair value adjustment of the securities made at the time of the acquisition.
The Company assumed $5.0 million in subordinated debentures as a result of the acquisition of Universal in 2018. These securities mature 30 years from the date of issuance, or October 7, 2035. The rate resets quarterly at the prevailing three-month LIBOR rate plus 169 basis points, which was 3.68% at December 31, 2019. The Company has the right to redeem the trust preferred securities, in whole or in part, without penalty. These securities mature on October 7, 2035. The net balance of the securities as of December 31, 2019 was $4.1 million due to the fair value adjustment of the securities made at the time of the acquisition.
The Company borrowed $10.0 million in two $5.0 million term notes from First Horizon Bank to use in the acquisition of Universal. These loans had a combined balance of $9.2 million at December 31, 2019. The fixed rate term note had a balance of $4.2 million and matures 5 years from the date of issuance, or February 28, 2023. This term note bears a fixed rate of interest of 4.99% per annum and requires quarterly principal payments, which began March 31, 2018. The variable rate term note matures 5 years from the date of issuance, or February 28, 2023. This term note bears a rate of interest of the prevailing three-month LIBOR rate plus 195 basis points, which was 4.04% at December 31, 2019. The Company has the right to redeem either note at any time, in whole or in part, without penalty.
Contractual maturities of notes payable as of December 31, 2019, are as follows:
Note 16: Lease Commitments
The Company and its subsidiaries are obligated under leases for certain office premises, land, and equipment. In determining whether a contract contains a lease, the Company examines the contract to ensure an asset was specifically identified and that the Company has control of use over the asset. To determine whether a lease is classified as operating or financing, the Company performs an economic life test. The Company has recognized sixteen operating leases.
At lease inception, the Company determines the lease term by adding together the minimum lease term and all optional renewal periods that it is reasonably certain to renew. Our leases primarily have initial lease terms of generally 1 to 7 years with various lease renewal options at the Company’s sole discretion. We include certain renewal options in the measurement of our right-of-use assets and lease liabilities if they are reasonably certain to be exercised.
We have made a policy election to exclude the recognition requirements of Topic 842 to all classes of leases with original terms of 12 months or less. Instead, lease obligations with an initial term of 12 months or less are expensed.
The Company also elected not to separate lease components from non-lease components.
The discount rate used in determining the lease liability and related right of use asset is based upon what would be obtained by the Company for similar loans at an incremental rate as of the date of origination or renewal.
The following table shows lease right of use assets and lease liabilities as of December 31, 2019.
The following table shows the components of operating leases expense for the year ended December 31, 2019.
Operating lease costs are included in net occupancy expenses and equipment expenses. Gross rental expense for the operating leases in net occupancy expenses for the year ended December 31, 2019 was $758,000. Gross rental expense for the operating leases in equipment expenses for the year ended December 31, 2019 was $160,000.
The following table shows future minimum rental commitments for all noncancelable operating leases for the next five years and thereafter.
The following table shows the weighted average remaining lease term, the weighted average discount rate and supplemental Consolidated Statement of Cash Flows information for operating leases at December 31, 2019.
Note 17: Loan Servicing
Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of these loans consist of the following:
The aggregate fair value of capitalized mortgage servicing rights is based on comparable market values and expected cash flows, with impairment assessed based on portfolio characteristics including product type and interest rates. The amount of servicing fees collected during 2019, 2018 and 2017 totaled approximately $1.3 million, $1.1 million, and $783,000, respectively.
The fair value of servicing rights subsequently measured using the amortization method was as follows:
Note 18: Income Tax
The provision for income taxes includes these components:
A reconciliation of income tax expense at the federal statutory rate to actual tax expense is shown below:
The Tax Cuts and Jobs Act (“Tax Act”) was enacted on December 22, 2017 reducing the Company’s federal corporate tax rate from 34% to 21%, effective January 1, 2018. For deferred tax assets and liabilities, amounts were remeasured based on the rates expected to reverse in the future, which was 21%. Based on this new law, we recorded an additional tax expense of $2.0 million due to the revaluation of the Company’s deferred tax asset in 2017. The Tax Act repealed the corporate Alternative Minimum Tax (“AMT”) and as a result a portion of the Company’s AMT credit carryover from prior years is refundable beginning in 2018.
The components of the net deferred tax asset included on the consolidated balance sheets at December 31, were as follows:
The Company has a federal net operating loss carryforward acquired in the Universal acquisition of $7.1 million. The use of this carryforward is limited to $1.3 million annually. The Company also has a state net operating loss carryforward of $27.4 million that will begin to expire in 2025. In addition, the Company has an AMT credit carryover of $408,000. Management believes that the Company will be able to utilize the benefits recorded for the state loss carryforwards and federal credits within the allotted time periods, except for the amount represented by the valuation allowance. The valuation allowance has been recorded for the possible inability to use a portion of the state net operating loss carryover.
Retained earnings include approximately $14.7 million for which no deferred income tax liability has been recognized. This amount represents an allocation of income to bad debt deductions as of December 31, 1987 for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses or adjustments arising from carryback of net operating losses would create income for tax purposes only, which income would be subject to the then-current corporate income tax rate. The unrecorded deferred income tax liability on the above amounts was approximately $3.1 million at December 31, 2019.
The Company’s federal and state income tax returns have been closed without audit by the IRS through the year ended December 31, 2015.
Note 19: Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows:
The following table presents the reclassification adjustments out of accumulated other comprehensive income (loss) that were included in net income in the Consolidated Statement of Income for the years ended December 31, 2019, 2018 and 2017.
Note 20: Commitments and Contingent Liabilities
In the normal course of business, there are outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making such commitments as it does for instruments that are included in the consolidated statements of financial condition.
Financial instruments whose contract amount represents credit risk as of December 31:
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation. Collateral held varies, but may include residential real estate, income-producing commercial properties, or other assets of the borrower.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.
The Company and Bank are also subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits at December 31, 2019 will not have a material adverse effect on the consolidated financial position of the Company.
The Company has entered into employment agreements with certain officers that provide for the continuation of salary and certain benefits for a specified period of time under certain conditions. Under the terms of the agreement, these payments could occur in the event of a change in control of the Company or other circumstances.
Mortgage loans in the process of origination represent amounts that the Company plans to fund within a normal period of 60 to 90 days, and which are primarily intended for sale to investors in the secondary market. Total mortgage loans in the process of origination amounted to $11.4 million and $7.7 million, and mortgage loans held for sale amounted to $13.4 million and $4.0 million, at December 31, 2019 and 2018, respectively.
Note 21: Stockholders’ Equity
Without prior regulatory approval, current regulations allow the Bank to pay dividends to the Company not exceeding retained net income for the previous two calendar years and the current year. In the event the Bank becomes unable to pay dividends to the Company, the Company may not be able to service its debt, pay its other obligations or pay dividends on its common stock. At December 31, 2019, the Bank was able to pay dividends without prior regulatory approval.
Note 22: Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier I and Common Equity Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital to average assets (as defined). As of December 31, 2019 and 2018, the Bank meets all capital adequacy requirements to which it is subject.
In May 2018 the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Act”) was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. While the Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion. Many of these changes could result in meaningful regulatory relief for community banks such as MutualBank.
The Act, among other matters, expands the definition of qualified mortgages which may be held by a financial institution and simplifies the regulatory capital rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of 9 percent to replace the leverage and risk-based regulatory capital ratios. The Act also expands the category of holding companies that may rely on the “Small Bank Holding Company and Savings and Loan Holding Company Policy statement” by raising the maximum amount of assets a qualifying holding company may have from $1.0 billion to $3.0 billion. This expansion also excludes such holding companies from the minimum capital requirement of the Dodd-Frank Act. In addition, the Act includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures and risk weights for certain high-risk commercial real estate loans.
In July 2013, the three federal bank regulatory agencies jointly published final rules (the Basel III Capital Rules) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee’s December 2010 framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. These rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, compared to the current U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions’ regulatory capital ratios. These rules also address risk weights and other issues affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing risk-weighting approach with a more risk-sensitive approach. The Basel III Capital Rules were effective for the Company and Bank on January 1, 2015 (subject to a four-year phase-in period).
The Bank’s actual capital amounts and ratios as of December 31, are presented in the tables below.
The minimum capital requirements exclude the capital conservation buffer required to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. The capital conservation buffer was fully phased in during 2019. The capital conservation buffer was 2.5% at December 31, 2019. The unrealized gain or loss on available for sale securities is not included in computing regulatory capital. As of December 31, 2019, the Bank is in excess of the capital conversation buffer requirements.
Note 23: Employee Benefits
The Company has a retirement savings 401(k) plan in which substantially all employees may participate. The contributions are discretionary and determined annually. The Company matches employees’ contributions at the following rates: 100 percent of participant contributions up to 4% and 50 percent of participant contributions from 4-6%, not to exceed a maximum of 5% of their compensation. The Company’s expense for the plan was $1.2 million for both 2019 and 2018 and $957,000 for 2017.
