MUTUALFIRST Financial, Inc.
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2001 ANNUAL REPORT
MUTUALFIRST Financial, Inc.
110 E. Charles St.
Muncie, IN 47305
MUTUAL FEDERAL SAVINGS BANK
MISSION STATEMENT
"The mission of the Bank will continue to be a growing community bank,
building relationships with individuals, families and businesses by offering a
broad range of innovative consumer and commercial products and services. The
Bank will depend upon high quality service to set the Bank apart from all
competitors. These goals are accomplished by continually focusing on employees
to ensure proper training, technological competence, teamwork, motivation and
rewards are provided. Shareholder value, measured by total return will be key in
the decision process. The Bank is committed to the effective utilization of
technology to meet customer needs. Directors, officers and staff fill roles of
influence and responsibility in the communities served. The Bank will continue
to build on the tradition of strength, security, stability, longevity,
consistency and superior quality service."
TABLE OF CONTENTS
PAGE NO.
President's Message 1
Selected Consolidated Financial Information 2
Management's Discussion and Analysis of Financial
Condition and Results of Operation 4
Independent Accountants' Report 17
Consolidated Financial Statements 18
Notes to Consolidated Financial Statements 23
Corporate Information 46
Shareholder Information 48
PRESIDENT'S LETTER
ANNUAL REPORT
MUTUALFIRST Financial, Inc. completed its second full year as a public
company in 2001, a year that will be forever remembered for the great tragedy
that occurred on September 11th. It was also a year of unprecedented cuts in
short term interest rates as the Federal Reserve attempted to ward off a
deepening national recession. In light of all of these factors, I feel fortunate
to be able to bring you a positive report of our financial results for 2001.
As I reflect on 2001, I am proud of the fact that we made several
leadership transitions by promoting key people within Mutual Federal Savings
Bank, continued our integration with First Federal of Marion, and increased
shareholder value.
We fine-tuned our organization structure to allow focused effort on
enhanced performance within Mutual Federal Savings Bank by the creation of the
position of Executive Vice President and Chief Operating Officer. David W.
Heeter was elected to fill that role. Vice Presidents Larry Phillips and Patrick
Botts also assumed new responsibilities. Mr. Phillips was named Controller, and
Mr. Botts will lead our Administration Division. Lynda Stoner and Ralph Spencer
were both promoted to the position of Vice President. Mrs. Stoner leads the
Delaware/Randolph County Community Banking Division. Mr. Spencer heads Consumer
Lending within our Corporate Products and Services Division. Bill Curl and
Glenda Thomas were elected to the position of Assistant Vice President in our
Kosciusko County market to lead our lending and branch operations, respectively,
in that rapidly growing community. We also created the position of Assistant
Treasurer, and promoted Christopher Cook to fill that role.
The low interest rate environment led to outstanding growth in consumer
and commercial loans, as they grew by more than $9 million during the year, as
well as record mortgage loan originations of over $186 million. Despite the
volatility of interest rates, we were able to maintain our interest margins. The
Bank's insurance business, through Mutual Financial Services and Family
Financial Life Insurance Company, also performed well. In December, we entered
into a joint agreement with two other banks to purchase two Delaware County
title insurance agencies and form our own title insurance company, Indiana Title
Insurance, LLC. These levels of growth and financial performance could not have
been accomplished without a committed, competent staff dedicated to giving
Mutual Federal Savings Bank and its customers their best each and every day.
In a year when stock markets fluctuated, our stock price remained
relatively flat throughout the year, ranging from a low of $13.875 during the
first quarter to a high of $15.39 in the third quarter. However, early
indications in 2002 have been positive in regards to price. In 2001, MUTUALFIRST
Financial, Inc. was able to increase earnings per share and return on equity,
while increasing our dividends paid to shareholders by 14%. At year-end, we were
nearing completion of our third stock repurchase program.
Our top priority continues to be growing Mutual Federal Savings Bank. We
will do this by providing our customers with the combination of stability,
security and quality products and services only a financially sound and
federally insured community bank can provide. We believe in our ability to grow
in a changing marketplace, without compromising the values and principles that
have governed us for nearly 113 years.
I would like to thank you for your continued confidence in our company
and your willingness to grow with us.
/s/ R. Donn Roberts
President and Chief Executive Officer
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following information is only a summary and you should read it in
conjunction with our financial statements and notes contained in this Annual
Report.
AT OR FOR THE YEAR ENDED DECEMBER 31,
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2001 2000 1999 1998 1997
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(In Thousands)
SELECTED FINANCIAL CONDITION DATA
Total Assets $769,328 $770,370 $544,523 $469,515 $458,695
Cash and cash equivalents 30,558 21,046 19,983 12,938 10,349
Loans, net 636,635 639,362 442,787 398,146 399,290
Investment Securities:
Available-for -sale, at fair value 31,580 35,142 29,599 14,208 12,370
Held-to-maturity 0 10,539 12,449 11,004 10,167
Total deposits 538,878 514,710 364,604 365,999 344,860
Total borrowings 110,743 116,182 74,898 52,462 66,255
Total stockholders' equity 109,744 129,941 96,712 43,846 39,660
SELECTED OPERATIONS DATA
Total interest income $ 54,940 $ 41,180 $ 34,811 $ 34,474 $ 34,085
Total interest expense 29,081 21,645 19,242 19,690 19,082
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Net interest income 25,859 19,535 15,569 14,784 15,003
Provision for loan losses 1,282 685 760 1,265 700
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Net interest income after provision for loan losses 24,577 18,850 14,809 13,519 14,303
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Service fee income 2,626 2,070 1,728 1,544 1,316
Gain on sale of loans and investment securities 1,350 144 32 807 188
Other non-interest income 2,126 1,402 1,091 1,077 579
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Total non-interest income 6,102 3,616 2,851 3,428 2,083
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Salaries and employee benefits 12,288 7,496 7,236 6,115 5,548
Charitable contributions -- 4 4,570 97 69
Other expenses 7,232 5,625 4,870 4,547 4,474
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Total non-interest expense 19,520 13,125 16,676 10,759 10,091
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Income before taxes 11,159 9,341 984 6,188 6,295
Income tax expense 3,079 3,106 138 2,049 2,160
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Net income $ 8,080 $ 6,235 $ 846 $ 4,139 $ 4,135
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2
AT OR FOR THE YEAR ENDED DECEMBER 31,
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2001 2000 1999 1998 1997
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SELECTED FINANCIAL RATIOS AND OTHER FINANCIAL DATA:
Performance Ratios:
Return on average assets (ratio of net
income to average total assets) 1.05% 1.09% 0.17% 0.89% 0.93%
Return on average equity (ratio of net
income to average equity) 6.80 6.15 1.83 9.83 11.36
Interest rate spread information:
Average during the period 3.22 3.09 3.24 3.21 3.34
Net interest margin(1) 3.67 3.71 3.41 3.42 3.58
Ratio of operating expense to average total assets 2.54 2.30 3.35 2.31 2.28
Ratio of average interest-earning assets to
average interest-bearing liabilities 110.85 115.17 104.05 104.56 105.18
Efficiency ratio(2) 61.08 56.69 90.53 59.08 59.06
Asset Quality Ratios:
Non-performing assets to total assets at
end of period 1.05 0.56 0.30 0.29 0.62
Non-performing loans to total loans 1.03 0.53 0.17 0.28 0.19
Allowance for loan losses to non-performing loans 82.4 189.13 467.61 307.36 406.71
Allowance for loan losses to loans, net 0.85 1.01 0.82 0.85 0.77
Capital Ratios:
Equity to total assets at end of period 14.26 16.87 17.76 9.34 8.65
Average equity to average assets 15.44 17.81 9.29 9.06 8.22
Share and Per Share Data:
Average common shares outstanding
Basic 6,949,879 5,558,377
Diluted 6,964,305 5,558,377
Per share:
Basic earnings $1.16 $1.12
Diluted earnings $1.16 $1.12
Dividends 0.32 0.28
Dividend payout ratio (3) 27.59% 25.00%
Other Data:
Number of full-service offices 17 17 13 12 12
(1) Net interest income divided by average interest earning assets.
(2) Total non-interest expense divided by net interest income plus total
non-interest income.
(3) Dividends per share divided by earnings per share.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
MUTUALFIRST Financial, Inc., a Maryland corporation, is a savings and
loan holding company, which has as its wholly owned subsidiary, Mutual Federal
Savings Bank, Muncie, Indiana. MFS Financial, Inc. was formed in September 1999
to become the holding company of Mutual Federal in connection with Mutual
Federal's conversion from the mutual to stock form of organization on December
29, 1999. In April 2000, MFS Financial, Inc. formally changed its corporate name
to MUTUALFIRST Financial, Inc. ("MUTUALFIRST") The words "we," "our" and "us"
refer to MUTUALFIRST and Mutual Federal on a consolidated basis, except that
references to us prior to December 29, 1999 refer only to Mutual Federal.
Our principal business consists of attracting retail deposits from the
general public and investing those funds primarily in permanent loans secured by
first mortgages on owner-occupied, one to fourfamily residences and in a variety
of consumer loans. We also originate loans secured by commercial and
multi-family real estate, commercial business loans and construction loans
secured primarily by residential real estate. We are headquartered in Muncie,
Indiana with 17 retail offices primarily serving Delaware, Randolph, Kosciusko,
and Grant counties in Indiana. We also originate mortgage loans in contiguous
counties, and we originate indirect consumer loans throughout Indiana.
The following discussion is intended to assist your understanding of our
financial condition and results of operations. The information contained in this
section should be read in conjunction with our consolidated financial statements
and the accompanying notes to our consolidated financial statements.
Our results of operations depend primarily on our net interest income,
which is the difference between interest income on interest-earning assets,
which principally consist of loans and mortgage-backed and investment
securities, and interest expense on interest-bearing liabilities, which
principally consist of deposits and borrowings. Our results of operations also
are affected by the level of our non-interest income and expenses and income tax
expense.
FORWARD-LOOKING STATEMENTS
This discussion contains various forward-looking statements, which are
based on assumptions and describe our future plans and strategies and our
expectations. These forward-looking statements are generally identified by words
such as "believe," "expect," "intend," "anticipate," "estimate," "project," or
similar words. Our ability to predict results or the actual effect of future
plans or strategies is uncertain. Factors which could cause actual results to
differ materially from those estimated include, but are not limited to, changes
in interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government, including policies of the
U.S. Treasury and the Federal Reserve Board, the quality and composition of our
loan and investment portfolios, demand for our loan products, deposit flows, our
operating expenses, competition, demand for financial services in our market
areas and accounting principles and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking statements and you should not
rely too much on these statements. We do not undertake, and specifically
disclaim any obligation, to publicly revise any forward-looking statements to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
MANAGEMENT STRATEGY
Our strategy is to operate as an independent, retail oriented financial
institution dedicated to serving customers in our market areas. Our commitment
is to provide a broad range of products and services to meet the needs of our
customers. As part of this commitment, we are looking to increase our
4
emphasis on commercial business products and services. We have also created a
fully interactive transactional website. In addition, we are continually looking
at cost-effective ways to expand our market area.
Financial highlights of our strategy include:
o CONTINUING AS A DIVERSIFIED LENDER. We have been successful in
diversifying our loan portfolio to reduce our reliance on any
one type of loan. From 1995 through 2000 approximately 36% of
our loan portfolio has consisted of loans other than
one-to-four family real estate loans. At the end of 2001 that
percentage had increased to 41.1%.
o CONTINUING AS A LEADING ONE TO FOUR-FAMILY LENDER. We are one
of the largest originators of one-to-four family residential
loans in our four-county market area. During 2001, we
originated $185.0 million of one-to-four family residential
loans.
o CONTINUING TO FOCUS ON ASSET QUALITY. Although 2001 saw a rise
in non-performing assets to total assets to 1.03%, our
historical ratios had not exceeded .62% since 1994. We are
confident that our underwriting standards will continue to
provide for a quality loan portfolio.
o CONTINUING OUR STRONG CAPITAL POSITION. As a result of our
consistent profitability, we have historically maintained a
strong capital position. At December 31, 2001, our ratio of
stockholders' equity to total assets was 14.3%.
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 are 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 our most
significant market risk.
HOW WE MEASURE OUR RISK OF INTEREST RATE CHANGES. As part of our attempt
to manage our exposure to changes in interest rates and comply with applicable
regulations, 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 increases in interest rates on our results of operations, we adopted
asset and liability management policies to better match the maturities and
repricing terms of our interest-earning assets and interest-bearing liabilities.
