MUTUALFIRST FINANCIAL, INC. Overview and Significant Events in 2019
MutualFirst is aMaryland corporation and a bank holding company headquartered inMuncie, Indiana , with operations inAllen ,Delaware ,Elkhart ,Grant ,Greene ,Hamilton ,Jackson ,Johnson ,Knox ,Kosciusko ,Lawrence ,Monroe ,Randolph ,St. Joseph andWabash counties inIndiana . It ownsMutualBank , anIndiana commercial bank with 39 financial centers inIndiana , trust offices inFishers andCrawfordsville, Indiana and a loan origination office inNew Buffalo, Michigan . The Bank has a subsidiary,Summit Mortgage, Inc. , that operates a mortgage banking firm inFort Wayne, Indiana . MutualFirst also owns MutualFirst Risk Management, a captive insurance company based inNevada andMutual Risk Advisors , an information security consulting firm based inIndiana .MutualBank is anIndiana commercial bank subject to regulation, supervision and examination by the IDFI and theFDIC . MutualFirst is a bank holding company subject to examination, supervision and regulation by the FRB, which is subjected to regulatory capital requirements similar to those imposed on the Bank. For more details on these regulations see "Item 1. Business - How We Are Regulated." AtDecember 31, 2019 , we had$2.1 billion in assets,$1.5 billion in loans,$1.6 billion in deposits and$226.8 million in stockholders' equity. The Bank's total risk-based capital ratio atDecember 31, 2019 was 13.9%, exceeding the 10.0% requirement for a well-capitalized institution. The ratio of average tangible common equity increased to 9.89% as of year-end 2019 compared to 8.72% at year-end 2018. For the year endedDecember 31, 2019 , net income available to common shareholders was$23.8 million , or$2.77 per basic and$2.74 per diluted share, compared with net income available to common shareholders of$18.9 million , or$2.25 per basic and$2.21 per diluted share for 2018. Net income for 2019 includes$1.0 million of one-time merger related expenses, net of tax, related to the merger with and into Northwest Bancshares. Net income for 2018 includes$1.9 million of one-time merger and system conversion expenses, net of tax, related to the acquisition of Universal. The details of our 2019 performance are set forth below and in our Consolidated Audited Financial Statements contained in Item 8 of this Form 10K, as well as details regarding the acquisition are discussed in Note 2.
Key aspects of our 2019 operations include:
· Commercial loan balances at
in 2019.
· Non-real estate consumer loan balances increased
primarily due to growth in indirect lending.
· Mortgage loans sold in 2019 of
loans sold in 2018 of
· Deposits increased
· Tangible book value per common share was
compared to
· Net interest income increased
· Net interest margin for 2019 was 3.35% compared to 3.47% in 2018. Tax
equivalent net interest margin was 3.43% for 2019 compared to 3.55% in 2018.
· Provision for loan losses decreased by
compared to
· Non-interest income increased
· Non-interest expense increased
Our principal business consists of attracting retail deposits from the general
public, including some brokered deposits, and investing those funds primarily in
loans secured by first mortgages on owner-occupied, one-to-four family
residences, a variety of consumer loans, loans secured by commercial real estate
and commercial business loans. Funds not invested in loans generally are
invested in investment
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securities, including mortgage-backed and mortgage-related securities and agency and municipal bonds. We also obtain funds from FHLB advances and other borrowings.
MutualWealth is the wealth management division of the Bank providing a variety of fee-based financial services, including trust, investment, insurance, broker advisory, retirement plan and private banking services, in the Bank's market area. MutualWealth produces non-interest income for the Bank that is tied primarily to the market value of the portfolios being managed. As ofDecember 31, 2019 , MutualWealth had$513.5 million of fiduciary assets and generated$3.8 million in commission income during 2019. MutualFinancial Services is the brokerage division of the Bank providing a variety of fee-based financial services related to securities and investment transactions. MutualFinancial Services produces non-interest income for the Bank that is tied primarily to the volume of the transactions being processed.
During 2019, MutualFinancial Services generated
Our results of operations depend primarily on the level of our net interest income, which is the difference between interest income on interest-earning assets, such as loans, mortgage-backed securities and investment securities, and interest expense on interest-bearing liabilities, primarily deposits and borrowings. The structure of our interest-earning assets versus the structure of interest-bearing liabilities, along with the shape of the yield curve, has a direct impact on our net interest income. Historically, our interest-earning assets have been longer term in nature (i.e., fixed-rate mortgage loans) and interest-bearing liabilities have been shorter term (i.e., certificates of deposit, regular savings accounts, etc.). This structure would impact net interest income favorably in a decreasing rate environment, assuming a normally shaped yield curve, as the rates on interest-bearing liabilities would decrease more rapidly than rates on the interest-earning assets. Conversely, in an increasing rate environment, assuming a normally shaped yield curve, net interest income would be impacted unfavorably as rates on interest-earning assets would increase at a slower rate than rates on interest-bearing liabilities. The Company continues to reduce the impact of interest rate changes on its net interest income by shortening the term of its interest-earning assets to better match the terms of our interest-bearing liabilities and by selling long-term fixed rate loans and increasing the term of certain liabilities. See "Item 7A - Quantitative and Qualitative Disclosures About Market Risk - Asset and Liability Management and Market Risk" in this Form 10K. It has been the Company's strategic objective to change the repricing structure of its interest-earning assets from longer term to shorter term to better match the structure of our interest-bearing liabilities and therefore reduce the impact interest rate changes have on our net interest income. Strategies employed to accomplish this objective have been to increase the originations of variable rate commercial loans and shorter term consumer loans and to sell longer term mortgage loans.
The percentage of non-residential consumer and commercial loans to total loans
has increased from 63.7% at the end of 2018 to 67.0% as of
We continued to see improvements in our markets during 2019 and made significant progress toward achieving our strategic target loan mix through both organic non-residential consumer and commercial loan growth and the acquisition of Universal. On the liability side of the balance sheet, the Company is continuing to employ strategies intended to increase the balance of core deposit accounts, such as low cost checking and money market accounts. The percentage of core deposits to total deposits declined slightly from 67.8% in 2018 to 67.6% in 2019. These are ongoing strategies that are dependent on current market conditions and competition. The Company lengthens the term to maturity of FHLB advances when advantageous to lengthen repricing of the liability side of the balance sheet in order to reduce interest rate risk exposure.