The Company has an executive benefit plan and deferred compensation arrangements for the benefit of certain officers. The Company also has deferred compensation arrangements with certain directors whereby, in lieu of previously receiving fees, the directors or their beneficiaries will be paid benefits for an established period following the director’s retirement or death. These arrangements are informally funded by life insurance contracts which have been purchased by the Company. The Company records a liability for these
vested benefits based on the present value of future payments. The Company’s expense for the plan was $790,000, $675,000 and $652,000 for 2019, 2018 and 2017, respectively.
Note 24: Stock Option Plans
Under the Company’s stock option plans, which are accounted for in accordance with FASB ASC 718, Stock Compensation, the Company grants selected executives and other key employees and directors incentive and non-qualified stock option awards that vest and become fully exercisable at the discretion of the Compensation Committee as the options are granted. The Company had stock option plans that were approved in 2000 and 2008 that expired in 2015 and 2018, respectively. Under the plan’s provisions, all option grants that have not been exercised or expired are still exercisable until the maturity or the participant forfeits the grant. No additional grants of options can be made from these plans.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the following table. Expected volatility is based on historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate timing of option exercises and employee terminations within the valuation model; separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted represents the period of time that options are expected to be outstanding; the range given below results from certain groups of employees exhibiting different behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The discount rate for post-vesting restrictions is estimated based on the Company’s credit-adjusted risk-free rate of return.
The following is a summary of the status of the Company’s stock option plans and changes in these plans during 2019.
There were 140,962, 28,538 and 65,161 options exercised during the years ended December 31, 2019, 2018 and 2017. There were no options granted during those periods. The Company will fulfill options with authorized but unissued shares of stock from the 352,741 shares the Company has authorized under the 2008 shareholder-approved stock option and incentive plan. The Company will also fulfill options with authorized but unissued shares of stock from the 141,462 shares the Company has authorized under the 2000 stock option plan. Outstanding options may continue to be exercised from these plans; however no further grants can be made.
Cash received from options exercised under all share-based payment arrangements for years ended December 31, 2019, 2018 and 2017 was $1.0 million, $253,000 and $1.2 million, respectively. The intrinsic value on options exercised during the years ended December 31, 2019, 2018 and 2017 was $4.0 million, $722,000 and $1.1 million, respectively.
Note 25: Earnings Per Share
Earnings per share were computed as follows:
As of December 31, 2019, 2018 and 2017, the exercise price for all options was lower than the average market price of the common shares.
Note 26: Fair Values of Financial Instruments
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3 Unobservable inputs supported by little or no market activity and are significant to the fair value of the assets or liabilities
Items Measured at Fair Value on a Recurring Basis
Following is a description of the valuation methodologies and inputs used for instruments measured at fair value on a recurring basis and recognized in the accompanying comparative balance sheet, as well as the general classification of such instruments pursuant to the valuation hierarchy.
Available for Sale Securities
Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. The Company uses a third-party provider to provide market prices on its securities. Pooled trust preferred securities prices are evaluated by a third party. Level 1 securities include marketable equity securities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include mortgage-backed, collateralized mortgage obligations, small business administration, municipal, federal agency and certain corporate obligation securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include certain corporate obligation securities.
Third party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities (Level 2). Matrix pricing is a mathematical technique widely used in the banking industry to value investment securities without relying exclusively on quoted prices for specific investment securities but rather relying on investment securities relationship to other benchmark quoted investment securities. Any investment security not valued based upon the methods above are considered Level 3.
Interest Rate Derivative Agreements
Interest rate swap positions, both assets and liabilities, are valued by a third-party pricing agent using an income approach and utilizing models that use as their basis readily observable market parameters. This valuation process considers various factors including interest rate yield curves, time value and volatility factors.
The following table presents the fair value measurements of assets and liabilities measured on a recurring basis and the level within the ASC 820 fair value hierarchy.
The following is a reconciliation of the beginning and ending balances for the years ended December 31, 2019, 2018 and 2017 of recurring fair value measurements recognized in the accompanying balance sheets using significant unobservable (Level 3) inputs:
Items Measured at Fair Value on a Non-Recurring Basis
From time to time, certain assets may be recorded at fair value on a non-recurring basis. These non-recurring fair value adjustments typically are a result of the application of lower of cost or fair value accounting or a write-down occurring during the period.
The following tables present quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements.
The estimated fair values of the Company’s financial instruments not carried at fair value in the consolidated balance sheets as of the dates noted below are as follows:
Note 27: Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position, results of operations and cash flows of the Company:
Condensed Balance Sheets
Condensed Statements of Income
Condensed Statements of Comprehensive Income
Condensed Statements of Cash Flows
Note 28: Quarterly Results of Operations (Unaudited)
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures (as defined in SEC Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) that is designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file under the Exchange Act is recorded, processed, summarized and reported accurately and within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate. An evaluation of the Company’s disclosure controls and procedures as of December 31, 2019, was carried out under the supervision and with the participation of our Chief Executive Officer, Chief Financial Officer and several other members of our senior management preceding the filing date of this annual report. Our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2019, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) accumulated and communicated to the Company’s management (including our Chief Executive Officer and Chief Financial Officer) in a timely manner, and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
The Company does not expect that its disclosure controls and procedures will prevent all error and all fraud. A control procedure, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control procedure are met. Because of the inherent limitations in all control procedures, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within MutualFirst have been detected. These inherent limitations include the realities that judgment in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any control procedure also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control procedure, misstatements due to error or fraud may occur and not be detected.
Management’s Report on Internal Control over Financial Reporting
The management of MutualFirst Financial, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on our assessment, we believe that, as of December 31, 2019, the Company’s internal control over financial reporting was effective based on the specified criteria.
Report of Independent Registered Public Accounting Firm
To the Stockholders, Board of Directors and Audit Committee
MutualFirst Financial, Inc.
Muncie, Indiana
Opinion on the Internal Control over Financial Reporting
We have audited MutualFirst Financial, Inc.'s (the "Company") internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the consolidated financial statements of the Company and our report dated March 12, 2020, expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BKD, LLP
Indianapolis, Indiana
March 12, 2020
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting (as defined in SEC Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Directors
The following table sets forth information regarding our directors and executive officers who are also directors including their age, position with the Company and term of office.
The business experience for at least the past five years of each member of the Company’s Board of Directors is set forth below.
Michelle A. Altobella. Ms. Altobella is an attorney and currently the chief privacy officer for Indiana University Health, Inc. and the Vice President and general counsel for Indiana University Health East Region. Ms. Altobella is a specialist in healthcare law and corporate governance. Her expertise in corporate governance and her participation in our local business community over two decades will enhance the boards knowledge of corporate governance issues and involvement with the community.
Mark L. Barkley. Mr. Barkley is the former chairman and CEO of Universal Bancorp and BloomBank, a position he held from 1997 until its merger with the Company in February 2018. Mr. Barkley’s over 20-year background in bank operations and knowledge of our expanded market after the Universal acquisition are important to the board and will assist the board in carrying out their functions of overseeing and understanding many aspects of the Bank’s business.
James M. Bernard. Mr. Bernard is a seasoned investment professional and holds the CFA designation. He is the senior vice president and fixed income portfolio manager for Ancora Advisors LLC. Mr. Bernard has also worked in a financial institution as an investment manager. Mr. Bernard’s vast experience understanding financial market conditions and the challenges they may pose will help the board in addressing business issues.
Linn A. Crull. Mr. Crull is a Certified Public Accountant and has been a member and managing partner of the accounting firm of Whitinger & Company, LLC, Muncie, Indiana, since 1979. Mr. Crull has over 35 years of experience in public accounting, including conducting audits and preparing financial statements, and his knowledge of generally accepted accounting principles brings important technical expertise to the Board and was critical to his selection for service on the Board and as Chair of the Audit/Compliance Committee. His years of providing business consulting services to a broad range of companies has provided him with knowledge of compensation issues that aids the Board and the Compensation Committee. His skills and experience as a member of a financial advisory firm provides insight into various investment vehicles that supports the Board and the Wealth Management Committee.
Wilbur R. Davis. Mr. Davis currently serves as President of the Ball State Innovation Corporation, the technology transfer and commercialization arm of Ball State University. Mr. Davis also served as co-founder and President of Ontario Systems, LLC, a computer software company located in Muncie, Indiana from 1980 until July, 2008 and Chairman until January 1, 2016. He is the Chairman of the Board of Directors of the Company and the Bank, and as such, he serves on every committee of the board. Mr. Davis brings management expertise, as well as information technology knowledge to the Board. His participation in our local business community for over 30 years brings a knowledge of the local economy and business opportunities to the Bank.
