HORIZON BANCORP
FORM 10-Q
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
Commission file number 0-10792
HORIZON BANCORP
(Exact name of registrant as specified in its charter)
Indiana | 35-1562417 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
515 Franklin Square, Michigan City, Indiana | 46360 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (219) 879-0211
Former name, former address and former fiscal year, if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated Filer | ¨ | Accelerated Filer | x | |||
Non-accelerated Filer | ¨ (Do not check if smaller reporting company) | Smaller Reporting Company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 8,693,741 shares of Common Stock, no par value, at November 8, 2012.
HORIZON BANCORP
FORM 10-Q
2
PART 1 FINANCIAL INFORMATION
HORIZON BANCORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands)
September 30 2012 (Unaudited) |
December 31 2011 |
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Assets |
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Cash and due from banks |
$ | 41,562 | $ | 20,447 | ||||
Investment securities, available for sale |
497,704 | 431,045 | ||||||
Investment securities, held to maturity |
6,100 | 7,100 | ||||||
Loans held for sale |
18,163 | 14,090 | ||||||
Loans, net of allowance for loan losses of $18,568 and $18,882 |
1,136,480 | 964,311 | ||||||
Premises and equipment |
40,297 | 34,665 | ||||||
Federal Reserve and Federal Home Loan Bank stock |
13,333 | 12,390 | ||||||
Goodwill |
19,748 | 5,910 | ||||||
Other intangible assets |
4,295 | 2,292 | ||||||
Interest receivable |
8,248 | 6,671 | ||||||
Cash value life insurance |
34,929 | 30,190 | ||||||
Other assets |
25,917 | 18,051 | ||||||
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Total assets |
$ | 1,846,776 | $ | 1,547,162 | ||||
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Liabilities |
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Deposits |
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Non-interest bearing |
$ | 211,935 | $ | 130,673 | ||||
Interest bearing |
1,095,036 | 879,192 | ||||||
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Total deposits |
1,306,971 | 1,009,865 | ||||||
Borrowings |
333,150 | 370,111 | ||||||
Subordinated debentures |
32,282 | 30,676 | ||||||
Interest payable |
579 | 596 | ||||||
Other liabilities |
17,932 | 14,449 | ||||||
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Total liabilities |
1,690,914 | 1,425,697 | ||||||
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Commitments and contingent liabilities |
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Stockholders Equity |
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Preferred stock, $.01 par value, $1,000 liquidation value |
12,500 | 12,500 | ||||||
Common stock, no par value |
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Additional paid-in capital |
31,894 | 11,736 | ||||||
Retained earnings |
101,267 | 89,387 | ||||||
Accumulated other comprehensive income |
10,201 | 7,842 | ||||||
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Total stockholders equity |
155,862 | 121,465 | ||||||
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Total liabilities and stockholders equity |
$ | 1,846,776 | $ | 1,547,162 | ||||
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See notes to condensed consolidated financial statements
3
HORIZON BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
Nine Months Ended September 30 | Three Months Ended September 30 | |||||||||||||||
2012 (Unaudited) |
2011 (Unaudited) |
2012 (Unaudited) |
2011 (Unaudited) |
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Interest Income |
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Loans receivable |
$ | 15,527 | $ | 12,481 | $ | 42,386 | $ | 36,260 | ||||||||
Investment securities |
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Taxable |
2,178 | 2,542 | 6,738 | 7,828 | ||||||||||||
Tax exempt |
1,014 | 988 | 2,944 | 3,066 | ||||||||||||
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Total interest income |
18,719 | 16,011 | 52,068 | 47,154 | ||||||||||||
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Interest Expense |
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Deposits |
1,638 | 1,978 | 4,803 | 6,510 | ||||||||||||
Borrowed funds |
1,597 | 1,583 | 4,635 | 4,760 | ||||||||||||
Subordinated debentures |
485 | 459 | 1,427 | 1,363 | ||||||||||||
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Total interest expense |
3,720 | 4,020 | 10,865 | 12,633 | ||||||||||||
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Net Interest Income |
14,999 | 11,991 | 41,203 | 34,521 | ||||||||||||
Provision for loan losses |
1,041 | 1,564 | 1,809 | 4,444 | ||||||||||||
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Net Interest Income after Provision for Loan Losses |
13,958 | 10,427 | 39,394 | 30,077 | ||||||||||||
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Other Income |
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Service charges on deposit accounts |
1,002 | 802 | 2,477 | 2,422 | ||||||||||||
Wire transfer fees |
248 | 167 | 643 | 412 | ||||||||||||
Interchange fees |
885 | 721 | 2,227 | 1,905 | ||||||||||||
Fiduciary activities |
971 | 1,016 | 2,928 | 2,911 | ||||||||||||
Gain on sale of securities |
2 | 1,115 | 2 | 1,754 | ||||||||||||
Gain on sale of mortgage loans |
4,436 | 2,145 | 10,121 | 3,986 | ||||||||||||
Mortgage servicing income net of impairment |
(355 | ) | (172 | ) | (95 | ) | 691 | |||||||||
Increase in cash value of bank owned life insurance |
300 | 245 | 760 | 661 | ||||||||||||
Death benefit on officer life insurance |
| 453 | | 453 | ||||||||||||
Other income |
221 | 46 | 344 | 105 | ||||||||||||
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Total other income |
7,710 | 6,538 | 19,407 | 15,300 | ||||||||||||
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Other Expenses |
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Salaries and employee benefits |
7,905 | 6,081 | 20,407 | 16,912 | ||||||||||||
Net occupancy expenses |
1,186 | 1,056 | 3,216 | 3,176 | ||||||||||||
Data processing |
754 | 549 | 1,883 | 1,450 | ||||||||||||
Professional fees |
366 | 359 | 1,483 | 1,039 | ||||||||||||
Outside services and consultants |
624 | 454 | 1,621 | 1,221 | ||||||||||||
Loan expense |
1,311 | 820 | 2,879 | 2,276 | ||||||||||||
FDIC insurance expense |
291 | 254 | 798 | 944 | ||||||||||||
Other losses |
309 | 1,088 | 501 | 1,365 | ||||||||||||
Other expenses |
2,094 | 1,652 | 5,392 | 4,675 | ||||||||||||
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Total other expenses |
14,840 | 12,313 | 38,180 | 33,058 | ||||||||||||
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Income Before Income Tax |
6,828 | 4,652 | 20,621 | 12,319 | ||||||||||||
Income tax expense |
1,978 | 1,235 | 6,248 | 3,044 | ||||||||||||
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Net Income |
4,850 | 3,417 | 14,373 | 9,275 | ||||||||||||
Preferred stock dividend and discount accretion |
(63 | ) | (710 | ) | (325 | ) | (1,263 | ) | ||||||||
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Net Income Available to Common Shareholders |
$ | 4,787 | $ | 2,707 | $ | 14,048 | $ | 8,012 | ||||||||
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Basic Earnings Per Share |
$ | 0.56 | $ | 0.37 | $ | 1.81 | $ | 1.08 | ||||||||