During 2019, in keeping with our strategic objective to reduce interest rate
risk exposure, the Company also sold
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As previously disclosed, onOctober 29, 2019 , we announced that we entered into an agreement to merge with and into Northwest Bancshares, Inc., with Northwest Bancshares as the surviving entity. Under the terms of the agreement, each share of our common stock outstanding at the closing will be converted into the right to receive 2.4 shares of Northwest Bancshares common stock. Completion of the transaction is subject to customary closing conditions, including the receipt of required regulatory approvals and the approval of our stockholders. We anticipate completing the merger during the second quarter 2020.
Recent Accounting Standards
For discussion of recent accounting standards, please see Note 3: Impact of Accounting Pronouncements to our Consolidated Financial Statements in Item 8 of this Form 10K.
Critical Accounting Policies
The Notes to the Consolidated Financial Statements in Item 8 of this Form 10K contain a summary of the Company's significant accounting policies. Certain of these policies are important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management believes that its critical accounting policies include determining the allowance for loan losses, the valuation of foreclosed assets, mortgage servicing rights, valuation of intangible assets and securities, deferred tax asset and income tax accounting. Allowance for Loan Losses. The allowance for loan losses is a significant estimate that can and does change based on management's assumptions about specific borrowers and current general economic and business conditions, among other factors. Management reviews the adequacy of the allowance for loan losses on at least a quarterly basis. The evaluation by management includes consideration of past loss experience, changes in the composition of the loan portfolio, the current condition and amount of loans outstanding, identified problem loans and the probability of collecting all amounts due. 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. A worsening or protracted economic decline would increase the likelihood of additional losses due to credit and market risk and could create the need for additional loss reserves. Foreclosed Assets. Foreclosed assets are carried at the lower of cost or fair value less estimated selling costs. Management estimates the fair value of the properties based on current appraisal information. Fair value estimates are particularly susceptible to significant changes in the economic environment, market conditions, and real estate market. A worsening or protracted economic decline would increase the likelihood of a decline in property values and could create the need to write down the properties through current operations.
Mortgage Servicing Rights. MSRs associated with loans originated and sold, where servicing is retained, are capitalized and included in other assets in the consolidated balance sheet. The value of the capitalized servicing rights represents the fair value of the right to service loans in the portfolio.
Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance.
Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based
on a
discounted cash flow
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methodology, utilizing current prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as a reduction in loan servicing fee income.
Goodwill and Intangible Assets. MutualFirst periodically assesses the impairment of its goodwill and the recoverability of its core deposit intangible. Impairment is the condition that exists when the carrying amount exceeds its implied fair value. If actual external conditions and future operating results differ from MutualFirst's judgments, impairment and/or increased amortization charges may be necessary to reduce the carrying value of these assets to the appropriate value.Goodwill is tested for impairment on an annual basis as ofNovember 30 , or whenever events or changes in circumstances indicate the carrying amount of goodwill exceeds its implied fair value. No events or changes in circumstances have occurred since the annual impairment test that would suggest it was more likely than not goodwill impairment existed. Securities. Under FASB Codification Topic 320 (ASC 320), Investments-Debt and Equity Securities, investment securities must be classified as held to maturity, available for sale or trading. Management determines the appropriate classification at the time of purchase. The classification of securities is significant since it directly impacts the accounting for unrealized gains and losses on securities. Debt securities are classified as held to maturity and carried at amortized cost when management has the positive intent and the Company has the ability to hold the securities to maturity. Securities not classified as held to maturity are classified as available for sale and are carried at fair value, with the unrealized holding gains and losses, net of tax, reported in other comprehensive income and do not affect earnings until realized. The fair values of the Company's securities are generally determined by reference to quoted prices from reliable independent sources utilizing observable inputs. Certain of the Company's fair values of securities are determined using models whose significant value drivers or assumptions are unobservable and are significant to the fair value of the securities. These models are utilized when quoted prices are not available for certain securities or in markets where trading activity has slowed or ceased. When quoted prices are not available and are not provided by third party pricing services, management judgment is necessary to determine fair value. As such, fair value is determined using discounted cash flow analysis models, incorporating default rates, estimation of prepayment characteristics and implied volatilities. The Company evaluates all securities on a quarterly basis, and more frequently when economic conditions warrant additional evaluations, for determining if OTTI exists pursuant to guidelines established in ASC 320. In evaluating the possible impairment of securities, consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the ability and intent of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, the Company may consider whether the securities are issued by the federal government or its agencies or government sponsored agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. If management determines that an investment experienced an OTTI, management must then determine the amount of the OTTI to be recognized in earnings. If management does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security before recovery of its amortized cost basis less any current period loss, the OTTI will be separated into the amount representing the credit loss and the amount related to all other factors. The amount of OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the OTTI related to other factors will be recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings will become the new amortized cost basis of the investment. If management 57
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intends to sell the security or more likely than not will be required to sell the security before recovery of its amortized cost basis less any current period credit loss, the OTTI will be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. Any recoveries related to the value of these securities are recorded as an unrealized gain (as accumulated other comprehensive income (loss) in stockholders' equity) and not recognized in income until the security is ultimately sold. The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements, business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time. Deferred Tax Asset. The Company has evaluated its deferred tax asset to determine if it is more likely than not that the asset will be utilized in the future. The Company's most recent evaluation has determined that, except for the amounts represented by the valuation allowance as discussed below, the Company will more likely than not be able to utilize the remaining deferred tax asset. The Company has generated average positive pre-tax pre-provision earnings of$21.6 million , or 1.3% of pre-tax pre-provision ROA over the previous five years. These earnings would be sufficient to utilize portions of the operating losses, tax credit carryforwards and temporary tax differences over the allowable periods. The analysis supports no additional valuation reserve is needed.
The valuation allowance established is the result of net operating losses for
state franchise tax purposes totaling
Income Tax Accounting. We file a consolidated federal income tax return. The
provision for income taxes is based upon income in our consolidated financial
statements, rather than amounts reported on our income tax return. Deferred tax
assets and liabilities are recognized for future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on our deferred tax
assets and liabilities is recognized as income or expense in the period that
includes the enactment date.
The Tax Cuts and Jobs Act ("Tax Act") was enacted on December 22, 2017 reducing
the Company's federal corporate tax rate from 34% to 21%, effective January 1,
2018 . For deferred tax assets and liabilities, amounts were remeasured based on
the applicable tax rate, which is now 21%. Based on this new law, we recorded an
additional tax expense of $2.0 million due to the revaluation of the company's
deferred tax asset in 2017. The Tax Act repealed the corporate Alternative
Minimum Tax ("AMT") and as a result a portion of the Company's AMT credit
carryover from prior years will be refundable beginning in 2018.
