MutualFirst Financial Announces Record 2017 Core Earnings

MUNCIE, Ind., Feb. 2, 2018 /PRNewswire/ -- MutualFirst Financial, Inc. (NASDAQ: MFSF), the holding company of MutualBank (the "Bank"), announced its continued momentum in core earnings. On December 22, 2017, the "Tax Cuts and Jobs Act" was enacted into law reducing the federal corporate tax rate to 21%, effective January 1, 2018.  Based on this new law, MFSF recorded an additional tax expense in the fourth quarter of 2017 of $2.0 million due to a revaluation of MFSF's deferred tax asset.  Without the additional non-recurring tax adjustment, net income to common shareholders would have been $3.5 million, or $0.46 diluted earnings per common share for the quarter ended December 31, 2017.  This compared to net income available to common shareholders for the same period in 2016 of $3.2 million, or $0.43 diluted earnings per common share. Annualized return on average assets would have been 0.87% and return on average tangible common equity would have been 9.23% for the fourth quarter of 2017 compared to 0.83% and 9.31%, respectively, for the same period of last year. 

Excluding the non-recurring tax adjustment, net income to common shareholders would have been $14.3 million, or $1.91 diluted earnings per common share for year ended 2017. This compared to net income available for common shareholders of $13.2 million, or $1.76 diluted earnings per common share for the year ended December 31, 2016.  Return on average assets would have been 0.91% and return on average tangible common equity would have been 9.91% for the year ended 2017 compared to 0.87% and 9.56%, respectively, for last year.

Additionally, all non-executive employees will be given a $750 bonus, a $340,000 expense reflected in the fourth quarter and full year 2017 results, and all non-exempt employees were also given a $0.50 per hour raise starting in 2018.  David W. Heeter said, "Investing in employees is critically important to our future success. Our strong culture is reflective of past investments and these actions represent additional opportunities."

Including the non-recurring tax adjustment, net income available to common shareholders for the fourth quarter ended December 31, 2017 was $1.5 million, or $0.19 diluted earnings per common share and $12.3 million, or $1.64 diluted earnings per common share for the year ended December 31, 2017.

On October 4, 2017, MutualFirst Financial, Inc. and Universal Bancorp announced that they had entered into a merger agreement, pursuant to which Universal will be merged into MutualFirst. Upon closing, Universal's wholly owned subsidiary, BloomBank, will be merged into MutualFirst's wholly owned subsidiary, MutualBank. The companies expect the merger to close in the first quarter of 2018. More information about the merger can be found in the MFSF Form 8-K filed on October 4, 2017.

Other financial highlights for the fourth quarter and the year ended December 31, 2017 included:

• Commercial loan balances increased $11.1 million, or 9.5% on an annualized basis, in the fourth quarter of 2017. Commercial loan balances increased $21.8 million, or 4.8%, for all of 2017.
• Non-real estate consumer loan balances increased $2.3 million, or 4.9% on an annualized basis, in the fourth quarter of 2017.  Non-real estate consumer loan balances increased $28.6 million, or 17.2%, for all of 2017.
• Mortgage loans sold in the fourth quarter of 2017 of $49.4 million increased compared to mortgage loans sold in the fourth quarter of 2016 of $41.4 million primarily due to a portfolio loan sale of $18.5 million.  Mortgage loans sold in 2017 were $134.2 million, a decrease compared to mortgage loans sold in 2016 of $151.8 million.
• Deposits increased $3.1 million in the fourth quarter of 2017 and increased $48.7 million, or 4.2%, in 2017.
• Tangible book value per common share was $20.08 as of December 31, 2017 compared to $18.82 as of December 31, 2016.
• Net interest income for the fourth quarter of 2017 increased by $624,000 compared to the fourth quarter of 2016. Net interest income increased $3.7 million in 2017 compared to 2016.
• Net interest margin was 3.27% for the fourth quarter of 2017 compared to 3.20% in the fourth quarter of 2016. Tax equivalent net interest margin was 3.39% for the fourth quarter of 2017 compared to 3.30% in the fourth quarter of 2016.  Net interest margin for 2017 was 3.27% compared 3.17% in 2016.
• Provision for loan losses increased by $100,000 in the fourth quarter of 2017 to $350,000 compared to $250,000 for the fourth quarter of 2016.  Provision for loan losses was $1.2 million in 2017 compared to $850,000 in 2016.
• Non-interest income in the fourth quarter of 2017 increased by $382,000 when compared to the fourth quarter of 2016.  Non-interest income decreased $1.3 million in 2017 compared to 2016.
• Non-interest expense increased in the fourth quarter of 2017 by $457,000 when compared to the fourth quarter of 2016.  Non-interest expense increased $505,000 in 2017 compared to 2016. 