Mutual Federal's board of directors sets and recommends asset and liability
policies which are implemented by the asset and liability management committee.
The asset and liability management committee is chaired by the chief financial
officer and is comprised of members of our senior management. The purpose of the
asset and liability management committee is to communicate, coordinate and
control asset/liability management consistent with our business plan and board
approved policies. This 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 objectives are 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
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.
5
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:
o originate and purchase adjustable rate mortgage loans and
commercial business loans,
o originate shorter-term consumer loans,
o manage our deposits to establish stable deposit relationships,
o 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
o limit the percentage of 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. We
intend to increase our emphasis on the origination of relatively short-term
and/or adjustable rate loans. In addition, in an effort to maintain our limit on
the percentage of fixed-rate loans, in 2001, we sold $58.4 million of fixed
rate, one-to-four family mortgage loans in the secondary market.
The asset and liability management committee regularly reviews interest
rate risk by forecasting the impact of alternative interest rate environments on
net interest income and market value of portfolio equity, which is defined as
the net present value of an institution's existing assets, liabilities and
offbalance sheet instruments, and evaluating such impacts against the maximum
potential changes in net interest income and market value of portfolio equity
that are authorized by our board of directors.
The Office of Thrift Supervision provides Mutual Federal with the
information presented in the following tables. The tables present the change in
our net portfolio value at December 31, 2001 and 2000 that would occur upon an
immediate and sustained change in market interest rates of 100 to 300 basis
points as required by the Office of Thrift Supervision, and do not give any
effect to actions that management might take to counteract that change. All
changes in net portfolio value under all rate changes listed were within board
of director approved guidelines.
6
DECEMBER 31, 2001
NET PORTFOLIO VALUE
NPV AS % OF PV OF ASSETS
CHANGES -------------------------
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
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(Dollars in thousands)
+300 bp 72,270 -31,165 -30% 9.92% -341 bp
+200 bp 83,082 -20,353 -20% 11.16% -217 bp
+100 bp 93,661 -9,774 -9% 12.32% -102 bp
0 bp 103,435 13.33%
- -100 bp 109,059 5,624 5% 13.85% +51 bp
- -200 bp n/m(1) n/m(1) n/m(1) n/m(1) n/m(1)
- -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 rate less than
zero.
DECEMBER 31, 2000
NET PORTFOLIO VALUE
NPV AS % OF PV OF ASSETS
CHANGES -------------------------
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO CHANGE
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(Dollars in thousands)
+300 bp 75,383 -29,360 -28% 10.47% -323 bp
+200 bp 85,990 -18,753 -18% 11.69% -201 bp
+100 bp 95,979 -8,764 -8% 12.79% -91 bp
0 bp 104,743 13.70%
- -100 bp 110,794 6,051 6% 14.28% +58 bp
- -200 bp 115,006 10,263 10% 14.63% +93 bp
- -300 bp 121,141 16,398 16% 15.18% +148 bp
The Office of Thrift Supervision uses certain assumptions in assessing
the interest rate risk of savings associations. These assumptions relate to
interest rates, loan prepayment rates, deposit decay rates, and the market value
of certain assets under differing interest rate scenarios, among others.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing tables. 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 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.
FINANCIAL CONDITION AT DECEMBER 31, 2001 COMPARED TO DECEMBER 31, 2000
GENERAL. Our total assets remained stable, decreasing $1.0 million during
2001 ending the year at $769.3 million compared to $770.3 million at December
31, 2000, primarily due to the sale of $58.4 million of one-to-four family real
estate mortgage loans. Liabilities increased $19.2 million due to increased
deposits and stockholders' equity decreased $20.2 million primarily due to the
repurchase of common stock.
7
LOANS. Our net loan portfolio decreased $2.8 million from $639.4 million
at December 31, 2000, to $636.6 million at December 31, 2001. Consumer loans
increased $5.3 million or 3.4% from $156.9 million at December 31, 2000 to
$162.2 million at December 31, 2001, despite the sale of our $1.9 million credit
card portfolio in November. Most of the consumer loan growth came from auto
loans, which increased $4.2 million or 14.7% from $28.9 million to $33.1 million
and recreation vehicle loans, which increased $10.0 million or 28.7% from $34.7
million to $44.7 million. Commercial business loans increased $3.7 million or
14.1% from $26.4 million to $30.1 million at December 31, 2001. Real estate
mortgage loans decreased $10.7 million, or 2.3% from $465.5 million to $454.8
million at December 31, 2001. Mortgage loans held for sale increased $7.6
million and mortgage loans sold during the period totaled $58.4 million,
primarily to mitigate interest rate risk.
ALLOWANCE FOR LOAN LOSS. The allowance for loan losses decreased to $5.4
million at December 31, 2001 from $6.5 million at December 31, 2000, a decrease
of $1.1 million, or 16%. Net charge offs were $2.3 million during the year ended
2001 as compared to net charge offs of $1.0 million for 2000. This, along with a
$1.3 million loan loss provision during 2001, resulted in the allowance for loan
losses as a percentage of total loans decreasing to .85% at December 31, 2001
compared to 1.01% at December 31, 2000. The allowance for loan losses as a
percentage of non-performing loans was 82.4% and 189.1% at December 31, 2001 and
December 31, 2000, respectively. Non-performing loans were $6.6 million or 1.03%
of total loans at December 31, 2001 compared to $3.4 million or .53% at December
31, 2000. The decrease in allowance for loan losses is due to the write down to
fair value of several non-performing commercial real estate loans acquired in
the merger of Marion Capital Holdings.
SECURITIES. Investment securities amounted to $31.6 million at December
31, 2001 compared to $45.7 million at December 31, 2000, a 30.9% decrease. This
decrease was primarily due to the shifting of funds from longer-term securities
to short-term interest-bearing accounts and loans held for sale.
LIABILITIES. Our total liabilities increased $19.2 million, or 3.0%, to
$659.6 million at December 31, 2001 from $640.4 million at December 31, 2000.
This increase was due primarily to an increase in deposits of $24.2 million.
Borrowed funds decreased $5.4 million.
STOCKHOLDERS' EQUITY. Stockholders' equity decreased $20.2 million from
$129.9 million at December 31, 2000 to $109.7 million at December 31, 2001. The
decrease was due primarily to the repurchase of 1,905,979 shares at a cost of
$28.2 million and dividend payments of $2.3 million. These decreases were
partially offset by net income of $8.1 million, Employee Stock Ownership Plan
(ESOP) shares earned of $464,000, RRP shares earned of $1.4 million, and
proceeds from the exercise of stock options of $54,000. Also, unrealized gain on
securities available for sale increased $300,000.
FINANCIAL CONDITION AT DECEMBER 31, 2000 COMPARED TO DECEMBER 31, 1999
GENERAL. Our total assets increased by $225.9 million, or 41.5%, to
$770.4 million at December 31, 2000 from $544.5 million at December 31, 1999.
The increase was mainly due to an increase in net loans of $196.6 million, or
44.4% and an increase in cash surrender value of life insurance of $12.2 million
or 113.3%. These increases were funded primarily by an increase of $150.1
million in total deposits and $41.3 million in borrowed funds. Most of these
increases resulted from the merger with Marion Capital Holdings, Inc., which was
approved by our shareholders on December 8, 2000.
LOANS. Our net loan portfolio increased from $442.8 million at December
31, 1999 to $639.4 million at December 31, 2000. The increase in the loan
portfolio over this time period was due primarily to the merger with Marion
Capital, which had a $163.7 million loan portfolio. The loan portfolio increased
most in the one-to-four family category, from $286.6 million at December 31,
1999 to $388.9 million at December 31, 2000. All other loan categories increased
from $163.2 million at December 31, 1999 to $259.9 million at December 31, 2000.
8
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses increased to
$6.5 million at December 31, 2000 from $3.7 million at December 31, 1999 an
increase of $2.8 million or 75.7%. Net charge-offs were $1.0 million during the
year ended 2000 as compared to net charge-offs of $532,000 for 1999. An
additional $3.2 million allowance was acquired as a result of the merger with
Marion Capital. This, along with a $685,000 loan loss provision during 2000,
resulted in the allowance for loan losses as a percentage of total loans
increasing to 1.01% at December 31, 2000 compared to .82% at December 31, 1999.
The allowance for loan losses as a percentage of non-performing loans was 189.1%
and 467.6% at December 31, 2000 and December 31, 1999, respectively.
Non-performing loans were $3.4 million or .53% of total loans at December 31,
2000 compared to $781,000 or .17% at December 31, 1999.
SECURITIES. Investment securities amounted to $42.0 million at December
31, 1999 and $45.7 million at December 31, 2000 or an 8.8% increase.
LIABILITIES. Our total liabilities increased $196.6 million, or 43.0%, to
$640.4 million at December 31, 2000 from $447.8 million at December 31, 1999.
This increase was due primarily to an increase in deposits of $150.1 million and
an increase in borrowed funds of $41.3 million. Deposits from Marion Capital at
the merger date were $134.0 million and borrowed funds were $30.0 million.
STOCKHOLDERS' EQUITY. Stockholders' equity increased $33.2 million from
$96.7 million at December 31, 1999 to $129.9 million at December 31, 2000. The
increase was primarily due to stock issued in the Marion Capital acquisition net
of costs of $27.6 million and net income for 2000 of $6.2 million. These
increases were partially offset by dividend payments of $1.5 million.
9
AVERAGE BALANCES, NET INTEREST INCOME, YIELDS EARNED AND RATES PAID
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are daily average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
YEAR ENDED DECEMBER 31,
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2001 2000 1999
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AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest-Earning Assets:
Interest-bearing deposits $6,210 $189 3.04% $1,003 $56 5.58% $3,664 $161 4.39%
Trading account securities -- -- -- 186 9 4.84 1,134 67 5.91
Mortgage-backed securities:
Available-for-sale 11,124 759 6.82 13,637 931 6.83 5,006 323 6.45
Investment securities:
Available-for-sale (1) 18,413 1,184 6.43 18,530 1,243 6.71 8,294 470 5.67
Held-to-maturity 5,155 270 5.24 11,423 673 5.89 12,365 733 5.93
Loans 656,579 52,018 7.92 475,912 37,811 7.94 422,611 32,739 7.75
Stock in FHLB of Indianapolis 6,993 520 7.44 5,464 457 8.36 3,926 318 8.10
----- ------ ------- ------ ------- ------
Total interest-earning assets (2) 704,474 54,940 7.80 526,155 41,180 7.83 457,000 34,811 7.62
------ ------ ------
Non-interest earning assets, net of
allowance for loan losses and
unrealized gain/loss 65,438 43,583 40,162
------ ------ ------
Total assets $769,912 $569,738 $497,162
======== ======== ========
Interest-Bearing Liabilities
Demand and NOW accounts $74,545 729 0.98 $56,288 516 0.92 $54,122 553 1.02
Savings deposits 49,468 921 1.86 39,842 845 2.12 42,709 853 2.00
Money market accounts 43,042 1,270 2.95 33,310 1,369 4.11 29,299 1,056 3.60
Certificate accounts 366,375 20,394 5.57 261,693 14,814 5.66 252,452 13,392 5.30
------- ------ ------- ------ ------- ------
Total deposits 533,430 23,314 4.37 391,133 17,544 4.49 378,582 15,854 4.19
Borrowings 102,087 5,767 5.65 65,728 4,101 6.24 60,620 3,388 5.59
------- ------ ------- ------ ------- ------
Total interest-bearing
accounts 635,517 29,081 4.58 456,861 21,645 4.74 439,202 19,242 4.38
------ ------ ------
Other liabilities 15,544 11,419 11,767
------- ------- -------
Total liabilities 651,061 468,280 450,969
Stockholders' equity 118,851 101,458 46,193
------- ------- -------
Total liabilities and
stockholders' equity $769,912 $569,738 $497,162
======== ======== ========
Net earning assets $68,957 $69,294 $17,798
======= ======= =======
Net interest income $25,859 $19,535 $15,569
======= ======= =======
Net interest rate spread 3.22% 3.09% 3.24%
==== ==== ====
Net yield on average
interest-earning assets 3.67% 3.71% 3.41%
==== ==== ====
Average interest-earning assets to
average interest-bearing
liabilities 110.85% 115.17% 104.05%
====== ====== ======
- ----------------
(1) Average balances were calculated using amortized cost, which excludes FASB
115 valuation allowances.