Management Strategy
Our strategy is to operate as an independent, business- and retail- oriented financial institution dedicated to serving customers in our market area. 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 emphasis on commercial business products and services. We also operate a fully interactive transactional website that also allows consumers to open accounts. In addition, we are continually looking at cost-effective ways to expand our market area. Financial highlights of our strategy have included:
Broadening Loan Portfolio Diversification. We continue to work toward diversifying our loan portfolio to reduce our reliance on any one type of loan.
Approximately 63.7% of our loan portfolio consisted of loans other than consumer real estate loans at the end of 2018. At the end of 2019, that percentage had
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increased to 67.0%, reflecting an increase of
Continuing as a Leading One-to-four family Lender in
During 2019, we originated$301.3 million of one-to-four family residential first mortgage loans. While the last economic downturn decreased real estate values, we have seen a stabilization in purchase activity in our market areas. Interest rates decreasing led to an increase in one-to-four family residential first mortgage loan originations in 2019.
Increasing Market Share and Changing Mix of Deposits. We continue to be focused
on growth of core deposits, as deposits grew
Expanding Wealth Management Presence. We continue to focus on leveraging our operations in the markets in which we serve. Total fiduciary balances remained consistent with that of year-end 2019. Commission income (non-interest income) generated by these relationships during 2019 totaled$4.8 million .
Financial Condition at
General. Total assets at year-end 2019 were$2.1 billion , reflecting a$14.5 million increase during the year, primarily due to the increase in the investment portfolio of$14.7 million and an increase in loans held for sale of$9.4 million . These increases were partially offset by an$8.3 million decrease in gross loans, or 0.6% decrease in the gross loan portfolio, excluding loans held for sale. Average interest-earning assets increased$101.6 million , or 5.6%, to$1.9 billion atDecember 31, 2019 from$1.8 billion atDecember 31, 2018 . Average interest-bearing liabilities increased by$78.7 million , or 5.3% to$1.6 billion at year-end 2019 from$1.5 billion at year-end 2018 reflecting an increase in total deposits. Average stockholders' equity increased by$29.3 million , or 15.9%, during 2019. Cash and Investments. Cash and investments increased$12.9 million from$408.5 million at year-end 2018 to$421.4 million at year-end 2019. The details of our cash and investments are as follows: At December 31, Amount Percent 2019 2018 Change Change (Dollars in thousands) Cash$ 11,192 $ 13,078 $ (1,886) (14.42) % Interest-bearing demand deposits 21,131 20,336 795 3.91 Interest-bearing time deposits 3,496 4,239 (743) (17.53) Securities available for sale (fair value) 385,622 370,875 14,747 3.98 Total$ 421,441 $ 408,528 $ 12,913 3.16 %
AtDecember 31, 2019 , our investment portfolio consisted of$217.2 million in government-sponsored agency and government-sponsored entity mortgage-backed securities and collateralized mortgage obligations,$166.3 million in municipal securities and$2.2 million in corporate obligations. AtDecember 31, 2019 , these securities had gross unrealized gains of$11.9 million and gross unrealized losses of$1.2 million , of which$793,000 was due to unrealized losses on a trust preferred security. We have the ability to hold the trust preferred security until maturity and believe that we will be able to collect the adjusted amortized cost basis of the security. See Note 5 of the Notes to Consolidated Financial Statements in Item 8 of this Form 10K for additional information about our investment securities. 59
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Loans. Our gross loan portfolio, excluding loans held for sale, decreased$8.3 million , remaining consistent at approximately$1.5 billion at year-end 2019 and 2018. The following table reflects the changes in the gross amount of loans, excluding loans held for sale, by type during 2019: At December 31, Amount Percent 2019 2018 Change Change (Dollars in thousands) Real estate Commercial$ 504,241 $ 485,808 $ 18,433 3.79 %
Commercial construction and
development 49,496 53,310 (3,814) (7.15) Consumer closed end first mortgage 415,865 464,539 (48,674) (10.48)
Consumer open end and junior
liens 75,596 77,072 (1,476) (1.92) Total real estate loans 1,045,198 1,080,729 (35,531) (3.29) Consumer loans Auto 57,107 43,667 13,440 30.78 Boat/RV 213,305 216,608 (3,303) (1.52) Other 7,319 6,893 426 6.18 Total consumer other 277,731 267,168 10,563 3.95 Commercial and industrial 166,019 149,359 16,660 11.15 Total other loans 443,750 416,527 27,223 6.54 Total loans$ 1,488,948 $ 1,497,256 $ (8,308) (0.55) % The Bank made significant progress in its strategy to increase commercial and consumer loans as we increased the commercial portfolio by$31.3 million and the non-residential consumer portfolio by$10.6 million during 2019. We actively seek out opportunities to provide financing for new and growing commercial borrowers, as well as refinancing to sound commercial borrowers currently served by other financial institutions. The increase in the commercial and consumer portfolios was offset by selling$232.8 million of consumer residential mortgage loans during the period partially offset by an increase of$114.4 million in residential mortgage loan originations as a result of rates decreasing during 2019. The Bank continues to sell longer term fixed-rate mortgage loans to reduce related interest rate risk. Delinquencies and Non-performing Assets. As ofDecember 31, 2019 , our total loans delinquent 30to89 days were$17.5 million , or 1.2% of total loans, compared to$20.1 million , or 1.3% of total loans, at the end of 2018. AtDecember 31, 2019 , our non-performing assets totaled$9.2 million , or 0.45% of total assets, compared to$11.1 million , or 0.54% of total assets, atDecember 31, 2018 . This$1.9 million , or 17.3%, decrease was due to a decrease in non-performing loans primarily in the commercial real estate loan portfolio.
The table below sets forth the amounts and categories of non-performing assets in our loan portfolio at the dates indicated.