Diluted Earnings Per Share |
0.54 | 0.36 | 1.75 | 1.05 |
See notes to condensed consolidated financial statements
4
HORIZON BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands)
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
2012 (Unaudited) |
2011 (Unaudited) |
2012 (Unaudited) |
2011 (Unaudited) |
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Net Income |
$ | 4,850 | $ | 3,417 | $ | 14,373 | $ | 9,275 | ||||||||
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Other Comprehensive Income |
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Change in fair value of derivative instruments, net of taxes of $(92) and $(317) for three and nine months ended 2012 and $(1,051) and $(1,221), for three and nine months ended 2011, respectively |
(170 | ) | (1,951 | ) | (589 | ) | (2,268 | ) | ||||||||
Unrealized appreciation on available-for-sale securities, net of taxes of $860 and $1,588, for three and nine months ended 2012 and $1,856 and $4,852 for the three and nine months ended 2011, respectively |
1,597 | 3,447 | 2,949 | 9,011 | ||||||||||||
Less: reclassification adjustment for realized gains included in net income, net of taxes of $1 for three and nine months ended 2012, and $390 and $614, for three and nine months ended 2011, respectively |
1 | 725 | 1 | 1,140 | ||||||||||||
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1,426 | 771 | 2,359 | 5,603 | |||||||||||||
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Comprehensive Income |
$ | 6,276 | $ | 4,188 | $ | 16,732 | $ | 14,878 | ||||||||
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See notes to condensed consolidated financial statements
5
HORIZON BANCORP AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders Equity
(Unaudited)
(Table Dollar Amounts in Thousands, Except Per Share Data)
Preferred Stock |
Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive Income |
Total | ||||||||||||||||
Balances, January 1, 2012 |
$ | 12,500 | $ | 11,736 | $ | 89,387 | $ | 7,842 | $ | 121,465 | ||||||||||
Net income |
14,373 | 14,373 | ||||||||||||||||||
Other comprehensive income, net of tax |
2,359 | 2,359 | ||||||||||||||||||
Amortization of unearned compensation |
124 | 124 | ||||||||||||||||||
Issuance of restricted shares |
115 | 115 | ||||||||||||||||||
Exercise of stock options |
226 | 226 | ||||||||||||||||||
Stock option expense |
25 | 25 | ||||||||||||||||||
Stock issued from acquisition |
19,668 | 19,668 | ||||||||||||||||||
Cash dividends on preferred stock |
(325 | ) | (325 | ) | ||||||||||||||||
Cash dividends on common stock ($.27 per share) |
(2,168 | ) | (2,168 | ) | ||||||||||||||||
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Balances, September 30, 2012 |
$ | 12,500 | $ | 31,894 | $ | 101,267 | $ | 10,201 | $ | 155,862 | ||||||||||
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See notes to condensed consolidated financial statements
6
HORIZON BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
Nine Months Ended September 30 | ||||||||
2012 (Unaudited) |
2011 (Unaudited) |
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Operating Activities |
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Net income |
$ | 14,373 | $ | 9,275 | ||||
Items not requiring (providing) cash |
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Provision for loan losses |
1,809 | 4,444 | ||||||
Depreciation and amortization |
1,988 | 1,868 | ||||||
Share based compensation |
25 | 27 | ||||||
Mortgage servicing rights impairment (recovery) |
369 | (464 | ) | |||||
Premium amortization on securities available for sale, net |
2,387 | 1,612 | ||||||
Gain on sale of investment securities |
(2 | ) | (1,754 | ) | ||||
Gain on sale of mortgage loans |
(10,121 | ) | (3,986 | ) | ||||
Proceeds from sales of loans |
293,909 | 178,239 | ||||||
Loans originated for sale |
(283,788 | ) | (174,253 | ) | ||||
Change in cash value of life insurance |
(727 | ) | 236 | |||||
(Gain) loss on sale of other real estate owned |
(5 | ) | 126 | |||||
Net change in |
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Interest receivable |
(757 | ) | (132 | ) | ||||
Interest payable |
(107 | ) | (199 | ) | ||||
Other assets |
217 | (1,590 | ) | |||||
Other liabilities |
(2,112 | ) | 1,416 | |||||
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Net cash provided by operating activities |
17,458 | 14,865 | ||||||
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Investing Activities |
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Purchases of securities available for sale |
(96,713 | ) | (170,689 | ) | ||||
Proceeds from sales, maturities, calls, and principal repayments of securities available for sale |
92,734 | 134,583 | ||||||
Purchase of securities held to maturity |
| (2,437 | ) | |||||
Proceeds from maturities of securities held to maturity |
4,177 | 1,400 | ||||||
(Purchase) proceeds from the sale of Federal Home Loan Bank stock |
| 1,274 | ||||||
Net change in loans |
(66,596 | ) | (44,766 | ) | ||||
Proceeds on the sale of OREO and repossessed assets |
2,661 | 2,008 | ||||||
Purchases of premises and equipment |
(4,520 | ) | (1,548 | ) | ||||
Purchases of bank owned life insurance |
| (3,000 | ) | |||||
Acquisition of Heartland |
26,283 | | ||||||
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Net cash used in by investing activities |
(41,974 | ) | (83,175 | ) | ||||
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Financing Activities |
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Net change in |
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Deposits |
85,861 | 4,251 | ||||||
Borrowings |
(38,078 | ) | 75,423 | |||||
Redemption of preferred stock |
| (18,750 | ) | |||||
Issuance of preferred stock |
| 12,500 | ||||||
Proceeds from issuance of stock |
341 | 115 | ||||||
Tax benefit from issuance of stock |
| 8 | ||||||
Dividends paid on common shares |
(2,168 | ) | (1,728 | ) | ||||
Dividends paid on preferred shares |
(325 | ) | (730 | ) | ||||
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Net cash provided by financing activities |
45,631 | 71,089 | ||||||
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Net Change in Cash and Cash Equivalent |
21,115 | 2,779 | ||||||
Cash and Cash Equivalents, Beginning of Period |
20,447 | 15,683 | ||||||
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Cash and Cash Equivalents, End of Period |
$ | 41,562 | $ | 18,462 | ||||
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Additional Cash Flows Information |
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Interest paid |
$ | 10,882 | $ | 12,832 | ||||
Income taxes paid |
3,925 | 2,100 | ||||||
Transfer of loans to other real estate owned |
3,486 | 4,273 |
See notes to condensed consolidated financial statements
7
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 1 Accounting Policies
The accompanying condensed consolidated financial statements include the accounts of Horizon Bancorp (Horizon or the Company) and its wholly-owned subsidiaries, including Horizon Bank, N.A. (Bank). All inter-company balances and transactions have been eliminated. The results of operations for the periods ended September 30, 2012 and September 30, 2011 are not necessarily indicative of the operating results for the full year of 2012 or 2011. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizons management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments.
