Note 2: Acquisitions

On February 28, 2018, the Company completed the 100% acquisition of Universal Bancorp (“Universal”). Universal and BloomBank, a wholly-owned subsidiary of Universal, merged with and into the Company and the Bank, respectively. BloomBank was headquartered in Bloomfield, Indiana and had 13 retail financial center offices serving counties in central and southern Indiana. Under terms of the merger agreement, shareholders of Universal received fixed consideration of 15.6 shares of MutualFirst common stock and $250.00 in cash for each share of Universal common stock. The Company issued approximately 1.2 million shares of common stock, which was valued at approximately $42.3 million. Based upon the February 28, 2018 closing price of $35.70 per share of MutualFirst common stock, the transaction has an implied valuation of approximately $61.3 million. The Company incurred approximately $2.2 million in pretax expenses related to the acquisition in the first nine months of 2018. These expenses are classified in the non-interest expense section of the income statement, primarily in salaries and employee benefits, professional fees and other expenses. As a result of the acquisition, the Company was able to increase both its deposit and loan base and expects to reduce costs through economies of scale. Goodwill resulted from this transaction due to the expected synergies and economies of scale.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired, liabilities assumed and related deferred tax impacts, which are based on assumptions that are subject to change as management continues to evaluate, the purchase price for the Universal acquisition is detailed in the following table. If, prior to the end of the one-year measurement period for finalizing the purchase price allocation, information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be recorded in the reporting period in which the adjustment amounts are determined. The measurement period adjustments will be calculated as if the accounting had been completed as of the acquisition date.



Assets			Liabilities
Cash and cash equivalents	$	11,326	Deposits
Interest-bearing time deposits		8,747	Non-interest bearing	$	81,061
Investment securities, available for sale		87,817	NOW accounts		66,372
			Savings and money market		85,690
Loans			Certificated of deposits		82,107
Commercial		203,621	Total deposits		315,230
Residential mortgage		36,410
Consumer		12,532	Borrowings		25,463
Total loans		252,563	Interest payable		81
			Subordinated debt		4,000
Premises and equipment, net		4,799	Other liabilities		762
Federal Home Loan Bank stock		1,637	Total liabilities assumed	$	345,536
Deferred tax asset, net		2,848
Cash value of life insurance		7,556
Goodwill		20,679
Core deposit intangible		4,545
Interest receivable		1,259
Other real estate owned and repossessed assets		1,009
Other assets		2,073
Total assets purchased	$	406,858

Common shares issued	$	42,323
Cash paid		18,999
Total purchase price	$	61,322

Of the total purchase price, $4.5 million has been allocated to a core deposit intangible that will be amortized over its estimated life of 15 years. Of the remaining purchase price, $20.7 million has been allocated to goodwill, which is not deductible for tax purposes. Loans acquired had a fair value of $252.6 million. The contractual principal at the acquisition date was $257.2 million. The $4.6 million will be accreted into income for the performing loans or utilized for charging off non-performing loans.

Pro Forma Financial Information

The results of operations of Universal Bancorp have been included in the Company’s consolidated financial statements since the acquisition date. The following schedule includes pro forma results for the three and nine months ended September 30, 2018 and 2017, as if the Universal acquisition occurred as of the beginning of the reporting periods presented.



	Three Months Ended September 30,
	2018		2017
Summary of Operations
Net interest income	$	16,417	$	16,358
Provision for loan losses		(570)		(370)
Net interest income after provision	$	15,847	$	15,988
Non-interest income		5,039		5,134
Non-interest expense		(14,574)		(14,755)
Income before income taxes	$	6,312	$	6,367
Income tax benefit (expense)		(910)		(1,478)
Net income to common shareholders	$	5,402	$	4,889
Basic earnings per share	$	0.63	$	0.57
Diluted earnings per share	$	0.62	$	0.56



	Nine Months Ended September 30,
	2018		2017
Summary of Operations
Net interest income	$	48,900	$	48,425
Provision for loan losses		(1,520)		(870)
Net interest income after provision	$	47,380	$	47,555
Non-interest income		14,556		15,193
Non-interest expense		(49,532)		(44,677)
Income before income taxes	$	12,404	$	18,071
Income tax benefit (expense)		(1,286)		(4,046)
Net income to common shareholders	$	11,118	$	14,025
Basic earnings per share	$	1.30	$	1.69
Diluted earnings per share	$	1.27	$	1.66

The pro-forma information for September 30, 2018 includes operating revenue from Universal of $9.1 million since the date of acquisition. Earnings of Universal since the acquisition date, net of tax and non-recurring expenses related to the acquisition were $4.2 million as of September 30, 2018. The pro forma information is presented for information purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.