FORM 10-Q
Table of Contents

 

 

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 June 30, 2013

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):

 

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 issuer’s classes of common stock, as of the latest practicable date: 8,695,721 shares of Common Stock, no par value, at August 8, 2013.

 

 

 


Table of Contents

HORIZON BANCORP

FORM 10-Q

INDEX

 

PART I. FINANCIAL INFORMATION

  

Item 1.

  Financial Statements   
  Condensed Consolidated Balance Sheets      3   
  Condensed Consolidated Statements of Income (Loss)      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

  

Index To Exhibits

  

 

2


Table of Contents

PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)

 

     June 30      December 31  
     2013      2012  
     (Unaudited)         

Assets

     

Cash and due from banks

   $ 31,735       $ 30,735   

Investment securities, available for sale

     482,453         482,801   

Investment securities, held to maturity

     9,910         —     

Loans held for sale

     14,710         13,744   

Loans, net of allowance for loan losses of $18,880 and $18,270

     1,098,786         1,172,447   

Premises and equipment

     43,362         42,184   

Federal Reserve and Federal Home Loan Bank stock

     14,184         13,333   

Goodwill

     19,748         19,748   

Other intangible assets

     3,667         4,048   

Interest receivable

     7,749         7,716   

Cash value life insurance

     35,701         35,192   

Other assets

     23,902         26,279   
  

 

 

    

 

 

 

Total assets

   $ 1,785,907       $ 1,848,227   
  

 

 

    

 

 

 

Liabilities

     

Deposits

     

Non-interest bearing

   $ 213,700       $ 209,200   

Interest bearing

     1,083,556         1,084,953   
  

 

 

    

 

 

 

Total deposits

     1,297,256         1,294,153   

Borrowings

     282,837         345,764   

Subordinated debentures

     32,409         32,331   

Interest payable

     931         560   

Other liabilities

     12,309         16,451   
  

 

 

    

 

 

 

Total liabilities

     1,625,742         1,689,259   
  

 

 

    

 

 

 

Commitments and contingent liabilities

     

Stockholders’ Equity

     

Preferred stock, Authorized, 1,000,000 shares Series B shares $.01 par value, $1,000 liquidation value Issued 12,500 shares

     12,500         12,500   

Common stock, no par value Authorized, 22,500,000 shares Issued, 8,693,471 shares Outstanding, 8,617,466 shares

     —           —     

Additional paid-in capital

     32,108         31,965   

Retained earnings

     114,398         105,402   

Accumulated other comprehensive income

     1,159         9,101   
  

 

 

    

 

 

 

Total stockholders’ equity

     160,165         158,968   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 1,785,907       $ 1,848,227   
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

 

     Three Months Ended June 30     Six Months Ended June 30  
     2013     2012     2013     2012  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Interest Income

        

Loans receivable

   $ 16,906      $ 13,327      $ 33,346      $ 26,859   

Investment securities

        

Taxable

     2,047        2,246        4,069        4,560   

Tax exempt

     1,024        950        1,991        1,930   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     19,977        16,523        39,406        33,349   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Deposits

     1,445        1,526        2,925        3,165   

Borrowed funds

     1,456        1,519        2,904        3,038   

Subordinated debentures

     501        472        992        942   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     3,402        3,517        6,821        7,145   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     16,575        13,006        32,585        26,204   

Provision for loan losses

     729        209        2,813        768   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Loan Losses

     15,846        12,797        29,772        25,436   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Income

        

Service charges on deposit accounts

     988        763        1,901        1,475   

Wire transfer fees

     203        213        393        395   

Interchange fees

     1,060        714        1,926        1,342   

Fiduciary activities

     1,047        982        2,187        1,957   

Gain on sale of investment securities (includes $0 and $368 for the three and six months ended 2013 and $0 for the three and six months ended 2012, respectively, related to accumulated other comprehensive earnings reclasifications)

     —          —          368        —     

Gain on sale of mortgage loans

     2,807        3,411        5,913        5,685   

Mortgage servicing income net of impairment

     302        170        465        260   

Increase in cash value of bank owned life insurance

     257        235        509        460   

Other income

     185        67        647        123   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     6,849        6,555        14,309        11,697   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Expense

        