Certain information and note disclosures normally included in Horizons annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizons Annual Report on Form 10-K for 2011 filed with the Securities and Exchange Commission on March 12, 2012. The consolidated condensed balance sheet of Horizon as of December 31, 2011 has been derived from the audited balance sheet as of that date.
Basic earnings per share is computed by dividing net income available to common shareholders (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted-average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following table shows computation of basic and diluted earnings per share.
Three months ended September 30 |
Nine months ended September 30 |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Basic earnings per share |
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Net income |
$ | 4,850 | $ | 3,417 | $ | 14,373 | $ | 9,275 | ||||||||
Less: Preferred stock dividends and accretion of discount |
63 | 710 | 325 | 1,263 | ||||||||||||
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Net income available to common shareholders |
$ | 4,787 | $ | 2,707 | $ | 14,048 | $ | 8,012 | ||||||||
Weighted average common shares outstanding(1)(2) |
8,503,475 | 7,414,043 | 7,758,537 | 7,402,300 | ||||||||||||
Basic earnings per share |
$ | 0.56 | $ | 0.37 | $ | 1.81 | $ | 1.08 | ||||||||
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Diluted earnings per share |
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Net income available to common shareholders |
$ | 4,787 | $ | 2,707 | $ | 14,048 | $ | 8,012 | ||||||||
Weighted average common shares outstanding(1)(2) |
8,503,475 | 7,414,043 | 7,758,537 | 7,402,300 | ||||||||||||
Effect of dilutive securities: |
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Warrants |
269,432 | 163,325 | 231,038 | 167,668 | ||||||||||||
Restricted stock |
30,971 | 4,399 | 19,317 | 13,676 | ||||||||||||
Stock options |
34,782 | 14,803 | 26,105 | 15,307 | ||||||||||||
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Weighted average shares outstanding |
8,838,659 | 7,596,569 | 8,034,996 | 7,598,950 | ||||||||||||
Diluted earnings per share |
$ | 0.54 | $ | 0.36 | $ | 1.75 | $ | 1.05 | ||||||||
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(1) | Adjusted for 3:2 stock split announced on October 16, 2012 payable November 9, 2012 |
(2) | Includes average shares issued for the Heartland acquisition for the three and nine months ending September 30, 2012 |
8
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
At September 30, 2012 and 2011, there were no shares and 66,551 for the three months ended and 12,750 shares and 73,359 shares for the nine months ended, respectively that were not included in the computation of diluted earnings per share because they were non-dilutive.
Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2011 Annual Report on Form 10-K.
Reclassifications
Certain reclassifications have been made to the 2011 consolidated financial statements to be comparable to 2012. These reclassifications had no effect on net income.
Note 2 Acquisition
On July 17, 2012 Horizon closed its acquisition of Heartland Bancshares, Inc. and Horizon Bank N.A.s acquisition of Heartland Community Bank, through mergers effective July 17, 2012. Under the final terms of the acquisition, the exchange ratio was 0.54 shares of Horizons common stock for each share of Heartland common stock outstanding. Heartland shares outstanding at the closing were 1,442,449, and the shares of HBNC common stock issued to Heartland shareholders totaled 778,922. Horizons stock price was $25.25 per share at the close of business on July 17, 2012. Based upon these numbers, the total value of the consideration, including the retirement of TARP, for the acquisition was $26.9 million. For the nine months ended September 30, 2012, the Company had approximately $1.5 million is costs related to the acquisition. These expenses are classified in the other expense section of the income statement primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce cost through economies of scale.
Under the purchase method of accounting, the total estimated purchase price is allocated to Heartlands net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on managements preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the preliminary purchase price for the Heartland acquisition is allocated as follows (in thousands):
ASSETS |
LIABILITIES | |||||||||
Cash and due from banks |
$ | 33,531 | Deposits | |||||||
Investment securities, available for sale |
63,707 | Non-interest bearing | $ | 59,350 | ||||||
NOW accounts | 42,681 | |||||||||
Commercial |
70,343 | Savings and money market | 61,465 | |||||||
Residential mortgage |
20,838 | Certificates of deposits | 47,749 | |||||||
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Consumer |
23,423 | Total deposits |
211,245 | |||||||
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Total loans |
114,604 | |||||||||
Borrowings | 1,186 | |||||||||
Premises and equipment |
2,647 | Subordinated debentures | 1,537 | |||||||
FRB and FHLB stock |
943 | Interest payable | 90 | |||||||
Goodwill |
13,838 | Other liabilities | 4,670 | |||||||
Core deposit intangible |
2,332 | |||||||||
Interest receivable |
820 | |||||||||
Cash value life insurance |
4,012 | |||||||||
Other assets |
9,210 | |||||||||
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Total assets purchased |
$ | 245,644 | Total liabilities assumed | $ | 218,728 | |||||
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Common shares issued |
$ | 19,668 | ||||||||
Retirement of TARP preferred shares |
7,248 | |||||||||
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Total estimated purchase price |
$ | 26,916 | ||||||||
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9
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Prior to the end of the measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation retrospectively.
Of the total estimated purchase price of $26.9 million, $2.3 million has been allocated to core deposit intangible. Additionally, $13.8 million has been allocated to goodwill and $10.8 million of the purchase price is deductible and was assigned to the business assets. The core deposit intangible will be amortized over seven years on a straight line basis.
The Company acquired loans in the acquisition and the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.
Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and nonaccrual status, borrower credit scores and recent loan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.
The Company acquired the $131.1 million loan portfolio at a fair value discount of $16.5 million. The performing portion of the portfolio, $95.4 million, had an estimated fair value or $91.6 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-20.
Preliminary estimates of certain loans, those for which specific credit-related deterioration, since origination, was identified are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected. Many of the acquired loans deemed impaired and considered collateral dependent, with the timing of a sale of loan collateral indeterminate, remain on non-accrual status and have no accretable yield.
The following table details the acquired loans that are accounted for in accordance with ASC 310-30 (formerly Statement of Position SOP 03-3) as of July 17, 2012.
Contractually required principal and interest at acquisition |
$ | 35,574 | ||
Contractual cash flows not expected to be collected (nonaccretable differences) |
9,747 | |||
|
|
|||
Expected cash flows at acquisition |
25,827 | |||
Interest component of expected cash flows (accretable discount) |
2,886 | |||
|
|
|||
Fair value of acquired loans accounted for under ASC 310-30 |
$ | 22,941 | ||
|
|
Pro-forma statements were determined to be impracticable due to the materiality of the transaction.