David W. Heeter. Mr. Heeter has served as President and Chief Executive Officer of the Company and Chief Executive Officer of the Bank since 2003. During the years prior to that appointment, he had served as Executive Vice President of the Company and the Bank and as Chief Operating Officer and Vice President of Human Resources, Marketing and Administration of the Bank. He has been employed by the Bank since 1986. Mr. Heeter’s many years of service in all areas of the Bank’s operations and his duties as Chief Executive Officer of the Bank bring a special knowledge of the financial, economic and regulatory challenges the Company faces, and he is well suited to educating the Board on these matters.
Brian C. Hewitt. Mr. Hewitt is a former director of Universal Bancorp and BloomBank, a position he held from 2013 until its merger with the Company in February, 2018. Mr. Hewitt is currently a practicing attorney with the firm of Hewitt Law and Mediation LLC. Mr. Hewitt represents businesses and individuals in the areas of estate and trust planning and litigation as well as mediation, real estate, business and commercial law. His legal background will serve the Board as a resource for matters of real estate, contract law and business transactions.
William V. Hughes. Mr. Hughes was a partner in the law firm of Beasley & Gilkison, LLP, Muncie, Indiana from 1977 to 2019. He is currently of counsel to the firm. That law firm serves as general counsel to the Bank. Mr. Hughes brings extensive legal knowledge to the Board, particularly with respect to Indiana real property law, commercial transactions, trusts and estates and business litigation. His legal background also serves the Board as a resource for matters of corporate governance and director responsibility. Mr. Hughes chairs the Wealth Management Committee.
Richard J. Lashley. In 1996 Mr. Lashley became a co-founder and co-owner of PL Capital LLC, an investment management firm which specializes in the banking industry. In addition, Mr. Lashley has served on multiple bank and thrift boards. Mr. Lashley currently also serves as a director of Banc of California. From June 2015 to February 2016, Mr. Lashley served as a director of Metro Bancorp, Inc. in Harrisburg, PA. From 2009 - 2013, Mr. Lashley served as a director of State Bancorp, Inc., in Jericho, New York. From 2011 - 2015, Mr. Lashley served as a director of BCSB Bancorp, Inc., in Baltimore, Maryland, and from 2008-2011, Mr. Lashley served as a director of Community FSB Holding Co., in Woodhaven, NY. He worked for KPMG Peat
Marwick, LLP from 1984-1996 where he provided professional accounting and financial advisory services to bank and thrift clients nationwide. He is licensed as a CPA in New Jersey (status inactive). Mr. Lashley serves on the Compensation and the Audit Committee.
Edward C. Levy. Mr. Levy has been an officer and owner of Freeman-Spicer Financial Services, Inc., a business finance and leasing company for more than five years and is a 50% owner and managing partner in two real estate partnerships. During 2010, he became chairman of One-Touch Automation, Inc., a company engaged in home and business automation and security systems in Indiana. He is a partner in CVM Productions, Inc., a video production company specializing in corporate marketing and advertising videos and live sports broadcasting for network distribution. Mr. Levy is also president of Visible Electronics, Inc. a lighting and electronic company. The company has also developed lifts for the RV Industry. He had served as a director of MFB Corp. and its banking subsidiary for three years prior to their acquisition by the Company in 2008. Mr. Levy’s extensive knowledge of investments, insurance and these regulated industries supports the Board’s and Wealth Management Committee’s knowledge in these areas. He also brings that understanding of regulations to the Audit/Compliance Committee. Mr. Levy’s background in finance, real estate and management is also important to his service on our Audit/Compliance Committee.
Michael J. Marien. Mr. Marien is employed by R. W. Baird, a registered broker/dealer and investment advisor firm. He has an active FINRA Series 7 License and Series 66 Indiana License. He retired in 2009 as Account Manager for IT/Signode Corp., a division of Illinois Tool Works (packaging of steel industry products and services, Glenview, Illinois), after 40 years of service. He had served as a director of MFB Corp. and its banking subsidiary for 21 years and was chairman of the board of MFB Corp. for five years prior to the acquisition by the Company in 2008. Mr. Marien brings his prior knowledge of the Wealth Management business of MFB Corp. to his service on our Wealth Management Committee and Compensation Committee. His participation in our local business community for over 30 years brings knowledge of the local economy and business opportunities to the Bank.
Charles J. Viater. Mr. Viater has served as Senior Vice President of the Company and Regional President of the Bank since July 2008. He had served as president, chief executive officer and a director of MFB Corp. and its banking subsidiary for 13 years prior to their acquisition by the Company in 2008. Prior to its acquisition by the Company, MFB Corp. had $500 million in assets and was operated under the leadership of Mr. Viater. Mr. Viater’s over 40-year background in bank operations and knowledge of the local communities we now serve after the MFB Corp. acquisition are important to the Board. He has training as a CPA.
Executive Officers Who Are Not Also Directors
The business experience of each of our other current executive officers for at least the past five years is set forth below.
Christopher D. Cook. Age 46 years. Mr. Cook, a certified public accountant, has served as Senior Vice President, Treasurer and Chief Financial Officer of MutualFirst and MutualBank since May 2010. Mr. Cook began his career with MutualBank in 1996. Since that time he has served as Profitability Analyst, Assistant Treasurer, Controller and Director of Finance.
Sharon L. Ferguson. Age 64 years. Ms. Ferguson has served as Chief Risk Officer and Senior Vice President of Retail Lending of the Bank and Risk Management since January 2015. From February 2009 until January 2015, she served as Senior Vice President of Risk Management. From April 2008 until February 2009, she served as Senior Vice President of Consumer Banking. From September 2007 to April 2008 she served as Vice President of Retail Products. From October 2005 until September 2007 she served as Assistant Vice President, Retail Products Manager. Prior to October 2005 she served as Assistant Vice President, Consumer Lending and Deposits Manager. She has been with the Bank since March 1998.
Christopher L. Caldwell. Age 54 years. Mr. Caldwell has served as Senior Vice President of Business Banking of MutualBank since December 2012. Beginning in 2008, he served as Vice President/Senior Business Banker for the Central Region of MutualBank. From 2006 to 2008, he served as Regional Head of Commercial Lending for Delaware and Randolph counties. Prior to that he was Vice President of Commercial Lending. Mr. Caldwell is a graduate of the ABA Stonier Graduate School of Banking and serves as Secretary of the MutualBank Charitable Foundation. He has been with the Bank since 2005.
Audit Committee Matters and Audit Committee Financial Expert
The Board of Directors of the Company has a standing Audit/Compliance Committee, which has been established in accordance with Section 3(a)(58)(A) of the Exchange Act. The members of that committee are Directors Linn A. Crull (Chairman), Wilbur R. Davis, Edward J. Levy and Richard J. Lashley. The Board of Directors has determined that Mr. Crull, Mr. Levy and Mr. Lashley are each considered to be an “audit committee financial expert” as defined in applicable SEC rules. All members of the Audit Committee (i) are independent as defined under Rule 4200 (a)(15) of the Nasdaq Marketplace Rules; (ii) meet the criteria for independence set forth in SEC Rule 10A-3(b)(1); (iii) have not participated in the preparation of the financial statements of the Company or any of its current subsidiaries at any time during the past three years; and (iv) are able to read and understand fundamental financial statements, including our balance sheet, income statement, and cash flow statement.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires the Company’s directors and executive officers, and persons who own more than 10% of a registered class of the Company’s equity securities, to file with the SEC reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file.
To the Company’s knowledge, based solely on its review of the Section 16 reports filed by its directors and executive officers and written representations from those directors and executive officers, all Section 16(a) filing requirements applicable to the Company’s executive officers and directors during the fiscal year ended December 31, 2019.
Code of Ethics
The Company adopted a written Code of Ethics based upon the standards set forth under Item 406 of Regulation S-K of the Securities Exchange Act. The Code of Ethics applies to all of the Company’s directors, officers and employees. You may obtain a copy of the Code of Ethics on our website at www.bankwithmutual.com at “About Us - Investor Relations - Corporate Overview - Governance Documents - Code of Ethics,” or free of charge from the Company by writing to our Corporate Secretary at MutualFirst Financial, Inc., 110 E. Charles Street, Muncie, Indiana 47305 2400 or by calling (765) 747 2800.
Nomination Procedures
There have been no material changes to the procedures by which stockholders may recommend nominees to the Company’s Board of Directors.
Item 11.
Item 11. Executive Compensation
Compensation Discussion and Analysis
In this section, we provide an overview and analysis of our compensation programs, the material compensation policy decisions we have made under those programs, and the material factors that we have considered in making those decisions. Following this section, you will find a series of tables containing specific information about compensation paid or payable to the following individuals, whom we refer to as our “named executive officers.” Mr. Botts, our Chief Operating Officer passed away on October 12, 2019.
