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 March 31, 2015

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: 9,232,163 shares of Common Stock, no par value, at May 1, 2015.

 

 

 


Table of Contents

HORIZON BANCORP

FORM 10-Q

INDEX

 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)
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   39   

Item 3.

Quantitative and Qualitative Disclosures about Market Risk   53   

Item 4.

Controls and Procedures   53   

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings   54   

Item 1A.

Risk Factors   54   

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds   54   

Item 3.

Defaults Upon Senior Securities   54   

Item 4.

Mine Safety Disclosures   54   

Item 5.

Other Information   54   

Item 6.

Exhibits   55   

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)

 

     March 31      December 31  
     2015      2014  
     (Unaudited)         

Assets

     

Cash and due from banks

   $ 38,676       $ 43,476   

Investment securities, available for sale

     331,033         323,764   

Investment securities, held to maturity (fair value of $171,405 and $169,904)

     164,282         165,767   

Loans held for sale

     6,229         6,143   

Loans, net of allowance for loan losses of $16,634 and $16,501

     1,444,725         1,362,053   

Premises and equipment, net

     53,989         52,461   

Federal Reserve and Federal Home Loan Bank stock

     11,348         11,348   

Goodwill

     28,176         28,176   

Other intangible assets

     3,738         3,965   

Interest receivable

     8,431         8,246   

Cash value of life insurance

     39,640         39,382   

Other assets

     23,698         32,141   
  

 

 

    

 

 

 

Total assets

$ 2,153,965    $ 2,076,922   
  

 

 

    

 

 

 

Liabilities

Deposits

Non-interest bearing

$ 285,181    $ 267,667   

Interest bearing

  1,179,915      1,214,652   
  

 

 

    

 

 

 

Total deposits

  1,465,096      1,482,319   

Borrowings

  440,415      351,198   

Subordinated debentures

  32,680      32,642   

Interest payable

  504      497   

Other liabilities

  15,779      15,852   
  

 

 

    

 

 

 

Total liabilities

  1,954,474      1,882,508   
  

 

 

    

 

 

 

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, 9,289,916 and 9,278,916 shares Outstanding, 9,232,163 and 9,213,036 shares

  —        —     

Additional paid-in capital

  46,064      45,916   

Retained earnings

  138,500      134,477   

Accumulated other comprehensive income

  2,427      1,521   
  

 

 

    

 

 

 

Total stockholders’ equity

  199,491      194,414   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

$ 2,153,965    $ 2,076,922   
  

 

 

    

 

 

 

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  
     March 31  
     2015     2014  
     (Unaudited)     (Unaudited)  

Interest Income

    

Loans receivable

   $ 16,862      $ 12,954   

Investment securities

    

Taxable

     2,154        2,390   

Tax exempt

     1,077        1,123   
  

 

 

   

 

 

 

Total interest income

  20,093      16,467   
  

 

 

   

 

 

 

Interest Expense

Deposits

  1,232      1,277   

Borrowed funds

  1,479      1,422   

Subordinated debentures

  496      496   
  

 

 

   

 

 

 

Total interest expense

  3,207      3,195   
  

 

 

   

 

 

 

Net Interest Income

  16,886      13,272   

Provision for loan losses

  614      —     
  

 

 

   

 

 

 

Net Interest Income after Provision for Loan Losses

  16,272      13,272   
  

 

 

   

 

 

 

Non-interest Income

Service charges on deposit accounts

  999      923   

Wire transfer fees

  151      112   

Interchange fees

  1,102      959   

Fiduciary activities

  1,297      1,048   

Gain on sale of investment securities (includes $124 and $0 for the three months ended March 31, 2015 and 2014, respectively, related to accumulated other comprehensive earnings reclassifications)

  124      —     

Gain on sale of mortgage loans

  2,379      1,411   

Mortgage servicing income net of impairment

  179      207   

Increase in cash value of bank owned life insurance

  258      233   

Death benefit on bank owned life insurance

  145      —     

Other income

  432      629   
  

 

 

   

 

 

 

Total non-interest income

  7,066      5,522   
  

 

 

   

 

 

 