10
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 3 Securities
The fair value of securities is as follows:
September 30, 2012 | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
Available for sale |
||||||||||||||||
U.S. Treasury and federal agencies |
$ | 46,982 | $ | 394 | $ | | $ | 47,376 | ||||||||
State and municipal |
163,407 | 11,476 | (62 | ) | 174,821 | |||||||||||
Federal agency collateralized mortgage obligations |
97,534 | 1,621 | (114 | ) | 99,041 | |||||||||||
Federal agency mortgage-backed pools |
166,029 | 8,114 | (6 | ) | 174,137 | |||||||||||
Private labeled mortgage-backed pools |
2,207 | 81 | | 2,288 | ||||||||||||
Corporate notes |
32 | 9 | | 41 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available for sale investment securities |
$ | 476,191 | $ | 21,695 | $ | (182 | ) | $ | 497,704 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Held to maturity, State and Municipal |
$ | 6,100 | $ | | $ | | $ | 6,100 | ||||||||
|
|
|
|
|
|
|
|
December 31, 2011 | Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
Available for sale |
||||||||||||||||
U.S. Treasury and federal agencies |
$ | 12,693 | $ | 329 | $ | | $ | 13,022 | ||||||||
State and municipal |
135,011 | 8,950 | (71 | ) | 143,890 | |||||||||||
Federal agency collateralized mortgage obligations |
89,016 | 2,106 | | 91,122 | ||||||||||||
Federal agency mortgage-backed pools |
173,797 | 5,669 | (115 | ) | 179,351 | |||||||||||
Private labeled mortgage-backed pools |
3,518 | 118 | | 3,636 | ||||||||||||
Corporate notes |
32 | | (8 | ) | 24 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available for sale investment securities |
$ | 414,067 | $ | 17,172 | $ | (194 | ) | $ | 431,045 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Held to maturity, State and Municipal |
$ | 7,100 | $ | 34 | $ | | $ | 7,134 | ||||||||
|
|
|
|
|
|
|
|
Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information, and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. While these securities are held in the available for sale portfolio, Horizon intends, and has the ability, to hold them until the earlier of a recovery in fair value or maturity.
Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. At September 30, 2012, no individual investment security had an unrealized loss that was determined to be other-than-temporary.
The unrealized losses on the Companys investments in securities of state and municipal governmental agencies, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at September 30, 2012.
The amortized cost and fair value of securities available for sale and held to maturity at September 30, 2012 and December 31, 2011, 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.
11
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
September 30, 2012 | December 31, 2011 | |||||||||||||||
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
|||||||||||||
Available for sale |
||||||||||||||||
Within one year |
$ | 4,232 | $ | 4,245 | $ | 931 | $ | 940 | ||||||||
One to five years |
45,096 | 46,420 | 30,796 | 31,910 | ||||||||||||
Five to ten years |
97,217 | 102,990 | 51,476 | 55,053 | ||||||||||||
After ten years |
63,876 | 68,583 | 64,533 | 69,033 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
210,421 | 222,238 | 147,736 | 156,936 | |||||||||||||
Federal agency collateralized mortgage obligations |
97,534 | 99,041 | 89,016 | 91,122 | ||||||||||||
Federal agency mortgage-backed pools |
166,029 | 174,137 | 173,797 | 179,351 | ||||||||||||
Private labeled mortgage-backed pools |
2,207 | 2,288 | 3,518 | 3,636 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available for sale investment securities |
$ | 476,191 | $ | 497,704 | $ | 414,067 | $ | 431,045 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Held to maturity |
||||||||||||||||
Within one year |
$ | 6,100 | $ | 6,100 | $ | 7,100 | $ | 7,134 | ||||||||
One to five years |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total held to maturity investment securities |
$ | 6,100 | $ | 6,100 | $ | 7,100 | $ | 7,134 | ||||||||
|
|
|
|
|
|
|
|
The following table shows the gross unrealized losses and the fair value of the Companys investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
September 30, 2012 |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
State and municipal |
$ | 9,535 | $ | (62 | ) | $ | | $ | | $ | 9,535 | $ | (62 | ) | ||||||||||
Federal agency collateralized mortgage obligations |
19,284 | (114 | ) | | | 19,284 | (114 | ) | ||||||||||||||||
Federal agency mortgage-backed pools |
4,479 | (6 | ) | | | 4,479 | (6 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 33,298 | $ | (182 | ) | $ | | $ | | $ | 33,298 | $ | (182 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
December 31, 2011 |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||
State and municipal |
$ | 1,550 | $ | (44 | ) | $ | 1,948 | $ | (27 | ) | $ | 3,498 | $ | (71 | ) | |||||||||
Federal agency mortgage-backed pools |
23,442 | (115 | ) | 23 | | 23,465 | (115 | ) | ||||||||||||||||
Corporate notes |
24 | (8 | ) | | | 24 | (8 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 25,016 | $ | (167 | ) | $ | 1,971 | $ | (27 | ) | $ | 26,987 | $ | (194 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Sales of securities available for sale (Unaudited) |
||||||||||||||||
Proceeds |
$ | 14,991 | $ | 153,299 | $ | 14,991 | $ | 170,689 | ||||||||
Gross gains |
3 | 1,115 | 3 | 1,754 | ||||||||||||
Gross losses |
(1 | ) | | (1 | ) | |
12
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 4 Loans
September 30 2012 |
December 31 2011 |
|||||||
Commercial |
||||||||
Working capital and equipment |
$ | 193,671 | $ | 170,325 | ||||
Real estate, including agriculture |
242,212 | 172,910 | ||||||
Tax exempt |
4,719 | 3,818 | ||||||
Other |
6,812 | 5,323 | ||||||
|
|
|
|
|||||
Total |
447,414 | 352,376 | ||||||
Real estate |
||||||||
14 family |
172,770 | 153,039 | ||||||
Other |
3,783 | 4,102 | ||||||
|
|
|
|
|||||
Total |
176,553 | 157,141 | ||||||
Consumer |
||||||||
Auto |
137,490 | 134,686 | ||||||
Recreation |
5,005 | 4,737 | ||||||
Real estate/home improvement |
30,905 | 27,729 | ||||||
Home equity |
105,960 | 92,249 | ||||||
Unsecured |
4,435 | 3,183 | ||||||
Other |
3,053 | 2,793 | ||||||
|
|
|
|
|||||
Total |
286,848 | 265,377 | ||||||
Mortgage warehouse |
244,233 | 208,299 | ||||||
|
|
|
|
|||||
Total loans |
1,155,048 | 983,193 | ||||||
Allowance for loan losses |
(18,568 | ) | (18,882 | ) | ||||
|
|
|
|
|||||
Loans, net |
$ | 1,136,480 | $ | 964,311 | ||||
|
|
|
|
Commercial
Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Companys commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.
13
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Real Estate and Consumer
With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Mortgage Warehousing
Horizons mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizons agreement with the mortgage company. Each individual mortgage is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company repurchases the loan under its option within the agreement. Due to the repurchase feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.
Based on the agreements with each mortgage company, at any time a mortgage company can repurchase from Horizon their outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company repurchase an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the purchase commitment and the mortgage company would not be able to repurchase its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement.
14
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following table shows the recorded investment of individual loan categories.