Salaries and employee benefits

     7,721        6,539        15,225        12,502   

Net occupancy expenses

     1,295        976        2,606        2,030   

Data processing

     818        603        1,418        1,129   

Professional fees

     454        583        953        1,117   

Outside services and consultants

     486        526        1,198        997   

Loan expense

     1,402        866        2,516        1,568   

FDIC insurance expense

     268        250        551        507   

Other losses

     163        162        91        192   

Other expense

     2,188        1,675        4,216        3,298   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     14,795        12,180        28,774        23,340   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Tax

     7,900        7,172        15,307        13,793   

Income tax expense (includes $0 and $129 for the three and six months ended 2013 and $0 for the three and six months ended 2012, respectively, related to income tax expense from reclassification items)

     2,235        2,262        4,331        4,270   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

     5,665        4,910        10,976        9,523   

Preferred stock dividend and discount accretion

     (96     (106     (242     (263
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Available to Common Shareholders

   $ 5,569      $ 4,804      $ 10,734      $ 9,260   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic Earnings Per Share

   $ 0.65      $ 0.65      $ 1.25      $ 1.25   

Diluted Earnings Per Share

     0.62        0.62        1.20        1.21   

See notes to condensed consolidated financial statements

 

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HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Dollar Amounts in Thousands)

 

     Three Months Ended June 30     Six Months Ended June 30  
     2013     2012     2013     2012  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Net Income

   $ 5,665      $ 4,910      $ 10,976      $ 9,523   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss)

        

Change in fair value of derivative instruments:

        

Change in fair value of derivative instruments for the period

     1,582        (1,208     2,020        (645

Income tax effect

     (554     423        (707     226   
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from derivative instruments

     1,028        (785     1,313        (419

Change in securities available-for-sale:

        

Unrealized appreciation (depreciation) for the period

     (12,168     1,211        (14,607     2,080   

Reclassification adjustment for securities gains realized in income

     —          —          368        —     

Income tax effect

     4,259        (424     4,984        (728
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on available-for-sale securities

     (7,909     787        (9,255     1,352   

Other Comprehensive Income (Loss), Net of Tax

     (6,881     2        (7,942     933   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income (Loss)

   $ (1,216   $ 4,912      $ 3,034      $ 10,456   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

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Table of Contents

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, 2013

   $ 12,500       $ 31,965       $ 105,402      $ 9,101      $ 158,968   

Net income

           10,976          10,976   

Other comprehensive income (loss), net of tax

             (7,942     (7,942

Amortization of unearned compensation

        127             127   

Stock option expense

        16             16   

Cash dividends on preferred stock (3.87%)

           (242       (242

Cash dividends on common stock ($.20 per share)

           (1,738       (1,738
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances, June 30, 2013

   $ 12,500       $ 32,108       $ 114,398      $ 1,159      $ 160,165   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

 

     Six Months Ended June 30  
     2013
(Unaudited)
    2012
(Unaudited)
 

Operating Activities

    

Net income

   $ 10,976      $ 9,523   

Items not requiring (providing) cash

    

Provision for loan losses

     2,813        768   

Depreciation and amortization

     1,686        1,298   

Share based compensation

     16        17   

Mortgage servicing rights impairment (recovery)

     (135     (64

Premium amortization on securities available for sale, net

     1,540        1,410   

Gain on sale of investment securities

     (368     —     

Gain on sale of mortgage loans

     (5,913     (5,685

Proceeds from sales of loans

     202,947        184,317   

Loans originated for sale

     (198,000     (178,632

Change in cash value of life insurance

     (509     (459

(Gain) loss on sale of other real estate owned

     (277     26   

Net change in

    

Interest receivable

     (33     (14

Interest payable

     371        315   

Other assets

     7,101        (464

Other liabilities

     (983     260   
  

 

 

   

 

 

 

Net cash provided by operating activities

     21,232        12,616   
  

 

 

   

 

 

 

Investing Activities

    

Purchases of securities available for sale

     (97,983     (54,618

Proceeds from sales, maturities, calls, and principal repayments of securities available for sale

     82,920        50,718   

Purchase of securities held to maturity

     (9,910     —     

Proceeds from maturities of securities held to maturity

     —          1,000   

Purchase of Federal Reserve Bank stock

     (851     —     

Net change in loans

     67,621        (11,431

Proceeds on the sale of OREO and repossessed assets

     2,053        2,991   

Purchases of premises and equipment

     (2,356     (2,324
  

 

 

   

 

 

 

Net cash provided by (used in) by investing activities

     41,494        (13,664
  

 

 

   

 

 

 

Financing Activities

    

Net change in

    

