Assets totaled $978.9 million at June 30, 2006, an increase from December 31, 2005 of $7.1 million, or .7%. Gross loans, excluding loans held for sale, increased $6.4 million or .8%. Consumer loans increased $8.3 million, or 3.9%, and commercial business loans increased $3.9 million, or 6.0%, while residential and commercial real estate loans held in the portfolio decreased $6.4 million, furthering our strategy to reduce the percentage of real estate mortgage loans to total loans. Mortgage loans held for sale increased $1.3 million and mortgage loans sold during the first half of 2006 totaled $11.3 million. Second quarter seasonality (traditionally higher loan production activity) is the primary reasons for the increased loan balances. Mortgage loan production increased $17.0 million from the first to the second quarter in 2006, however when comparing the first half of 2006 to the first half of 2005 mortgage loan production fell $5.9 million, or 9.1%, primarily due to higher market interest rates. Consumer loan production increased $10.6 million, or 88.7% from the first to the second quarter in 2006 and increased $8.7 million, or 33.7% when comparing the first half of 2006 to the first half of 2005, as demand for loans on recreational vehicles, boats and for home improvements was steady. Commercial business loan production increased $16.4 million, or 283.7% from the first to the second quarter in 2006 and decreased $3.5 million, or 11.2% when comparing the first half of 2006 to the first half of 2005 primarily due to a slow first quarter. Commercial business loan production was up $6.9 million, or 43.6% when comparing the second quarter of 2006 to that of 2005. Investment securities available for sale increased $825,000 or 2.1% in order to maintain liquidity targets set by the Board of Directors.
Premises and equipment increased $120,000 or .8% due to the purchase of land for the purpose of building a branch office in Madison County in the yet to be determined future. The land purchase was partially offset by normal depreciation.
Allowance for loan losses increased $77,000 to $8.2 million when comparing December 31, 2005 to June 30, 2006. Net charge offs for the first half of 2006 were $841,000 or .20% of average loans on an annualized basis compared to $846,000, or .23% of average loans for the comparable period in 2005. A large portion of the net charge offs in the second quarter of 2006 was related to a $300,000 write-down of a $623,000 commercial business loan on a property and business located Muncie, Indiana. The loan is in default and the value of the real estate and business is not sufficient to pay off the total debt. As of June 30, 2006 the allowance for loan losses as a percentage of loans receivable and non-performing loans was .98% and 122.91%, respectively.
Total deposits were $684.3 million at June 30, 2006 a small decrease from $684.6 at December 31, 2005. Increases in core demand and savings accounts of $29.9 million and brokered deposits of $2.7 million were offset by reductions in public deposits of $21.8 million and daily money market account’s of $11.0 million. A new market rate checking account was introduced during the second quarter. The account pays an interest rate (indexed to the fed funds rate) that is tiered based on the balance of the checking account. The higher the balance the higher the interest rate paid. As of June 30, 2006 the balance in this account was $21.9 million. Total borrowings increased $7.3 million to $195.1 million at June 30, 2006 from $187.8 million at December 31, 2005 to help fund loan growth and stock repurchases..
Stockholders’ equity decreased $618,000, or .7%, from $88.8 million at December 31, 2005, to $88.2 million at June 30, 2006. The decrease was due primarily to the repurchase of 139,000 shares of common stock for $2.9 million and dividend payments of $1.2 million. This decrease was partially offset by net income of $2.9 million, Employee Stock Ownership Plan (ESOP) shares earned of $333,000, and RRP shares earned of $75,000. Also, the market value of securities available for sale compared to their book value decreased $167,000 from a loss of $375,000 at December 31, 2005 to a loss of $542,000 at June 30, 2006.
Comparison of the Operating Results for the Three Months Ended June 30, 2006 and 2005
Net income for the second quarter ended June 30, 2006 was $1.3 million, or $.32 for basic and $.31 for diluted earnings per share. This compared to net income for the comparable period in 2005 of $1.7 million, or $.39 for basic and $.38 for diluted earnings per share. Annualized return on assets was .56% and return on tangible equity was 7.18% for the second quarter of 2006 compared to .80% and 7.77% respectively, for the same period last year.