September 30, 2012 | Loan Balance |
Interest Due | Deferred Fees / (Costs) |
Recorded Investment |
||||||||||||
Owner occupied real estate |
$ | 168,015 | $ | 614 | $ | 20 | $ | 168,649 | ||||||||
Non owner occupied real estate |
187,953 | 547 | 55 | 188,555 | ||||||||||||
Residential spec homes |
1,130 | 2 | | 1,132 | ||||||||||||
Development & spec land loans |
6,645 | 19 | | 6,664 | ||||||||||||
Commercial and industrial |
83,589 | 390 | 7 | 83,986 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
447,332 | 1,572 | 82 | 448,986 | ||||||||||||
Residential mortgage |
164,720 | 646 | 91 | 165,457 | ||||||||||||
Residential construction |
11,742 | 19 | | 11,761 | ||||||||||||
Mortgage warehouse |
244,233 | 427 | | 244,660 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total real estate |
420,695 | 1,092 | 91 | 421,878 | ||||||||||||
Direct installment |
30,247 | 116 | (346 | ) | 30,017 | |||||||||||
Direct installment purchased |
518 | | | 518 | ||||||||||||
Indirect installment |
128,502 | 373 | | 128,875 | ||||||||||||
Home equity |
128,671 | 620 | (744 | ) | 128,547 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer |
287,938 | 1,109 | (1,090 | ) | 287,957 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans |
1,155,965 | 3,773 | (917 | ) | 1,158,821 | |||||||||||
Allowance for loan losses |
(18,568 | ) | | | (18,568 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loans |
$ | 1,137,397 | $ | 3,773 | $ | (917 | ) | $ | 1,140,253 | |||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2011 | Loan Balance |
Interest Due | Deferred Fees / (Costs) |
Recorded Investment |
||||||||||||
Owner occupied real estate |
$ | 131,893 | $ | 383 | $ | 30 | $ | 132,306 | ||||||||
Non owner occupied real estate |
142,269 | 360 | 94 | 142,723 | ||||||||||||
Residential spec homes |
3,574 | 6 | | 3,580 | ||||||||||||
Development & spec land loans |
8,739 | 16 | | 8,755 | ||||||||||||
Commercial and industrial |
65,774 | 169 | 3 | 65,946 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
352,249 | 934 | 127 | 353,310 | ||||||||||||
Residential mortgage |
150,893 | 513 | 68 | 151,474 | ||||||||||||
Residential construction |
6,181 | 8 | | 6,189 | ||||||||||||
Mortgage warehouse |
208,299 | 427 | | 208,726 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total real estate |
365,373 | 948 | 68 | 366,389 | ||||||||||||
Direct installment |
24,252 | 94 | (360 | ) | 23,986 | |||||||||||
Direct installment purchased |
981 | | | 981 | ||||||||||||
Indirect installment |
127,751 | 420 | (56 | ) | 128,115 | |||||||||||
Home equity |
113,561 | 559 | (752 | ) | 113,368 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer |
266,545 | 1,073 | (1,168 | ) | 266,450 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans |
984,167 | 2,955 | (973 | ) | 986,149 | |||||||||||
Allowance for loan losses |
(18,882 | ) | | | (18,882 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loans |
$ | 965,285 | $ | 2,955 | $ | (973 | ) | $ | 967,267 | |||||||
|
|
|
|
|
|
|
|
15
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 5 Allowance for Loan Losses
The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior one to five years. Management believes the two-year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. The actual allowance for loan loss activity is provided below.
Three Months Ended September 30 |
Nine Months Ended September 30 |
|||||||||||||||
2012 (Unaudited) |
2011 (Unaudited) |
2012 (Unaudited) |
2011 (Unaudited) |
|||||||||||||
Balance at beginning of the period |
$ | 18,374 | $ | 18,586 | $ | 18,882 | $ | 19,064 | ||||||||
Loans charged-off: |
||||||||||||||||
Commercial |
||||||||||||||||
Owner occupied real estate |
92 | 65 | 95 | 189 | ||||||||||||
Non owner occupied real estate |
81 | 196 | 109 | 310 | ||||||||||||
Residential development |
| | | | ||||||||||||
Development & Spec Land Loans |
| | | | ||||||||||||
Commercial and industrial |
221 | 17 | 548 | 227 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
394 | 278 | 752 | 726 | ||||||||||||
Real estate |
||||||||||||||||
Residential mortgage |
247 | 86 | 451 | 837 | ||||||||||||
Residential construction |
| | | | ||||||||||||
Mortgage warehouse |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total real estate |
247 | 86 | 451 | 837 | ||||||||||||
Consumer |
||||||||||||||||
Direct Installment |
90 | 78 | 261 | 480 | ||||||||||||
Direct Installment Purchased |
| | | | ||||||||||||
Indirect Installment |
313 | 494 | 922 | 1,280 | ||||||||||||
Home Equity |
123 | 359 | 1,010 | 1,888 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer |
526 | 931 | 2,193 | 3,648 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans charged-off |
1,167 | 1,295 | 3,396 | 5,211 | ||||||||||||
Recoveries of loans previously charged-off: |
||||||||||||||||
Commercial |
||||||||||||||||
Owner occupied real estate |
| | 352 | 18 | ||||||||||||
Non owner occupied real estate |
| | 7 | | ||||||||||||
Residential development |
| | | | ||||||||||||
Development & Spec Land Loans |
| | | | ||||||||||||
Commercial and industrial |
61 | 9 | 114 | 14 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
61 | 9 | 473 | 32 | ||||||||||||
Real estate |
||||||||||||||||
Residential mortgage |
42 | | 74 | 10 | ||||||||||||
Residential construction |
| | | | ||||||||||||
Mortgage warehouse |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total real estate |
42 | | 74 | 10 | ||||||||||||
Consumer |
||||||||||||||||
Direct Installment |
28 | 16 | 63 | 83 | ||||||||||||
Direct Installment Purchased |
| | | | ||||||||||||
Indirect Installment |
173 | 179 | 563 | 568 | ||||||||||||
Home Equity |
16 | 51 | 100 | 120 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer |
217 | 246 | 726 | 771 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loan recoveries |
320 | 255 | 1,273 | 813 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loans charged-off |
847 | 1,040 | 2,123 | 4,398 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Provision charged to operating expense |
||||||||||||||||
Commercial |
625 | 1,341 | 320 | 1,290 | ||||||||||||
Real estate |
254 | 815 | 900 | 968 | ||||||||||||
Consumer |
162 | (592 | ) | 589 | 2,186 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total provision charged to operating expense |
1,041 | 1,564 | 1,809 | 4,444 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at the end of the period |
$ | 18,568 | $ | 19,110 | $ | 18,568 | $ | 19,110 | ||||||||
|
|
|
|
|
|
|
|
16
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Certain loans are individually evaluated for impairment, and the Companys general practice is to proactively charge down impaired loans to the fair value of the underlying collateral.
Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Companys policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.
For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrowers ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.
The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down or specific allocation of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the value is known but no later than when a loan is 180 days past due. Pursuant to such guidelines, the Company also charges-off unsecured open-end loans when the loan is 90 days past due, and charges down to the net realizable value other secured loans when they are 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off.