David W. Heeter - President and Chief Executive Officer
Patrick C. Botts - Chief Operating Officer
Christopher D. Cook - Chief Financial Officer
Charles J. Viater - Senior Vice President
Christopher L. Caldwell - Senior Vice President, MutualBank
Sharon L. Ferguson - Senior Vice President, MutualBank
The discussion below is intended to help you understand the detailed information provided in those tables and put that information into context within our overall compensation program.
Philosophy and Objectives of Compensation Program
The Compensation Committee has established a broad-based compensation program to address compensation for directors, executive officers and other employees. The overall goals of this compensation program help the Company and the Bank attract, motivate and retain talented and dedicated executives, orient its executives toward the achievement of business goals and link the compensation of its executives to the Company’s success. The Compensation Committee seeks to establish compensation levels that attract highly effective executives who work well as a team. In determining compensation levels based on Company performance, the Committee compares MutualFirst to a peer group of approximately 33 Midwest bank holding companies with subsidiary financial institutions ranging in size from $1.0 billion to $3.0 billion with similar balance sheets. The Compensation Committee evaluates this peer group periodically to ensure it closely resembles MutualFirst. In addition, our compensation philosophy is based on established principles for all pay practices and aligns with our corporate values, which are to conduct our business with character, compassion, class and competition. We reflect these values in our compensation by ensuring competitive and fair practices. Our overriding principles in setting types and amounts of compensation are:
·
Merit/Performance Based - Individual compensation is linked to the successful achievement of performance objectives.
·
Market Competition - Total compensation that attracts, retains and motivates our top performers at a competitive level in our market.
·
Stockholder Balance - Compensation components that align the interests of key management, especially the named executive officers, with those of our stockholders in furtherance of our goal to increase stockholder value.
The Company implements this philosophy by using a combination of cash and stock-based compensation, benefits and perquisites to attract and retain qualified persons to serve as executive officers of the Company and the Bank. Our compensation program seeks to reach an appropriate balance between base salary (to provide competitive fixed compensation), incentive opportunities in performance-based cash bonuses (to provide rewards for meeting performance goals) and equity compensation (to align our executives’ interests with our stockholders’ interests).
The Compensation Committee and the Board have established a variable incentive compensation program that provides for cash incentive payments to designated executives of the Company, including the five named executive officers, based on Company performance, as reflected in basic earnings per share (“Basic EPS”)
for each fiscal year (see “- Non-Equity Incentive Plans”). In addition, in 2008, the stockholders approved a stock option plan that authorizes the Compensation Committee to award options to directors, officers and other employees (see “- Equity Incentive Plan”). Stock options encourage our executives to own and retain a meaningful stake in the Company’s common stock, thereby aligning their long-term interests with those of our stockholders. Both of these compensation programs encourage our executive officers to achieve the Company’s financial and other performance goals.
Each executive officer of the Company also is an executive officer of the Bank. Executive officers are not compensated separately for their service to the Company. The Compensation Committee considers the significant amount of time and level of skill required to perform the required duties of each executive’s position, taking into account the complexity of our business as a regulated public company and financial institution.
The Company provides benefits, including health care benefits, to all employees to attract and retain highly effective executives and other employees with an opportunity to maintain a quality standard of living over time and to have access to health care. These benefits are administered consistently to all levels of the organization. All employees share in the cost of health benefits based on the coverage they select. In addition, employees share the cost of their health insurance premiums based on their compensation level. Available health care benefits are commensurate with that available in our market area. In addition, the Company provides various perquisites designed to enhance the success of the Company.
Components of Executive Compensation
The components of our compensation program are as follows:
Base Salary. A base salary is established for each executive to reflect the potential contribution of the executive to the achievement of the Bank’s business objectives and to be competitive with base salaries paid by other comparable financial institutions. The level of each executive officer’s base salary is designed to reward performance for carrying out the required day-to-day activities and responsibilities of each officer’s position. The Committee utilizes outside resources to ascertain appropriate base salaries for our officers and other employees. The Committee also is cognizant of the salaries paid by other non-financial institution companies in the Bank’s market area with which it believes the Bank competes for executives. Through its merit increase planning guide, the Bank increases salaries based upon competitive market conditions, the Bank’s past and expected financial performance and the individual employee’s performance. Base salary is the largest element of the Company’s compensation program because it fairly compensates individuals for fulfilling their daily responsibilities and obligations.
Annual Incentive Cash Bonus Compensation. The MutualBank 2019 Executive Variable Compensation Plan provided for cash incentive payments to designated executives of the Company, including the five named executive officers. This cash incentive plan provides for one-time payments to the designated executives based on the Company’s 2019 Basic EPS. Under the plan, cash payments were calculated as a percentage of 2019 base salary, with the appropriate percentage determined by whether a targeted Basic EPS level was met for 2019. For the named executive officers of the Company, the plan established seven designated Basic EPS levels (including the Company’s target Basic EPS based on its 2019 budget) based upon internal forecasts for the performance of the Company and a range of percentage of salary cash incentive payments for meeting these designated Basic EPS levels based upon each officer’s anticipated contribution to that performance. For additional information, see “Non-Equity Incentive Plans.”
Equity Compensation. The Company has utilized equity compensation in the form of stock options and restricted stock to align the interests of our named executive officers with our shareholders and to reward those individuals’ contributions to our franchise value over time.
Benefits. The Company provides benefits to all employees with an opportunity to maintain a quality standard of living over time and to have access to health care. These benefits help us to attract and retain highly effective executives and other employees. These welfare benefits are administered consistently to all levels of the organization. All employees share in the cost of health benefits based on the coverage they elect. Health insurance premiums are paid by the Bank based on employee compensation levels. Available health care benefits are commensurate with that available in our market area.
The Company has designed retirement plans or programs to ensure our employees have adequate income levels after employment. The Company maintains a KSOP, which is subject to Department of Labor and IRS requirements. The Compensation Committee determines the amount of Company contributions to the 401(k) portion of the plan for all employees. It has been the Company’s practice to contribute 100% of the first 4% contributed by a participant and a matching 50% for the next 2% contributed providing for a total of a 5% contribution on behalf of MutualBank for those employees choosing to contribute 6% or more. The employee stock ownership plan component of the plan (“ESOP”) was designed to ensure all employees have a vested interest in the success of the Company. The ESOP purchased shares of the Company’s stock in 1999, which were allocated to employees annually over 15 years. These plans were funded by the Company to help provide retirement income for non-executive employees at normal retirement age of approximately 60% to 70% of pre-retirement income for employees that dedicate their career to the Company.
Because tax-qualified plans limit funding for certain highly compensated employees and are not available to directors, the Company has established other retirement compensation plans for those individuals. Certain officers, including some of the named executive officers, and certain directors are entitled to defer compensation under nonqualified plans. The deferred compensation plan for executive officers enables them to supplement their retirement income under our qualified plans to provide them with approximately 10% of their salary at retirement as retirement income, if and to the extent they participate in the program. For additional information regarding these plans, see “Non-Qualified Deferred Compensation - Executive Deferred Compensation Agreements” and “Director Compensation.” The Company also maintains an Executive Benefit Plan for key employees, including some of the named executive officers. See “Retirement Plans” for more information about the Executive Benefit Plan. The deferred compensation program and Executive Benefit Plan are designed to provide career executive officer retirees, in conjunction with Social Security, tax qualified retirement plans and the ESOP, with approximately 70% of their pre-retirement income.
Four of our named executive officers have three-year employment agreements that provide for special payments to the executives in case of a change in control of the Company or an involuntary termination of the executive for other than cause (as defined in the agreements). Two of our named executive officers have a change in control agreement in which the executives will receive a payment in the event of a change in control of the Company. These agreements are common benefits for executives of publicly traded financial institutions, and the Company believes they are important in order to attract and retain qualified executive management. Certain of our benefit plans also provide for accelerated payments or other benefits upon a change in control of the Company or an involuntary termination of the executive for other than cause. See “Potential Termination and Change in Control Payments.”
Perquisites. The Company provides perquisites designed to enhance the success of the Company. Executive officer education is provided at industry conferences, seminars and schools, sometimes with spousal travel expenses. Dues to country clubs, social clubs and service organizations are paid to encourage community involvement and build business relationships. Messrs. Heeter, Botts, Viater and Caldwell receive a car allowance, and the value of the allowance is included in their taxable income.