At December 31, Amount Percent
2019 2018 Change Change
(Dollars in thousands)
Non-accruing loans $ 7,040 $ 8,589 $ (1,549) (18.03) %Accruing loans delinquent 90 days or more 156 517 (361) (69.83) Other real estate owned and repossessed assets 1,995 2,013
(18) (0.89)
Total $ 9,191 $ 11,119 $ (1,928) (17.34) %
Other real estate owned and repossessed assets totaled $2.0 million at
December 31, 2019 and 2018. Commercial real estate non-performing loans
decreased $4.0 million due to one loan on non-accrual at the end of 2018 coming
off non-accrual in the first quarter of 2019. This credit was partially offset
by increases in commercial construction and development, consumer closed end
first mortgage and boat and RV non-accrual loans at the end of 2019. The Bank
continues to diligently monitor and write down loans that appear to have
irreversible weakness. The Bank works to ensure possible problem loans have been
identified and steps have been taken to reduce loss by restructuring loans
to
improve cash flow or
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by increasing collateral. Total classified assets increased 1.3% from $22.7
million at December 31, 2018 to $26.5 million at December 31, 2019 . The
increase in total classified loans was primarily the result of the $2.1
million increase in commercial real estate and $857,000 increase in commercial
and industrial loans classified as substandard credits at December 31, 2019 .
At December 31, 2019 , foreclosed real estate totaled $1.2 million . All
foreclosed real estate properties were one-to-four family residential or
commercial real estate properties within our footprint. All foreclosed real
estate is currently for sale. At the end of 2019, the Bank also held $778,000
in other repossessed assets, such as autos, boats, RVs and horse trailers.
Allowance for Loan Loss. Allowance for loan losses increased
Year Ended December 31,
2019 2018
(Dollars in thousands)Balance at beginning of period$ 13,281
$ 12,387 Charge-offs 2,157 1,466 Recoveries 233 240 Net charge-offs 1,924 1,226
Provisions charged to operations 1,950 2,120 Balance at end of period$ 13,307
Ratio of net charge-offs during the period to average loans outstanding during the period
0.13 % 0.09 %
Allowance as a percentage of non-performing loans 184.92 % 145.85 %
Allowance as a percentage of total loans (end of period) 0.89% 0.89 %
Specific loan loss allocation related to loans that have been individually
evaluated for impairment remained unchanged throughout the year, and general
loan loss reserves have increased
to 2019, and the loan portfolio mix. Net charge-offs for the year 2019 were$1.9 million , or 0.13% of average loans on an annualized basis, compared to$1.2 million , or 0.09% of average loans, for 2018. As ofDecember 31, 2019 , the allowance for loan losses as a percentage of loans receivable and non-performing loans was 0.89% and 184.9%, respectively, compared to 0.89% and 145.9%, respectively, atDecember 31, 2018 . Allowance for loan losses as a percentage of loans receivable remained consistent due to the total loan portfolio and allowance for loan losses remained consistent as ofDecember 31, 2019 compared to 2018. Allowance for loan losses as a percentage of non-performing loans increased due to the decrease in non-performing loans as ofDecember 31, 2019 .
The increase in the allowance was primarily due to management's ongoing evaluation of the loan portfolio conditions in our market areas.
Other Assets. Other material changes in our assets during 2019 include
a decrease in deferred tax asset of
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Deposits. Total deposits increased$34.3 million to$1.6 billion at year-end 2019 compared to$1.5 billion at year-end 2018, primarily due to an increase in money market accounts and certificates of deposit. The changes in type of account, with corresponding average rates as of the same date, reflected below are consistent with the Bank's strategy to grow and strengthen core deposit
relationships.
At December 31,
2019 2018
Weighted Weighted
Average Average Amount Percent
Amount Rate Amount Rate Change Change
(Dollars in thousands)
Type of Account:
Non-interest Checking $ 261,600 0.00 % $ 259,909 0.00 % $ 1,691 0.65 %
Interest-bearing NOW 399,788 0.54 408,135 0.78 (8,347) (2.05)
Savings 177,296 0.01 182,346 0.01 (5,050) (2.77)
Money Market 212,142 0.86 180,395 0.65 31,747 17.60Certificates of Deposit 502,652 1.94 488,440
1.83 14,212 2.91 Total$ 1,553,478 0.88 %$ 1,519,225 0.87 %$ 34,253 2.25 %
Borrowings. Total borrowings decreased
The Company acquired$5.0 million of subordinated debentures in the 2008 acquisition of another financial institution. The net balance of these securities as ofDecember 31, 2019 was$4.3 million due to the purchase accounting adjustment made at the time of the acquisition. The securities bear the prevailing three-month LIBOR rate plus 170 basis points. The Company has the right to redeem the trust preferred securities, in whole or in part, without penalty. These securities mature onSeptember 15, 2035 . The Company also acquired$5.0 million of subordinated debentures in the acquisition of Universal during 2018. The net balance of these securities as ofDecember 31, 2019 was$4.1 million due to the purchase accounting adjustment made at the time of the acquisition. The securities bear the prevailing three-month interest rate of LIBOR plus 169 basis points. The Company has the right to redeem the trust preferred securities, in whole or in part, without penalty. These securities mature onOctober 7, 2035 . The Company borrowed$10.0 million in two$5.0 million term notes fromFirst Horizon Bank to use in the acquisition of Universal. These loans had a combined balance of$9.2 million atDecember 31, 2019 . The fixed rate term note had a balance of$4.2 million and matures 5 years from the date of issuance, orFebruary 28, 2023 . This term note bears a fixed rate of interest of 4.99% per annum and requires quarterly principal payments, which beganMarch 31, 2018 . The variable rate term note matures 5 years from the date of issuance, orFebruary 28, 2023 . This term note bears a rate of interest of the prevailing three-month LIBOR rate plus 195 basis points, which was 4.04% atDecember 31, 2019 . The Company has the right to redeem either note at any time, in whole or in part, without penalty. Stockholders' Equity. Stockholders' equity was$226.8 million as ofDecember 31, 2019 , an increase of$24.4 million fromDecember 31, 2018 . The increase was primarily due to net income available to common shareholders of$23.8 million and other comprehensive income of$10.8 million . These increases were partially offset by cash dividends of$6.9 million and stock repurchases of 136,471 shares at a cost of$4.3 million . The Company's tangible book value per common share as ofDecember 31, 2019 increased to$23.43 compared to$20.51 as ofDecember 31, 2018 and the tangible common equity ratio increased to 9.89% as ofDecember 31, 2019 compared to 8.72% as ofDecember 31, 2018 . The Bank's risk-based capital ratios were well in excess of "well-capitalized" levels as defined by all regulatory standards as ofDecember 31, 2019 . 62
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Average Balances and Net Interest Margin
The table on the following page 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. All average balances are
daily average balances. Non-accruing loans have been included in the table as
loans carrying a zero yield.