Non-interest Expense

Salaries and employee benefits

  8,504      7,483   

Net occupancy expenses

  1,551      1,424   

Data processing

  923      870   

Professional fees

  527      608   

Outside services and consultants

  626      661   

Loan expense

  1,257      1,015   

FDIC insurance expense

  337      256   

Other losses

  (45   38   

Other expense

  2,388      2,159   
  

 

 

   

 

 

 

Total non-interest expense

  16,068      14,514   
  

 

 

   

 

 

 

Income Before Income Tax

  7,270      4,280   

Income tax expense (includes $43 and $0 for the three months ended March 31, 2015 and 2014, respectively, related to income tax expense from reclassification items)

  1,912      863   
  

 

 

   

 

 

 

Net Income

  5,358      3,417   

Preferred stock dividend

  (31   (31
  

 

 

   

 

 

 

Net Income Available to Common Shareholders

$ 5,327    $ 3,386   
  

 

 

   

 

 

 

Basic Earnings Per Share

$ 0.58    $ 0.39   

Diluted Earnings Per Share

  0.55      0.38   

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Dollar Amounts in Thousands)

 

     Three Months Ended
March 31
 
     2015     2014  
     (Unaudited)     (Unaudited)  

Net Income

   $ 5,358      $ 3,417   
  

 

 

   

 

 

 

Other Comprehensive Income

Change in fair value of derivative instruments:

Change in fair value of derivative instruments for the period

  (329   (225

Income tax effect

  115      79   
  

 

 

   

 

 

 

Changes from derivative instruments

  (214   (146
  

 

 

   

 

 

 

Change in securities available-for-sale:

Unrealized appreciation for the period on available-for-sale securities

  1,962      4,426   

Unrealized appreciation for the period on held-to-maturity

  (114   —     

Reclassification adjustment for securities gains realized in income

  (124   —     

Income tax effect

  (604   (1,550
  

 

 

   

 

 

 

Unrealized gains on available-for-sale securities

  1,120      2,876   
  

 

 

   

 

 

 

Other Comprehensive Income, Net of Tax

  906      2,730   
  

 

 

   

 

 

 

Comprehensive Income

$ 6,264    $ 6,147   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

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HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)

 

     Preferred
Stock
     Additional
Paid-in
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income
     Total  

Balances, January 1, 2015

   $  12,500       $ 45,916       $ 134,477      $ 1,521       $ 194,414   

Net income

           5,358           5,358   

Other comprehensive income, net of tax

             906         906   

Amortization of unearned compensation

        89              89   

Stock option expense

        59              59   

Cash dividends on preferred stock (1.00%)

           (31        (31

Cash dividends on common stock ($.14 per share)

           (1,304        (1,304
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balances, March 31, 2015

$ 12,500    $ 46,064    $ 138,500    $ 2,427    $ 199,491   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

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)

 

     Three Months Ended
March 31
 
     2015     2014  
     (Unaudited)     (Unaudited)  

Operating Activities

    

Net income

   $ 5,358      $ 3,417   

Items not requiring (providing) cash

    

Provision for loan losses

     614        —     

Depreciation and amortization

     956        844   

Share based compensation

     59        27   

Mortgage servicing rights net (recovery) impairment

     414        (5

Premium amortization on securities available for sale, net

     476        549   

Gain on sale of investment securities

     (124     —     

Gain on sale of mortgage loans

     (2,379     (1,411

Proceeds from sales of loans

     71,211        35,348   

Loans originated for sale

     (68,918     (35,991

Change in cash value of life insurance

     (258     (233

Gain on sale of other real estate owned

     (263     (218

Net change in

    

Interest receivable

     (185     (35

Interest payable

     7        (8

Other assets

     5,503        675   

Other liabilities

     (1,287     (1,138
  

 

 

   

 

 

 

Net cash provided by operating activities

  11,184      1,821   
  

 

 

   

 

 

 

Investing Activities

Purchases of securities available for sale

  (30,406   (27,290

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

  25,260      20,327   

Proceeds from maturities of securities held to maturity

  735      —     

Net change in loans

  (81,515   (32,259

Proceeds on the sale of OREO and repossessed assets

  1,414      784   

Purchases of premises and equipment

  (2,168   (1,394

Purchase of Mortgage Company

  —        (735
  

 