Stock Ownership Guidelines. We have in place Board-approved stock ownership guidelines applicable to our Section 16 officers (those officers reporting share ownership to the SEC) as well as our non-employee directors. These guidelines were established to further reinforce the alignment of the financial interests of these executives and non-employee directors with those of our long-term shareholders. Section 16 officers have five years from the time they are promoted, named to a senior leadership position or their ownership requirement is increased to achieve the ownership levels set forth in our stock ownership guidelines. The
stock ownership levels currently applicable to our Section 16 officers and non-employee directors under these guidelines are as follows:
Level
Guideline
President and CEO
3.0× base salary
Other Section 16 Officers
2.0× base salary
Non-Employee Directors
3.0× base annual retainer
A Section 16 officer’s stock ownership requirement is based upon the officer's salary as of the date the guidelines were adopted or, if later, as of the date the officer first became subject to the guidelines. As of any date, the share value for shares owned will be the greater of the fair market value of the shares as of that date or the Section 16 officer’s or non-employee director’s cost basis in those shares.
The ownership requirement is based on actual ownership, which includes (i) all shares beneficially owned, but excluding unexercised stock options or unvested equity awards and, (ii) shares held in trust or other entity where the officer or Board member retains beneficial ownership.
The Compensation Committee and the Board review compliance with the guidelines at least annually. If a director or executive officer fails to comply with the guidelines, the Committee and/or the Board may (i) limit future equity awards, (ii) require retention of portions of future equity exercises or shares that have vested or (iii) pay future bonus amounts or Board retainers in stock.
Pay Ratio
The following is a reasonable estimate, prepared under applicable SEC rules, of the ratio of annual total compensation of our Chief Executive Officer to the median of the annual total compensation of our other employees. We determine our median employee based on salary (annualized in the case of full and part-time employees (excluding the Chief Executive Officer) as of December 31, 2019. The annual total compensation of our median employee (other than the Chief Executive Officer) for 2019 was $37,981. As disclosed in the Summary Compensation table, our Chief Executive Officer’s annual total compensation for 2019 was $715,557. Based on the foregoing, our estimate of the ratio of annual total compensation of our Chief Executive Officer to the median of the annual total compensation of all other employees was 18.8 to 1. Given the different methodologies that various public companies will use to determine an estimate of their pay ratio, the estimated ratio reported above should not be used as a basis for comparison between companies.
Impact of Tax and Accounting
As a general matter, the Compensation Committee takes into account the various tax and accounting implications of the compensation vehicles employed by the Company.
Accounting Impact
When determining amounts of long-term incentive grants to executives and employees, the Compensation Committee examines the accounting cost associated with the grants. Under FASB ASC Topic 718, grants of equity-based awards result in an accounting charge for the Company equal to the grant date fair value of those securities.
Tax Impact
Section 162(m) of the Internal Revenue Code does not permit publicly traded companies to take income tax deductions for compensation paid to the Chief Executive Officer and the other Named Executive Officers (other than the Chief Financial Officer) to the extent that compensation exceeds $1.0 million per officer in any taxable year.
The Compensation Committee will continue to consider steps that might be in the Company’s best interests to comply with Section 162(m) of the Code. However, in establishing the cash and equity incentive compensation programs for the executive officers, the Compensation Committee believes that the potential deductibility of the compensation payable under those programs should be only one of a number of relevant factors taken into consideration, and not the sole or primary factor. The Compensation Committee believes that cash and equity incentive compensation must be maintained at the requisite level to attract and retain the executive officers essential to the Company’s financial success, even if all or part of that compensation may not be deductible by reason of the limitations of Section 162(m) of the Code.
Section 280G of the Internal Revenue Code provides that severance payments triggered by a change in control, which equal or exceed three times the individual’s “base amount” are deemed to be “excess parachute payments.” Individuals receiving parachute payments in excess of three times their base amount are subject to a 20% excise tax on the amount of the excess payments. If excess parachute payments are made, the Company and the Bank would not be entitled to deduct the amount of the excess payments. Each employment agreement provides that severance and other payments that are subject to a change in control will be reduced as much as necessary to ensure that no amounts payable to the executive will be considered excess parachute payments.
Compensation Committee Report
The Compensation Committee has reviewed and discussed with management the “Compensation Discussion and Analysis” for the year ended December 31, 2019. Based on this review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.
The foregoing report is furnished by the Compensation Committee of the Board of Directors.
Richard J. Lashley (Chairman)
Linn A. Crull
Wilbur R. Davis
Michael J. Marien
Michelle A. Altobella
Summary Compensation Table
The following table sets forth information concerning the compensation earned in 2019, 2018 and 2017 by our principal executive officer, principal financial officer and the next three most highly compensated executive officers. Mr. Botts passed away in October 2019. As a result, Sharon Ferguson was added to the table below as a named executive officer.
Grants of Plan-Based Awards
The following table sets forth certain information with respect to grants of plan-based awards to the named executive officers during 2019.
Equity Incentive Plans
On March 20, 2019, based upon the recommendation of the Compensation Committee, the Board of Directors approved the Company’s 2019 Omnibus Incentive Plan (the “2019 Plan”), which was subsequently approved by the Company’s stockholders at the 2019 Annual Meeting. The Plan has available as awards up to 600,000 shares.
The purpose of the 2019 Plan is to promote the long-term success, and enhance the long-term value, of the Company by linking the personal interests of employees and directors with those of the Company’s stockholders. The 2019 Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of employees and directors upon whose judgment, interest, and special effort the successful conduct of its operation largely is dependent, in a manner that does not expose the Company to imprudent risks and that is consistent with the long-term health of the Company. No awards were made under this Plan during fiscal 2019.
Outstanding Equity Awards at Fiscal Year-End
There were no stock options held by named executive officers at December 31, 2019.
Non-Equity Incentive Plans
In March 2019, based on a recommendation from its Compensation Committee, the Board of Directors of the Company approved the MutualBank 2019 Executive Variable Compensation Plan, which provided for cash incentive payments to designated executives of the Company, including the five named executive officers. This cash incentive plan provides for one-time payments to the designated executives based on the Company’s 2019 Basic EPS. Under the plan, cash payments would be calculated as a percentage of 2019 base salary, with the appropriate percentage determined by whether a targeted Basic EPS level was met for 2019. For the named executive officers of the Company, the plan established a range of Basic EPS levels (including the Company’s target Basic EPS based on its 2019 budget) based upon internal forecasts for the performance of the Company and a range of percentage of salary cash incentive payments for meeting these designated Basic EPS levels based upon each officer’s anticipated contribution to that performance as follows:
The Company’s Basic EPS for 2019 was 2.77%, which was a Basic EPS level that entitled the named executive officers to a cash payment under the plan. Messrs. Heeter, Cook, Botts, Viater, Caldwell and Ferguson qualified for an incentive cash payment of 49%, 32%, 39%, 32%, 27% and 26%, respectively of his or her 2019 base salary. The Compensation Committee and the Board determined that payments at that level were appropriate and awarded Messrs. Heeter, Cook, Botts, Viater and Caldwell cash payments of $209,471; $89,310; $137,436; $105,548; $59,349 and $41,914 respectively, for 2019, which payments were made in early 2020.
The plan does not create any vested rights in the participants and may be modified, repealed or discontinued at any time by the Board of Directors. In addition, the plan includes a clawback requiring repayment to the extent any payment made is later determined to have been based on performance measurements that are subsequently deemed to be inaccurate due to misstatement or misrepresentation. No awards were made in 2020.
Nonqualified Deferred Compensation
The Bank maintains an executive deferral program for the benefit of designated senior executives, including Messrs. Heeter and Botts, to supplement their retirement earnings to provide them with approximately another 10% of their expected salary at retirement as additional annual retirement income, after Social Security benefits, ESOP shares and income from all retirement plans of the Bank, to the extent they chose to participate in the program. Pursuant to the agreements under the program, key executives have been provided an additional opportunity to defer, at their choice, 1% to 15% of their base salary into a non-qualified deferral program. For each participant, the Bank matched $.50 of every dollar deferred, up to a maximum match established in each person’s agreement. The Bank also pays interest on each account at a rate of 10%, which rate was set at the inception of the plan in 1993 and was not an above-market rate at that time. Matching contributions and interest vest over five years. The Bank maintains a record of all amounts deferred by the executive. Benefits are paid to the executives when they reach age 65. The deferred compensation benefit is the annuitized value, at 10%, of the executive’s account, which value is paid in monthly installments over 15 years. The plan provides for earlier payouts for disability and for continued payouts as death benefits. Deferrals under this plan ceased after 2008; however, annual earnings at 10% continue. For the year ending December 31, 2019, the aggregate earnings accrued for Messrs. Heeter and Botts on their deferred compensation balances (a portion of which also is reflected in the 2019 Summary Compensation Table) were $37,898 and $28,975, respectively.
Non Qualified Deferred Compensation Table for 2019
The following table sets forth certain information with respect to our Executive Deferred Compensation Agreements with each named executive officer for the year ended December 31, 2019.