Deposits

     3,103        35,924   

Borrowings

     (62,849     (30,185

Proceeds from issuance of stock

     —          166   

Dividends paid on common shares

     (1,738     (1,298

Dividends paid on preferred shares

     (242     (263
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (61,726     4,344   
  

 

 

   

 

 

 

Net Change in Cash and Cash Equivalent

     1,000        3,296   

Cash and Cash Equivalents, Beginning of Period

     30,735        20,447   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 31,735      $ 23,743   
  

 

 

   

 

 

 

Additional Cash Flows Information

    

Interest paid

   $ 6,450      $ 6,829   

Income taxes paid

     3,100        3,925   

Transfer of loans to other real estate owned

     1,381        1,224   

See notes to condensed consolidated financial statements

 

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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 June 30, 2013 and June 30, 2012 are not necessarily indicative of the operating results for the full year of 2013 or 2012. 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 2012 filed with the Securities and Exchange Commission on March 12, 2013. The consolidated condensed balance sheet of Horizon as of December 31, 2012 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      Six months ended  
     June 30      June 30  
     2013      2012      2013      2012  
     (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Basic earnings per share

           

Net income

   $ 5,665       $ 4,910       $ 10,976       $ 9,523   

Less: Preferred stock dividends and accretion of discount

     96         106         242         263   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 5,569       $ 4,804       $ 10,734       $ 9,260   

Weighted average common shares outstanding(1)(2)

     8,617,466         7,434,537         8,617,466         7,428,699   

Basic earnings per share

   $ 0.65       $ 0.65       $ 1.25       $ 1.25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

           

Net income available to common shareholders

   $ 5,569       $ 4,804       $ 10,734       $ 9,260   

Weighted average common shares outstanding(1)(2)

     8,617,466         7,434,537         8,617,466         7,428,699   

Effect of dilutive securities:

           

Warrants

     287,815         238,512         290,550         204,770   

Restricted stock

     35,263         26,373         35,411         18,561   

Stock options

     33,559         29,097         33,981         22,244   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     8,974,103         7,728,519         8,977,408         7,674,273   

Diluted earnings per share

   $ 0.62       $ 0.62       $ 1.20       $ 1.21   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Adjusted for 3:2 stock split on November 9, 2012

(2)

Includes average shares issued for the Heartland acquisition for the three and six months ending June 30, 2013

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Table Dollar Amounts in Thousands, Except Per Share Data)

 

At June 30, 2013 and 2012, there were 46,760 shares and 12,750 shares, respectively, which 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, 2012 Annual Report on Form 10-K.

Reclassifications

Certain reclassifications have been made to the 2012 consolidated financial statements to be comparable to 2013. 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 as of that date. Under the final terms of the acquisition, the exchange ratio was 0.81 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 Horizon common stock issued to Heartland shareholders totaled 1,168,383. Horizon’s stock price was $16.83 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 year ended December 31, 2012, the Company had approximately $1.5 million in costs related to the acquisition. These expenses are classified in the non-interest 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 has the opportunity to increase its deposit base and reduce transaction costs. The Company also expects to continue reducing costs 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

  

Cash and due from banks

   $ 33,531   

Investment securities, available for sale

     63,707   

Commercial

     70,343   

Residential mortgage

     20,838   

Consumer

     23,423   
  

 

 

 

Total loans

     114,604   

Premises and equipment

     2,647   

FRB and FHLB stock

     943   

Goodwill

     13,838   

Core deposit intangible

     2,332   

Interest receivable

     820   

Cash value life insurance

     4,012   

Other assets

     9,210   
  

 

 

 

Total assets purchased

   $ 245,644   
  

 

 

 

Common shares issued

   $ 19,668   

Retirement of TARP preferred shares

     7,248   
  

 

 

 

Total estimated purchase price

   $ 26,916   
  

 

 

 

LIABILITIES

  

Deposits

  

Non-interest bearing

   $ 59,350   

NOW accounts

     42,681   

Savings and money market

     61,465   

Certificates of deposits

     47,749   
  

 

 

 

Total deposits

     211,245   

Borrowings

     1,186   

Subordinated debentures

     1,537   

Interest payable

     90   

Other liabilities

     4,670   
  

 

 

 

Total liabilities assumed

   $ 218,728   
  

 

 

 
 

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Table Dollar Amounts in Thousands, Except Per Share Data)

 

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 of $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.