Balance Sheet

Assets increased $35.8 million, or 2.3% as of December 31, 2017 compared to December 31, 2016, primarily due to an increase in the investment portfolio of $27.5 million and an increase in gross loans of $10.6 million.  The increase in the investment portfolio was primarily due to the purchase of municipal securities funded with the proceeds from the $18.5 million loan sale discussed above. The increase in the gross loan portfolio was primarily due to an increase in commercial loans of $21.8 million, or 4.8% and in non-real estate consumer loans of $28.6 million, or 17.2%. 

The increase in gross loans was partially offset by a decline in the consumer residential loan portfolio of $39.8 million. This decline partially due to the $18.5 million sale of consumer residential mortgage loans in the fourth quarter of 2017.  Mortgage loans held for sale increased by $514,000 during 2017.  The Bank generally sells longer term fixed rate mortgage loans to mitigate interest rate risk and generate fee income.  Mortgage loans sold during 2017 totaled $134.2 million compared to $151.8 million in 2016.

Deposits increased by $48.7 million in 2017.  The increase in deposits was a result of an increase in core deposits of $50.2 million and a decline of $1.6 million in certificates of deposit.

Allowance for loan losses increased $5,000 to $12.4 million as of December 31, 2017 compared to December 31, 2016.  Net charge-offs in 2017 were $1.2 million, or 0.10% of total average loans, compared to $1.1 million, or 0.10% of total average loans in 2016.  The allowance for loan losses to non-performing loans as of December 31, 2017 was 235.9% compared to 230.1% as of December 31, 2016.  The allowance for loan losses to total loans as of December 31, 2017 was 1.05% compared to 1.06% as of December 31, 2016.  Non-performing loans to total loans at December 31, 2017 were 0.44% compared to 0.46% at December 31, 2016.  Non-performing assets to total assets were 0.38% at December 31, 2017 compared to 0.42% at December 31, 2016.

Stockholders' equity was $150.3 million at December 31, 2017, an increase of $10.2 million from December 31, 2016. The increase was primarily due to net income available to common shareholders of $12.3 million, an increase in accumulated other comprehensive income of $1.6 million and an increase of $1.2 million due to exercises of stock options.  These increases were partially offset by common stock dividends of $4.9 million for 2017. MFSF's tangible book value per common share as of December 31, 2017 increased to $20.08 compared to $18.82 as of December 31, 2016 and the tangible common equity ratio increased to 9.35% as of December 31, 2017 compared to 8.89% as of December 31, 2016.  MFSF's and the Bank's capital ratios were well in excess of "well-capitalized" levels as defined by all regulatory standards as of December 31, 2017.

Income Statement

Net interest income before the provision for loan losses increased $624,000 for the quarter ended December 31, 2017 compared to the same period in 2016.  The increase in net interest income was primarily a result of an increase of $44.2 million in average interest earning assets, due to an increase of $36.2 million in average loans.  This increase was aided by an increase of 7 basis points in net interest margin to 3.27%, while the tax equivalent margin increased 9 basis points.  On a linked quarter basis, net interest income before the provision for loan losses decreased $71,000 as net interest margin decreased by 6 basis points partially offset by average interest earning assets increasing by $14.2 million, primarily due to increases in the average loan portfolio and average interest-bearing deposits. 

Net interest income before the provision for loan losses increased $3.7 million in 2017 compared to 2016.  The increase was a result of an increase of $68.6 million in average interest earning assets due to an increase in the average loan portfolio of $66.5 million. This increase was aided by the net interest margin increasing to 3.27% in 2017 compared to 3.17% in 2016, while the tax equivalent net interest margin increased to 3.38% in 2017 compared to 3.27% in 2016.  

Provision for loan losses in the fourth quarter of 2017 was $350,000 compared to $250,000 during last year's comparable period.  The increase was due to management's ongoing evaluation of the adequacy of the allowance for loan losses and was partially attributable to an increasing loan portfolio. Net charge offs totaled $341,000, or 0.11% of total average loans on an annualized basis, in the fourth quarter of 2017 compared to net charge offs of $455,000, or 0.16% of total average loans on an annualized basis, in the fourth quarter of 2016.   