Retirement Plans
The Company has designed retirement plans or programs to ensure our employees have adequate income levels after employment. Prior to July 2009, the Company maintained a 401(k) Retirement Savings Plan, in which the Compensation Committee determined the amount of Company contributions for all employees. The Company also maintained an ESOP designed to ensure all employees have a vested interest in the success of the Company. The ESOP purchased shares of the Company’s stock in 1999, which were allocated to employees annually over 15 years. On July 1, 2009, these two qualified plans were combined into a KSOP. This reduced our administrative expenses and provides employee compensation tied to the success of the Company. Under the KSOP, in addition to the regular ESOP allocations, employee contributions are matched.
The Company also maintains a non-qualified Executive Benefit Plan (“Benefit Plan”) for key employees, including Messrs. Heeter and Botts. The Benefit Plan is designed to provide the executives with retirement income, in conjunction with Social Security and the KSOP, of approximately 60% of their pre-retirement income. An estimated annual retirement payment is established based on the individual’s anticipated salary at retirement, estimates of the person’s retirement income from Social Security benefits, all tax qualified plans of the Bank and an assumed 8% annual rate of return. This estimated payment amount is reviewed periodically for changes in the relevant factors.
The Bank makes an annual payment to each participant for the purpose of funding the cost of their future benefit. Those contributions are taxable income to the participant in the year they are made and are reflected in the 2019 Summary Compensation Table.
Under the Benefit Plan, if the executive is involuntarily terminated other than for cause or in connection with a change in control, the Bank must make a lump sum contribution to the executive of the full contribution for the then-current year and the present value, based on an 8% rate, of the next five years of required contributions (or of all required remaining contributions if less). In addition, if the executive is deemed to be terminated in connection with a change of control, the Bank must make a lump sum final contribution to the executive’s account equal to the present value, at 8%, of all remaining contributions required under then-current payout estimates, through age 65.
In the 2008 acquisition of another financial institution, the Bank assumed the terms of the Salary Continuation Agreement between that entity and Mr. Viater, which provides for an annual retirement benefit of $60,000 payable in monthly installments for 15 years if he retires at the age of 60 or later. Any payments made upon a change in control are subject to reduction to avoid adverse tax consequences under Section 280G.
Employment Agreements
The Bank has entered into three-year employment agreements with Messrs. Heeter, Cook, Botts and Viater which provide for annual one-year extensions, if authorized by the Compensation Committee and the Board. Under these agreements, each executive’s salary is reviewed for adjustments annually and cannot be decreased below any adjusted level. The 2019 base salaries of Messrs. Heeter, Cook, Botts and Viater under these agreements are $430,000, $275,000, $355,000 and $325,000, respectively. Under these agreements, each executive is entitled to participate equitably in discretionary bonuses awarded to executive employees and in the Bank’s other employee benefit plans, including medical, dental, group life, disability and accidental death and dismemberment insurance benefits. Each agreement provides that the executive’s employment may be terminated by the Bank or by the executive at any time and also provides for termination upon the occurrence of certain events specified by federal regulations. If the executive’s employment is terminated due to disability, he would receive his salary and other benefits for the remainder of the three-year term, with a reduction in his salary for disability insurance payments from insurance purchased by the Bank. If the executive’s employment is terminated due to death, his estate would receive all benefits under the agreement through the end of the month in which the executive dies. If the executive’s employment is terminated for cause or voluntarily by the executive, he would receive all benefits under the agreement
through that termination date. If the executive’s employment is terminated by constructive termination, with no change in control, the Bank would be required to pay to the executive his then-current salary over the three-year term and to provide the executive with his then-current employee health benefits for the remaining term of his agreement. If the executive’s employment is involuntarily terminated in connection with a change in control, MutualBank must pay to the executive in a lump sum 299% of his Section 280G base amount (the base amount is essentially the executive’s average annual Box 1, W-2 compensation during the five full calendar year periods prior to the effective date of the termination) and continue to provide substantially the same health benefits as were being provided to the executive officers of MutualBank immediately prior to the change in control, in each case subject to reduction to ensure deductibility under Section 280G of the Internal Revenue Code. The executives have no responsibility to mitigate amounts owed to them under the agreements nor does any compensation received from another employer reduce post-termination compensation under the agreements. The agreements provide that for the three years following any termination of employment, each officer will be prohibited from soliciting Company or Bank depositors, customers and employees to leave the Company or the Bank. As a result of Mr. Botts death in October 2019, his estate was paid through the end of October, the month in which he passed, pursuant to his agreement.
Change in Control Agreement
The Bank entered into a Change in Control Agreement with Mr. Caldwell and Ms. Ferguson on October 15, 2017 which provides for annual one-year extensions, if authorized by the Compensation Committee and the Board. Under the agreement, if Mr. Caldwell’s or Ms. Ferguson’s employment is terminated within twelve months subsequent to a Change in Control for any reason other than for cause, disability, retirement or as a result of Mr. Caldwell’s or Ms. Ferguson’s death, or if Mr. Caldwell or Ms. Ferguson resigns for good reason as a result of any material breach of the change in control agreement by Mr. Caldwell’s or Ms. Ferguson’s employer or as a result of a material change in the location where Mr. Caldwell or Ms. Ferguson works, Mr. Caldwell and Ms. Ferguson will be entitled to a lump sum payment equal to his or her annual compensation plus the cost of benefits over a twelve month period including the cost of all group insurance, life insurance, health and accident and disability insurance and any other benefit plan program or insurance he or she was entitled to participate in immediately prior to his or her termination. In the event of his termination, Mr. Caldwell would be entitled to receive $398,974 based on his compensation for 2019. In the event of her termination, Ms. Ferguson would be entitled to receive $331,373 based on her compensation for 2019.
In the 2008 acquisition of another financial institution, the Bank also assumed Mr. Viater’s director fee continuation agreement, which provides that if he retires after attaining age 65 and continues to serve as a director for at least five years, he would be entitled to an annual retirement benefit for 10 years equal to 50% of any director fees paid to him during the last plan year before ending service. In the event of a change in control followed within 24 months by a termination of service as a director prior to age 72, the director would be entitled to receive the present value of the normal retirement benefit (without regard to years of service).
Potential Payments upon Termination of Employment or Change in Control
The following tables show the approximate value of the benefits and payments that the Named Executive Officers would have been entitled to receive as of December 31, 2019 had their employment been terminated or had a change in control occurred on that date. The table excludes (i) amounts accrued through December 31, 2019 that would be paid in the normal course of continued employment, such as accrued but unpaid salary and bonus amounts, (ii) vested account balances under the Company’s KSOP plan, and (iii) already vested equity awards.
David W. Heeter
Christopher D. Cook
Charles J. Viater
Christopher L. Caldwell
Sharon L. Ferguson
Director Compensation
The Company uses a combination of cash and stock-based compensation to attract and retain qualified persons to serve as non-employee directors of the Company and the Bank. Each director of the Company also is a director of the Bank. Directors are not compensated separately for their service on the Company’s Board of Directors. In setting director compensation, the Board of Directors considers the significant amount of time and level of skill required for service on the Boards of the Company and the Bank, particularly due to the duties imposed on directors of public companies and financial institutions. The types and levels of director compensation are annually reviewed and set by the Compensation Committee and ratified by the full Board of Directors.
For the year ending December 31, 2019, each director received an annual fee of $36,000 for serving on the Bank’s Board of Directors, except for Messrs. Heeter, Botts, and Viater, who were compensated as executive officers of the Bank and are not separately compensated as directors. Mr. Davis receives an additional $12,000 per year for serving as Chairman of the Board of Directors; Mr. Crull receives an additional $5,000 for serving as the Chairman of the Audit/Compliance Committee; Mr. Lashley receives an additional $3,000 for serving as Chairman of the Compensation Committee; and Mr. Hughes receives an additional $3,000 for serving as the Chairman of the Wealth Management Committee. In addition, each director receives $200.00 per Board committee meeting attended and the Audit/Compliance Committee members receive $400.00 per meeting attended. No stock options were granted to directors in 2019.
The Bank maintains deferred compensation arrangements with some directors, which allowed them to defer all or a portion of their Board fees earned before September 2008 and earn interest on deferred amounts at the rate of 10% per year, which rate was set at the inception of the plan in 1993 and was not an above-market rate at that time. Participants receive the deferred amounts as income when they are no longer serving as active directors. The participant may choose to receive the deferred payments in a lump sum or in annual installments for 15 years beginning at age 70.
Messrs. Levy and Marien were parties to director fee continuation agreements with the institution acquired in 2008, which were assumed by the Company. Those agreements provided that if the director retired after attaining age 72 and had served as a director for at least five years, he would be entitled to an annual retirement benefit for five years (or 10 years, if the director had more than 10 years of service) equal to 50% of the total fees paid to him during the last plan year before ending service. These agreements also provided that, in the event of a change in control followed within 24 months by a termination of service as a director prior to age 72, the director would be entitled to receive the present value of the normal retirement benefit (without regard to years of service) paid in a lump sum.