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment analysis:
September 30, 2012 | Commercial | Real Estate | Mortgage Warehousing |
Consumer | Total | |||||||||||||||
Allowance For Loan Losses |
||||||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 2,403 | $ | | $ | | $ | | $ | 2,403 | ||||||||||
Collectively evaluated for impairment |
5,655 | 2,974 | 1,716 | 5,820 | 16,165 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total ending allowance balance |
$ | 8,058 | $ | 2,974 | $ | 1,716 | $ | 5,820 | $ | 18,568 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 12,865 | $ | | $ | | $ | | $ | 12,865 | ||||||||||
Collectively evaluated for impairment |
436,121 | 177,218 | 244,660 | 287,957 | 1,145,956 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total ending loans balance |
$ | 448,986 | $ | 177,218 | $ | 244,660 | $ | 287,957 | $ | 1,158,821 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2011 | Commercial | Real Estate | Mortgage Warehousing |
Consumer | Total | |||||||||||||||
Allowance For Loan Losses |
||||||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 2,136 | $ | | $ | | $ | | $ | 2,136 | ||||||||||
Collectively evaluated for impairment |
5,881 | 2,472 | 1,695 | 6,698 | 16,746 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total ending allowance balance |
$ | 8,017 | $ | 2,472 | $ | 1,695 | $ | 6,698 | $ | 18,882 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 7,960 | $ | | $ | | $ | | $ | 7,960 | ||||||||||
Collectively evaluated for impairment |
345,350 | 157,663 | 208,726 | 266,450 | 978,189 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total ending loans balance |
$ | 353,310 | $ | 157,663 | $ | 208,726 | $ | 266,450 | $ | 986,149 | ||||||||||
|
|
|
|
|
|
|
|
|
|
17
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 6 Non-performing Loans and Impaired Loans
The following table presents the nonaccrual, loans past due over 90 days still on accrual, and troubled debt restructured (TDRs) by class of loans:
September 30, 2012 | Nonaccrual | Loans Past Due Over 90 Days Still Accruing |
Non Performing TDRs |
Performing TDRs |
Total Non- Performing Loans |
|||||||||||||||
Commercial |
||||||||||||||||||||
Owner occupied real estate |
$ | 3,887 | $ | | $ | 1,472 | $ | | $ | 5,359 | ||||||||||
Non owner occupied real estate |
3,754 | | 375 | | 4,129 | |||||||||||||||
Residential development |
| | | | | |||||||||||||||
Development & Spec Land Loans |
789 | | | | 789 | |||||||||||||||
Commercial and industrial |
492 | 9 | 801 | | 1,302 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
8,922 | 9 | 2,648 | | 11,579 | |||||||||||||||
Real estate |
||||||||||||||||||||
Residential mortgage |
4,266 | 57 | 2,361 | 1,857 | 8,541 | |||||||||||||||
Residential construction |
| | | 292 | 292 | |||||||||||||||
Mortgage warehouse |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total real estate |
4,266 | 57 | 2,361 | 2,149 | 8,833 | |||||||||||||||
Consumer |
||||||||||||||||||||
Direct Installment |
97 | 1 | | | 98 | |||||||||||||||
Direct Installment Purchased |
| | | | | |||||||||||||||
Indirect Installment |
923 | 42 | | | 965 | |||||||||||||||
Home Equity |
1,679 | | 52 | 832 | 2,563 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Consumer |
2,699 | 43 | 52 | 832 | 3,626 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 15,887 | $ | 109 | $ | 5,061 | $ | 2,981 | $ | 24,038 | ||||||||||
|
|
|
|
|
|
|
|
|
|
December 31, 2011 | Nonaccrual | Loans Past Due Over 90 Days Still Accruing |
Non Performing TDRs |
Performing TDRs |
Total Non- Performing Loans |
|||||||||||||||
Commercial |
||||||||||||||||||||
Owner occupied real estate |
$ | 2,515 | $ | | $ | | $ | | $ | 2,515 | ||||||||||
Non owner occupied real estate |
3,970 | | 152 | | 4,122 | |||||||||||||||
Residential development |
| | | | | |||||||||||||||
Development & Spec Land Loans |
90 | | | | 90 | |||||||||||||||
Commercial and industrial |
330 | | 901 | | 1,231 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
6,905 | | 1,053 | | 7,958 | |||||||||||||||
Real estate |
||||||||||||||||||||
Residential mortgage |
4,550 | | 1,120 | 2,389 | 8,059 | |||||||||||||||
Residential construction |
144 | | | 293 | 437 | |||||||||||||||
Mortgage warehouse |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total real estate |
4,694 | | 1,120 | 2,682 | 8,496 | |||||||||||||||
Consumer |
||||||||||||||||||||
Direct Installment |
256 | 1 | | | 257 | |||||||||||||||
Direct Installment Purchased |
| 4 | | | 4 | |||||||||||||||
Indirect Installment |
926 | 29 | | | 955 | |||||||||||||||
Home Equity |
1,587 | 3 | 25 | 858 | 2,473 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Consumer |
2,769 | 37 | 25 | 858 | 3,689 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 14,368 | $ | 37 | $ | 2,198 | $ | 3,540 | $ | 20,143 | ||||||||||
|
|
|
|
|
|
|
|
|
|
18
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is managements policy to convert the loan from an earning asset to a non-accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is managements policy to place a loan on a non-accrual status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief Operating Officer or the senior collection officer must review all loans placed on non-accrual status. Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Nonaccrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual loan to accrual status.
A loan becomes impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor. The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement. However, if a particular loan has a determinable market value for its collateral, the creditor may use that value. Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral. Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.
Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 1 4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrowers business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to non-accrual status when they are 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, including TDRs, are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.
The Companys TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At September 30, 2012, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of September 30, 2012, the Company had $8.4 million in TDRs and $3.4 million were performing according to the restructured terms. The financial statement impact of non-performing TDRs was not material for the three and nine months ending September 30, 2012. There was $1.3 million of specific reserves allocated to TDRs at September 30, 2012 based on the collateral deficiencies.
19
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Loans transferred and classified as troubled debt restructuring during the nine months ended September 30, 2012 and 2011, segregated by class, are shown in the table below.
September 30, 2012 | September 30, 2011 | |||||||||||||||
Number of Defaults |
Unpaid Principal Balance |
Number of Defaults |
Unpaid Principal Balance |
|||||||||||||
Commercial |
||||||||||||||||
Owner occupied real estate |
3 | $ | 1,472 | | $ | | ||||||||||
Non owner occupied real estate |
3 | 637 | | | ||||||||||||
Residential development |
| | | | ||||||||||||
Development & Spec Land Loans |
| | | | ||||||||||||
Commercial and industrial |
| | 1 | 841 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
6 | 2,109 | 1 | 841 | ||||||||||||
Real estate |
||||||||||||||||
Residential mortgage |
1 | 582 | 2 | 174 | ||||||||||||
Residential construction |
| | | | ||||||||||||
Mortgage warehouse |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total real estate |
1 | 582 | 2 | 174 | ||||||||||||
Consumer |
||||||||||||||||
Direct Installment |
| | | | ||||||||||||
Direct Installment Purchased |
| | | | ||||||||||||
Indirect Installment |
| | | | ||||||||||||
Home Equity |
| | 8 | 724 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Consumer |
| | 8 | 724 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
7 | $ | 2,691 | 11 | $ | 1,739 | ||||||||||
|
|
|
|
|
|
|
|
Troubled debt restructured loans which had payment defaults during the nine months ended September 30, 2012 and 2011, segregated by class, are shown in the table below. Default occurs when a loan is 90 days or more past due or has been transferred to nonaccrual.