(2) Calculated net of deferred loan fees, loan discounts, loans in process and
loss reserves.
10
RATE/VOLUME ANALYSIS
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities. For each category of interest earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(1) changes in volume, which are changes in volume multiplied by the old rate,
and (2) changes in rate, which are changes in rate multiplied by the old volume.
Changes attributable to both rate and volume, which cannot be segregated, have
been allocated proportionately to the change due to volume and the change due to
rate.
YEAR ENDED DECEMBER 31,
2001 VS. 2000 2000 VS. 1999
--------------------------------- ----------------------------------
INCREASE INCREASE
(DECREASE) (DECREASE)
DUE TO TOTAL DUE TO TOTAL
------------------- INCREASE ----------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
- -----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Interest-bearing deposits $ 169 $ (36) $ 133 $ (140) $ 35 $ (105)
Trading account securities (9) -- (9) (48) (10) (58)
Investment securities:
Available-for-sale (174) (58) (232) 1,261 120 1,381
Held-to-maturity (335) (68) (403) (56) (4) (60)
Loans 14,314 (106) 14,208 4,217 855 5,072
Stock in FHLB of Indianapolis 118 (55) 63 128 11 139
-------- ------- -------- -------- ------- -------
Total interest-earning assets $14,083 $ (323) 13,760 $ 5,362 $ 1,007 6,369
======== ======= -------- ======== ======= -------
Interest-bearing liabilities:
Savings deposits $ 188 $ (112) $ 76 $ (59) $ 51 $ (8)
Money market accounts 343 (442) (99) 155 158 313
Demand and NOW accounts 177 36 213 21 (58) (37)
Certificate accounts 5,831 (249) 5,580 502 919 1,422
Borrowings 2,085 (419) 1,666 299 414 713
-------- ------- -------- -------- ------- -------
Total interest-bearing liabilities $ 8,624 $(1,186) 7,436 $ 918 $ 1,484 2,403
======== ======= -------- ======== ======= -------
Change in net interest income $ 6,324 $ 3,966
======== =======
COMPARISON OF RESULTS OF OPERATIONS FOR YEARS ENDED DECEMBER 31, 2001 AND 2000.
GENERAL. Net income for the year ended December 31, 2001 increased $1.9
million to $8.1 million compared to $6.2 million for the year ended December 31,
2000. The increase in net income was primarily due to the merger with Marion
Capital Holdings completed in December, 2000 and accounted for as a purchase.
NET INTEREST INCOME. Interest income increased $13.7 million, or 33.4%,
to $54.9 million for the year ended December 31, 2001 from $41.2 million for the
year ended December 31, 2000. Interest expense increased $7.4 million, or 34.4%,
from $21.6 million for the year ended December 31, 2000 to $29.0 million for the
year ended December 31, 2001. As a result, net interest income for the year
ended December 31, 2001 increased $6.3 million, or 32.4% compared to 2000. The
increase in net interest income was due to the increase in the average balance
of net earning assets related to the merger with Marion Capital. In addition,
the average interest rate spread increased from 3.09% to 3.22%.
11
INTEREST INCOME. The increase in interest income during the year ended
December 31, 2001 was due to an increase in the average balance of
interest-earnings assets (primarily from the December, 2000 merger with Marion
Capital Holdings). The average balance of the loan portfolio increased $180.7
million, or 38.0%, to $656.6 million for 2001, from $475.9 million for 2000,
primarily due to the merger with Marion Capital Holdings. The average yield on
our loan portfolio decreased slightly from 7.94% in 2000 to 7.92% in 2001,
primarily due to lower market rates of interest.
INTEREST EXPENSE. The increase in interest expense during the year ended
December 31, 2001 was due primarily to increased average balances of borrowings
and deposits. As a result of the merger with Marion Capital Holdings, average
balances of borrowings and deposits increased from $456.9 million in 2000, to
$635.5 million in 2001. The average rate paid on deposits and borrowed funds
decreased from 4.74% in 2000 to 4.58% in 2001, primarily due to decreasing
market rates throughout the year.
PROVISION FOR LOAN LOSSES. For the year ended December 31, 2001, the
provision for loan losses amounted to $1.3 million compared to $685,000 in 2000.
The primary reason for this increase was an increase of non-accruing one-to-four
family and commercial real estate loans. Non-accruing one-to-four family loans
increased from $710,000 at December 31, 2000 to $2.9 million at December 31,
2001 as a result of the slowing economy, primarily in the Grant County market.
Non-accruing commercial real estate loans increased from $1.5 million at
December 31, 2000 to $2.9 million at December 31, 2001, due primarily to two
nursing home loans becoming more than ninety days delinquent. At the present
time it is management's opinion that these loans are sufficiently reserved and
no additional allowance will be necessary. The 2001 provision and the allowance
for loan losses were considered adequate based on size, condition and components
of the loan portfolio, past history of loan losses, and current qualitative
factors such as the local and national economy.
OTHER INCOME. Other income for the year ended December 31, 2001 increased
$2.5 million, or 68.8%, to $6.1 million for the year ended December 31, 2001
compared to $3.6 million for the year 2000. This improvement was primarily due
to an increase of $555,000 in service fee income; $190,000 increase in
commission income; $1.3 million gain on sale of loans; and a $587,000 increase
in cash surrender value of life insurance. Most of these increases, with the
exception of the gain on sale of loans, were due to the merger with Marion
Capital Holdings.
OTHER EXPENSES. Total operating expenses increased $6.4 million from
$13.1 million for the year ended December 31, 2000 to $19.5 million for 2001.
Salaries and employees benefits were $12.3 million for the year ended December
31, 2001 compared to $7.5 million for the 2000 period, an increase of $4.8
million, or 63.9%. The reasons for the increase in salaries and benefits
included an increase in the number of full time equivalent employees resulting
from the merger with Marion Capital Holdings, the grant of restricted stock
awards under the Recognition and Retention Plan, and an increased incentive
bonus due to increased profitability. All other expenses increased $1.6 million,
or 28.5%, for the year ended December 31, 2001, compared to 2000. These
increases were due primarily to the merger with Marion Capital Holdings.
INCOME TAX EXPENSE. Income tax expense for the year ended December 31,
2001 was $3.1 million, the same as for the year ended December 31, 2000. During
2001, there was increased tax-exempt income and increased low-income housing tax
credits related to the Marion Capital Holdings merger. The effective tax rate
was 27.6% and 33.3% for 2001 and 2000, respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 2000 AND 1999
GENERAL. Net income for the year ended December 31, 2000 increased $5.4
million to $6.2 million compared to $846,000 for the year ended December 31,
1999. The increase in net income was primarily due to the lack of nonrecurring
charges in 2000 compared to a one-time nonrecurring $4.5 million contribution in
1999 to the Mutual Federal Savings Bank Charitable Foundation, Inc. made in
connection with the stock conversion.
12
NET INTEREST INCOME. Net interest income increased $3.9 million, or 25%,
to $19.5 million for 2000 from $15.6 million for 1999 reflecting a $6.4 million
or 18.3% increase in interest income and a $2.4 million or 12.5% increase in
interest expense. Our interest rate spread decreased to 3.09% for 2000 from
3.24% for 1999, primarily due to rising market interest rates. Offsetting the
decrease in spread, the ratio of average interest earning assets to average
interest bearing liabilities increased to 115.17% for 2000 from 104.05% for
1999.
INTEREST INCOME. The increase in interest income during the year ended
December 31, 2000 was due to an increase in the average balance of interest
earning assets (primarily from December, 1999 stock conversion proceeds) and a
higher yield. The average balance of the loan portfolio increased $53.3 million
or 12.6% to $476 million for 2000 from $422.6 million for 1999 primarily due to
increases in the consumer and commercial loan products due to strong demand. The
average yield on our loan portfolio increased from 7.75% in 1999 to 7.94% in
2000 primarily due to higher market rates of interest in non-mortgage related
products.
INTEREST EXPENSE. The increase in interest expense during the year ended
December 31, 2000 was primarily due to an increase in the average rate paid on
deposits and borrowed funds from 4.38% in 1999 to 4.74% in 2000. Also, average
balances of borrowings and deposits increased from $439.2 million in 1999 to
$456.9 million in 2000.
PROVISION FOR LOAN LOSSES. For the year ended December 31, 2000, the
provision for loan losses amounted to $685,000 compared to a provision for loan
losses in 1999 of $760,000. The 2000 provision and the allowance for loan losses
were considered adequate based on size, condition and components of the loan
portfolio, past history of loan losses and peer comparisons.
OTHER INCOME. Other income amounted to $3.6 million and $2.9 million for
the years ended December 31, 2000 and 1999, respectively. For the year 2000,
service fee income was $2.1 million compared to $1.7 million for 1999
representing an increase of $342,000 or 19.8%. This increase was primarily due
to higher fees collected as a result of increased volumes in checking account
activity. Net gains on loan sales in 2000 were $144,000; there were no sales in
1999.
OTHER EXPENSES. Total operating expenses increased to $13.1 million for
2000 compared to $12.1 million, exclusive of the $4.5 million contribution to
the foundation, for the year 1999 representing an increase of $948,000 or 7.8%.
This increase was primarily attributed to a $763,000 or 22.5% increase in data
processing fees, advertising and promotion, ATM expenses and other expenses.
These increases were due to normal growth and increased activity relating to
delivery channels, such as more ATM's and an on-line transactional Internet web
site.
INCOME TAX EXPENSE. Income tax expense increased $3.0 million from 1999
to 2000. This variation in income tax expense is directly related to taxable
income and the low income housing income tax credits earned during those years.
The effective tax rate was 33.2% and 14.1% for 2000 and 1999, respectively. The
effective rate increased in 2000 as compared to 1999 because the low-income
housing income tax credits remained relatively constant while the level of
income increased.
LIQUIDITY AND COMMITMENTS
Mutual Federal is required to maintain adequate levels of investments
that qualify as liquid assets under Office of Thrift Supervision regulations to
ensure the institution's safe and sound operations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, we have maintained
liquid assets at levels above the minimum requirements imposed by Office of
Thrift Supervision regulations and above levels believed to be adequate to meet
the requirements of normal operations, including potential deposit outflows.
Cash flow projections are regularly reviewed and updated to ensure that adequate
liquidity is maintained. At December 31, 2001, our liquidity ratio, which is our
liquid assets as a percentage of net withdrawable savings deposits and current
borrowings, was 9.48%.
13
Our liquidity, represented by cash and cash equivalents, is a product of
our operating, investing and financing activities. Our primary sources of funds
are deposits, amortization, prepayments and maturities of outstanding loans and
mortgage-backed securities, maturities of investment securities and other
short-term investments and funds provided from operations. While scheduled
payments from the amortization of loans and mortgage-backed securities and
maturing investment securities and short-term investments are relatively
predictable sources of funds, deposit flows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition. In
addition, we invest excess funds in short-term interest-earning assets, which
provide liquidity to meet lending requirements. We also generate cash through
borrowings. We utilize Federal Home Loan Bank advances to leverage our capital
base and provide funds for our lending and investment activities, and to enhance
our interest rate risk management.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as overnight deposits or U.S. Agency securities. We use our sources of
funds primarily to meet our ongoing commitments, to pay maturing certificates of
deposit and savings withdrawals, to fund loan commitments and to maintain our
portfolio of mortgage-backed securities and investment securities. At December
31, 2001, the total approved loan origination commitments outstanding amounted
to $22.4 million. At the same date, the unadvanced portion of construction loans
was $5.2 million. At December 31, 2001, unused lines of credit totaled $35.9
million and outstanding letters of credit totaled $7.3 million. As of December
31, 2001, certificates of deposit scheduled to mature in one year or less
totaled $237.5 million, and investment and mortgage-backed securities scheduled
to mature in one year or less totaled $3.0 million. Based on historical
experience, management believes that a significant portion of maturing deposits
will remain with us. We anticipate that we will continue to have sufficient
funds, through deposits and borrowings, to meet our current commitments.
CAPITAL
Consistent with our goals to operate a sound and profitable financial
organization, Mutual Federal actively strives to remain a "well capitalized"
institution in accordance with regulatory standards. Total stockholders' equity
of MUTUALFIRST Financial, Inc. was $109.7 million at December 31, 2001, or 14.3%
of total assets on that date. As of December 31, 2001, Mutual Federal exceeded
all capital requirements of the Office of Thrift Supervision, with regulatory
capital ratios as follows: core capital 13.5%; Tier I risk-based capital, 19.6%;
and total risk-based capital, 20.7%. The regulatory capital requirements to be
considered well capitalized are 5.0%, 6.0% and 10.0%, respectively.