 

   

 

 

 

Net cash used in investing activities

  (86,680   (40,567
  

 

 

   

 

 

 

Financing Activities

Net change in

Deposits

  (17,224   64,051   

Borrowings

  89,255      (20,214

Dividends paid on common shares

  (1,304   (961

Dividends paid on preferred shares

  (31   (31
  

 

 

   

 

 

 

Net cash provided by financing activities

  70,696      42,845   
  

 

 

   

 

 

 

Net Change in Cash and Cash Equivalents

  (4,800   4,099   

Cash and Cash Equivalents, Beginning of Period

  43,476      31,721   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

$ 38,676    $ 35,820   
  

 

 

   

 

 

 

Additional Supplemental Information

Interest paid

$ 3,199    $ 3,203   

Income taxes paid

  —        —     

Transfer of loans to other real estate owned

  (772   610   

See notes to condensed consolidated financial statements

 

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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)

Note 1 – Accounting Policies

The accompanying unaudited 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 March 31, 2015 and March 31, 2014 are not necessarily indicative of the operating results for the full year of 2015 or 2014. 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 2014 filed with the Securities and Exchange Commission on March 13, 2015. The condensed consolidated balance sheet of Horizon as of December 31, 2014 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  
     March 31  
     2015      2014  
     (Unaudited)      (Unaudited)  

Basic earnings per share

     

Net income

   $ 5,358       $ 3,417   

Less: Preferred stock dividends

     31         31   
  

 

 

    

 

 

 

Net income available to common shareholders

$ 5,327    $ 3,386   

Weighted average common shares outstanding

  9,216,011      8,630,966   

Basic earnings per share

$ 0.58    $ 0.39   
  

 

 

    

 

 

 

Diluted earnings per share

Net income available to common shareholders

$ 5,327    $ 3,386   

Weighted average common shares outstanding

  9,216,011      8,630,966   

Effect of dilutive securities:

Warrants

  321,652      311,278   

Restricted stock

  30,510      39,519   

Stock options

  41,333      40,023   
  

 

 

    

 

 

 

Weighted average shares outstanding

  9,609,506      9,021,786   

Diluted earnings per share

$ 0.55    $ 0.38   
  

 

 

    

 

 

 

At March 31, 2015 and 2014, there were 62,445 and no shares, respectively, which were not included in the computation of diluted earnings per share because they were non-dilutive.

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2014 Annual Report on Form 10-K.

Reclassifications

Certain reclassifications have been made to the 2014 condensed consolidated financial statements to be comparable to 2015. These reclassifications had no effect on net income.

Note 2 – Acquisition

On April 3, 2014 Horizon closed its acquisition of SCB Bancorp, Inc. (“Summit”) and Horizon Bank N.A.’s acquisition of Summit Community Bank, through mergers effective as of that date. Under the final terms of the acquisition, the exchange ratio was 0.4904 shares of Horizon’s common stock and $5.15 in cash for each share of Summit common stock outstanding. Summit shares outstanding at the closing were 1,164,442, and the shares of Horizon common stock issued to Summit shareholders totaled 570,820. Horizon’s stock price was $22.23 per share at the close of business on April 3, 2014. Based upon these numbers, the total value of the consideration for the acquisition was $18.9 million (not including the retirement of Summit debt). The Company had approximately $1.3 million in costs related to the acquisition. These expenses are classified in the other expense section of the income statement and 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 Summit’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 Summit acquisition is allocated as follows:

 

ASSETS

Cash and due from banks

$ 15,161   

Commercial

  70,441   

Residential mortgage

  43,448   

Consumer

  10,192   
  

 

 

 

Total loans

  124,081   

Premises and equipment, net

  2,548   

FRB and FHLB stock

  2,136   

Goodwill

  8,428   

Core deposit intangible

  822   

Interest receivable

  347   

Cash value of life insurance

  2,185   

Other assets

  2,877   
  

 

 

 

Total assets purchased

$ 158,585   
  

 