Director Compensation Table for 2019
The following table provides compensation information for each member of our Board of Directors during the year ending December 31, 2019 (except for Messrs. Heeter, Botts and Viater, whose compensation is reported as named executive officers). All prior stock options and restricted stock awards to non-officer directors were fully vested at December 31, 2019, and no stock option or restricted stock awards were granted to non-officer directors during 2019.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table provides information as of December 31, 2019 of each of MutualFirst Financial’s directors, by the named executive officers of MutualFirst Financial and by all directors and executive officers of MutualFirst Financial as a group as well as the persons known to MutualFirst Financial to be the beneficial owners of more than 5% of MutualFirst Financial’s outstanding common stock.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes generally voting power and/or investment power with respect to securities. Shares of common stock that an individual has a right to acquire within 60 days after December 31, 2019, including pursuant to stock options to purchase shares of common stock, are deemed outstanding for purposes of computing the percentage of beneficial ownership owned by the person holding such security, but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person. Except as indicated by footnote, MutualFirst Financial believes that the persons named in this table, based on information provided by these persons, have sole voting and investment power with respect to the securities indicated. The address of each of MutualFirst Financial’s directors and executive officers is care of MutualFirst Financial, Inc., 110 E. Charles Street, Muncie, Indiana 47305.
________________________
(1)
Includes options for 5,000 shares and 20,000 shares owned by Mr. Davis’s spouse.
(2)
Includes 14,490 shares allocated to Mr. Heeter in the ESOP and 2,917 shares held in a charitable trust established by Mr. Heeter for which he has voting and dispositive power over all the shares.
(3)
Includes 188,650 shares held directly and 124,950 shares held by the Eleanor T. Barkley, LP for which Mr. Barkley is the manager.
(4)
Includes options for 2,500 shares and 20,000 shares owned by Mr. Crull’s spouse.
(5)
Includes options for 4,000 shares, 500 shares owned by Mr. Hughes’ spouse and 4,000 shares in an IRA account.
(6)
Of the shares reported as beneficially owned by Mr. Lashley, 352,451 shares of common stock are held in the name of Financial Edge Fund, L.P.; 154,723 shares of common stock are held in the name of Financial Edge-Strategic Fund, L.P.; 66,886 shares of common stock are held in the name of PL Capital/Focused Fund, L.P.; 141,713 shares of common stock are held in the name of Goodbody/PL Capital, L.P.; and 2,000 shares of common stock are held in Mr. Lashley's IRA. With regard to the shares held by Financial Edge Fund, L.P., Financial Edge-Strategic Fund, L.P., PL Capital/Focused Fund, L.P., and Goodbody/PL Capital, L.P., Mr. Lashley reports beneficial ownership above because he has shared voting and dispositive power as a Managing Member of PL Capital, LLC and Goodbody/PL Capital, LLC, the general partners of the funds, and as a Managing Member of PL Capital Advisors, LLC, the investment advisor of the Funds. Mr. Lashley disclaims beneficial ownership of the reported securities except to the extent of his pecuniary interest therein.
(7)
Includes 16,033 shares in Mr. Viater’s 401(k) account; 25,694 shares allocated to Mr. Viater in the ESOP.
(8)
Mr. Bernard is a representative of Ancora Advisors. See footnote 14.
(9)
Includes 4,883 shares allocated to Mr. Cook in the ESOP.
(10)
Includes 2,115 shares allocated to Mr. Caldwell in the ESOP.
(11)
This amount includes options for 11,500 shares held by directors and executive officers. This amount does not include the 200,000 shares owned by the MutualBank Charitable Foundation, Inc., which is an Indiana non-profit corporation and 501(c)(3) tax-exempt organization with no stock or stockholders. Two of the six directors and all the officers of the foundation also are directors or officers of the Company or the Bank. Pursuant to its charter and applicable federal regulations, these shares are required to be voted in any stockholder vote in the same ratio as the votes cast by all other stockholders of the Company.
(12)
According to filings under the Exchange Act, the PL Capital Group consists of the following persons and entities which share beneficial ownership of certain of the shares: Financial Edge Fund, L.P. (“Financial Edge Fund”); Financial Edge-Strategic Fund, LP (“Financial Edge Strategic”); PL Capital Focused Fund, L.P. (‘Focused Fund”), PL Capital, LLC (“PL Capital’), general partner of Financial Edge Fund, Financial Edge Strategic and Focused Fund; PL Capital Advisors, LLC (“PL Capital Advisors”), the investment advisor to Financial Edge Fund, Financial Edge Strategic, Focused Fund and Goodbody/PL LP; Goodbody /PL Capital LP (“Goodbody/PL LP”);Goodbody/PL Capital LLC(“Goodbody/PL LLC”), general partner of Goodbody/PL LP; John W. Palmer as managing member of PL Capital, PL Capital Advisors and Goodbody/PL LLC and individually; Richard Lashley, as managing member of PL Capital, PL Capital Advisors and Goodbody/PL LLC, and individually. Mr. Lashley is also a director of the Company. PL Capital Group has shared voting and dispositive power over 715,773 shares.
(13)
Represents shares held by Ancora Advisors, LLC, a registered investment advisor, as filed on Schedule 13-D/A on March 2, 2018 and as updated with information provided to the Company on Schedule 13-F. Ancora Advisors, LLC reported sole voting and dispositive power over 530,725 shares. Mr. Bernard is a representative of Ancora Advisors but he does not possess voting or dispositive power over the shares reported.
(14)
Represents shares held by clients of Dimensional Fund Advisors LP, an investment advisor, which disclaims beneficial ownership of these shares. Dimensional Fund Advisors LP filed an amended Schedule 13G with the SEC on February 12, 2020.
Equity Compensation Plan Information. The following table summarizes our equity compensation plans as of December 31, 2019.
____________________
(1)
No shares were awarded under this plan.
Item 13.
Item 13. Certain Relationships and Related Transactions
The Company and the Bank may engage in transactions or series of transactions with our directors, executive officers and certain persons related to them. Except for loans by the Bank, which are governed by a separate policy, these transactions are considered “related party” transactions under applicable regulations of the SEC and are subject to review and approval of the Audit/Compliance Committee and ratification by the Board of
Directors. All other transactions with executive officers, directors and related persons are approved by the Board of Directors.
The Bank has a written policy of granting loans to officers and directors, which fully complies with all applicable federal regulations. Loans to directors and executive officers are made in the ordinary course of business and on substantially the same terms and conditions, including interest rates and collateral, as those of comparable transactions with non-insiders prevailing at the time, in accordance with the Bank’s underwriting guidelines, and do not involve more than the normal risk of collectability or present other unfavorable features. These loans to directors and executive officers are not made at preferential rates; however, certain closing fees are waived. No director, executive officer or any of their affiliates had aggregate indebtedness to the Bank at below-market interest rates exceeding $120,000 in the aggregate since December 31, 2018. Loans to all directors and executive officers and their associates totaled approximately $11.6 million at December 31, 2019, which was approximately 5.1% of the Company’s consolidated stockholders’ equity at that date. All loans to directors and executive officers were performing in accordance with their terms at December 31, 2019.
Independence and Ethics Code
The Board has determined that Directors Crull, Davis, Hewitt, Lashley, Levy, Marien, Rosema, Altobella and Bernard, who constitute a majority of our Board members, are “independent directors,” as that term is defined in the NASDAQ listing standards. Among other things, when making this determination, the Board considers each director’s current or previous employment relationships and material transactions or relationships with the Company or the Bank, members of their immediate family and entities in which the director has a significant interest. The purpose of this review is to determine whether any relationships or transactions exist or have occurred that are inconsistent with a determination that the director is independent. Among other matters, in reaching its determination on independence, the Board considered the fact that certain of the directors or their affiliates have borrowed money from the Bank. See "Election of Directors - Business Relationships and Transactions with Executive Officers, Directors and Related Persons."
The Board of Directors has adopted a Code of Business Conduct and Ethics that applies to all directors, officers and employees. You may obtain a copy of the Code free of charge by writing to the Corporate Secretary of the Company, 110 E. Charles Street, Muncie, Indiana 47305-2400 or by calling (765) 747-2800. The Code of Business Conduct and Ethics is also available at http://www.bankwithmutual.com/conduct.
Board Leadership Structure and Risk Oversight
As noted above, the positions of Chairman of the Board of the Company and Chief Executive Officer and President of the Company are held by separate persons. This has been the case since the Company was formed. The Board believes this structure is appropriate for the Company and the Bank because it creates a clear line between management by the executive management and oversight of management by the Board of Directors, led by the Chairman.
Item 14.
Item 14. Principal Accountant Fees and Services
Services and Payments
During the year ending December 31, 2019, BKD, LLP provided various audit, audit-related and non-audit services to the Company as follows: (1) the audit of the Company’s 2019 annual financial statements; (2) the review of 2019 financial statements in the Company’s Quarterly Reports on Form 10-Q; and (3) tax services.