IMPACT OF NEW ACCOUNTING STANDARDS
ACCOUNTING FOR A BUSINESS COMBINATION. Statement of Financial Accounting
Standards ("SFAS") No. 141 requires that all business combinations should be
accounted for using the purchase method of accounting; use of the pooling method
is prohibited. A business combination occurs when an enterprise acquires all or
a portion of the net assets that constitutes a business or equity interests of
one or more other enterprises and obtains control over the enterprise or
enterprises. All two-party and multi-party business combinations, including
"roll-up" and "put-together" transactions are included in the scope of this
Statement.
This Statement requires that goodwill be initially recognized as an asset
in the financial statement and measured as the excess of the cost of an acquired
entity over the net of the amounts assigned to identifiable assets acquired and
liabilities assumed. In addition, SFAS No. 141 requires all other intangibles,
such as core deposit intangibles for a financial institution, to be identified.
14
The provisions of Statement No. 141 are effective for any business
combination that is initiated after June 30, 2001.
ACCOUNTING FOR GOODWILL. Under the provisions of SFAS No. 142, goodwill
should not be amortized but should be tested for impairment at the reporting
unit level. Impairment test of goodwill should be done on an annual basis unless
events or circumstances indicate impairment has occurred in the interim period.
The annual impairment test can be performed at any time during the year as long
as the measurement date is used consistently from year to year.
Impairment testing is a two step process. The first step is a comparison
of the fair value of a reporting unit to its carrying amount including goodwill.
If the fair value of the reporting unit is greater than its carrying value,
goodwill is not impaired and no further work is required. Companies should
perform the first step of the impairment test on all goodwill within six months
of initially applying the Statement. If the fair value is less, the second step
should be performed. The second step is to compare the fair value of goodwill to
its carrying amount. If the fair value of goodwill is less than its carrying
value, then the goodwill is deemed impaired and a loss recognized. Any
impairment loss recognized as a result of completing the transitional impairment
test should be treated as a change in accounting principle and recognized in the
first interim period financial statements.
The provisions of Statement No. 142 would be effective for fiscal years
beginning after December 15, 2001. Early adoption would be permitted for
companies with a fiscal year beginning after March 15, 2001 provided that the
first quarter financial statements have not been previously issued. In all
cases, the Statement must be adopted as of the beginning of a fiscal year.
Goodwill and intangible assets acquired in a transaction completed after June
30, 2001 but before this Statement is initially applied would be accounted for
in accordance with the amortization and non-amortization provisions of the
Statement. The useful economic life of previously recognized intangible assets
should be reassessed upon adoption of the Statement, and remaining amortization
periods should be adjusted accordingly. Intangible assets deemed to have an
indefinite life would no longer be amortized.
The Company will adopt these new accounting rules on January 1, 2002. The
impact of Statements No. 141 and No. 142 is not expected to have a material
impact on MUTUALFIRST'S financial conditions or results of operations.
IMPACT OF INFLATION
Our consolidated financial statements have been prepared in accordance
with generally accepted accounting principles. The principles require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation.
Our primary assets and liabilities are monetary in nature. As a result,
interest rates affect our performance more than general levels of inflation.
Interest rates, however, do not necessarily move in the same direction or with
the same magnitude as the price of goods and services, since such prices are
affected by inflation. In a period of rapidly rising interest rates, the
liquidity and maturity structure of our assets and liabilities are critical to
the maintenance of acceptance performance levels.
The principal effect of inflation, as distinct from levels of interest
rates, on earnings is in the area of non-interest expense. Expense items such as
employee compensation, employee benefits and occupancy and equipment cost may
increase because of inflation. Inflation also may increase the dollar value of
the collateral securing loans that we have made. We are unable to determine the
extent to which properties securing our loans have appreciated in dollar value
due to inflation.
15
SELECTED QUARTERLY FINANCIAL INFORMATION
The following table sets forth certain quarterly results for the years
ended December 31, 2001 and 2000.
BASIC DILUTED
PROVISION EARNINGS EARNINGS
NET FOR PER PER
QUARTER INTEREST INTEREST INTEREST LOAN NET COMMON COMMON
ENDED INCOME EXPENSE INCOME LOSSES INCOME SHARE SHARE
- -----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
2001
- ----
March $ 14,057 $ 7,734 $ 6,323 $ 189 $ 1,739 $ 0.23 $ 0.22
June 14,112 7,514 6,598 296 2,164 0.30 0.30
September 13,667 7,173 6,494 607 2,116 0.31 0.31
December 13,104 6,660 6,444 190 2,061 0.33 0.33
-----------------------------------------------------------------
Total $ 54,940 $ 29,081 $ 25,859 $ 1,282 $ 8,080 1.16 1.16
=================================================================
2000
- ----
March $ 9,538 $ 4,738 $ 4,800 $ 172 $ 1,507 $ 0.28 $ 0.28
June 9,883 4,984 4,899 171 1,569 0.29 0.29
September 10,270 5,586 4,684 171 1,462 0.27 0.27
December 11,489 6,337 5,152 171 1,697 0.28 0.28
-----------------------------------------------------------------
Total $ 41,180 $ 21,645 $ 19,535 $ 685 $ 6,235 1.12 1.12
=================================================================
16
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
MUTUALFIRST Financial, Inc.
Muncie, Indiana
We have audited the accompanying consolidated balance sheets of MUTUALFIRST
Financial, Inc. as of December 31, 2001 and 2000, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits. We conducted our audits in accordance with
auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above present
fairly, in all material respects, the consolidated financial position of
MUTUALFIRST Financial, Inc. as of December 31, 2001 and 2000, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
BKD, LLP
Indianapolis, Indiana
February 14, 2002
17
MUTUALFIRST FINANCIAL, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
2001 2000
- ---------------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 24,140,688 $ 19,913,870
Interest-bearing demand deposits 6,416,985 1,132,187
---------------------------------
Cash and cash equivalents 30,557,673 21,046,057
Investment securities
Available for sale 31,580,095 35,141,744
Held to maturity (fair value of $10,413,000) -- 10,539,129
---------------------------------
Total investment securities 31,580,095 45,680,873
Loans held for sale 11,559,158 3,913,328
Loans, net of allowance for loan losses of $5,449,292 and $6,472,430 636,635,126 639,362,186
Premises and equipment 8,674,152 9,042,462
Federal Home Loan Bank stock 6,993,400 6,993,400
Investment in limited partnerships 5,677,060 6,437,467
Deferred income tax benefit 4,553,975 5,407,532
Cash surrender value of life insurance 24,231,091 23,055,091
Other assets 8,866,143 9,431,206
---------------------------------
Total assets $ 769,327,873 $ 770,369,602
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest-bearing $ 23,433,570 $ 24,485,387
Interest-bearing 515,444,601 490,224,150
---------------------------------
Total deposits 538,878,171 514,709,537
Federal Home Loan Bank advances 107,484,586 112,542,194
Notes payable 3,258,677 3,639,751
Other liabilities 9,962,261 9,536,728
---------------------------------
Total liabilities 659,583,695 640,428,210
---------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value
Authorized and unissued - 5,000,000 shares
Common stock, $.01 par value
Authorized - 20,000,000 shares
Issued and outstanding - 6,693,841 and 8,379,447 shares 66,938 83,794
Additional paid-in capital 59,575,884 84,553,285
Retained earnings 55,195,694 49,380,571
Accumulated other comprehensive income 356,009 55,528
Unearned employee stock ownership plan shares (3,813,946) (4,131,786)
Unearned recognition and retention plan shares (1,636,401) --
---------------------------------
Total stockholders' equity 109,744,178 129,941,392
---------------------------------
Total liabilities and stockholders' equity $ 769,327,873 $ 770,369,602
=================================
18
MUTUALFIRST FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME
Loans receivable $52,018,175 $ 37,810,620 $32,739,166
Trading account securities -- 8,192 66,535
Investment securities 2,212,568 2,847,684 1,526,993
Federal Home Loan Bank stock 519,859 457,271 317,938
Deposits with financial institutions 189,272 56,116 160,812
----------------------------------------------
Total interest and dividend income 54,939,874 41,179,883 34,811,444
----------------------------------------------
INTEREST EXPENSE
Deposits 23,314,477 17,543,506 15,854,093
Federal Home Loan Bank advances 5,719,922 4,095,843 3,350,567
Other interest expense 46,980 5,497 37,598
----------------------------------------------
Total interest expense 29,081,379 21,644,846 19,242,258
----------------------------------------------
NET INTEREST INCOME 25,858,495 19,535,037 15,569,186
Provision for loan losses 1,281,648 685,000 760,000
----------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 24,576,847 18,850,037 14,809,186
----------------------------------------------
OTHER INCOME
Service fee income 2,625,649 2,070,326 1,728,487
Net realized gains on sales of available-for-sale securities 46,241 -- 32,326
Net trading assets profit (loss) 25,116 (189,741)
Commissions 750,524 560,831 486,706
Net gains sales of loans and servicing 1,304,077 143,791 --
Increase in cash surrender value of life insurance 1,176,000 589,389 490,957
Other income 199,300 226,198 303,115
----------------------------------------------
Total other income 6,101,791 3,615,651 2,851,850
----------------------------------------------
OTHER EXPENSES
Salaries and employee benefits 12,288,117 7,496,211 7,235,933
Net occupancy expenses 973,568 692,132 655,494
Equipment expenses 906,636 782,116 829,058
Data processing fees 780,360 559,631 472,621
Advertising and promotion 516,487 462,230 412,604
Automated teller machine expense 524,886 457,356 228,162
Charitable contributions -- 3,800 4,569,937
Other expenses 3,529,753 2,671,140 2,272,841
----------------------------------------------
Total other expenses 19,519,807 13,124,616 16,676,650
----------------------------------------------
INCOME BEFORE INCOME TAX 11,158,831 9,341,072 984,386
Income tax expense 3,078,700 3,105,850 138,004
----------------------------------------------
NET INCOME $ 8,080,131 $ 6,235,222 $ 846,382
==============================================
EARNINGS PER SHARE
Basic $ 1.16 $ 1.12 --
Diluted 1.16 1.12 --
19
MUTUALFIRST FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
COMMON STOCK ADDITIONAL
SHARES PAID-IN COMPREHENSIVE RETAINED
OUTSTANDING AMOUNT CAPITAL INCOME EARNINGS
- -----------------------------------------------------------------------------------------------------------------------
BALANCES, JANUARY 1, 1999 $43,801,385
Comprehensive income
Net income $ 846,382 846,382
Other comprehensive loss, net of tax
Unrealized losses on securities, net
of reclassification adjustment (328,458)
----------
Comprehensive income $ 517,924
==========
Stock issued in conversion, net of costs 5,595,780 $55,958 $54,510,552
Stock contributed to charitable foundation 223,831 2,238 2,236,072
Contribution of unearned ESOP shares
ESOP shares earned (6,434)
------------------------------------- ------------
BALANCES, DECEMBER 31, 1999 5,819,611 58,196 56,740,190 44,647,767
Comprehensive income
Net income $6,235,222 6,235,222
Other comprehensive income, net of tax
Unrealized gains on securities 339,575
----------
Comprehensive income $6,574,797
==========
Cash dividends ($.28 per share) (1,502,418)
Exercise of stock options 18,774 188 203,886
Stock issued in acquisition, net of costs 2,541,062 25,410 27,567,304
ESOP shares earned 41,905
------------------------------------- ------------
BALANCES, DECEMBER 31, 2000 8,379,447 83,794 84,553,285 49,380,571
Comprehensive income
Net income $8,080,131 8,080,131
Other comprehensive income, net of tax
Unrealized gains on securities 300,481
----------
Comprehensive income $8,380,612
==========
Cash dividends ($.32 per share) (2,265,008)
Exercise of stock options 11,373 114 53,836
Stock repurchased (1,905,979) (19,060) (28,205,313)
RRP shares granted 209,000 2,090 3,028,410
RRP shares earned
ESOP shares earned 145,666
------------------------------------- ------------
BALANCES, DECEMBER 31, 2001 6,693,841 $66,938 $59,575,884 $55,195,694
===================================== ============
[WIDE TABLE CONTINUED ON FOLLOWING PAGE]
[WIDE TABLE CONTINUED FROM PREVIOUS PAGE]
ACCUMULATED
OTHER
COMPREHENSIVE UNEARNED UNEARNED
INCOME ESOP RRP
(LOSS) SHARES SHARES TOTAL
- --------------------------------------------------------------------------------------------------------
BALANCES, JANUARY 1, 1999 $ 44,411 $43,845,796
Comprehensive income
Net income 846,382
Other comprehensive loss, net of tax
Unrealized losses on securities, net
of reclassification adjustment (328,458) (328,458)
Comprehensive income
Stock issued in conversion, net of costs 54,566,510