 

 

Common shares issued

$ 12,689   

Cash paid

  6,207   

Retirement of Holding Company Debt

  1,029   
  

 

 

 

Total estimated purchase price

$ 19,925   
  

 

 

 

LIABILITIES

Deposits

Non-interest bearing

$ 27,274   

NOW accounts

  16,332   

Savings and money market

  35,045   

Certificates of deposits

  42,368   
  

 

 

 

Total deposits

  121,019   

Borrowings

  16,990   

Interest payable

  52   

Other liabilities

  599   
  

 

 

 

Total liabilities assumed

$ 138,660   
  

 

 

 
 

 

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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 $19.9 million, $822,000 has been allocated to core deposit intangible. Additionally, $8.4 million has been allocated to goodwill and $4.4 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 non-accrual 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 $130.5 million loan portfolio at a fair value discount of $6.4 million. The performing portion of the portfolio, $106.2 million, had an estimated fair value of $104.6 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.

Final estimates of certain loans, those for which specific credit-related deterioration, since origination, 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 as of April 3, 2014.

 

Contractually required principal and interest at acquisition

$ 14,460   

Contractual cash flows not expected to be collected (nonaccretable differences)

  3,146   
  

 

 

 

Expected cash flows at acquisition

  11,314   

Interest component of expected cash flows (accretable discount)

  1,688   
  

 

 

 

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

$ 9,626   
  

 

 

 

Pro-forma statements were not presented due to the materiality of the transaction.

 

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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:

 

            Gross      Gross         
March 31, 2015    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Fair
Value
 

Available for sale

           

U.S. Treasury and federal agencies

   $ 28,400       $ 69       $ (48    $ 28,421   

State and municipal

     50,036         1,577         (37      51,576   

Federal agency collateralized mortgage obligations

     120,785         1,471         (537      121,719   

Federal agency mortgage-backed pools

     125,923         3,590         (246      129,267   

Corporate notes

     32         18         —           50   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

$ 325,176    $ 6,725    $ (868 $ 331,033   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

U.S. Treasury and federal agencies

$ 9,824    $ 157    $ —      $ 9,981   

State and municipal

  128,558      6,179      (143   134,594   

Federal agency collateralized mortgage obligations

  3,873      45      —        3,918   

Federal agency mortgage-backed pools

  22,027      961      (76   22,912   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

$ 164,282    $ 7,342    $ (219 $ 171,405   
  

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2014    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available for sale

           

U.S. Treasury and federal agencies

   $ 26,996       $ 56       $ (229    $ 26,823   

State and municipal

     46,535         1,462         (45      47,952   

Federal agency collateralized mortgage obligations

     122,930         975         (1,045      122,860   

Federal agency mortgage-backed pools

     122,583         3,172         (360      125,395   

Private labeled mortgage-backed pools

     670         19         —           689   

Corporate notes

     32         13         —           45   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

$ 319,746    $ 5,697    $ (1,679 $ 323,764   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

U.S. Treasury and federal agencies

$ 9,804    $ 82    $ —      $ 9,886   

State and municipal

  129,595      3,398      (106   132,887   

Federal agency collateralized mortgage obligations

  4,039      35      (1   4,073   

Federal agency mortgage-backed pools

  22,329      729      —        23,058   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

$ 165,767    $ 4,244    $ (107 $ 169,904   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 and held-to-maturity, 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 March 31, 2015, 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, U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations, 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

 

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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)

 

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 March 31, 2015.

The Company elected to transfer 319 available-for-sale (“AFS”) securities with an aggregate fair value of $167.1 million to a classification of held-to-maturity (“HTM”) on April 1, 2014. In accordance with FASB ASC 320-10-55-24, the transfer from AFS to HTM must be recorded at the fair value of the AFS securities at the time of transfer. The net unrealized holding gain of $1.3 million, net of tax, at the date of transfer was retained in accumulated other comprehensive income, with the associated pre-tax amount retained in the carrying value of the HTM securities. Such amounts will be amortized to comprehensive income over the remaining life of the securities. The fair value of the transferred AFS securities became the book value of the HTM securities at April 1, 2014, with no unrealized gain or loss at this date. Future reporting periods, with potential changes in market value for these securities, would likely record an unrealized gain or loss for disclosure purposes.