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Year ended December 31,
2019 2018 2017
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 $ 23,947 $ 291 1.22 % $ 22,927 $ 251 1.09 % $ 21,465 $ 130 0.61 %
Mortgage-backed securities available for sale
(1) 216,374 5,703 2.64 203,891 5,513 2.70 156,887 3,814 2.43
Investment securities available for sale (1) 154,838 5,020
3.24 149,535 4,850 3.24 98,493 3,223 3.27
Loans (2) 1,509,658 73,623 4.88 1,427,436 68,474 4.80 1,185,956 51,231 4.32
Stock in FHLB of Indianapolis 13,105 692 5.28 12,557 606 4.83 11,167 470 4.21
Total interest-earning assets 1,917,922 85,329 4.45 1,816,346 79,694 4.39 1,473,968 58,868 3.99
Non-Interest Earning Assets (net of allowance
for loan losses and unrealized gain (loss)) 147,692 127,142 97,768
Total Assets $ 2,065,614 $ 1,943,488 $ 1,571,736
Interest-Bearing Liabilities:
Demand and NOW accounts $ 403,399 $ 3,072 0.76
182,589 19 0.01 180,065 20 0.01 139,335 15 0.01
Money market accounts 197,296 1,777 0.90 191,433 1,027 0.54 172,163 645 0.37
Certificate accounts 507,589 10,251
2.02 455,431 7,347 1.61 382,134 4,913 1.29
Total deposits 1,290,873 15,119 1.17 1,212,610 10,856 0.90 1,001,027 6,815 0.68
Borrowings 261,460 5,913 2.26 260,994 5,735 2.20 220,648 3,796 1.72Total interest-bearing liabilities 1,552,333 21,032
1.35 1,473,604 16,591 1.13 1,221,675 10,611 0.87
Non-Interest Bearing Accounts 278,792 267,812 188,203
Other Liabilities 20,417 17,315 15,282
Total Liabilities 1,851,542 1,758,731 1,425,160
Stockholders' Equity 214,072 184,757 146,576Total liabilities and stockholders' equity$ 2,065,614
$ 1,943,488 $ 1,571,736 Net Earning Assets$ 365,589 $ 342,742 $ 252,293 Net Interest Income$ 64,297 $ 63,103 $ 48,257 Net Interest Rate Spread (3) 3.10 % 3.26 % 3.13 % Net interest margin (4) 3.35 % 3.47 % 3.27 %
Net interest margin, tax equivalent (5) 3.43 % 3.55 % 3.38 % Average Interest-Earning Assets to Average Interest-Bearing Liabilities 123.55 % 123.26 % 120.65 % (1) Average balances of securities is computed based on the average of the historical amortized cost balances without the effects of the fair value adjustments. (2) Calculated net of deferred loan fees, loan discounts and loans in process. (3) Interest rate spread is calculated by subtracting weighted average interest rate cost from weighted average interest rate yield for the period indicated. (4) The net yield on weighted average interest-earning assets is calculated by dividing net interest income by weighted average interest-earning assets for the period indicated. (5) Tax equivalent margin is calculated by taking non-taxable interest and grossing up by 21% applicable tax rate for 2018 and 2019 or 34% applicable
tax rate for prior to
2018.
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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
changes in volume, which are changes in volume multiplied by the old rate, and
changes in rate, which is a change in rate multiplied by the old volume.
Changes attributable to both rate and volume, which cannot be segregated, are
allocated proportionately to the change due to volume and the change due to
rate.
Year Ended December 31,
2019 vs. 2018 2018 vs. 2017
Increase (Decrease) Due to Increase Due to
Total
Increase Total
Volume Rate (Decrease) Volume Rate Increase
(Dollars in thousands)
Interest-Earning Assets:
Interest-bearing deposits $ 11 $ 30 $ 41 $ 9 $ 111 $ 120
Investment securities
available for sale 510 (150) 360 2,813 513 3,326
Loans receivable 3,944 1,204 5,148 10,431 6,813 17,244
Stock in FHLB of
Indianapolis 26 60 86 59 77 136
Total interest-earning
assets $ 4,491 $ 1,144 $ 5,635 $ 13,312 $ 7,514 $ 20,826
Interest-Bearing
Liabilities:
Savings deposits $ - $ (1) $ (1) $ 4 $ 1 $ 5
Money market accounts 31 719 750 72 310 382
Demand and NOW accounts 113 497 610 316 904 1,220
Certificate accounts 841 2,063 2,904 942 1,492 2,434
Borrowings 10 168 178 694 1,245 1,939
Total interest-bearing
liabilities $ 995 $ 3,446 $ 4,441 $ 2,028 $ 3,952 $ 5,980
Change in net interest
income $ 1,194 $ 14,846 Comparison of Results of Operations for the Years Ended
General. Net income available to common stockholders for the year endedDecember 31, 2019 was$23.8 million , or$2.77 basic and$2.74 diluted earnings per common share, compared to net income available to common stockholders of$18.9 million , or$2.25 basic and$2.21 diluted earnings per common share, for the year endedDecember 31, 2018 . Net income for 2019 includes$1.0 million of one-time merger-related expenses, net of tax, related to the proposed merger with and into Northwest Bancshares discussed. Details regarding the proposed merger are discussed in Note 2 of these Notes to Consolidated Financial Statements contained in Item 8 of this Form 10-K. Net income for 2018 includes$1.9 million of one-time merger and system conversion expenses, net of tax, related to the acquisition of Universal. The details of our 2019 performance are set forth below and in our Consolidated Audited Financial Statements contained in Item 8 of this Form 10K, and regarding the acquisition are discussed in Note 2.