Stock contributed to charitable foundation 2,238,310
Contribution of unearned ESOP shares $(4,655,680) (4,655,680)
ESOP shares earned 205,894 199,460
-------------------------------------------------------
BALANCES, DECEMBER 31, 1999 (284,047) (4,449,786) 96,712,320
Comprehensive income
Net income 6,235,222
Other comprehensive income, net of tax
Unrealized gains on securities 339,575 339,575
Comprehensive income
Cash dividends ($.28 per share) (1,502,418)
Exercise of stock options 204,074
Stock issued in acquisition, net of costs 27,592,714
ESOP shares earned 318,000 359,905
-------------------------------------------------------
BALANCES, DECEMBER 31, 2000 55,528 (4,131,786) 129,941,392
Comprehensive income
Net income 8,080,131
Other comprehensive income, net of tax
Unrealized gains on securities 300,481 300,481
Comprehensive income
Cash dividends ($.32 per share) (2,265,008)
Exercise of stock options 53,950
Stock repurchased (28,224,373)
RRP shares granted $(3,030,500)
RRP shares earned 1,394,099 1,394,099
ESOP shares earned 317,840 463,506
-------------------------------------------------------
BALANCES, DECEMBER 31, 2001 $ 356,009 $(3,813,946) $(1,636,401) $109,744,178
=======================================================
20
MUTUALFIRST FINANCIAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
OPERATING ACTIVITIES
Net income $ 8,080,131 $ 6,235,222 $ 846,382
Items not requiring cash
Provision for loan losses 1,281,648 685,000 760,000
Common stock contributed to charitable foundation 2,238,310
ESOP shares earned 463,506 359,905 199,460
RRP shares earned 1,394,099 -- --
Depreciation and amortization 3,336,680 2,416,172 2,174,208
Deferred income tax 650,457 1,324,430 (1,418,864)
Loans originated for sale (66,040,391) (11,779,434) --
Proceeds from sales on loans held for sale 59,698,638 8,009,898 --
Gains on sales of loans held for sale (1,304,077) (65,130) --
Change in
Trading account securities -- 1,234,884 (1,234,884)
Interest receivable 616,615 (916,078) (466,407)
Other assets 534,165 (119,882) 573,417
Interest payable (12,512) (896,500) (174,491)
Other liabilities 426,810 (1,510,608) 1,246,392
Cash surrender value of life insurance (1,176,000) (589,389) (490,957)
Other adjustments 1,325,092 398,881 257,776
----------------------------------------------
Net cash provided by operating activities 9,274,861 4,787,371 4,510,342
----------------------------------------------
INVESTING ACTIVITIES
Purchases of securities available for sale (11,517,408) (3,489,519) (25,866,267)
Proceeds from maturities and paydowns of securities available for sale 7,331,030 2,186,922 1,711,883
Proceeds from sales of securities available for sale 10,261,210 -- 8,252,785
Purchases of securities held to maturity -- -- (8,463,897)
Proceeds from maturities and paydowns of securities held to maturity 7,110,618 1,893,239 7,021,088
Proceeds from sales of securities held to maturity 1,499,928 -- --
Net change in loans (1,992,175) (36,317,394) (47,744,581)
Purchases of premises and equipment (802,172) (1,442,449) (874,377)
Proceeds from real estate owned sales 184,606 1,822,824 266,798
Purchase of FHLB of Indianapolis stock -- (1,726,100)
Cash received in acquisition, net -- 6,362,718 --
Other investing activities (11,988) (758,940) (1,023,065)
----------------------------------------------
Net cash provided by (used in) investing activities 12,063,649 (29,742,599) (68,445,733)
----------------------------------------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing, interest-bearing demand and savings deposits 11,977,689 (4,841,526) 1,275,554
Certificates of deposits 12,190,945 20,938,838 (2,670,565)
Securities sold under repurchase agreements (840,000) 840,000
Repayment of note payable (443,824) (61,358) (61,357)
Proceeds from FHLB advances 192,200,000 282,000,000 157,000,000
Repayment of FHLB advances (197,327,508) (269,855,188) (135,342,923)
Net change in advances by borrowers for taxes and insurance 11,235 (24,268) 28,881
Proceeds from sale of common stock, net of costs -- -- 49,910,830
Stock repurchased (28,224,373) -- --
Proceeds from stock options exercised 53,950 204,074 --
Cash dividends (2,265,008) (1,502,418) --
----------------------------------------------
Net cash provided by (used in) financing activities (11,826,894) 26,018,154 70,980,420
----------------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 9,511,616 1,062,926 7,045,029
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 21,046,057 19,983,131 12,938,102
----------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 30,557,673 $ 21,046,057 $ 19,983,131
==============================================
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 29,093,891 $ 22,425,869 $ 19,416,749
Income tax paid 1,505,000 2,042,000 1,716,402
Transfers from loans to foreclosed real estate 684,649 1,307,005 971,983
Loans transferred to loans held for sale -- 7,866,107 --
Mortgage servicing rights capitalized 581,773 78,661 --
Common stock issued to leveraged ESOP -- -- 4,655,680
Fair value of net assets in acquisition -- 28,013,809 --
21
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
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 subsidiary, Mutual Federal Savings Bank (Bank)
and the Bank's wholly owned subsidiaries, First MFSB Corporation and Third MFSB
Corporation, conform to accounting principles generally accepted in the United
States of America and reporting practices followed by the thrift 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.
The Company is a thrift holding company whose principal activity is the
ownership of the Bank. The Bank operates under a federal thrift charter and
provides full banking services. As a federally chartered thrift, the Bank is
subject to regulation by the Office of Thrift Supervision, and the Federal
Deposit Insurance Corporation.
The Bank generates mortgage, consumer and commercial loans and receives
deposits from customers located primarily in central Indiana. The Bank's loans
are generally secured by specific items of collateral including real property,
consumer assets and business assets. First MFSB sells various insurance products
and Third MFSB offers tax-deferred annuities and long-term health care and life
insurance products.
CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and the Bank after elimination of all material
intercompany transactions.
INVESTMENT SECURITIES - Debt securities are classified as held to
maturity when the Company has the positive intent and ability to hold the
securities to maturity. Securities held to maturity are carried at amortized
cost. Debt securities not classified as held to maturity and marketable equity
securities are classified as available for sale. Securities available for sale
are carried at fair value with unrealized gains and losses reported separately
in accumulated other comprehensive income, net of tax.
Amortization of premiums and accretion of discounts are recorded using
the interest method as interest income from securities. Realized gains and
losses are recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.
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 are carried at the principal amount outstanding. A loan is impaired
when, based on current information or events, it is probable that the Company
will be unable to collect all amounts due (principal and interest) according to
the contractual terms of the loan agreement. Payments with insignificant delays
not exceeding 90 days outstanding are not considered impaired. Certain
nonaccrual and substantially delinquent loans may be considered to be impaired.
The Company considers its investment in one-to-four family residential loans and
consumer loans to be homogeneous and therefore excluded from separate
22
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
identification for evaluation of impairment. Interest income is accrued on the
principal balances of loans. The accrual of interest on impaired and nonaccrual
loans is discontinued when, in management's opinion, the borrower may be unable
to meet payments as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed when considered uncollectible. Interest
income is subsequently recognized only to the extent cash payments are received.
Certain loan fees and direct costs are being deferred and amortized as an
adjustment of yield on the loans over the contractual maturity of the loans.
ALLOWANCE FOR LOAN LOSSES is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience, changes
in the composition of the portfolio, the current condition and amount of loans
outstanding, and the probability of collecting all amounts due. Impaired loans
are measured by the present value of expected future cash flows, or the fair
value of the collateral of the loan, if collateral dependent.
The determination of the adequacy of the allowance for loan losses is
based on estimates that are particularly susceptible to significant changes in
the economic environment and market conditions. Management believes that as of
December 31, 2001, the allowance for loan losses is adequate based on
information currently available. A worsening or protracted economic decline in
the areas within which the Bank operates would increase the likelihood of
additional losses due to credit and market risks and could create the need for
additional loss reserves.
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 system. The required investment
in the common stock is based on a predetermined formula and is carried at cost.
INVESTMENT IN LIMITED PARTNERSHIPS is recorded primarily on the equity
method of accounting. Losses due to impairment are recorded when it is
determined that the investment no longer has the ability to recover its carrying
amount. The benefits of low income housing tax credits associated with the
investment are accrued when earned.
INCOME TAX in the consolidated statements of income includes deferred
income tax provisions or benefits for all significant temporary differences in
recognizing income and expenses for financial reporting and income tax purposes.
The Company files consolidated income tax returns with the Bank.
EARNINGS PER SHARE is computed based upon the weighted-average common and
common equivalent shares outstanding during the periods subsequent to the Bank's
conversion to a stock savings bank on December 29, 1999. Net income per share
for the periods prior to the conversion is not meaningful. Unearned ESOP shares
have been excluded from the weighted-average shares outstanding calculation.
RECLASSIFICATIONS of certain amounts in the 2000 and 1999 consolidated
financial statements have been made to conform to the 2001 presentation.
23
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
NOTE 2: CONVERSION
On December 29, 1999, the Bank completed the conversion from a federally
chartered mutual institution to a federally chartered stock savings bank and the
formation of the Company as the holding company of the Bank. As part of the
conversion, the Company issued 5,595,780 shares of common stock at $10 per
share. Net proceeds of the Company's stock issuance, after costs of $1,391,000
and excluding the shares issued for the ESOP, were $49,911,000, of which
$27,284,000 was used to acquire 100% of the stock and ownership of the Bank. The
transaction was accounted for at historical cost in a manner similar to that
utilized in a pooling of interests. In connection with the Conversion, the
Company contributed 223,831 shares of common stock and cash of $2,238,000 to
Mutual Federal Savings Bank Charitable Foundation, Inc. (Foundation), a
charitable foundation dedicated to community development activities in the
Company's market areas. This resulted in the recognition of an additional
$4,477,000 charitable contribution expense for the year ended December 31, 1999.
NOTE 3: ACQUISITION
On December 8, 2000, the Company acquired Marion Capital Holdings, Inc.
(Marion), the holding company of First Federal Savings Bank of Marion (First
Federal), a federally chartered savings bank. Marion was merged into the Company
and First Federal was merged into the Bank. First Marion Service Corporation, a
wholly owned subsidiary of Marion, was dissolved.
Shareholders of Marion received 1.862 shares of the Company's common
stock for each share of Marion common stock. The Company issued 2,541,062 shares
of its common stock at a cost of $27,593,000, net of registration costs of
$211,000.
The combination was accounted for under the purchase method of
accounting, and accordingly, the net assets were recorded at their estimated
fair values at date of acquisition. Fair value adjustments on the assets and
liabilities purchased are being amortized over the estimated lives of the
related assets and liabilities. The excess of the estimated fair value of the
underlying net assets over the purchase price was allocated as a reduction in
the carrying value of premises and equipment and investments in limited
partnerships acquired as part of the acquisition. Marion's results of operations
and financial position were included in the Company's consolidated financial
statements beginning December 9, 2000.
The following pro forma information discloses the results of operations
as though the merger had taken place at the beginning of each year.
2000 1999
- --------------------------------------------------------------------------------
Net Interest Income $22,338 $22,634
===================
Net Income $ 7,408 $ 3,577
===================
Combined Net Income per Share - basic and diluted $ .89 N/A
24
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
NOTE 4: RESTRICTION ON CASH
The Bank is required to maintain reserve funds in cash and/or on deposit
with the Federal Reserve Bank. The reserve required at December 31, 2001, was
$6,781,000.