The amortized cost and fair value of securities available for sale and held to maturity at March 31, 2015 and December 31, 2014, 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.

 

     March 31, 2015      December 31, 2014  
     Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value  

Available for sale

           

Within one year

   $ 6,170       $ 6,220       $ 6,098       $ 6,169   

One to five years

     49,096         49,902         44,720         45,093   

Five to ten years

     16,830         17,373         16,147         16,768   

After ten years

     6,372         6,552         6,598         6,790   
  

 

 

    

 

 

    

 

 

    

 

 

 
  78,468      80,047      73,563      74,820   

Federal agency collateralized mortgage obligations

  120,785      121,719      122,930      122,860   

Federal agency mortgage-backed pools

  125,923      129,267      122,583      125,395   

Private labeled mortgage-backed pools

  —        —        670      689   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

$ 325,176    $ 331,033    $ 319,746    $ 323,764   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

Within one year

$ —      $ —      $ —      $ —     

One to five years

  1,223      1,243      592      593   

Five to ten years

  104,305      109,391      99,225      101,323   

After ten years

  32,854      33,941      39,582      40,857   
  

 

 

    

 

 

    

 

 

    

 

 

 
  138,382      144,575      139,399      142,773   

Federal agency collateralized mortgage obligations

  3,873      3,918      4,039      4,073   

Federal agency mortgage-backed pools

  22,027      22,912      22,329      23,058   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

$ 164,282    $ 171,405    $ 165,767    $ 169,904   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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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)

 

     Less than 12 Months     12 Months or More     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
March 31, 2015    Value      Losses     Value      Losses     Value      Losses  

U.S. Treasury and federal agencies

   $ —         $ —        $ 16,937       $ (48   $ 16,937       $ (48

State and municipal

     15,766         (173     1,259         (7     17,025         (180

Federal agency collateralized mortgage obligations

     9,233         (21     29,821         (516     39,054         (537

Federal agency mortgage-backed pools

     6,847         (84     27,253         (238     34,100         (322
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

$ 31,846    $ (278 $ 75,270    $ (809 $ 107,116    $ (1,087
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 Months     12 Months or More     Total  
December 31, 2014    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. Treasury and federal agencies

   $ 2,993       $ (7   $ 20,762       $ (222   $ 23,755       $ (229

State and municipal

     10,287         (121     2,050         (30     12,337         (151

Federal agency collateralized mortgage obligations

     15,013         (88     39,801         (957     54,814         (1,045

Federal agency mortgage-backed pools

     5,993         (9     28,044         (351     34,037         (360
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

$ 34,286    $ (225 $ 90,657    $ (1,560 $ 124,943    $ (1,785
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Three Months Ended March 31  
     2015      2014  

Sales of securities available for sale (Unaudited)

     

Proceeds

   $ 13,332       $ —     

Gross gains

     147         —     

Gross losses

     (23      —     

Note 4 – Loans

 

     March 31      December 31  
     2015      2014  

Commercial

     

Working capital and equipment

   $ 311,789       $ 300,940   

Real estate, including agriculture

     354,356         343,455   

Tax exempt

     8,890         8,595   

Other

     20,701         21,324   
  

 

 

    

 

 

 

Total

  695,736      674,314   

Real estate

1–4 family

  256,809      250,799   

Other

  3,581      3,826   
  

 

 

    

 

 

 

Total

  260,390      254,625   

Consumer

Auto

  160,668      154,538   

Recreation

  5,645      5,673   

Real estate/home improvement

  38,371      38,288   

Home equity

  112,180      112,426   

Unsecured

  3,437      3,613   

Other

  6,033      5,921   
  

 

 

    

 

 

 

Total

  326,334      320,459   

Mortgage warehouse

  178,899      129,156   
  

 

 

    

 

 

 

Total loans

  1,461,359      1,378,554   

Allowance for loan losses

  (16,634   (16,501
  

 

 

    

 

 

 

Loans, net

$ 1,444,725    $ 1,362,053   
  

 

 

    

 

 

 

 

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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)

 

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.