September 30, 2012 | September 30, 2011 | |||||||||||||||
Number of Defaults |
Unpaid Principal Balance |
Number of Defaults |
Unpaid Principal Balance |
|||||||||||||
Commercial |
||||||||||||||||
Owner occupied real estate |
3 | $ | 1,473 | | $ | | ||||||||||
Non owner occupied real estate |
2 | 261 | | | ||||||||||||
Residential development |
| | | | ||||||||||||
Development & Spec Land Loans |
| | | | ||||||||||||
Commercial and industrial |
| | 2 | 361 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
5 | 1,734 | 2 | 361 | ||||||||||||
Real estate |
||||||||||||||||
Residential mortgage |
2 | 677 | 2 | 1,143 | ||||||||||||
Residential construction |
| | | | ||||||||||||
Mortgage warehouse |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total real estate |
2 | 677 | 2 | 1,143 | ||||||||||||
Consumer |
||||||||||||||||
Direct Installment |
| | | | ||||||||||||
Direct Installment Purchased |
| | | | ||||||||||||
Indirect Installment |
| | | | ||||||||||||
Home Equity |
| | 2 | 65 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Consumer |
| | 2 | 65 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
7 | $ | 2,411 | 6 | $ | 1,569 | ||||||||||
|
|
|
|
|
|
|
|
20
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following table presents commercial loans individually evaluated for impairment by class of loan:
Three Months Ending | Nine Months Ending | |||||||||||||||||||||||||||
September 30, 2012 | Unpaid Principal Balance |
Recorded Investment |
Allowance For Loan Loss Allocated |
Average Balance in Impaired Loans |
Cash/Accrual Interest Income Recognized |
Average Balance in Impaired Loans |
Cash/Accrual Interest Income Recognized |
|||||||||||||||||||||
With no recorded allowance |
||||||||||||||||||||||||||||
Commercial |
||||||||||||||||||||||||||||
Owner occupied real estate |
$ | 4,457 | $ | 4,460 | $ | | $ | 3,810 | $ | | $ | 1,978 | $ | 3 | ||||||||||||||
Non owner occupied real estate |
2,521 | 2,542 | | 2,429 | 70 | 1,920 | 72 | |||||||||||||||||||||
Residential development |
| | | | | | | |||||||||||||||||||||
Development & Spec Land Loans |
131 | 131 | | 109 | (0 | ) | 37 | | ||||||||||||||||||||
Commercial and industrial |
456 | 471 | | 382 | | 129 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial |
7,565 | 7,604 | | 6,730 | 69 | 4,064 | 75 | |||||||||||||||||||||
With an allowance recorded |
||||||||||||||||||||||||||||
Commercial |
||||||||||||||||||||||||||||
Owner occupied real estate |
903 | 903 | 450 | 910 | (0 | ) | 1,109 | 1 | ||||||||||||||||||||
Non owner occupied real estate |
2,938 | 2,938 | 1,065 | 2,943 | | 2,843 | | |||||||||||||||||||||
Residential development |
| | | | | | | |||||||||||||||||||||
Development & Spec Land Loans |
658 | 658 | 615 | 660 | | 523 | 6 | |||||||||||||||||||||
Commercial and industrial |
801 | 801 | 273 | 801 | | 807 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial |
5,300 | 5,300 | 2,403 | 5,314 | (0 | ) | 5,282 | 7 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 12,865 | $ | 12,904 | $ | 2,403 | $ | 12,044 | $ | 69 | $ | 9,346 | $ | 82 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Three Months Ending | Nine Months Ending | |||||||||||||||||||||||||||
September 30, 2011 | Unpaid Principal Balance |
Recorded Investment |
Allowance For Loan Loss Allocated |
Average Balance in Impaired Loans |
Interest Income Recognized |
Average Balance in Impaired Loans |
Interest Income Recognized |
|||||||||||||||||||||
With no recorded allowance |
||||||||||||||||||||||||||||
Commercial |
||||||||||||||||||||||||||||
Owner occupied real estate |
$ | 1,315 | $ | 1,314 | $ | | $ | 1,224 | $ | 31 | $ | 856 | $ | 32 | ||||||||||||||
Non owner occupied real estate |
2,403 | 2,625 | | 1,683 | 85 | 985 | 89 | |||||||||||||||||||||
Residential development |
| | | | | 9 | | |||||||||||||||||||||
Development & Spec Land Loans |
| 111 | | | | 69 | | |||||||||||||||||||||
Commercial and industrial |
1,154 | 1,156 | | 1,091 | 47 | 1,099 | 47 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial |
4,872 | 5,206 | | 3,998 | 163 | 3,018 |
|
168 |
| |||||||||||||||||||
With an allowance recorded |
||||||||||||||||||||||||||||
Commercial |
||||||||||||||||||||||||||||
Owner occupied real estate |
1,420 | 1,420 | 460 | 1,449 | | 1,234 | | |||||||||||||||||||||
Non owner occupied real estate |
5,499 | 5,538 | 996 | 4,943 | | 4,859 | | |||||||||||||||||||||
Residential development |
| | | | | | | |||||||||||||||||||||
Development & Spec Land Loans |
90 | 90 | 125 | 90 | | 179 | | |||||||||||||||||||||
Commercial and industrial |
234 | 308 | 225 | 284 | | 393 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial |
7,243 | 7,356 | 1,806 | 6,766 | | 6,665 |
|
|
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 12,115 | $ | 12,562 | $ | 1,806 | $ | 10,764 | $ | 163 | $ | 9,683 |
$ |
168 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following table presents the payment status by class of loan:
September 30, 2012 | 30 - 59 Days Past Due |
60 - 89 Days Past Due |
Greater than 90 Days Past Due |
Total Past Due | Loans Not Past Due |
Total | ||||||||||||||||||
Commercial |
||||||||||||||||||||||||
Owner occupied real estate |
$ | 1,008 | $ | 110 | $ | | $ | 1,118 | $ | 166,897 | $ | 168,015 | ||||||||||||
Non owner occupied real estate |
| 123 | | 123 | 187,830 | 187,953 | ||||||||||||||||||
Residential development |
| | | | 1,130 | 1,130 | ||||||||||||||||||
Development & Spec Land Loans |
| | | | 6,645 | 6,645 | ||||||||||||||||||
Commercial and industrial |
433 | 2,373 | 9 | 2,815 | 80,774 | 83,589 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
1,441 | 2,606 | 9 | 4,056 | 443,276 | 447,332 | ||||||||||||||||||
Real estate |
||||||||||||||||||||||||
Residential mortgage |
1,300 | 197 | 57 | 1,554 | 163,166 | 164,720 | ||||||||||||||||||
Residential construction |
| | | | 11,742 | 11,742 | ||||||||||||||||||
Mortgage warehouse |
| | | | 244,233 | 244,233 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total real estate |
1,300 | 197 | 57 | 1,554 | 419,141 | 420,695 | ||||||||||||||||||
Consumer |
||||||||||||||||||||||||
Direct Installment |
162 | 243 | 1 | 406 | 29,841 | 30,247 | ||||||||||||||||||
Direct Installment Purchased |
| | | | 518 | 518 | ||||||||||||||||||
Indirect Installment |
1,124 | 101 | 42 | 1,267 | 127,235 | 128,502 | ||||||||||||||||||
Home Equity |
1,038 | 139 | | 1,177 | 127,494 | 128,671 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer |
2,324 | 483 | 43 | 2,850 | 285,088 | 287,938 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 5,065 | $ | 3,286 | $ | 109 | $ | 8,460 | $ | 1,147,505 | $ | 1,155,965 | ||||||||||||
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|
|
|
|
|
|
|
|
|
|
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December 31, 2011 | 30 - 59 Days Past Due |
60 - 89 Days Past Due |
Greater than 90 Days Past Due |
Total Past Due | Loans Not Past Due |
Total | ||||||||||||||||||
Commercial |
||||||||||||||||||||||||
Owner occupied real estate |
$ | 89 | $ | 168 | $ | | $ | 257 | $ | 131,636 | $ | 131,893 | ||||||||||||