NOTE 5: INVESTMENT SECURITIES
2001
GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------
Available for sale
Mortgage-backed securities $ 5,613 $ 157 $ (2) $ 5,768
Collateralized mortgage obligations 4,867 111 (24) 4,954
Federal agencies 2,940 67 (2) 3,005
Corporate obligations 7,238 311 -- 7,549
Marketable equity securities 10,179 -- (25) 10,154
Municipal obligation 150 -- -- 150
--------------------------------------------------------
Total investment securities $ 30,987 $ 646 $ (53) $ 31,580
========================================================
2000
GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
- ------------------------------------------------------------------------------------------------------
Available for sale
Mortgage-backed securities $ 7,934 $ 70 $ (25) $ 7,979
Collateralized mortgage obligations 4,529 55 -- 4,584
Federal agencies 4,364 56 -- 4,420
Corporate obligations 10,300 105 -- 10,405
Marketable equity securities 7,925 (171) 7,754
--------------------------------------------------------
Total available for sale 35,052 286 (196) 35,142
--------------------------------------------------------
Held to maturity
Federal agencies 9,400 4 (130) 9,274
Corporate obligations 989 -- -- 989
Municipal obligation 150 -- -- 150
--------------------------------------------------------
Total held to maturity 10,539 4 (130) 10,413
--------------------------------------------------------
Total investment securities $ 45,591 $ 290 $ (326) $ 45,555
========================================================
25
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
Marketable equity securities consist of shares in mutual funds which
invest in government obligations and mortgage-backed securities.
The amortized cost and fair value of securities available for sale at
December 31, 2001, 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.
2001
AMORTIZED FAIR
COST VALUE
- ----------------------------------------------------------------------
Within one year $ 2,999 $ 3,027
One to five years 6,398 6,715
Five to ten years 476 509
After ten years 150 150
-------------------
10,023 10,401
Mortgage-backed securities 5,613 5,768
Collateralized mortgage obligations 4,867 4,954
Small Business Administration 305 303
Marketable equity securities 10,179 10,154
-------------------
Totals $30,987 $31,580
===================
Securities with a carrying value of $5,049,000 and $29,974,000 were
pledged at December 31, 2001 and 2000 to secure FHLB advances.
Proceeds from sales of securities available for sale during 2001 and 2000
were $10,261,000 and $8,253,000. Gross gains of $93,000 and $79,000 and gross
losses of $69,000 and $47,000 were recognized on those sales in 2001 and 2000.
Proceeds from sales of securities held to maturity during 2001 were
$1,500,000. Gross gains of $28,000 were realized on those sales in 2001. Gross
losses of $6,000 were recognized on those sales in 2001. The remaining balance
of held-to-maturity securities totaling $2,290,000 was reclassified as available
for sale.
There were no trading securities at December 31, 2001 or 2000. Unrealized
holding losses of $212,000 were included in earnings for 1999.
26
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
NOTE 6: LOANS AND ALLOWANCE
2001 2000
- ------------------------------------------------------------------------------
Loans
Real estate loans
One-to-four family $ 376,772 $ 388,919
Multi family 10,059 9,787
Commercial 51,503 53,197
Construction and development 16,438 13,591
------------------------
454,772 465,494
------------------------
Consumer loans
Auto 33,159 28,909
Home equity 18,365 17,428
Home improvement 19,782 23,304
Mobile home 7,910 9,865
Recreational vehicles 44,700 34,744
Boats 33,904 35,180
Other 4,411 7,508
------------------------
162,231 156,938
Commercial business loans 30,092 26,375
------------------------
647,095 648,807
Undisbursed loans in process (7,669) (5,247)
Unamortized deferred loan fees and costs, net 2,658 2,274
Allowance for loan losses (5,449) (6,472)
------------------------
Total loans $ 636,635 $ 639,362
========================
27
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
2001 2000 1999
- ----------------------------------------------------------------------------------------
Allowance for loan losses
Balances, January 1 $ 6,472 $ 3,652 $ 3,424
Allowance acquired in acquisition -- 3,172 --
Provision for losses 1,282 685 760
Recoveries on loans 61 57 119
Loans charged off (2,366) (1,094) (651)
---------------------------------
Balances, December 31 $ 5,449 $ 6,472 $ 3,652
=================================
Information on impaired loans is summarized below
2001 2000
- ----------------------------------------------------------------------------------------
Impaired loans with an allowance $ 2,690 $ 1,839
====================
Allowance for impaired loans included in the
Company's allowance for loan losses $ 404 $ 990
====================
2001 2000 1999
- ----------------------------------------------------------------------------------------
Average balance of impaired loans $ 3,642 $ 141 $ 429
Interest income recognized on impaired loans 114 -- 9
Cash-basis interest included above 23 -- 9
NOTE 7: PREMISES AND EQUIPMENT
2001 2000
- ----------------------------------------------------------------------------------------
Cost
Land $ 2,285 $ 2,486
Buildings and land improvements 8,981 8,741
Equipment 6,525 5,995
--------------------
Total cost 17,791 17,222
Accumulated depreciation and amortization (9,117) (8,180)
--------------------
Net $ 8,674 $ 9,042
====================
28
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
NOTE 8: INVESTMENT IN LIMITED PARTNERSHIPS
2001 2000
- --------------------------------------------------------------------------------
Pedcor Investments 1987-II (99.00 percent ownership) $ 748 $ 748
Pedcor Investments 1988-V (98.97 percent ownership) 472 511
Pedcor Investments 1990-XI (19.79 percent ownership) 72 84
Pedcor Investments 1990-XIII (99.00 percent ownership) 698 708
Pedcor Investments 1997-XXVIII (99.00 percent ownership) 3,320 3,707
-----------------
Pedcor Investments 1997-XXIX (99.00 percent ownership) 367 679
=================
The limited partnerships build, own and operate apartment complexes. The Company
records its equity in the net income or loss of the Pedcor Investments 1987-II,
1988-V, 1990-XIII, 1997-XXVIII and 1997-XXIX based on the Company's interest in
the partnerships. The Company has recorded its investment in Pedcor Investments
1990-XI, which represents less than a 20 per cent ownership, at amortized cost
and records income when distributions are received. The Company recorded losses
from these limited partnerships of $249,000, $210,000 and $12,000 for 2001, 2000
and 1999. In addition, the Company has recorded the benefit of low income
housing credits of $817,000, $339,000 and $262,000 for 2001, 2000 and 1999.
Combined financial statements for the limited partnerships recorded under the
equity method of accounting are as follows:
2001 2000
- -----------------------------------------------------------------------------
Combined balance sheets condensed
Assets
Cash $ 192 $ 256
Land and property 30,306 31,042
Other assets 1,402 1,136
----------------------
Total assets $ 31,900 $ 32,434
======================
Liabilities
Notes payable $ 29,525 $ 30,061
Other liabilities 1,370 884
----------------------
Total liabilities 30,895 30,945
======================
Partners' equity (deficit)
General partners (3,285) (3,076)
Limited partners 4,290 4,565
----------------------
Total partners' equity 1,005 1,489
----------------------
Total liabilities and partners' equity $ 31,900 $ 32,434
======================
29
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
2001 2000 1999
- --------------------------------------------------------------------------------
Combined condensed statements of operations
Total revenue $ 3,567 $ 3,743 $ 2,497
Total expenses 4,124 4,353 2,499
---------------------------------
Net loss $ (557) $ (610) $ (2)
=================================
NOTE 9: DEPOSITS
2001 2000
- --------------------------------------------------------------------------------
Noninterest-bearing demand $ 23,434 $ 24,485
Interest-bearing demand 60,013 52,497
Passbook 49,702 48,189
Money market savings 48,110 43,898
Certificates and other time deposits of $100,000 or more 83,126 66,916
Other certificates 274,493 278,725
---------------------
Total deposits $538,878 $514,710
=====================
Certificates including other time deposits of $100,000 or more maturing in years
ending December 31:
2002 $237,540
2003 53,637
2004 12,720
2005 46,853
2006 6,869
--------
$357,619
========
NOTE 10: FEDERAL HOME LOAN BANK ADVANCES
MATURITIES YEAR ENDING DECEMBER 31 AMOUNT
- --------------------------------------------------------------------------------
2002 $ 23,361
2003 25,061
2004 18,304
2005 8,381
2006 4,902
Thereafter 27,476
--------
$107,485
========
30
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
The terms of a security agreement with the FHLB require the Bank to
pledge as collateral for advances and outstanding letters of credit both
qualifying first mortgage loans and investment securities in an amount equal to
at least 170 percent of these advances and letters of credit. Advances are
subject to restrictions or penalties in the event of prepayment.
NOTE 11: NOTES PAYABLE
The Bank has a noninterest-bearing, unsecured term note payable to Pedcor
Investments 1997-XXVIII, L.P. of $1,646,000 and $1,707,000 at December 31, 2001
and 2000 payable in semiannual installments through January 1, 2010. At December
31, 2001 and 2000, the Bank was obligated under an irrevocable direct pay letter
of credit for the benefit of a third party in the amount of $1,254,000 relating
to this note and the financing for an apartment project by Pedcor Investments
1997-XXVIII L.P.
The Bank also has a noninterest-bearing, unsecured term note payable to
Pedcor Investments 1997-XXIX, LP. The note, which is payable in annual
installments through August 15, 2008, had a balance of $1,613,000 and 1,933,000
at December 31, 2001 and 2000.
MATURITIES YEAR ENDING DECEMBER 31
- --------------------------------------------------------------------------------
2002 $ 360
2003 358
2004 352
2005 349
2006 345
Thereafter 1,495
------
$3,259
======
NOTE 12: 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:
2001 2000 1999
- --------------------------------------------------------------------------------
Mortgage loan portfolio serviced for
Freddie Mac $ 82,629 $40,585 $22,128
Fannie Mae 4,924 8,467 9,977
Other investors 12,993 17,559 311
--------------------------------
$100,546 $66,611 $32,416
================================
The aggregate fair value of capitalized mortgage servicing rights at
December 31, 2001, 2000 and 1999 is based on comparable market values and
expected cash flows, with impairment assessed based on portfolio characteristics
including product type, investor type, and interest rates.
31
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
No valuation allowance was necessary at December 31, 2001, 2000 and 1999.
2001 2000 1999
- -------------------------------------------------------------------------------------
Mortgage Servicing Rights
Balances, January 1 $ 428 $ 279 $ 340
Servicing rights acquired -- 133 --
Servicing rights capitalized 572 79 --
Amortization of servicing rights (121) (63) (61)
-----------------------------------
Balances, December 31 $ 879 $ 428 $ 279
===================================
NOTE 13: INCOME TAX
2001 2000 1999
- -------------------------------------------------------------------------------------
Income tax expense
Currently payable
Federal $ 1,804 $ 1,669 $ 1,088
State 628 113 469
Deferred
Federal 552 864 (1,408)
State 94 460 (11)
-----------------------------------
Total income tax expense $ 3,078 $ 3,106 $ 138
===================================
Reconciliation of federal statutory to
actual tax expense
Federal statutory income tax at 34% $ 3,794 $ 3,176 $ 335
Effect of state income taxes 477 378 302
Low income housing credits (817) (339) (262)
Tax-exempt income (430) (217) (167)
Other 54 108 (70)
-----------------------------------
Actual tax expense $ 3,078 $ 3,106 $ 138
===================================
Effective tax rate 27.6% 33.3% 14.0%
===================================
32
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
The components of the deferred asset are as follows:
The components of the deferred asset are as follows:
2001 2000
- --------------------------------------------------------------------------------
ASSETS
Allowance for loan losses $ 2,144 $ 2,319
Deferred compensation 1,949 1,830
Charitable contribution carryover 857 1,141
Depreciation and amortization 361 261
Business tax and AMT credit carryovers 861 832
Investments in limited partnerships 435 811
Other 328 335
---------------------
Total assets 6,935 7,529
---------------------
LIABILITIES
FHLB stock (210) (210)
State income tax (210) (241)
Loan fees (1,358) (1,462)
Unrealized gain on securities available for sale (237) (29)
Mortgage servicing rights (366) (179)
---------------------
Total liabilities (2,381) (2,121)
---------------------
$ 4,554 $ 5,408
=====================
The Company has a charitable contribution carryover of $2,521,000 that
expires in 2005 and unused business income tax credits of $688,000 expiring in
2019 through 2021. In addition, the Company has an AMT credit carryover of
$173,000 with an unlimited carryover period.
Income tax expense attributable to securities gains was $12,500 and
$12,800 for 2001 and 2000.
Retained earnings include approximately $14,743,000 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 $5,013,000.