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 its 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

 

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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)

 

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.

The following table shows the recorded investment of individual loan categories.

 

     Loan             Deferred      Recorded  
March 31, 2015    Balance      Interest Due      Fees / (Costs)      Investment  

Owner occupied real estate

   $ 240,027       $ 426       $ 658       $ 241,111   

Non owner occupied real estate

     308,420         345         515         309,280   

Residential spec homes

     3,409         5         3         3,417   

Development & spec land loans

     11,229         28         25         11,282   

Commercial and industrial

     131,422         828         28         132,278   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

  694,507      1,632      1,229      697,368   

Residential mortgage

  244,081      743      546      245,370   

Residential construction

  15,763      22      —        15,785   

Mortgage warehouse

  178,899      480      —        179,379   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

  438,743      1,245      546      440,534   

Direct installment

  41,476      135      (380   41,231   

Direct installment purchased

  195      —        —        195   

Indirect installment

  146,938      302      —        147,240   

Home equity

  138,458      557      (353   138,662   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

  327,067      994      (733   327,328   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

  1,460,317      3,871      1,042      1,465,230   

Allowance for loan losses

  (16,634   —        —        (16,634
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans

$ 1,443,683    $ 3,871    $ 1,042    $ 1,448,596   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Loan             Deferred      Recorded  
December 31, 2014    Balance      Interest Due      Fees / (Costs)      Investment  

Owner occupied real estate

   $ 228,380       $ 385       $ 680       $ 229,445   

Non owner occupied real estate

     297,299         309         506         298,114   

Residential spec homes

     2,027         2         —           2,029   

Development & spec land loans

     12,097         28         30         12,155   

Commercial and industrial

     133,256         859         39         134,154   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

  673,059      1,583      1,255      675,897   

Residential mortgage

  242,521      737      599      243,857   

Residential construction

  11,505      21      —        11,526   

Mortgage warehouse

  129,156      480      —        129,636   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

  383,182      1,238      599      385,019   

Direct installment

  40,137      129      (375   39,891   

Direct installment purchased

  219      —        —        219   

Indirect installment

  141,868      314      (163   142,019   

Home equity

  139,007      568      (234   139,341   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

  321,231      1,011      (772   321,470   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

  1,377,472      3,832      1,082      1,382,386   

Allowance for loan losses

  (16,501   —        —        (16,501
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans

$ 1,360,971    $ 3,832    $ 1,082    $ 1,365,885   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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)

 

Note 5 – Accounting for Certain Loans Acquired in a Transfer

The Company acquired loans in acquisitions 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 non-accrual 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 carrying amounts of those loans included in the balance sheet amounts of loans receivable are as follows:

 

     March 31      March 31      March 31  
     2015      2015      2015  
     Heartland      Summit      Total  

Commercial

     15,378         59,398       $ 74,776   

Real estate

     8,460         22,379         30,839   

Consumer

     6,954         7,749         14,703   
  

 

 

    

 

 

    

 

 

 

Outstanding balance

$ 30,792    $ 89,526    $ 120,318   
  

 

 

    

 

 

    

 

 

 

Carrying amount, net of allowance of $254

$ 120,064   
        

 

 

 
     December 31
2014
Heartland
     December 31
2014
Summit
     December 31
2014

Total
 

Commercial

   $ 18,307       $ 66,371       $ 84,678   

Real estate

     9,734         24,653         34,387   

Consumer

     8,447         8,975         17,422   
  

 

 

    

 

 

    

 

 

 

Outstanding balance

$ 36,488    $ 99,999    $ 136,487   
  

 

 

    

 

 

    

 

 

 

Carrying amount, net of allowance of $359

$ 136,128   
        

 

 

 

Accretable yield, or income expected to be collected for the three months ended March 31, is as follows:

 

     Three Months Ended March 31, 2015  
     Heartland      Summit      Total  

Balance at January 1

   $ 2,400       $ 1,268       $ 3,668   

Additions

     —           —           —     

Accretion

     (107      (99      (206

Reclassification from nonaccretable difference

     —           —           —     

Disposals

     (88      (49      (137
  

 