Net interest income before the provision for loan losses increased $61,000 from $6.7 million for the three months ended June 30, 2005 to $6.8 million for the three months ended June 30, 2006. The primary reason for the improvement was due to a $108.9 million, or 14.0% increase in average interest earning assets (mainly due to the Fidelity Federal purchase in September of 2005), partially offset by a 40 basis point decrease in the net interest margin reflecting the Bank’s liability sensitive nature, as short term interest rates continued to rise.
The provision for loan losses for the second quarter of 2006 was $525,000, compared to $444,000 for last year’s comparable period. The increase was due primarily to higher non-performing loans and higher loan portfolio balances (mainly due to the Fidelity Federal purchase in September of 2005). Non-performing loans to total loans at June 30, 2006 were .79% compared to .70% at June 30, 2005. Non-performing assets to total assets were .90% at June 30, 2006 compared to .76% at June 30, 2005. It should be noted that, subsequent to June 30, 2006 and prior to the filing date of this report, a non-performing loan in the amount of approximately $1.9 million was paid in full.
13
Non-interest income was basically unchanged at $1.7 million for the three months ended June 30, 2006 compared to the same period in 2005. Increases in service fees on transaction accounts of $123,000, or 12.4% were offset by a reduction in commission income on annuity and mutual fund sales as short term interest rates have risen making these products less competitive.
Non-interest expense increased $587,000 or 10.4% to $6.2 million for the three months ended June 30, 2006 compared to $5.6 million for the same period in 2005. The increase was due primarily to increased salaries and benefits which were up $246,000 due to annual salary adjustments, increased health insurance costs and increased staffing for two new branches opened; one in May of 2005 and the other with the purchase of Fidelity Federal in September of 2005. Marketing expenses were up $105,000 primarily due to a new branding campaign designed to more clearly communicate our strategic position. Other expenses increased $180,000 due to increased professional fees primarily related to regulatory compliance requirements and legal costs related to REO, increased REO expenses (other than legal costs) resulting from more repossessed properties, and other general and administrative expense increases related to the opening of the previously mentioned new branches. On a linked quarter basis non-interest expense was flat at $6.2 million.
Income tax expense decreased $305,000 for the three months ended June 30, 2006 compared to the same period in 2005 due to less taxable income. The effective tax rate decreased from 27.5% to 20.0% due to an increased percentage of low income housing tax credits to taxable income when comparing the second quarter of 2006 to the second quarter of 2005.
Comparison of the Operating Results for the Six-Months Ended June 30, 2006 and 2005.
Net income for the six months ended June 30, 2006 was $2.9 million or $.68 for basic and $.67 for diluted earnings per share. This compared to net income for the comparable period in 2005 of $3.3 million or $.76 for basic and $.74 for diluted earnings per share. The primary reason for the decrease was a shrinking net interest margin brought on by increased short term interest rates. Annualized return on average assets was .60% and return on average tangible equity was 7.75% for the first half of 2006 compared to .78% and 7.62% respectively, for the same period last year.
Net interest income before the provision for loan losses increased $419,000 for the six months ended June 30, 2006 compared to the six months ended June 30, 2005. The primary reason for the increase was due to a $109.0 million, or 14.1% increase in average interest earning assets (mainly due to the Fidelity Federal purchase in September of 2005), partially offset by a 33 basis point decrease in the net interest margin reflecting the Bank’s liability sensitive nature, as short term interest rates continued to rise.
14
The provision for loan losses for the first half of 2006 was $918,000, compared to $888,000 for last year’s comparable period. The increase was due to higher non-performing loans at the end of the period compared to a year ago. Non-performing loans to total loans at June 30, 2006 were .79% compared to .70% at June 30, 2005. Non-performing assets to total assets were .90% at June 30, 2006 compared to .76% at June 30, 2005. As previously noted, subsequent to June 30, 2006 and prior to the filing date of this report, a non-performing loan in the amount of approximately $1.9 million was paid in full. Had this loan been paid as of June 30, 2006, the non-performing loans to total loans would have been .57% and non-performing assets to total assets would have been .71%.
For the six month period ended June 30, 2006 non-interest income has remained flat at $3.3 million compared to the same period in 2005. Increases in service fees on transaction accounts of $244,000, or 13.0% and other income increases of $62,000 (primarily increased gains on sale of REO) were offset by a reduction in commission income on annuity and mutual fund sales as short term interest rates have risen making these products less competitive. Also, income from gain on sale of loans and loan servicing fees were down $31,000 when comparing the first six months of 2006 to those of 2005 primarily due to lower mortgage loan production in the 2006 period.