33
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
NOTE 14: OTHER COMPREHENSIVE INCOME
2001
BEFORE-TAX TAX NET-OF-TAX
AMOUNT EXPENSE AMOUNT
- ----------------------------------------------------------------------------------------
Unrealized gains on securities
Unrealized holding gains arising during the year $ 549 $(216) $ 333
Less: reclassification adjustment for gains
realized in net income 46 (13) 33
---------------------------
Net unrealized gains $ 503 $(203) $ 300
===========================
2000
BEFORE-TAX TAX NET-OF-TAX
AMOUNT EXPENSE AMOUNT
- ----------------------------------------------------------------------------------------
Net unrealized gains on securities $ 563 $(223) $ 340
===========================
1999
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
- -----------------------------------------------------------------------------------------
Unrealized losses on securities
Unrealized holding losses arising during the year $(515) $ 206 $(309)
Less: reclassification adjustment for gains
realized in net income 32 (13) 19
---------------------------
Net unrealized losses $(547) $ 219 $(328)
===========================
NOTE 15: 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
Bank'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 Bank uses the same credit policies in making such commitments
as it does for instruments that are included in the consolidated statement of
financial condition.
34
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
Financial instruments whose contract amount represents credit risk as of
December 31 were as follows:
2001 2000
- --------------------------------------------------------------------------------
Loan commitments $65,915 $57,600
Standby letters of credit 7,269 3,548
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 Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank 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 Bank
to guarantee the performance of a customer to a third party.
The Company and subsidiary are also subject to claims and lawsuits which
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 will not have a material adverse effect on the consolidated financial
position of the Company.
NOTE 16: DIVIDEND AND CAPITAL RESTRICTIONS
The Company is not subject to any regulatory restrictions on the payment
of dividends to its stockholders.
Without prior approval, current regulations allow the Bank to pay
dividends to the Company not exceeding retained net income for the current
calendar year plus those for the previous two calendar years. At December 31,
2001, the stockholder's equity of the Bank was $104,377,000, of which
approximately $3,281,000 was available for the payment of dividends and
$101,096,000 was restricted from dividend distribution to the Company.
At the time of conversion, a liquidation account was established in an
amount equal to the Banks' net worth as reflected in the latest statement of
condition used in its final conversion offering circular. The liquidation
account is maintained for the benefit of eligible deposit account holders who
maintain their deposit account in the Bank after conversion. In the event of a
complete liquidation, and only in such event, each eligible deposit account
holder will be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance for deposit accounts then held, before any liquidation distribution may
be made to stockholders. Except for the repurchase of stock and payment of
dividends, the existence of the liquidation account will not restrict the use or
application of net worth. The initial balance of the liquidation account was
$45,619,000.
35
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
NOTE 17: REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies and is assigned to a capital
category. The assigned capital category is largely determined by three ratios
that are calculated according to the regulations: total risk adjusted capital,
Tier1 risk-based capital, and core leverage ratios. The ratios are intended to
measure capital relative to assets and credit risk associated with those assets
and off-balance sheet exposures of the entity. The capital category assigned to
an entity can also be affected by qualitative judgments made by regulatory
agencies about the risk inherent in the entity's activities that are not part of
the calculated ratios.
There are five capital categories defined in the regulations, ranging
from well capitalized to critically undercapitalized. Classification of a bank
in any of the undercapitalized categories can result in actions by regulators
that could have a material effect on a bank's operations. At December 31, 2001
and 2000, the Bank was categorized as well capitalized and met all subject
capital adequacy requirements. There are no conditions or events since December
31, 2001 that management believes have changed the Bank's classification.
The Bank's actual and required capital amounts and ratios are as follows:
REQUIRED FOR TO BE WELL
ACTUAL ADEQUATE CAPITAL(1) CAPITALIZED(1)
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
- -----------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 2001
Total risk-based capital (1)
(to risk-weighted assets) $108,340 20.7% $ 41,951 8.0% $ 52,439 10.0%
Tier 1 risk-based capital (1)
(to risk-weighted assets) 102,969 19.6% 20,975 4.0% 31,463 6.0%
Core capital (1) (to adjusted
total assets) 102,969 13.5% 22,912 3.0% 38,186 5.0%
Core capital (1) (to adjusted
tangible assets) 102,969 13.5% 15,275 2.0% NA NA
Tangible capital (1) (to
adjusted total assets) 102,969 13.5% 11,456 1.5% NA NA
AS OF DECEMBER 31, 2000
Total risk-based capital (1) (to
risk-weighted assets) $109,552 20.7% $ 42,276 8.0% $ 52,846 10.0%
Tier 1 risk-based capital (1) (to
risk-weighted assets) 103,882 19.7% 21,138 4.0% 31,707 6.0%
Core capital (1) (to adjusted
total assets) 103,882 13.6% 22,869 3.0% 38,115 5.0%
Core capital (1) (to adjusted
tangible assets) 103,882 13.6% 15,246 2.0% NA NA
Tangible capital (1) (to
adjusted total assets) 103,882 13.6% 11,435 1.5% NA NA
- ---------------------------------
(1) As defined by regulatory agencies
36
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
NOTE 18: 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. In 2001, 2000 and 1999, the Company matched employees'
contributions at the rate of 50% for the first $600 participant contributions to
the 401(k) and made a contribution to the profit-sharing plan of 7% of qualified
compensation. The Company's expense for the plan was $253,000, $216,000 and
$286,000 for 2001, 2000 and 1999.
The Company has a supplemental retirement 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 currently
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 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
$689,000, $416,000 and $320,000 for 2001, 2000 and 1999.
As part of the conversion in 1999, the Company established an ESOP
covering substantially all its employees. The ESOP acquired 465,568 shares of
the Company common stock at $10 per share in the conversion with funds provided
by a loan from the Company. Accordingly, the $4,655,680 of common stock acquired
by the ESOP is shown as a reduction of stockholders' equity. At December 31,
2001 and 2000, the Company had 381,395 and 413,179 unearned ESOP shares with a
fair value of $5,759,000 and $6,094,000. Shares are released to participants
proportionately as the loan is repaid. Dividends on allocated shares are
recorded as dividends and charged to retained earnings. Dividends on unallocated
shares, which may be distributed to participants, or used to repay the loan are
treated as compensation expense. Compensation expense is recorded equal to the
fair market value of the stock when contributions, which are determined annually
by the Board of Directors of the Company and Bank, are made to the ESOP. Expense
under the ESOP for 2001 and 2000 was $464,000 and $360,000. At December 31,
2001, the ESOP had 52,389 allocated shares, 381,395 suspense shares and 31,784
committed-to-be released shares. At December 31, 2000, the ESOP had 20,589
allocated shares, 413,179 suspense shares and 31,800 committed-to-be released
shares. At December 31, 1999, the ESOP had no allocated shares, 444,979 suspense
shares and 20,589 committed-to-be released shares.
The shareholders approved a Recognition and Retention Plan (RRP) in 2000
for the award of up to 232,784 shares of the common stock of the Company to
directors and executive officers. Common stock awarded under the RRP vests
ratably over a three or five-year period commencing with the date of the grants.
In 2001 the Company granted 209,000 RRP shares under the plan and expense
recognized on the vested shares totaled approximately $1,394,000 in 2001. The
unearned portion of these stock awards is presented as a reduction of
stockholders' equity.
NOTE 19: STOCK OPTION PLAN
Under the Company's stock option plan approved in 2000, which is
accounted for in accordance with Accounting Principles Board Opinion (APB) No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations, the
Company grants selected executives and other key employees and directors
incentive and non-qualified stock option awards which vest and become fully
exercisable at the discretion of the stock option committee as the options are
granted. The Company is authorized to grant options for
37
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
up to 581,961 shares of the Company's common stock. Under certain provisions of
the plan, the number of shares available for grant may be increased without
shareholder approval by the amount of shares surrendered as payment of the
exercise price of the stock option and by the number of shares of common stock
of the Company that could be repurchased by the Company using proceeds from the
exercise of stock options. The exercise price of each option, which has a 10 or
15 year life, may not be less than the market price of the Company's stock on
the date of grant; therefore, no compensation expense will be recognized when
the options are granted. Except for 58,295 options issued as part of the
acquisition of Marion, no options were granted under the plan during 2000.
The following is a summary of the status of the Company's stock option
plan and changes in that plan for 2001 and 2000.
2001 2000
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ------------------------------------------------------------------------------------------------
Outstanding, beginning of year 39,521 $ 10.97 -- $ --
Granted 507,000 14.50 58,295 --
Exercised (5,807) 9.29 (18,774) 10.87
Forfeited/expired (5,000) 14.50 -- --
------- ------
Outstanding, end of year 535,714 14.30 39,521 10.97
======= ======
Options exercisable at year end 165,714 39,521
Weighted-average fair value of
options granted during the year 2.77
At December 31, 2001 other information by exercise price for options
outstanding and exercisable is as follows:
WEIGHTED
AVERAGE
REMAINING NUMBER
EXERCISE NUMBER CONTRACTUAL OF SHARES
PRICE OF SHARES LIFE EXERCISABLE
- --------------------------------------------------------------------------------
$ 5.37 1,227 1.2 years 1,227
10.87 18,774 4.7 years 18,774
12.35 13,913 5.6 years 13,913
14.50 506,800 3.2 years 131,800
38
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
Although the Company has elected to follow APB No. 25, SFAS No. 123
requires pro forma disclosures of net income and earnings per share as if the
Company had accounted for its employee stock options under that statement. The
fair value of each option grant was estimated on the grant date using an
option-pricing model with the following assumptions:
2001 2000
- --------------------------------------------------------------------------------
Risk-free interest rates 5.14% --
Dividend yields 2.19% --
Volatility factors of expected market price of common stock 8.40% --
Weighted-average expected life of the options 8 --
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair market value of the options and amortized to expense over the
options' vesting period. The pro forma effect on net income and earnings per
share of this statement are as follows:
2001 2000
- --------------------------------------------------------------------------------
Net income As reported $8,080,131 $ --
Pro forma 7,787,654 --
Basic and diluted earnings per share As reported 1.16 --
Pro forma 1.12 --
39
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
NOTE 20: EARNINGS PER SHARE
Earnings per share were computed as follows:
2001
WEIGHTED-
AVERAGE PER-SHARE
INCOME SHARES AMOUNT
- ---------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $8,080,131 6,949,879 $ 1.16
EFFECT OF DILUTIVE SECURITIES
Stock options -- 14,426 --
--------------------------------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions $8,080,131 6,964,305 $ 1.16
======================================
2000
WEIGHTED-
AVERAGE PER-SHARE
INCOME SHARES AMOUNT
- ---------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $6,235,222 5,557,775 $ 1.12
EFFECT OF DILUTIVE SECURITIES
Stock options -- 602 --
--------------------------------------
DILUTED EARNINGS PER SHARE
Income available to common stockholders
and assumed conversions $6,235,222 5,558,377 $ 1.12
======================================
40
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
NOTE 21: FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument:
CASH AND CASH EQUIVALENTS - The fair value of cash and cash equivalents
approximates carrying value.
TRADING ACCOUNT, INVESTMENT AND MORTGAGE-BACKED SECURITIES - Fair values
are based on quoted market prices.
LOANS HELD FOR SALE - Fair values are based on quoted market prices.
LOANS - The fair value for loans are estimated using discounted cash flow
analyses using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
FHLB STOCK - Fair value of FHLB stock is based on the price at which it
may be resold to the FHLB.
CASH SURRENDER VALUE OF LIFE INSURANCE - The fair value of life insurance
values approximate carrying value.
INTEREST RECEIVABLE/PAYABLE - The fair values of interest
receivable/payable approximate carrying values.
DEPOSITS - The fair values of noninterest-bearing, interest-bearing
demand and savings accounts are equal to the amount payable on demand at
the balance sheet date. Fair values for fixed-rate certificates of
deposit are estimated using a discounted cash flow calculation that
applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on such time deposits.
FEDERAL HOME LOAN BANK ADVANCES - The fair value of these borrowings are
estimated using a discounted cash flow calculation, based on current
rates for similar debt for periods comparable to the remaining terms to
maturity of these advances.
NOTES PAYABLE - The fair value of this note is estimated using a discount
calculation based on current rates.
ADVANCES BY BORROWERS FOR TAXES AND INSURANCE - The fair value
approximates carrying value.
OFF-BALANCE SHEET COMMITMENTS - Commitments include commitments to
purchase and originate mortgage loans, commitments to sell mortgage
loans, and standby letters of credit and are generally of a short-term
nature. The fair values of such commitments are based on fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit
standing. The carrying amount of these investments are reasonable
estimates of the fair value of these financial statements.