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)

     5,264   
  

 

 

 

Expected cash flows at acquisition

     30,310   

Interest component of expected cash flows (accretable discount)

     7,494   
  

 

 

 

Fair value of acquired loans accounted for under ASC 310-30

   $ 22,816   
  

 

 

 

Pro-forma statements were determined to be impracticable due to the materiality of the transaction.

The carrying amount of those loans is included in the balance sheet amounts of loans receivable at June 30, 2013. The amounts of loans at June 30, 2013, are as follows:

 

Commercial

   $ 52,469   

Real estate

     13,848   

Consumer

     13,494   
  

 

 

 

Outstanding balance

   $ 79,811   
  

 

 

 

Carrying amount, net of allowance of $404

   $ 79,407   
  

 

 

 

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Table Dollar Amounts in Thousands, Except Per Share Data)

 

Accretable yield, or income expected to be collected, is as follows:

 

Balance at December 31, 2012

   $ 6,111   

Additions

     —     

Accretion

     (752

Reclassification from nonaccreatable difference

     —     

Disposals

     (1,296
  

 

 

 

Balance at June 30, 2013

   $ 4,063   
  

 

 

 

During the six months ended June 30, 2013, the Company increased the allowance for loan losses by a charge to the income statement of $1.5 million. No allowances for loan losses were reversed for the six months ended 2013.

Note 3 – Securities

The fair value of securities is as follows:

 

            Gross      Gross        
     Amortized      Unrealized      Unrealized     Fair  
June 30, 2013    Cost      Gains      Losses     Value  

Available for sale

          

U.S. Treasury and federal agencies

   $ 39,071       $ 150       $ (614   $ 38,607   

State and municipal

     176,838         5,949         (2,420     180,367   

Federal agency collateralized mortgage obligations

     108,607         1,366         (1,170     108,803   

Federal agency mortgage-backed pools

     151,146         3,583         (1,652     153,077   

Private labeled mortgage-backed pools

     1,502         52         —          1,554   

Corporate notes

     32         13         —          45   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale investment securities

   $ 477,196       $ 11,113       $ (5,856   $ 482,453   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held to maturity, State and Municipal

   $ 9,910       $ —         $ —        $ 9,910   
  

 

 

    

 

 

    

 

 

   

 

 

 
            Gross      Gross        
     Amortized      Unrealized      Unrealized     Fair  
December 31, 2012    Cost      Gains      Losses     Value  

Available for sale

          

U.S. Treasury and federal agencies

   $ 51,458       $ 351       $ (30   $ 51,779   

State and municipal

     162,147         10,842         (84     172,905   

Federal agency collateralized mortgage obligations

     95,337         1,533         (39     96,831   

Federal agency mortgage-backed pools

     152,372         6,847         (15     159,204   

Private labeled mortgage-backed pools

     1,960         71         —          2,031   

Corporate notes

     32         19         —          51   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale investment securities

   $ 463,306       $ 19,663       $ (168   $ 482,801   
  

 

 

    

 

 

    

 

 

   

 

 

 

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 June 30, 2013, no individual investment security had an unrealized loss that was determined to be other-than-temporary.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Table Dollar Amounts in Thousands, Except Per Share Data)

 

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 June 30, 2013.

The amortized cost and fair value of securities available for sale and held to maturity at June 30, 2013 and December 31, 2012, 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.

 

     June 30, 2013      December 31, 2012  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Available for sale

           

Within one year

   $ 4,163       $ 4,184       $ 4,358       $ 4,368   

One to five years

     43,560         44,113         49,415         50,673   

Five to ten years

     98,188         100,398         98,551         104,258   

After ten years

     70,030         70,324         61,313         65,436   
  

 

 

    

 

 

    

 

 

    

 

 

 
     215,941         219,019         213,637         224,735   

Federal agency collateralized mortgage obligations

     108,607         108,803         95,337         96,831   

Federal agency mortgage-backed pools

     151,146         153,077         152,372         159,204   

Private labeled mortgage-backed pools

     1,502         1,554         1,960         2,031   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 477,196       $ 482,453       $ 463,306       $ 482,801   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

Within one year

   $ 9,910       $ 9,910       $ —         $ —     

One to five years

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 9,910       $ 9,910       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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  

June 30, 2013

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. Treasury and federal agencies

   $ 27,871       $ (614   $ —         $ —        $ 27,871       $ (614

State and municipal

     55,862         (2,403     1,141         (17     57,003         (2,420

Federal agency collateralized mortgage obligations

     51,644         (1,170     —           —          51,644         (1,170

Federal agency mortgage-backed pools

     48,313         (1,652     —           —          48,313         (1,652
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 183,690       $ (5,839   $ 1,141       $ (17   $ 184,831       $ (5,856
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 Months     12 Months or More     Total  