Non owner occupied real estate |
228 | | | 228 | 142,041 | 142,269 | ||||||||||||||||||
Residential development |
| | | | 3,574 | 3,574 | ||||||||||||||||||
Development & Spec Land Loans |
| | | | 8,739 | 8,739 | ||||||||||||||||||
Commercial and industrial |
34 | 22 | | 56 | 65,718 | 65,774 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
351 | 190 | | 541 | 351,708 | 352,249 | ||||||||||||||||||
Real estate |
||||||||||||||||||||||||
Residential mortgage |
411 | | | 411 | 150,482 | 150,893 | ||||||||||||||||||
Residential construction |
| | | | 6,181 | 6,181 | ||||||||||||||||||
Mortgage warehouse |
| | | | 208,299 | 208,299 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total real estate |
411 | | | 411 | 364,962 | 365,373 | ||||||||||||||||||
Consumer |
||||||||||||||||||||||||
Direct Installment |
164 | 22 | 1 | 187 | 24,065 | 24,252 | ||||||||||||||||||
Direct Installment Purchased |
7 | 14 | 4 | 25 | 956 | 981 | ||||||||||||||||||
Indirect Installment |
1,333 | 335 | 29 | 1,697 | 126,054 | 127,751 | ||||||||||||||||||
Home Equity |
363 | 92 | 3 | 458 | 113,103 | 113,561 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer |
1,867 | 463 | 37 | 2,367 | 264,178 | 266,545 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 2,629 | $ | 653 | $ | 37 | $ | 3,319 | $ | 980,848 | $ | 984,167 | ||||||||||||
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|
The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.
Horizon Banks processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re-evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade.
| For new and renewed commercial loans, the Banks Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure of $500,000 or greater are validated by the Loan Committee, which is chaired by the Chief Operating Officer (COO). |
22
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
| Commercial loan officers are responsible for reviewing their loan portfolios and report any adverse material change to the COO or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the COO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the COO however, lenders must present their factual information to either the Loan Committee or the COO when recommending an upgrade. |
| The COO meets weekly with loan officers to discuss the status of past-due loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade. |
| Monthly, senior management meets with the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, and collateral repossessions. The information reviewed in this meeting acts as a precursor for developing managements analysis of the adequacy of the Allowance for Loan and Lease Losses. |
For real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non-accrual, or are classified as a TDR are graded Substandard. After being 90 days delinquent a loan is charged off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on non-accrual. Occasionally a mortgage loan may be graded as Special Mention. When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass.
Horizon Bank employs an eight-grade rating system to determine the credit quality of commercial loans. The first four grades represent acceptable quality, and the last four grades mirror the criticized and classified grades used by the bank regulatory agencies (special mention, substandard, doubtful, and loss). The loan grade definitions are detailed below.
Risk Grade 1: Excellent (Pass)
Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.
Risk Grade 2: Good (Pass)
Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit history; or loans to publicly held companies with current long-term debt ratings of Baa or better.
Risk Grade 3: Satisfactory (Pass)
Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:
23
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
| At inception, the loan was properly underwritten, did not possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory; |
| At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss. |
| The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance. |
| During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted. |
Risk Grade 4: Satisfactory/Monitored (Pass)
Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans due to weak balance sheets, marginal earnings or cash flow, lack of financial information, weakening markets, insufficient or questionable collateral coverage or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision. Loans that normally fall into this grade include construction of commercial real estate buildings, land development and subdivisions, and rental properties that have not attained stabilization.
Risk Grade 5: Special Mention
Loans which possess some credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered potential, not defined, impairments to the primary source of repayment. These loans may be to borrowers with adverse trends in financial performance, collateral value and/or marketability, or balance sheet strength.
Risk Grade 6: Substandard
One or more of the following characteristics may be exhibited in loans classified Substandard:
| Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss. |
| Loans are inadequately protected by the current net worth and paying capacity of the obligor. |
| The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees. |
| Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected. |
| Unusual courses of action are needed to maintain a high probability of repayment. |
| The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments. |
| The lender is forced into a subordinated or unsecured position due to flaws in documentation. |
| Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms. |
24
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
| The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan. |
| There is a significant deterioration in market conditions to which the borrower is highly vulnerable. |
Risk Grade 7: Doubtful
One or more of the following characteristics may be present in loans classified Doubtful:
| Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable. |
| The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment. |
| The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known. |
Risk Grade 8: Loss
Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.
25
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following table presents loans by credit grades.
September 30, 2012 | Pass | Special Mention |
Substandard | Doubtful | Total | |||||||||||||||
Commercial |
||||||||||||||||||||
Owner occupied real estate |
$ | 137,121 | $ | 8,826 | $ | 17,632 | $ | 4,436 | $ | 168,015 | ||||||||||
Non owner occupied real estate |
153,131 | 20,694 | 13,008 | 1,120 | 187,953 | |||||||||||||||
Residential development |
434 | | 696 | | 1,130 | |||||||||||||||
Development & Spec Land Loans |
3,637 | 251 | 2,627 | 130 | 6,645 | |||||||||||||||
Commercial and industrial |
74,279 | 4,339 | 4,715 | 256 | 83,589 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
368,602 | 34,110 |