The provision for loan losses for 2017 was $1.2 million compared to $850,000 during 2016.  The increase was primarily due to our loan portfolio that has increased $10.6 million, or 0.9% over the last year and an increased level of net charge-offs.  The loan mix also has contributed to the increase in provision with commercial and non-real estate consumer loans making up 57.0% of the loan portfolio at the end of 2017 compared to 53.2% as of the end of 2016.    Net charge-offs for 2017 equaled $1.2 million, or 0.10% of total average loans compared to $1.1 million, or 0.10% of total average loans in 2016.

Non-interest income for the fourth quarter of 2017 was $4.8 million, an increase of $382,000 compared to the fourth quarter of 2016.  Increases in non-interest income included an increase of $296,000 on gain on sale of loans primarily due to selling the $18.5 million of mortgage loans, as described earlier, in the fourth quarter of 2017 and an increase of $112,000 in service charges on deposit accounts primarily due to increased interchange income from increased debit card activity. On a linked quarter basis, non-interest income increased $414,000 due to an increase of $210,000 in gain on sale of investments, an increase of $168,000 due to service charges on deposit accounts and an increase of $152,000 due to gain on sale of mortgage loans.

Non-interest income for 2017 was $18.1 million, a decrease of $1.3 million compared to the year ended 2016.  The reasons for the decrease included a decrease of $874,000 on gain on sale of mortgage loans due to a decline in mortgage production, a decrease of $696,000 on other income resulting from one-time income received in 2016, but not repeated in 2017 and a decrease of $315,000 in gain on sale of investment securities.  These declines were partially offset by an increase of $460,000 in service charges on deposit accounts due to increased interchange revenue. 

Non-interest expense increased $457,000 when comparing the fourth quarter of 2017 with the same period in 2016.  The increase was primarily due to an increase of $304,000 in occupancy expense as a result of a loss of rental income from an office building sold in the fourth quarter of 2016, an increase of $160,000 in advertising expense and an increase of $142,000 in professional fees including $288,000 in merger-related activities. These increases were partially offset by a decrease of $237,000 in salaries and employee benefits primarily due to a decline in health insurance costs offset partially by the one-time employee bonus compared to the fourth quarter of 2016.  On a linked quarter basis, non-interest expense increased $492,000 partially due to an increase of $227,000 in salaries and benefits primarily due to an employee bonus accrual of $340,000 and an increase in professional fees of $308,000 primarily as a result of merger-related expenses.

Non-interest expense increased $505,000 when comparing 2017 with 2016 because of certain one-time expenses, such as the one-time bonus accrual of $340,000 and merger-related expenses of $288,000.  Net occupancy expense increased by $825,000 primarily due to the loss of rental income from an office building sold in the fourth quarter of 2016.  Other increases include a $330,000 increase in data processing expenses primarily related to increased technological services offered to customers and an increase of $140,000 on ATM and debit card expenses due to increased usage of debit cards. These increases were partially offset by a decrease of $727,000 in other expenses primarily related to one-time expenses in 2016 not repeated in 2017 and a decrease of $198,000 in salaries and employee benefits due primarily to a decline in health insurance costs compared to 2016.

The effective tax rate for the fourth quarter of 2017 was 69.3%, or 27.2% excluding the $2.0 million tax expense resulting from the revaluation due to the tax law change, compared to 24.8% in the same quarter of 2016.  The effective tax rate for 2017 was 35.6%, or 25.1% excluding the $2.0 million tax expense resulting from the revaluation due to the tax law change, compared to 24.9% in 2016. The reason for the increase was an increase in taxable income and an increase in non-deductible expenses primarily related to the impending merger with Universal.

Heeter concluded, "We continue to be pleased with the progress we are making. Our team is excited about our opportunities as we expand our footprint in Central and Southern Indiana with the acquisition of Universal and we continue to focus on areas that should create strong core performance for years to come."

MutualFirst Financial, Inc. is the parent company of MutualBank, an Indiana-based financial institution since 1889. MutualBank has twenty-seven full-service retail financial centers in Allen, Delaware, Elkhart, Grant, Kosciusko, Randolph, St. Joseph and Wabash Counties in Indiana. MutualBank has two offices located in Fishers and Crawfordsville, Indiana specializing in wealth management and trust services and a loan origination office in New Buffalo, Michigan. MutualBank also operates a wholly owned subsidiary named Summit Mortgage which operates out of Fort Wayne, Indiana. MutualBank provides a full range of financial services including commercial and business banking, personal banking, wealth management, trust services, investments and internet banking services. The Company's stock is traded on the NASDAQ National Market under the symbol "MFSF." Additional information can be found online at www.bankwithmutual.com.

Statements contained in this release, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission from time to time.

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SOURCE MutualFirst Financial, Inc.