December 31, 2012

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. Treasury and federal agencies

   $ 13,064       $ (30   $ —         $ —        $ 13,064       $ (30

State and municipal

     11,928         (84     —           —          11,928         (84

Federal agency collateralized mortgage obligations

     12,719         (39     —           —          12,719         (39

Federal agency mortgage-backed pools

     4,126         (15     —           —          4,126         (15
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 41,837       $ (168   $ —         $ —        $ 41,837       $ (168
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Table Dollar Amounts in Thousands, Except Per Share Data)

 

 

     Three months ended June 30      Six months ended June 30  
     2013      2012      2013     2012  

Sales of securities available for sale (Unaudited)

          

Proceeds

   $ —         $ —         $ 23,485      $ —     

Gross gains

     —           —           376        —     

Gross losses

     —           —           (8     —     

Note 4 Loans

 

     June 30
2013
    December 31
2012
 

Commercial

    

Working capital and equipment

   $ 235,315      $ 198,805   

Real estate, including agriculture

     249,220        247,108   

Tax exempt

     4,275        4,579   

Other

     13,420        9,979   
  

 

 

   

 

 

 

Total

     502,230        460,471   

Real estate

    

1–4 family

     179,007        185,940   

Other

     3,603        3,774   
  

 

 

   

 

 

 

Total

     182,610        189,714   

Consumer

    

Auto

     137,161        142,149   

Recreation

     5,185        5,163   

Real estate/home improvement

     29,415        29,989   

Home equity

     99,839        104,974   

Unsecured

     3,793        4,194   

Other

     2,471        2,615   
  

 

 

   

 

 

 

Total

     277,864        289,084   

Mortgage warehouse

     154,962        251,448   
  

 

 

   

 

 

 

Total loans

     1,117,666        1,190,717   

Allowance for loan losses

     (18,880     (18,270
  

 

 

   

 

 

 

Loans, net

   $ 1,098,786      $ 1,172,447   
  

 

 

   

 

 

 

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

 

13


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Table Dollar Amounts in Thousands, Except Per Share Data)

 

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.

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.

 

14


Table of Contents

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.

 

     Loan            Deferred     Recorded  
June 30, 2013    Balance     Interest Due      Fees / (Costs)     Investment  

Owner occupied real estate

   $ 159,379      $ 316       $ 210      $ 159,905   

Non owner occupied real estate

     233,203        178         446        233,827   

Residential spec homes

     245        —           —          245   

Development & spec land loans

     12,988        36         21        13,045   

Commercial and industrial

     95,649        804         89        96,542   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial

     501,464        1,334         766        503,564   

Residential mortgage

     174,032        631         445        175,108   

Residential construction

     8,133        9         —          8,142   

Mortgage warehouse

     154,962        480         —          155,442   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total real estate

     337,127        1,120         445        338,692   

Direct installment

     28,099        102         (252     27,949   

Direct installment purchased

     358        —           —          358   

Indirect installment

     128,647        343         —          128,990   

Home equity

     120,547        558         465        121,570   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer

     277,651        1,003         213        278,867   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total loans

     1,116,242        3,457         1,424        1,121,123   

Allowance for loan losses

     (18,880     —           —          (18,880
  

 

 

   

 

 

    

 

 

   

 

 

 

Net loans

   $ 1,097,362      $ 3,457       $ 1,424      $ 1,102,243   
  

 

 

   

 

 

    

 

 

   

 

 

 
     Loan            Deferred     Recorded  
December 31, 2012    Balance     Interest Due      Fees / (Costs)     Investment  

Owner occupied real estate

   $ 162,694      $ 503       $ 485      $ 163,682   

Non owner occupied real estate

     201,763        467         276        202,506   

Residential spec homes

     1,056        8         —          1,064   

Development & spec land loans

     6,963        11         —          6,974   

Commercial and industrial

     87,082        380         152        87,614   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial

     459,558        1,369         913        461,840   

Residential mortgage

     181,450        565         583        182,598   

Residential construction

     7,681        13         —          7,694   

Mortgage warehouse

     251,448        480         —          251,928   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total real estate

     440,579        1,058         583        442,220   

Direct installment

     27,831        115         (204     27,742   

Direct installment purchased

     429        —           —          429   

Indirect installment

     133,481        370         —          133,851   

Home equity

     126,588        605         959        128,152   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer

     288,329        1,090         755        290,174   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total loans

     1,188,466        3,517         2,251        1,194,234   

Allowance for loan losses

     (18,270     —           —          (18,270
  

 

 

   

 

 

    

 

 

   

 

 

 

Net loans

   $ 1,170,196      $ 3,517       $ 2,251      $ 1,175,964   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

15


Table of Contents

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 five-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     Six Months Ended  
     June 30     June 30  
     2013     2012     2013      2012  
     (Unaudited)     (Unaudited)     (Unaudited)      (Unaudited)  

Balance at beginning of the period

   $ 19,565      $ 19,412      $ 18,270       $ 18,882   

Loans charged-off:

         

Commercial

         

Owner occupied real estate

     6        3        138         3   

Non owner occupied real estate

     45        28        191         28   

Residential development

     —          —          —           —     

Development & Spec Land Loans

     —          —          —           —     

Commercial and industrial

     774        327        913         327   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total commercial

     825        358        1,242         358   

Real estate

         

Residential mortgage

     416        115        559         204   

Residential construction

     —          —          —           —     

Mortgage warehouse

     —          —          —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Total real estate

     416        115        559         204   

Consumer

         

Direct Installment

     88        58        195         171   

Direct Installment Purchased

     —          —          —           —     

Indirect Installment

     271        271        624         609   

Home Equity

     201        754        639         887   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total consumer

     560        1,083        1,458         1,667   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total loans charged-off

     1,801        1,556        3,259         2,229   

Recoveries of loans previously charged-off:

         

Commercial

         

Owner occupied real estate

     14        52        46         352   

Non owner occupied real estate

     1        —          3         7   

Residential development

     —          —          —           —     

Development & Spec Land Loans

     —          —          —           —     

Commercial and industrial

     111        28        147         53   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total commercial

     126        80        196         412   

Real estate

         

Residential mortgage

     5        2        8         32   

Residential construction

     —          —          —           —     

Mortgage warehouse

     —          —          —           —     
  

 

 

   

 

 

   

 

 

    

 

 

 

Total real estate

     5        2        8         32   

Consumer

         

Direct Installment

     54        20        448         35   

Direct Installment Purchased

     —          —          —           —     

Indirect Installment

     202        189        372         390   

Home Equity

     —          18        32         84   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total consumer

     256        227        852         509   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total loan recoveries

     387        309        1,056         953   
  

 

 

   

 

 

   

 

 

    

 

 

 

Net loans charged-off

     1,414        1,247        2,203         1,276   
  

 

 

   

 

 

   

 

 

    

 

 

 

Provision charged to operating expense

         

Commercial

     (940     (391     802         (305

Real estate

     675        35        986         646   

Consumer

     994        565        1,025         427   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total provision charged to operating expense

     729        209        2,813         768   
  

 

 

   

 

 

   

 

 

    

 

 

 

Balance at the end of the period

   $ 18,880      $ 18,374      $ 18,880       $ 18,374   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

16


Table of Contents

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:

 

June 30, 2013    Commercial      Real Estate      Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

              

Individually evaluated for impairment

   $ 2,398       $ —         $ —         $ —         $ 2,398   

Collectively evaluated for impairment

     5,128         3,734         1,610         6,010         16,482   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 7,526       $ 3,734       $ 1,610       $ 6,010       $ 18,880   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated for impairment

   $ 9,390       $ —         $ —         $ —         $ 9,390   

Collectively evaluated for impairment

     494,174         183,250         155,442         278,867         1,111,733   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 503,564       $ 183,250       $ 155,442       $ 278,867       $ 1,121,123   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2012    Commercial      Real Estate      Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

              

Individually evaluated for impairment

   $ 1,945       $ —         $ —         $ —         $ 1,945   

Collectively evaluated for impairment

     5,826         3,204         1,705         5,590         16,325   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 7,771       $ 3,204       $ 1,705       $ 5,590       $ 18,270   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated for impairment

   $ 10,597       $ —         $ —         $ —         $ 10,597   

Collectively evaluated for impairment

     451,243         190,292         251,928         290,174         1,183,637   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 461,840       $ 190,292       $ 251,928       $ 290,174       $ 1,194,234   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

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:

 

June 30, 2013    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

   $ 451       $ —         $ 79       $ 784       $ 1,314   

Non owner occupied real estate

     2,504         76         1,424         446         4,450   

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     733         —           —           —           733   