Interest Income. Total interest income increased$5.6 million , or 7.1%, to$85.3 million during the year endedDecember 31, 2019 from$79.7 million during the year endedDecember 31, 2018 . The increase was a result of the$101.6 million increase in average interest-earning assets to$1.9 billion at year end 2019 and a six basis point increase in yield on average interest-earning assets to 4.45% in 2019 compared to 4.39% in 2018, due to the increase in average interest-earning assets due to an increase in the average loan portfolio of$82.2 million . Interest income on loans in 2019 was$73.6 million compared to$68.5 million in 2018, a result of a$82.2 million increase in average loan balances due primarily to loans acquired from Universal which were held for the entire year and an eight basis point increase in the weighted average yield on average loans in 2019 to 4.88%. Interest income on investments, including 65
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FHLB stock, increased in 2019 by
Interest Expense. Interest expense increased$4.4 million , or 26.8%, to$21.0 million during the year endedDecember 31, 2019 compared to$16.6 million during the year endedDecember 31, 2018 . The reason for this increase was an increase in average interest-bearing liabilities of$78.7 million and a twenty-two basis point increase in weighted average rate paid on average interest-bearing liabilities. The increase in average interest-bearing liabilities was a result of a$78.3 million increase in average interest-bearing deposits, primarily certificates of deposit. Net Interest Income. Net interest income before the provision for loan losses increased$1.2 million in 2019 compared to 2018. The increase was a result of an increase of$101.6 million in average interest earning assets due primarily to an increase in the average loan portfolio of$82.2 million partially offset by an increase in the average deposits of$78.3 million . Average net interest margin decreased to 3.35% in 2019 compared to 3.47% in 2018, while the average tax equivalent net interest margin decreased to 3.43% in 2019 compared to 3.55% in 2018. For more information on our asset/liability management, especially as it relates to interest rate risk, see "Item 7A - Quantitative and Qualitative Disclosures About Market Risk" in this Form 10K. Provision for Loan Losses. The provision for loan losses for 2019 was$2.0 million compared to$2.1 million during 2018. The decrease was primarily a result of a decrease in our non-performing assets and consistent loan balance of$1.5 billion at the end of 2019 and 2018. Net charge-offs for 2019 increased$698,000 to$1.9 million , or 0.13% of total average loans for 2019 as compared to 0.09% for 2018. Non-Interest Income. Non-interest income increased by$5.3 million to$24.9 million in 2019. Year Ended Amount Percent 12/31/2019 12/31/2018 Change Change (Dollars in thousands) Non-Interest Income: Service fee income$ 8,949 $ 7,937 $ 1,012 12.75 % Net realized gain on sale of securities 1,014 804 210 26.12 Commissions 4,787 4,865 (78) (1.60) Net gains on sales of loans 5,871 3,126 2,745 87.81 Net servicing fees 595 591 4 0.68 Increase in cash surrender value of life insurance 1,239 1,239 - - Loss on sale of other real estate and repossessed assets (19) (43) 24 (55.81) Other income 2,485 1,055 1,430 135.55 Total$ 24,921 $ 19,574 $ 5,347 27.32 % Non-interest income increased due to an increase of$2.7 million in net gains on sale of loans caused by a$110.5 million increase in loans sold in 2019 compared to 2018. Service fee income on deposit accounts increased$1.0 million due to increases in service charges on deposit accounts as interchange revenue has increased due to increased debit card activity, increases as a result of changes made in the structure of our deposit accounts in 2019, and a full year of increased number of accounts due to the acquisition of Universal in 2018. Other income increased$1.4 million primarily due to the sale of Visa B shares resulting in income of$881,000 that did not occur in 2018. Other income also increased$738,000 due to death benefits received on life insurance in 2019 partially offset by a$327,000 increase due to death benefits received on life insurance in 2018. 66 Table of Contents Non-Interest Expenses. Non-interest expenses increased by$2.4 million to$61.2 million in 2019. Year Ended Amount Percent 12/31/2019 12/31/2018 Change Change (Dollars in thousands) Non-Interest Expenses:
Salaries and employee benefits$ 36,313 $ 32,964
$ 3,349 10.16 % Net occupancy expenses 4,055 3,965 90 2.27 Equipment expenses 2,441 2,514 (73) (2.90) Data processing fees 2,613 2,624 (11) (0.42) ATM and debit card expenses 2,334 2,290 44 1.92 Deposit insurance 413 898 (485) (54.01) Professional fees 2,706 2,177 529 24.30 Advertising and promotion 1,323 1,606 (283) (17.62)
Software subscriptions and maintenance 3,014 2,719 295 10.85 Intangible amortization 779 1,103 (324) (29.37) Other real estate and repossessed assets 256 189
67 35.45
Other expenses 4,911 5,684 (773) (13.60)
Total $ 61,158 $ 58,733 $ 2,425 4.13 %
The increase in non-interest expenses was primarily due to an increase of $3.3
million in salaries and employee benefits expense as a result of an increase in
the number of mortgage loan originators resulting in increased mortgage loan
origination of $114.4 million in 2019 that resulted in increased commission
expense, higher health insurance expense as a result of increased claim
activity and compensation payouts due to the death of an executive. Non-interest
expenses were also higher due to $1.1 million of Northwest merger-related
expenses primarily in professional fees and other expenses. These increases are
offset by $2.4 million of merger-related expenses in 2018 consisting primarily
of merger-related salaries and employee benefits expenses, service and software
contract cancellation expenses including deconversion and professional fees not
repeated in 2019. Non-interest expenses for 2019 also increased as a result of a
full year of expenses related to the integration of Universal. Deposit
insurance decreased $485,000 primarily due to the Small Bank Assessment Credits
received as a result of the FDIC reserve ratio exceeding 1.38%.
Income Tax Expense. Income tax expense in 2019 decreased
The
reason for the decrease was primarily due to the exercise of non-qualified options.