Non-interest expense increased $1.2 million or 11.3% to $12.4 million for the six months ended June 30, 2006 compared to $11.2 million for the same period in 2005. The increase was due primarily to increased salaries and benefits which were up $589,000 due to annual salary adjustments, increased health insurance costs and increased staffing for two new branches opened; one in May of 2005 and the other with the purchase of Fidelity Federal in September of 2005. Marketing expenses were up $110,000 primarily due to a new branding campaign designed to more clearly communicate our strategic position. Other expenses increased $375,000 due to increased professional fees primarily related to regulatory compliance requirements and legal costs related to REO, increased REO expenses (other than legal costs) due to more repossessed properties, and other general and administrative expense increases primarily related to the opening of the new branches.
For the six-month period ended June 30, 2006, income tax expense decreased $396,000 compared to the same period in 2005. The decrease was due primarily to decreased taxable income. The effective tax rate decreased from 27.5% to 22.7% due to an increased percentage of low income housing tax credits to taxable income when comparing the first half of 2006 to the first half of 2005.
Liquidity and Capital Resources
The standard measure of liquidity for savings associations is the ratio of cash and eligible investments to a certain percentage of the net-withdrawable savings accounts and borrowings due within one year. As of June 30, 2006, Mutual Federal had liquid assets of $60.5 million and a liquidity ratio of 6.94%. It is anticipated that this level of liquidity will be adequate for the remainder of 2006.
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ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk
Presented below as of June 30, 2006 and 2005 is an analysis of Mutual Federal’s interest rate risk as measured by changes in Mutual Federal’s net portfolio value (“NPV”) assuming an instantaneous and sustained parallel shift in the yield curve, in 100 basis point increments.
June 30, 2006
Net Portfolio Value
| | | | | | | | | | | NPV as % of PV of Assets | |
| | | | | | | | | | |
| |
Changes In Rates | | $ Amount | | $ Change | | % Change | | NPV Ratio | | Change | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
+300 bp | | | 52,500 | | | -45,832 | | | -47 | % | | 5.89 | % | | -440 bp | |
+200 bp | | | 68,204 | | | -30,128 | | | -31 | % | | 7.48 | % | | -281 bp | |
+100 bp | | | 83,485 | | | -14,847 | | | -15 | % | | 8.94 | % | | -135 bp | |
0 bp | | | 98,332 | | | | | | | | | 10.29 | % | | | |
-100 bp | | | 111,179 | | | 12,847 | | | 13 | % | | 11.38 | % | | 109 bp | |
-200 bp | | | 117,805 | | | 19,473 | | | 20 | % | | 11.86 | % | | 157 bp | |
-300 bp | | | 121,809 | | | 23,477 | | | 24 | % | | 12.08 | % | | 179 bp | |
June 30, 2005
Net Portfolio Value
| | | | | | | | | | | NPV as % of PV of Assets | |
| | | | | | | | | | |
| |
Changes In Rates | | $ Amount | | $ Change | | % Change | | NPV Ratio | | Change | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
+300 bp | | | 67,887 | | | -32,857 | | | -33 | % | | 8.54 | % | | -322 bp | |
+200 bp | | | 79,692 | | | -21,052 | | | -21 | % | | 9.78 | % | | -198 bp | |
+100 bp | | | 91,196 | | | -9,548 | | | -9 | % | | 10.91 | % | | -85 bp | |
0 bp | | | 100,744 | | | | | | | | | 11.76 | % | | | |
-100 bp | | | 103,803 | | | 3,059 | | | 3 | % | | 11.90 | % | | 14 bp | |
-200 bp | | | 99,545 | | | -1,199 | | | -1 | % | | 11.27 | % | | -49 bp | |
-300 bp | | | n/m | (1) | | n/m | (1) | | n/m | (1) | | n/m | (1) | | n/m | (1) |
|
(1) | Not meaningful because some market rates would compute to a zero rate or less. |
The analysis at June 30, 2006, indicates that there have been no material changes in market interest rates for Mutual Federal’s interest rate sensitivity instruments which would cause a material change in the market risk exposures that effect the quantitative and qualitative risk disclosures as presented in item 7A of the Company’s Form 10-K for the period ended December 31, 2005.