Commercial and industrial

     2,183         —           786         —           2,969   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     5,871         76         2,289         1,230         9,466   

Real estate

              

Residential mortgage

     3,795         3         2,866         2,415         9,079   

Residential construction

     —           —           287         —           287   

Mortgage warehouse

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     3,795         3         3,153         2,415         9,366   

Consumer

              

Direct Installment

     410         31         —           —           441   

Direct Installment Purchased

     —           —           —           —           —     

Indirect Installment

     717         —           —           —           717   

Home Equity

     3,062         12         1,144         1,441         5,659   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     4,189         43         1,144         1,441         6,817   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,855       $ 122       $ 6,586       $ 5,086       $ 25,649   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 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

   $ 2,800       $ —         $ 1,272       $ 819       $ 4,891   

Non owner occupied real estate

     1,705         —           1,605         446         3,756   

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     705         —           —           —           705   

Commercial and industrial

     544         —           797         —           1,341   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     5,754         —           3,674         1,265         10,693   

Real estate

              

Residential mortgage

     4,565         2         2,536         1,761         8,864   

Residential construction

     —           —           291         —           291   

Mortgage warehouse

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     4,565         2         2,827         1,761         9,155   

Consumer

              

Direct Installment

     138         26         —           —           164   

Direct Installment Purchased

     —           —           —           —           —     

Indirect Installment

     866         26         —           —           892   

Home Equity

     2,051         —           148         676         2,875   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     3,055         52         148         676         3,931   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,374       $ 54       $ 6,649       $ 3,702       $ 23,779   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Table Dollar Amounts in Thousands, Except Per Share Data)

 

Included in the $13.9 million of non-accrual loans and the $6.6 million of non-performing TDR’s at June 30, 2013 were $1.7 million and $841,000, respectively, of loans acquired for which accretable yield was recognized.

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 Vice President of Operations 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 June 30, 2013, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments and there have been no restructured loans with modified recorded balances. 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 June 30, 2013, the Company had $11.7 million in TDRs and $5.1 million were performing according to the restructured terms and no TDR’s were returned to accrual status in the first three months of 2013. There was $2.2 million of specific reserves allocated to TDRs at June 30, 2013 based on the collateral deficiencies.

 

19


Table of Contents

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 six months ended June 30, 2013 and 2012, segregated by class, are shown in the table below.

 

     June 30, 2013      June 30, 2012  
      Number
of
Defaults
     Unpaid
Principal
Balance
     Number
of
Defaults
     Unpaid
Principal
Balance
 

Commercial

           

Owner occupied real estate

     —         $ —           —         $ —     

Non owner occupied real estate

     —           —           —           —     

Residential development

     —           —           —           —     

Development & Spec Land Loans

     —           —           —           —     

Commercial and industrial

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     —           —           —           —     

Real estate

           

Residential mortgage

     5         758         1         332   

Residential construction

     —           —           —           —     

Mortgage warehouse

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     5         758         1         332   

Consumer

           

Direct Installment

     —           —           —           —     

Direct Installment Purchased

     —           —           —           —     

Indirect Installment

     —           —           —           —     

Home Equity

     1         997         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     1         997         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     6       $ 1,755         1       $ 332   
  

 

 

    

 

 

    

 

 

    

 

 

 

Troubled debt restructured loans which had payment defaults during the six months ended June 30, 2013 and 2012, 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.

 

     June 30, 2013      June 30, 2012  
      Number
of
Defaults
     Unpaid
Principal
Balance
     Number
of
Defaults
     Unpaid
Principal
Balance
 

Commercial

           

Owner occupied real estate

     —         $ —           —         $ —     

Non owner occupied real estate

     —           —           —           —     

Residential development

     —           —           —           —     

Development & Spec Land Loans

     —           —           —           —     

Commercial and industrial

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     —           —           —           —     

Real estate

           

Residential mortgage

     3         239         2         410   

Residential construction

     —           —           —           —     

Mortgage warehouse

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     3         239         2         410   

Consumer

           

Direct Installment

     —           —           —           —     

Direct Installment Purchased

     —           —           —           —     

Indirect Installment

     —           —           —           —     

Home Equity

     1         997         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     1         997         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4       $ 1,236         2       $ 410   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

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      Six Months Ending  
June 30, 2013    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

   $ 1,142       $ 1,146       $ —         $ 1,750         13       $ 1,785       $ 27   

Non owner occupied real estate

     2,579         2,584         —           2,710         12         2,439         23   