Comparison of Results of Operations for the Years Ended
General. Net income available to common stockholders for the year endedDecember 31, 2018 was$18.9 million , or$2.25 basic and$2.21 diluted earnings per common share, compared to net income available to common stockholders of$12.3 million , or$1.67 basic and$1.64 diluted earnings per common share, for the year endedDecember 31, 2017 . Net income for 2018 includes$1.9 million of one-time merger and system conversion expenses, net of tax, related to the acquisition of Universal. The details of our 2018 performance are set forth below and in our Consolidated Audited Financial Statements contained in Item 8 of this Form 10K, and regarding the acquisition are discussed in Note 2. Interest Income. Total interest income increased$20.8 million , or 35.4%, to$79.7 million during the year endedDecember 31, 2018 from$58.9 million during the year endedDecember 31, 2017 . The increase was a result of the$342.4 million increase in average interest-earning assets to$1.8 billion at year end 2018 and a forty basis point increase in yield on average interest-earning assets to 4.39% in 2018 compared to 3.99% in 2017, due to the Universal acquisition and organic loan growth. Interest income on loans in 2018 was$68.5 million compared to$51.2 million in 2017, a result of a$241.5 million increase in average loan balances and a forty-eight basis point increase in the weighted average yield on average loans in 2018 to 4.80%. Interest income on investments, including FHLB stock, increased in 2018 by$3.5 million to$11.0 million primarily due to the Universal acquisition. 67
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Interest Expense. Interest expense increased$6.0 million , or 56.4%, to$16.6 million during the year endedDecember 31, 2018 compared to$10.6 million during the year endedDecember 31, 2017 . The reason for this increase was an increase in average interest-bearing liabilities of$251.9 million and a twenty-six basis point increase in weighted average rate paid on average interest-bearing liabilities. The increase in average interest-bearing liabilities was a result of a$211.6 million increase in average interest-bearing deposits, primarily due to the Universal acquisition and an increase of$40.3 million in average FHLB advances and other borrowings primarily as additional funding was used to fund increased loan demand and the Universal acquisition. Net Interest Income. Net interest income before the provision for loan losses increased$14.8 million in 2018 compared to 2017. The increase was a result of an increase of$342.4 million in average interest earning assets due primarily to an increase in the average loan portfolio of$241.5 million . This increase was aided by the average net interest margin increasing to 3.47% in 2018 compared to 3.27% in 2017, while the average tax equivalent net interest margin increased to 3.55% in 2018 compared to 3.38% in 2017. For more information on our asset/liability management, especially as it relates to interest rate risk, see "Item 7A - Quantitative and Qualitative Disclosures About Market Risk" in this Form 10K. Provision for Loan Losses. The provision for loan losses for 2018 was$2.1 million compared to$1.2 million during 2017. The increase was primarily a result of our organic loan portfolio growth over the last year and an increase in our non-performing assets. The loan mix also contributed to the increase in provision with commercial and non-real estate consumer loans making up 63.7% of the loan portfolio at the end of 2018 compared to 57.0% at of the end of 2017. Net charge-offs for 2018 and 2017 remained consistent at$1.2 million , or 0.09% and 0.10% of total average loans, respectively. Non-Interest Income. Non-interest income increased by$1.5 million to$19.6 million in 2018. Year Ended Amount Percent 12/31/2018 12/31/2017 Change Change (Dollars in thousands) Non-Interest Income: Service fee income$ 7,937 $ 6,584 $ 1,353 20.55 %
Net realized gain on sale of securities 804 708
96 13.56
Commissions 4,865 5,027 (162) (3.22)
Net gains on sales of loans 3,126 3,887 (761) (19.58)
Net servicing fees 591 391 200 51.15
Increase in cash surrender value of
life insurance 1,239 1,113 126 11.32
Loss on sale of other real estate and
repossessed assets (43) (122) 79 (64.75)
Other income 1,055 488 567 116.19
Total $ 19,574 $ 18,076 $ 1,498 8.29 %
Non-interest income increased due to an increase of$1.4 million in service fee income on deposit accounts due to increases in interchange income along with increases due to the increase in number of accounts due to the acquisition and a$567,000 increase in other income due to death benefits received on life insurance, as well as the sale of a low-income housing property that did not occur in 2017. These increases were partially offset by a decrease of$761,000 in gain on sale of mortgage loans caused by a decline in mortgage production. 68 Table of Contents Non-Interest Expenses. Non-interest expenses increased by$12.7 million to$58.7 million in 2018. Year Ended Amount Percent 12/31/2018 12/31/2017 Change Change (Dollars in thousands) Non-Interest Expenses:
Salaries and employee benefits$ 32,964 $ 27,229
$ 5,735 21.06 % Net occupancy expenses 3,965 3,133 832 26.56 Equipment expenses 2,514 1,773 741 41.79 Data processing fees 2,624 2,321 303 13.05 ATM and debit card expenses 2,290 1,676 614 36.63 Deposit insurance 898 724 174 24.03 Professional fees 2,177 1,855 322 17.36 Advertising and promotion 1,606 1,223 383 31.32
Software subscriptions and maintenance 2,719 2,202 517 23.48 Intangible amortization 1,103 264 839 317.80 Other real estate and repossessed assets 189 165
24 14.55
Other expenses 5,684 3,440 2,244 65.23
Total $ 58,733 $ 46,005 $ 12,728 27.67 %
The increase in non-interest expenses was primarily due to an increase of $5.7
million in salaries and employee benefits expense and $2.2 million of other
expenses, a majority of which was a result of the acquisition and integration of
Universal. The number of full-time employees increased from 390 at year end 2017
to 485 at year end 2018 causing the increase in salaries and employee benefits.
Other increases related to the acquisition and integration of Universal included
an increase of $832,000 of net occupancy expenses with the addition of 12
financial centers, an increase in equipment expenses of $741,000 , an increase of
$614,000 on ATM and debit card expenses and a $517,000 increase in software
subscription and maintenance expenses. Intangible amortization increased as a
result of the amortization of the $4.5 million of the Universal purchase price
allocated to a core deposit intangible. One-time pretax merger-related expenses
were $2.4 million consisting primarily of merger-related salaries and employee
benefits expenses, service and software contract cancellation expenses including
deconversion and professional fees.
Income Tax Expense. Income tax expense in 2018 decreased $3.8 million compared
to 2017. The effective tax rate for 2018 was 13.6% compared to 35.6% for 2017.
The reason for the decrease was primarily due to additional tax expense in 2017
caused by the revaluation of the Company's deferred tax asset and the reduction
in the Company's federal corporate tax rate to 21% effective January 1, 2018 ,
both a result of the Tax Cuts and Jobs Act which was enacted into law in
December 2017 . The effective tax rate excluding the $2.0 million tax expense
resulting from the revaluation was 25.1% in 2017.
Liquidity
We are required to have enough cash and investments that qualify as liquid assets in order to maintain sufficient liquidity to ensure safe and sound operation. 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 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 assure that adequate liquidity is maintained. Liquidity management involves the matching of cash flow requirements of customers, who may be either depositors desiring to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs and the ability of the Company to manage those requirements. The Company strives to maintain an adequate liquidity position by managing the balances
and
maturities of
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interest-earning assets and interest-bearing liabilities so that the balance it
has in short-term investments at any given time will cover adequately any
reasonably anticipated, immediate need for funds. Additionally, the Bank
maintains relationships with correspondent banks, which could provide funds on
short-term notice if needed. Our liquidity, represented by cash and
cash-equivalents and investment securities, is a product of our operating,
investing and financing activities.
Liquidity management is both a daily and long-term function of the management of
the Company and the Bank. It is overseen by the Asset and Liability Management
Committee . The Board of Directors required the Bank to maintain a minimum
liquidity ratio of 10% of deposits. At December 31, 2019 , our ratio was 23.5%.
