Edgar Filing: HORIZON BANCORP /IN/

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Form 10-Q

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)

Registrant’s 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):

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 issuer’s 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

INDEX


PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Income	4

	Condensed Consolidated Statements of Comprehensive Income	5

	Condensed Consolidated Statement of Stockholders’ Equity	6

	Condensed Consolidated Statements of Cash Flows	7

	Notes to Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	51

Item 4.	Controls and Procedures	51

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	52

Item 1A.	Risk Factors	52

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 3.	Defaults Upon Senior Securities	52

Item 4.	Mine Safety Disclosures	52

Item 5.	Other Information	52

Item 6.	Exhibits	53

Signatures		54

Index To Exhibits		55

PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)


	September 30 2012 (Unaudited)		December 31 2011
Assets
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

Total assets	$	1,846,776	$	1,547,162

Liabilities
Deposits
Non-interest bearing	$	211,935	$	130,673
Interest bearing		1,095,036		879,192

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

Total liabilities		1,690,914		1,425,697

Commitments and contingent liabilities
Stockholders’ Equity
Preferred stock, $.01 par value, $1,000 liquidation value Authorized, 1,000,000 Series B shares Issued 12,500 and 12,500 shares		12,500		12,500
Common stock, no par value Authorized, 22,500,000 shares Issued, 8,685,490 and 7,450,794 shares Outstanding, 8,617,735 and 7,421,544 shares		—		—
Additional paid-in capital		31,894		11,736
Retained earnings		101,267		89,387
Accumulated other comprehensive income		10,201		7,842

Total stockholders’ equity		155,862		121,465

Total liabilities and stockholders’ equity	$	1,846,776	$	1,547,162

See notes to condensed consolidated financial statements

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)
Interest Income
Loans receivable	$	15,527		$	12,481		$	42,386		$	36,260
Investment securities
Taxable		2,178			2,542			6,738			7,828
Tax exempt		1,014			988			2,944			3,066

Total interest income		18,719			16,011			52,068			47,154

Interest Expense
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

Total interest expense		3,720			4,020			10,865			12,633

Net Interest Income		14,999			11,991			41,203			34,521
Provision for loan losses		1,041			1,564			1,809			4,444

Net Interest Income after Provision for Loan Losses		13,958			10,427			39,394			30,077

Other Income
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

Total other income		7,710			6,538			19,407			15,300

Other Expenses
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

Total other expenses		14,840			12,313			38,180			33,058

Income Before Income Tax		6,828			4,652			20,621			12,319
Income tax expense		1,978			1,235			6,248			3,044

Net Income		4,850			3,417			14,373			9,275
Preferred stock dividend and discount accretion		(63	)		(710	)		(325	)		(1,263	)

Net Income Available to Common Shareholders	$	4,787		$	2,707		$	14,048		$	8,012

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

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)
Net Income	$	4,850		$	3,417		$	14,373		$	9,275

Other Comprehensive Income
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

		1,426			771			2,359			5,603

Comprehensive Income	$	6,276		$	4,188		$	16,732		$	14,878

See notes to condensed consolidated financial statements

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	)

Balances, September 30, 2012	$	12,500	$	31,894	$	101,267		$	10,201	$	155,862

See notes to condensed consolidated financial statements

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)


	Nine Months Ended September 30
	2012 (Unaudited)			2011 (Unaudited)
Operating Activities
Net income	$	14,373		$	9,275
Items not requiring (providing) cash
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
Interest receivable		(757	)		(132	)
Interest payable		(107	)		(199	)
Other assets		217			(1,590	)
Other liabilities		(2,112	)		1,416

Net cash provided by operating activities		17,458			14,865

Investing Activities
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			—

Net cash used in by investing activities		(41,974	)		(83,175	)

Financing Activities
Net change in
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	)

Net cash provided by financing activities		45,631			71,089

Net Change in Cash and Cash Equivalent		21,115			2,779
Cash and Cash Equivalents, Beginning of Period		20,447			15,683

Cash and Cash Equivalents, End of Period	$	41,562		$	18,462

Additional Cash Flows Information
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

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 Horizon’s 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 Horizon’s 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 Horizon’s 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
	2012		2011		2012		2011
	(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Basic earnings per share
Net income	$	4,850	$	3,417	$	14,373	$	9,275
Less: Preferred stock dividends and accretion of discount		63		710		325		1,263

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

Diluted earnings per share
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:
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

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

⁽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

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 Horizon’s 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. Horizon’s 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 Heartland’s net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on management’s 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

Consumer		23,423	Total deposits		211,245

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

Total assets purchased	$	245,644	Total liabilities assumed	$	218,728

Common shares issued	$	19,668
Retirement of TARP preferred shares		7,248

Total estimated purchase price	$	26,916

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.

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 Company’s 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.

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 Company’s 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	)		—

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
1–4 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 Company’s 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.

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

Horizon’s 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 Horizon’s 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.

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

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

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 Company’s 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 Company’s 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 borrower’s 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

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 TDR’s		Performing TDR’s		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 TDR’s		Performing TDR’s		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

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 management’s 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 management’s 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 borrower’s 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 Company’s 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.

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

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

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


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

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

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

Total consumer		1,867		463		37		2,367		264,178		266,545


Total	$	2,629	$	653	$	37	$	3,319	$	980,848	$	984,167

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 Bank’s 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 Bank’s 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).

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 management’s 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:

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.

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.

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

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