 

    

 

 

    

 

 

 

Balance at December 31

$ 2,205    $ 1,120    $ 3,325   
  

 

 

    

 

 

    

 

 

 
     Three Months Ended March 31, 2014  
     Heartland      Summit      Total  

Balance at January 1

   $ 3,185       $ —         $ 3,185   

Additions

     —           —           —     

Accretion

     (138      —           (138

Reclassification from nonaccretable difference

     —           —           —     

Disposals

     (18      —           (18
  

 

 

    

 

 

    

 

 

 

Balance at December 31

$ 3,029    $ —      $ 3,029   
  

 

 

    

 

 

    

 

 

 

During the three months ended March 31, 2015 and 2014, the Company decreased the allowance for loan losses by a recovery to the income statement of $105,000 and $0, respectively.

 

16


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 6 – 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  
     March 31  
     2015      2014  
     (Unaudited)      (Unaudited)  

Balance at beginning of the period

   $ 16,501       $ 15,992   

Loans charged-off:

     

Commercial

     

Owner occupied real estate

     —           —     

Non owner occupied real estate

     16         22   

Residential development

     —           —     

Development & Spec Land Loans

     —           7   

Commercial and industrial

     —           —     
  

 

 

    

 

 

 

Total commercial

  16      29   

Real estate

Residential mortgage

  22      22   

Residential construction

  —        —     

Mortgage warehouse

  —        —     
  

 

 

    

 

 

 

Total real estate

  22      22   

Consumer

Direct Installment

  59      33   

Direct Installment Purchased

  —        —     

Indirect Installment

  369      227   

Home Equity

  200      184   
  

 

 

    

 

 

 

Total consumer

  628      444   
  

 

 

    

 

 

 

Total loans charged-off

  666      495   

Recoveries of loans previously charged-off:

Commercial

Owner occupied real estate

  8      4   

Non owner occupied real estate

  —        1   

Residential development

  —        —     

Development & Spec Land Loans

  —        —     

Commercial and industrial

  19      385   
  

 

 

    

 

 

 

Total commercial

  27      390   

Real estate

Residential mortgage

  2      4   

Residential construction

  —        —     

Mortgage warehouse

  —        —     
  

 

 

    

 

 

 

Total real estate

  2      4   

Consumer

Direct Installment

  29      18   

Direct Installment Purchased

  —        —     

Indirect Installment

  101      119   

Home Equity

  26      74   
  

 

 

    

 

 

 

Total consumer

  156      211   
  

 

 

    

 

 

 

Total loan recoveries

  185      605   
  

 

 

    

 

 

 

Net loans charged-off (recovered)

  481      (110
  

 

 

    

 

 

 

Provision charged to operating expense

Commercial

  (45   212   

Real estate

  933      (604

Consumer

  (274   392   
  

 

 

    

 

 

 

Total provision charged to operating expense

  614      —     
  

 

 

    

 

 

 

Balance at the end of the period

$ 16,634    $ 16,102   
  

 

 

    

 

 

 

 

17


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:

 

March 31, 2015    Commercial      Real Estate      Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

              

Individually evaluated for impairment

   $ 1,029       $ —         $ —         $ —         $ 1,029   

Collectively evaluated for impairment

     6,593         3,281         1,272         4,205         15,351   

Loans acquired with deteriorated credit quality

     254         —           —           —           254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

$ 7,876    $ 3,281    $ 1,272    $ 4,205    $ 16,634   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

Individually evaluated for impairment

$ 8,547    $ —      $ —      $ —      $ 8,547   

Collectively evaluated for impairment

  687,092      261,155      179,379      327,328      1,454,954   

Loans acquired with deteriorated credit quality

  1,729      —        —        —        1,729   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

$ 697,368    $ 261,155    $ 179,379    $ 327,328    $ 1,465,230   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2014    Commercial      Real Estate      Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

              

Individually evaluated for impairment

   $ 1,589       $ —         $ —         $ —         $ 1,589   

Collectively evaluated for impairment

     5,827         2,508         1,132         4,951         14,418   

Loans acquired with deteriorated credit quality

     494         —           —           —           494   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