41
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
The estimated fair values of the Company's financial instruments are as
follows:
2001 2000
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- -------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 30,558 $ 30,558 $ 21,046 $ 21,046
Securities available for sale 31,580 31,580 35,142 35,142
Securities held to maturity -- -- 10,539 10,413
Loans held for sale 11,559 11,586 3,913 3,983
Loans 636,635 650,212 639,362 644,143
Stock in FHLB 6,993 6,993 6,993 6,993
Cash surrender value of life insurance 24,231 24,231 23,055 23,055
Interest receivable 3,697 3,697 4,313 4,313
LIABILITIES
Deposits 538,878 539,883 514,710 518,293
FHLB Advances 107,485 112,026 112,542 112,788
Notes payable 3,259 2,693 3,640 2,698
Interest payable 1,360 1,360 1,372 1,372
Advances by borrowers for taxes and
insurance 1,463 1,463 1,452 1,452
42
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
NOTE 22: 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
2001 2000
- -----------------------------------------------------------------------------------
ASSETS
Cash on deposit with Bank $ 831 $ 17,973
Cash on deposit with others 112 17
---------------------
Total cash and cash equivalents 943 17,990
Investment securities available for sale 1,001 2,516
Loans receivable 2,500 2,889
Investment in common stock of Bank 104,377 105,176
Deferred income tax 857 1,140
Other assets 133 359
---------------------
Total assets $109,811 $130,070
=====================
LIABILITIES - other $ 67 $ 129
STOCKHOLDERS' EQUITY 109,744 129,941
---------------------
Total liabilities and stockholders' equity $109,811 $130,070
=====================
43
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
CONDENSED STATEMENTS OF INCOME
2001 2000 1999
- -----------------------------------------------------------------------------------------
INCOME
Interest income from Bank $ 401 $ 904 $ --
Interest income from investments 136 158 --
Interest income from loans 404 -- --
Dividends from Bank 10,000 -- --
Other income 4 -- --
--------------------------------
Total income 10,945 1,062 --
--------------------------------
EXPENSES
Interest expense -- -- 40
Charitable contribution -- -- 4,477
Other 181 120 --
--------------------------------
Total expenses 181 120 4,517
================================
INCOME (LOSS) BEFORE INCOME TAX AND EQUITY IN
UNDISTRIBUTED INCOME OF SUBSIDIARY 10,764 942 (4,517)
INCOME TAX EXPENSE (BENEFIT) 297 374 (1,536)
--------------------------------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARY 10,467 568 (2,981)
EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY (2,387) 5,667 3,827
--------------------------------
NET INCOME $ 8,080 $6,235 $ 846
================================
44
MUTUALFIRST FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Table Dollar Amounts in Thousands, Except Share and Per Share Data)
CONDENSED STATEMENTS OF CASH FLOWS
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 8,080 $ 6,235 $ 846
Item not requiring (providing) cash
ESOP shares earned 464 360 199
Charitable contribution of Company's
common stock -- -- 2,238
Deferred income tax benefit 289 246 (1,393)
Distributions in excess of earnings
(undistributed income) of Bank 2,387 (5,667) (3,827)
Other 276 (488) (221)
-------------------------------------
Net cash provided by (used in)
operating activities 11,496 686 (2,158)
-------------------------------------
INVESTING ACTIVITIES
Capital contribution to subsidiary -- -- (27,283)
Cash received in acquisition, net -- 630 --
Net change in loans 389 -- --
Purchase of securities available for sale -- (2,498) --
Proceeds from sales of securities available for sale 503 -- --
Proceeds from maturities of securities available for sale 1,000 -- --
-------------------------------------
Net cash used in investing activities 1,892 (1,868) (27,283)
-------------------------------------
FINANCING ACTIVITIES
Proceeds from sale of common stock, net of costs -- -- 49,911
Stock repurchased (28,224) -- --
Cash dividends (2,265) (1,502) --
Proceeds from stock options exercised 54 204 --
-------------------------------------
Net cash provided by (used in) financing activities (30,435) (1,298) 49,911
-------------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (17,047) (2,480) 20,470
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 17,990 20,470 --
-------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 943 $ 17,990 $ 20,470
=====================================
ADDITIONAL CASH FLOW AND SUPPLEMENTARY INFORMATION
Common stock issued to ESOP leveraged with an
employee loan $ -- $ -- $ 4,656
Fair value of stock issued in acquisition of Marion -- 27,804 --
Fair value of net assets, excluding cash, in acquisition -- 2,411 --
45
OFFICERS & DIRECTORS OF MUTUALFIRST FINANCIAL, INC.
BOARD OF DIRECTORS
Wilbur R. Davis Steven L. Banks
Chairman of the Boards of MUTUALFIRST Financial Senior Vice President of MUTUALFIRST Financial
and Mutual Federal Savings Bank; and Mutual Federal Savings Bank
President, Ontario Systems Corporation
John M. Dalton
Julie A. Skinner Former Chairman, President and Chief Executive
Vice Chairman of the Boards of MUTUALFIRST Financial Officer of Marion Capital Holdings
and Mutual Federal Savings Bank; civic leader
Jon R. Marler
R. Donn Roberts President, Carrico Systems;
President and Chief Executive Officer of MUTUALFIRST Senior Vice President, Ralph M. Williams and
Financial and Mutual Federal Savings Bank Associates; President, Empire Real Estate
Edward J. Dobrow Jerry L. McVicker
President, D&M Leasing Director of Operations, Marion Community Schools
Linn A. Crull OFFICERS
Certified Public Accountant; R. Donn Roberts, President and Chief Executive
Member/Owner, Whitinger & Company, LLC Officer
James D. Rosema Timothy McArdle, Senior Vice President and
President, Rosema Corporation Treasurer
William V. Hughes Steven L. Banks, Senior Vice President
Attorney, Partner in Beasley & Gilkison, LLP
Rosalie Petro, Secretary
OFFICERS AND DIRECTORS OF MUTUAL FEDERAL SAVINGS BANK
BOARD OF DIRECTORS WARSAW ADVISORY BOARD
The Directors of MUTUALFIRST Financial, Inc. also serve J. Kevin Zachary, Advisory Director
as the Board of Directors of Mutual Federal Savings Candace Wolkins, Advisory Director
Bank John Sadler, Advisory Director
David Carey, Advisory Director
SENIOR DIRECTORS Stephen Harris, Advisory Director
Charles R. McCormick, Senior Director Phillip J. Harris, Senior Advisory Director
Jack E. Buckles, Senior Director
G. Richard Benson, Senior Director
WINCHESTER ADVISORY BOARD
Kenneth W. Girton, Advisory Director
Robert Morris, Advisory Director
Clark G. Loney, Advisory Director
Gene Gulley, Senior Advisory Director
46
CORPORATE OFFICERS
R. Donn Roberts, President and Chief Executive Officer
David Heeter, Executive Vice President and Chief Operating Officer
Steven Campbell, Senior Vice President
Stephen Selby, Senior Vice President
Timothy McArdle, Senior Vice President and Treasurer
Steven Banks, Senior Vice President
Max Courtney, Vice President
Marvin Vincent, Vice President
Patrick Botts, Vice President
Michael Barber, Vice President
Larry Phillips, Vice President and Controller
Cynthia Fortney, Vice President
Michael Fisher, Vice President
James Tinkey, Vice President
Lynda Stoner, Vice President
Ralph Spencer, Vice President
Norb Adrian, Assistant Vice President
Lori Ritchey, Assistant Vice President
Connie Bower, Assistant Vice President
Crystal Bradford, Assistant Vice President
Lila Piper, Assistant Vice President
Manfred Walgram, Assistant Vice President
William Curl, Assistant Vice President
Glenda Thomas, Assistant Vice President
Rosalie Petro, Corporate Secretary
- --------------------------------------------------------------------------------
ADMINISTRATIVE OFFICERS
Norma Lozier, Branch Manager, North Webster
Jean DeHart, Branch Manager, Northwest
Carla Burt, Business Development Officer
Tammy Hefflin, Assistant Controller & Manager, Accounting
Jan Heminger, Branch Manager, West Bethel
Kim Evans, Branch Manager, South Madison
Patti Decker, Branch Manager, Yorktown
Denise Abrams, Branch Manager, East Jackson
Vicki Reade, Branch Manager, Albany
Kristen Mattingly, Manager, Marketing
Sharon Ferguson, Manager, Deposit Products
Brad Zimmerman, Manager, Information Systems
Cathy Coolman, Branch Manager, Gas City
Barbara Wright, Manager, Loan Operations
Dorothy Douglass, Manager, Human Resources
Beth Winters, Branch Manager, Wal-Mart, Marion
JoEllen Frazier, Branch Manager, Marion Third Street
Stephanie Salyer, Branch Manager, Warsaw Market Street
Marlene Hoffer, Branch Manager, Warsaw East Center Street
Sonya Sochor, Branch Manager, West Jackson Street
Chris Cook, Assistant Treasurer
Angel Workman, Branch Manager, Broadway
47
MUTUALFIRST FINANCIAL, INC.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING
The annual meeting of shareholders will be held at 3:00 p.m. local time, on May
1, 2002, at the Company's main office, located at 110 E. Charles Street, Muncie,
Indiana.
TRANSFER AGENT:
Continental Stock Transfer & Trust Company
17 Battery Place
New York, New York 10004
(212) 509-4000
GENERAL COUNSEL: SPECIAL COUNSEL:
Beasley Gilkison, LLP Silver, Freedman & Taff, L.L.P.
110 E. Charles St. 1700 Wisconsin Av. N.W.
Muncie, IN 47305 Washington, D.C. 20007
INDEPENDENT AUDITOR:
BKD, LLP
201 N. Illinois, Suite 700
Indianapolis, IN 46204
SHAREHOLDER AND GENERAL INQUIRIES:
R. Donn Roberts Timothy J. McArdle
President & Chief Executive Officer Senior Vice President and Treasurer
MUTUALFIRST Financial, Inc.
110 E. Charles Street
Muncie, IN 47305
ANNUAL AND OTHER REPORTS
Copies of the Company's Annual Report or Form 10-K filed with the Securities and
Exchange Commission, without cost, by writing or calling: MUTUALFIRST Financial,
Inc. Investor Relations, Attn: R. Donn Roberts, President and Chief Executive
Officer, 110 E. Charles Street, Muncie, Indiana 47305.
The common stock for MUTUALFIRST Financial, Inc. is traded under the symbol
"MFSF" on the NASDAQ National 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 March 7, 2002, there were 6,327,293 shares of
common stock issued and outstanding and approximately 1,541 shareholders of
record.
______Stock Price____ Dividends per Share
QUARTER ENDING: HIGH LOW
First Quarter (ended 03/31/01) $15.125 $13.875 $0.08
Second Quarter (ended 06/30/01) $14.65 $13.938 $0.08
Third Quarter (ended 09/30/01) $15.39 $14.34 $0.08
Fourth Quarter (ended 12/31/01) $15.20 $14.50 $0.08
Our cash dividend payout policy is continually reviewed by management and the
Board of Directors. The company intends to continue its policy of paying
quarterly dividends; however, the payment will depend upon a number of factors,
including capital requirements, regulatory limitations, the Company's financial
condition, results of operations and the Bank's ability to pay dividends to the
Company. The Company relies significantly upon such dividends originating from
the Bank to accumulate earnings for payment of cash dividends to shareholders.
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[LOGO] MUTUAL FEDERAL
SAVINGS BANK
Serving North and East Central Indiana
[GRAPHIC - MAP -- LOCATIONS IN INDIANA]
DELAWARE COUNTY
MUNCIE:
110 East Charles Street
2918 West Jackson Street
4710 East Jackson Street
Oakwood & McGalliard
2000 South Madison Street
3613 North Broadway Avenue
3701 West Bethel Avenue
YORKTOWN:
2101 South Tiger Drive
ALBANY:
401 West State Street
RANDOLPH COUNTY
WINCHESTER:
110 West Pearl Street
Marsh Supermarket--
SR 32 East
KOSCIUSKO COUNTY
WARSAW:
219 West Market Street
2034 East Center Street
NORTH WEBSTER:
Crystal Flash Road &
SR 13 North
GRANT COUNTY
MARION:
100 West 3rd Street
Wal-Mart--
3240 S. Western Ave.
GAS CITY:
1010 East Main Street
MUTUALFIRST
FINANCIAL INC.
www.mfsbank.com