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     60         60         —           64         —           45         —     

Commercial and industrial

     906         922         —           1,595         3         1,478         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     4,687         4,712         —           6,119         28         5,747         53   

With an allowance recorded

                    

Commercial

                    

Owner occupied real estate

     172         172         30         216         —           222         —     

Non owner occupied real estate

     1,795         1,795         1,097         1,799         —           1,809         —     

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     673         673         425         702         —           706         —     

Commercial and industrial

     2,063         2,075         846         2,072         20         1,433         20   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     4,703         4,715         2,398         4,789         20         4,170         20   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,390       $ 9,427       $ 2,398       $ 10,908       $ 48       $ 9,917       $ 73   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
                          Three Months Ending      Six Months Ending  
June 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
     Interest
Income
Recognized
 

With no recorded allowance

                    

Commercial

                    

Owner occupied real estate

   $ 1,350       $ 1,350       $ —         $ 1,403       $ —         $ 1,343       $ 2   

Non owner occupied real estate

     422         422         —           389         2         392         3   

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     14         14         —           5         1         2         1   

Commercial and industrial

     257         257         —           365         —           312         5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     2,043         2,043         —           2,162         3         2,049         11   

With an allowance recorded

                    

Commercial

                    

Owner occupied real estate

     1,606         1,606         475         1,161         17         1,127         18   

Non owner occupied real estate

     3,682         3,684         1,100         3,685         —           3,524         —     

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     661         661         615         676         —           455         6   

Commercial and industrial

     804         804         273         806         —           811         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     6,753         6,755         2,463         6,328         17         5,917         24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,796       $ 8,798       $ 2,463       $ 8,490       $ 20       $ 7,966       $ 35   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

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:

 

June 30, 2013    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

   $ 525      $ 506      $ —        $ 1,031      $ 158,348      $ 159,379   

Non owner occupied real estate

     —          68        76        144        233,059        233,203   

Residential development

     —          —          —          —          245        245   

Development & Spec Land Loans

     —          —          —          —          12,988        12,988   

Commercial and industrial

     354        58        —          412        95,237        95,649   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     879        632        76        1,587        499,877        501,464   

Real estate

            

Residential mortgage

     330        2        3        335        173,697        174,032   

Residential construction

     —          —          —          —          8,133        8,133   

Mortgage warehouse

     —          —          —          —          154,962        154,962   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     330        2        3        335        336,792        337,127   

Consumer

            

Direct Installment

     135        18        31        184        27,915        28,099   

Direct Installment Purchased

     —          —          —          —          358        358   

Indirect Installment

     808        46        —          854        127,793        128,647   

Home Equity

     703        530        12        1,245        119,302        120,547   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     1,646        594        43        2,283        275,368        277,651   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,855      $ 1,228      $ 122      $ 4,205      $ 1,112,037      $ 1,116,242   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     0.26     0.11     0.01     0.38     99.62  
December 31, 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

   $ 2,207      $ 19      $ —        $ 2,226      $ 160,468      $ 162,694   

Non owner occupied real estate

     669        147        —          816        200,947        201,763   

Residential development

     —          —          —          —          1,056        1,056   

Development & Spec Land Loans

     —          —          —          —          6,963        6,963   

Commercial and industrial

     538        16        —          554        86,528        87,082   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     3,414        182        —          3,596        455,962        459,558   

Real estate

            

Residential mortgage

     167        —          2        169        181,281        181,450   

Residential construction

     —          —          —          —          7,681        7,681   

Mortgage warehouse

     —          —          —          —          251,448        251,448   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     167        —          2        169        440,410        440,579   

Consumer

            

Direct Installment

     240        64        26        330        27,501        27,831   

Direct Installment Purchased

     —          —          —          —          429        429   

Indirect Installment

     1,105        177        26        1,308        132,173        133,481   

Home Equity

     1,072        321        —          1,393        125,195        126,588   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     2,417        562        52        3,031        285,298        288,329   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 5,998      $ 744      $ 54      $ 6,796      $ 1,181,670      $ 1,188,466   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     0.50     0.06     0.00     0.57     99.43  

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.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Table Dollar Amounts in Thousands, Except Per Share Data)

 

   

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).

 

   

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 or his designee 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 foreclosure mitigation, loan extensions, troubled debt restructures, and collateral repossessions. The information reviewed in this meeting act 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.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Table Dollar Amounts in Thousands, Except Per Share Data)

 

Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

 

   

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.