The Company is currently in excess of the minimum liquidity ratio set by the
Board due to a larger investment portfolio. Management continues to seek to
reduce excess liquidity by utilizing proceeds generated from the investment
portfolio to fund loan growth over the next few years as demand for loans
increases while maintaining an adequate level of investments. Excess liquidity
is generally invested in short-term investments, such as overnight deposits and
federal funds. On a longer term basis, we maintain a strategy of investing in
various lending products and investment securities, including mortgage-backed
and municipal securities. The Bank uses its sources of funds primarily to meet
its ongoing commitments, pay maturing deposits, fund deposit withdrawals and
fund loan commitments.
We maintain cash and investments that qualify as liquid assets to maintain
adequate liquidity to ensure safe and sound operation and meet demands for funds
(particularly withdrawals of deposits). At December 31, 2019 , on a consolidated
basis, the Company had $417.9 million in cash and investment securities
available for sale and $13.4 million in loans held for sale generally available
for its cash needs. We can also generate funds from borrowings, primarily FHLB
advances, and, to a lesser degree, third party loans. At December 31, 2019 , the
Bank had the ability to borrow an additional $76.8 million in FHLB advances and
$80.0 million in fed funds. In addition, we have historically sold 15 and
30year long-term, fixed-rate mortgage loans in the secondary market in order to
reduce interest rate risk and to create another source of liquidity. The
Company is a separate legal entity from the Bank and must provide for its own
liquidity. In addition to its own operating expenses (many of which are paid to
the Bank), the Company is responsible for paying amounts owed on its trust
preferred securities, any dividends declared to its common stockholders, and
interest and principal on outstanding debt. The Company's primary source of
funds is Bank dividends, the payment of which is subject to regulatory limits.
At December 31, 2019 , the Company, on an unconsolidated basis, had $3.1 million
in cash, interest-bearing deposits and liquid investments generally available
for its cash needs.
Our liquidity, represented by cash and cash equivalents and investment securities, 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 FHLB advances to leverage our capital base and provide funds for our lending and investment activities, and to enhance our interest rate risk management. We use our sources of funds primarily to meet ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. AtDecember 31, 2019 , the approved outstanding loan commitments, including unused lines of credit, amounted to$257.8 million . Certificates of deposit scheduled to mature in one year or less atDecember 31, 2019 , totaled$349.3 million . It is management's policy to offer deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that a majority of maturing deposits will remain with the Bank. Except as set forth above, management is not aware of any trends, events, or uncertainties that will have, or that are reasonably likely to have a material impact on liquidity, capital resources or operations. 70
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Further, management is not aware of any current recommendations by regulatory agencies, which, if they were to be implemented, would have this effect.
Off-Balance Sheet Activities
In the normal course of operations, the Bank engages in a variety of financial transactions that are not recorded in our financial statements. These transactions involve varying degrees of off-balance sheet credit, interest rate and liquidity risks. These transactions are used primarily to manage customers' requests for funding and take the form of loan commitments and lines of credit. We also have off-balance sheet obligations to repay borrowings and deposits. For the year endedDecember 31, 2019 , we engaged in no off-balance sheet transactions likely to have a material effect on our financial condition, results of operations or cash flows. AtDecember 31, 2019 , the Bank had$133.8 million in commitments to make loans,$7.6 million in undisbursed portions of closed loans,$113.1 million in unused lines of credit and$3.3 million in standby letters of credit. In addition, on a consolidated basis, atDecember 31, 2019 , the Company had$263.5 million in outstanding non-deposit borrowings, primarily FHLB advances, of which$108.9 million is due during 2020.
Capital Resources
The Bank is subject to minimum capital requirements imposed by theFDIC . See "Item 1 - Business- How We Are Regulated - Regulatory Capital Requirements." TheFDIC may require the Bank to have additional capital above the specific regulatory levels if it believes the Bank is subject to increased risk due to asset problems, high interest rate risk and other risks. AtDecember 31, 2019 , the Bank's regulatory capital exceeded theFDIC regulatory requirements, and the Bank was well-capitalized under regulatory prompt corrective action standards. Consistent with our goals to operate a sound and profitable organization, our policy is for the Bank to maintain well-capitalized status. InMay 2018 , the Economic Growth, Regulatory Relief and Consumer Protection Act (the "Act"), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act. The Act expands the category of holding companies that may rely on the "Small Bank Holding Company and Savings and Loan Holding Company Policy Statement" (the "HC Policy Statement") by raising the maximum amount of assets a qualifying holding company may have from$1.0 billion to$3.0 billion . This expansion also excludes such holding companies from the minimum capital requirements of the Dodd-Frank Act.
Our capital ratios at
Minimum Required To
Minimum Regulatory Be Considered Well-
Actual Capital Levels Capital Levels Capitalized
Amount Ratio Amount Ratio Amount Ratio
Leverage Capital Level (1) :
MutualBank $ 201,197 9.9 % $ 80,985 4.0 % $ 101,231 5.0 %
Common Equity Tier 1 Capital Level
(2) :
MutualBank $ 201,197 13.0 % $ 69,574 4.5 % $ 100,496 6.5 %
Tier 1 Risk-Based Capital Level (3) :
MutualBank $ 201,197 13.0 % $ 92,766 6.0 % $ 123,688 8.0 %
Total Risk-Based Capital Level (4) :
MutualBank $ 214,504 13.9 % $ 123,688 8.0 % $ 154,610 10.0 %
(1) Tier 1 Capital to Total Average Assets for the Leverage Ratio of
(2) Common Equity Tier 1 Capital to Risk-Weighted Assets of
(3) Tier 1 Capital to Risk-Weighted Assets.
(4) Total Capital to Risk-Weighted Assets.
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Impact of Inflation
The effects of price changes and inflation can vary substantially for most
financial institutions. While management believes that inflation affects the
economic value of total assets, it believes that it is difficult to assess the
overall impact. Management believes this to be the case due to the fact that
generally neither the timing nor the magnitude of the inflationary changes in
the consumer price index ("CPI") coincides with changes in interest rates. For
example, the price of one or more of the components of the CPI may fluctuate
considerably and thereby influence the overall CPI without having a
corresponding effect on interest rates or upon the cost of those goods and
services normally purchased by us. In years of high inflation and high interest
rates, intermediate and long-term interest rates tend to increase, thereby
adversely impacting the market values of investment securities, mortgage loans
and other long-term fixed rate loans. In addition, higher short-term interest
rates caused by inflation tend to increase the cost of funds. In other years,
the opposite may occur.
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