The aggregate fees billed to the Company by BKD, LLP and its affiliates for the years ending December 31, 2019 and 2018 were as follows:
Pre-Approval of Audit and Non-Audit Services
Pursuant to the terms of its charter, the Audit/Compliance Committee is responsible for the appointment, compensation, retention and oversight of the work of the independent auditors. The Audit/Compliance Committee must pre-approve the engagement letters and the fees to be paid to the independent auditors for all audit and permissible non-audit services to be provided by the independent auditors and consider the possible effect that any non-audit services could have on the independence of the auditors. The Audit/Compliance Committee may establish pre-approval policies and procedures, as permitted by applicable law and SEC regulations and consistent with its charter for the engagement of the independent auditors to render permissible non-audit services to the Corporation, provided that any pre-approvals delegated to one or more members of the committee are reported to the committee at its next scheduled meeting. At this time, the Audit/Compliance Committee has not adopted any delegated pre-approval policies.
The Audit/Compliance Committee of the Board has authorized BKD, LLP to provide to the Company tax services and certain services in connection with the administration of our benefit plans. In authorizing those services, the Committee determined that providing those services were compatible with maintaining BKD, LLP’s independence.
			 		
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a)(1) List of Financial Statements
The following are contained in Item 8 of this Form 10-K:
Annual Report Section
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2019 and 2018
Consolidated Statements of Income for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements, December 31, 2019, 2018 and 2017
(a)(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is not required under the related instructions or is not applicable.
(a)(3) Exhibits:
Regulation
S-K
Exhibit
Number
Document
2.1
Agreement and Plan of Merger, dated as of October 4, 2017, by and among the Registrant and Universal Bancorp (incorporated herein by reference to the Registration Statement on Form S-4 filed with the SEC on January 17, 2018 (No. 333-222583))
2.1(a)
Agreement and Plan of Merger, dated as of October 29, 2019 by and between Northwest Bancshares, Inc. and MutualFirst Financial, Inc. (incorporated herein by reference to Exhibit 2.1 to the Registrant's Current Report on Form 8-K filed with the SEC on October 29, 2019 (No. 000-27905))
3.1
Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form S-1 filed with the SEC on September 16, 1999 (No. 333-87239))
3.1a
Articles Supplementary to the Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on July 15, 2008 (File No. 000-27905))
3.2
Amended and Restated Bylaws of the Registrant (incorporated herein by reference to Exhibit 3(ii) to the Registrant’s Current Report on Form 8-K filed with the SEC on February 27, 2015 (File No. 000-27905))
4.1
Certificate of Registrant’s common stock (incorporated herein by reference to Exhibit 4.0 to the Registrant’s Registration Statement on Form S-1 filed with the SEC on September 16, 1999 (No. 333-87239))
4.2
Description of the Registrant's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
10.1
Amended and Restated Employment Agreement between the Registrant, MutualBank and David W. Heeter (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (File No. 000-27905))
10.2
Amended and Restated Employment Agreement between the Registrant, MutualBank and Patrick D. Botts (incorporated herein by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (File No. 000-27905))
10.3
Amended and Restated Employment Agreement between the Registrant, MutualBank and Christopher D. Cook (incorporated herein by reference to Exhibit 10.22 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (File No. 000-27905))
10.4
Amended and Restated Employment Agreement between the Registrant, MutualBank and Charles J. Viater (incorporated herein by reference to Exhibit 10.14 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 (File No. 000-27905))
10.5
Salary Continuation Agreement between the Registrant and Charles J. Viater (incorporated herein by reference to Exhibit 10.17 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 23, 2009 (File No. 000-27905))
10.6
Form of Supplemental Retirement Plan Income Agreements for David W. Heeter and Patrick C. Botts (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the SEC on March 30, 2000 (File No. 000-27905))
10.7
Form of Director Shareholder Benefit Program Agreement, as amended, for Jerry D. McVicker (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000 filed with the SEC on April 2, 2001 (File No. 000-27905))
10.8
Form of Executive Deferred Compensation Plan Agreements for David W. Heeter and Patrick C. Botts (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999 filed with the SEC on March 30, 2000 (File No. 000-27905))
10.9
Registrant’s 2000 Stock Option and Incentive Plan (incorporated herein by reference to Appendix D to the joint proxy statement-prospectus included in the Registrant’s Registration Statement on Form S-4 filed with the SEC on October 19, 2000 (No. 333-46510))
10.10
Director Deferred Compensation Master Agreement (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on March 16, 2007 (File No. 000-27905))
10.11
Registrant’s 2008 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 23, 2009 (File No. 000-27905))
10.12
Form of Incentive Stock Option Agreement for 2008 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 18, 2010 (File No. 000-27905))
10.13
Form of Non-Qualified Stock Option Agreement for 2008 Stock Option and Incentive Plan (incorporated herein by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 filed with the SEC on March 18, 2010 (File No. 000-27905))
10.14
Change in Control Agreement between the Registrant, MutualBank and Christopher L. Caldwell (incorporated herein by reference to Exhibit 10.14 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 (File No. 000-27905))
10.15
Change in Control Agreement between the Registrant, MutualBank and Sharon L. Ferguson (incorporated herein by reference to Exhibit 10.15 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 (File No. 000-27905))
10.16
Director Fee Arrangements for 2019
10.17
Standstill Agreement dated March 16, 2018 by and among MutualFirst Financial, Inc. and the Ancora Parties (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 8-K filed on March 20, 2018 with the SEC (File No. 000-27905))
10.18
2019 Omnibus Incentive Plan
Statement re computation of earnings per share (See Note 25 of the Notes to Audited Consolidated Condensed Statements included in this Form 10-K)
Code of Business Conduct and Ethics (incorporated herein by reference to Exhibit 14 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 000-27905))
Subsidiaries of the registrant
Consent of Independent Registered Public Accounting Firm
31.1
Rule 13(a)-14(a) Certification (Chief Executive Officer)
31.2
Rule 13(a)-14(a) Certification (Chief Financial Officer)
Section 1350 Certification
Financial statements from the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, formatted in eXtensible Business Reporting Language (XBRL): (i) the Consolidated Condensed Balance Sheets, (ii) the Consolidated Condensed Statements of Income, (iii) the Consolidated Condensed Statements of Comprehensive Income, (iv) the Consolidated Condensed Statement of Stockholders’ Equity, (v) the Consolidated Condensed Statements of Cash Flows and (vi) Notes to Consolidated Condensed Financial Statements.
101.INSXBRL Instance Document
101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Labels Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document
(b)
Exhibits - See list in (a)(3) and the Exhibit Index following the signature page.
(c)
Financial Statements Schedules - None
			 		
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MutualFirst Financial, Inc.
Date: March 12, 2020
By:
/s/ David W. Heeter
David W. Heeter, President and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned officers and directors of MutualFirst Financial, Inc., hereby severally and individually constitute and appoint David W. Heeter the true and lawful attorneys and agents of each of us to execute in the name, place and stead of each of us (individually and in any capacity stated below) any and all amendments to this Annual Report on Form 10-K and all instruments necessary or advisable in connection therewith and to file the same with the Securities and Exchange Commission, each of said attorneys and agents to have the power to act with or without the others and to have full power and authority to do and perform in the name and on behalf of each of the undersigned every act whatsoever necessary or advisable to be done in the premises as fully and to all intents and purposes as any of the undersigned might or could do in person, and we hereby ratify and confirm our signatures as they may be signed by our said attorneys and agents or each of them to any and all such amendments and instruments. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ David W. Heeter
/s/ Wilbur R. Davis
David W. Heeter, President and Director
Wilbur R. Davis, Chairman of the Board
(Principal Executive Officer)
Date: March 12, 2020
Date: March 12, 2020
/s/ Linn A. Crull
/s/ William V. Hughes
Linn A. Crull, Director
William V. Hughes, Director
Date: March 12, 2020
Date: March 12, 2020
/s/ Michelle R. Altobella
/s/ Mark L. Barkley
Michelle R. Altobella, Director
Mark L. Barkley, Director
Date: March 12, 2020
Date: March 12, 2020
/s/ Edward C. Levy
/s/ Michael J. Marien
Edward C. Levy, Director
Michael J. Marien, Director
Date: March 12, 2020
Date: March 12, 2020
/s/ Charles J. Viater
/s/ Richard J. Lashley
Charles J. Viater, Director
Richard J. Lashley, Director
Date: March 12, 2020
Date: March 12, 2020
/s/ James M. Bernard
/s/ Brian C. Hewitt
James M. Bernard, Director
Brian C. Hewitt, Director
Date: March 12, 2020
Date: March 12, 2020
/s/ Christopher D. Cook
Christopher D. Cook, Senior Vice President
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 12, 2020