ITEM - 4 Controls and Procedures.
An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a -15(c) under the Securities Exchange Act of 1934 (the “Act”) was carried out, as of March 31, 2006, under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and several other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2006, 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 Act is (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and the 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. There were no changes in our internal control over financial reporting (as defined in Rule 13a – 15(f) under the Act) that occurred during the quarter ended June 30, 2006, that has materially affected, or is likely to materially affect our internal control over financial reporting.
The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all errors 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 the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns in controls or procedures can occur because of a 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.
16
PART II. | | OTHER INFORMATION |
| | |
Item 1. | | Legal Proceedings |
| | |
| | None. |
| | |
Item 1A. | | Risk Factors |
| | |
| | There are no material changes to the risk factors disclosed in the Company’s Form 10-K for the year ended December 31, 2005. |
| | |
Item 2. | | Unregistered sales of Equity Securities and Use of Proceeds |
| | |
| | On December 22, 2004 the Company’s Board of Directors authorized management to repurchase an additional 10% of the Company’s outstanding stock, or approximately 470,000 shares over a twelve-month period. Information on the shares purchased during the Second Quarter of 2006 is as follows: |
| | Total Number of
Shares Purchased | | Average Price
Per Share | | Total Number of
Shares Purchased
As Part of Publicly
Announced Plan | | Maximum Number of
Shares that May Yet
Be Purchased
Under the Plan | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | | | | | 245,827 | (1) |
April 1, 2006 - April 30, 2006 | | | — | | | | | | — | | | 245,827 | |
May 1, 2006 - May 31, 2006 | | | 34,500 | | | 21.09 | | | 34,500 | | | 211,327 | |
June 1, 2006 - June 30, 2006 | | | 41,867 | | | 20.75 | | | 41,867 | | | 169,460 | |
| |
|
| |
|
| |
|
| | | | |
| | | 76,367 | | $ | 20.90 | | | 76,367 | | | | |
| |
|
| |
|
| |
|
| | | | |
|
(1) | Amount represents the number of shares available to be repurchased under the plan as of March 31, 2006 |
Item 3. | | Defaults Upon Senior Securities. |
| | |
| | None. |
| | |
Item 4. | | Submission of Matters to Vote of Security Holders. |
| | |
| | The following is a record of the votes cast at the Company’s Annual Meeting of Stockholders held on April 26, 2006 in the election of directors of the Company: |
17
| | FOR | | VOTE WITHHELD | |
| |
| |
| |
Patrick C. Botts | | 3,158,926 | | 42,879 | |
William V. Hughes | | 3,159,357 | | 42,448 | |
Jerry D. McVicker | | 3,156,561 | | 45,244 | |
R. Donn Roberts | | 3,158,926 | | 42,879 | |
James D. Rosema | | 3,165,162 | | 36,643 | |
Lynne D. Richardson | | 3,165,055 | | 36,750 | |
| | Accordingly, the individuals named above, were declared to be duly elected directors of the Company for terms to expire in 2009. |
| | |
| | The following is a record of the votes cast for the proposal to ratify the appointment of BKD,LLP as the Company’s independent auditors for the fiscal year ending December 31, 2006. |
| | FOR | | 3,200,063 | |
| | AGAINST | | 667 | |
| | ABSTAIN | | 1,075 | |
| | Accordingly, the proposal described above was declared to be duly adopted by the stockholders of the Corporation. |
| | | |
Item 5. | | Other Information. |
| | |
| | None. |
| | |
Item 6. | | Exhibits. |
| | |
| | (a) | Exhibits |
| | | |
| | | Exhibit 31.1 – Rule 13a – 14(a) Certification – Chief Executive Officer |
| | | |
| | | Exhibit 31.2 – Rule 13a – 14(a) Certification – Chief Financial Officer |
| | | |
| | | Exhibit 32 – Section 1350 - Certificate of the Chief Executive Officer and Chief Financial Officer |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| MutualFirstFinancial, Inc. |
| | |
| | |
Date: August 9, 2006 | By: | /s/ David W. Heeter |
| |
|
| | David W. Heeter |
| | President and Chief Executive Officer |
| | |
| | |
Date: August 9, 2006 | By: | /s/ Timothy J. McArdle |
| |
|
| | Timothy J. McArdle |
| | Senior Vice President and Treasurer |
19