$ 7,910    $ 2,508    $ 1,132    $ 4,951    $ 16,501   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

Individually evaluated for impairment

$ 11,055    $ —      $ —      $ —      $ 11,055   

Collectively evaluated for impairment

  664,251      255,383      129,636      321,470      1,370,740   

Loans acquired with deteriorated credit quality

  591      —        —        —        591   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

$ 675,897    $ 255,383    $ 129,636    $ 321,470    $ 1,382,386   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 7 – Non-performing Loans and Impaired Loans

The following table presents the non-accrual, loans past due over 90 days still on accrual, and troubled debt restructured (“TDRs”) by class of loans:

 

March 31, 2015    Non-accrual      Loans Past
Due Over 90
Days Still
Accruing
     Non-
Performing
TDRs
     Performing
TDRs
     Total Non-
Performing
Loans
 

Commercial

  

           

Owner occupied real estate

   $ 1,452       $ —         $ —         $ 41       $ 1,493   

Non owner occupied real estate

     5,558         —           2,378         560         8,496   

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —     

Commercial and industrial

     566         —           985         —           1,551   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

  7,576      —        3,363      601      11,540   

Real estate

Residential mortgage

  2,547      —        748      2,506      5,801   

Residential construction

  —        —        261      —        261   

Mortgage warehouse

  —        —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

  2,547      —        1,009      2,506      6,062   

Consumer

Direct Installment

  334      —        —        —        334   

Direct Installment Purchased

  —        —        —        —        —     

Indirect Installment

  506      19      —        —        525   

Home Equity

  2,319      —        339      1,261      3,919   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

  3,159      19      339      1,261      4,778   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 13,282    $ 19    $ 4,711    $ 4,368    $ 22,380   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2014    Non-accrual      Loans Past
Due Over 90
Days Still
Accruing
     Non-
Performing
TDRs
     Performing
TDRs
     Total Non-
Performing
Loans
 

Commercial

              

Owner occupied real estate

   $ 1,773       $ —         $ —         $ 44       $ 1,817   

Non owner occupied real estate

     7,439         —           217         566         8,222   

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —     

Commercial and industrial

     812         —           1,004         —           1,816   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

  10,024      —        1,221      610      11,855   

Real estate

Residential mortgage

  2,297      40      765      2,526      5,628   

Residential construction

  —        —        266      —        266   

Mortgage warehouse

  —        —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

  2,297      40      1,031      2,526      5,894   

Consumer

Direct Installment

  227      10      —        —        237   

Direct Installment Purchased

  —        —        —        —        —     

Indirect Installment

  557      47      —        —        604   

Home Equity

  2,207      18      391      1,236      3,852   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

  2,991      75      391      1,236      4,693   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 15,312    $ 115    $ 2,643    $ 4,372    $ 22,442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


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 $13.3 million of non-accrual loans and the $4.7 million of non-performing TDRs at March 31, 2015 were $3.0 million and $417,000, 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 Credit 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. Non-accrual 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 non-accrual 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 March 31, 2015, 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 March 31, 2015, the Company had $9.1 million in TDRs and $4.4 million were performing according to the restructured terms and one TDR was returned to accrual status during the first three months of 2015. There was $994,000 of specific reserves allocated to TDRs at March 31, 2015 based on the discounted cash flows.

 

20


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 three months ended March 31, 2015 and 2014, segregated by class, are shown in the table below.

 

     March 31, 2015      March 31, 2014  
Commercial    Number of
Defaults
     Unpaid
Principal
Balance
     Number of
Defaults
     Unpaid
Principal
Balance
 

Owner occupied real estate

     1       $ 2         —         $ —     

Non owner occupied real estate

     —           —           —           —     

Residential development

     —           —           —           —     

Development & Spec Land Loans

     —           —           —           —     

Commercial and industrial

     —           —           2         398   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

  1      2      2      398   

Real estate

Residential mortgage

  —        —        —        —     

Residential construction

  —        —        —        —     

Mortgage warehouse

  —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

  —        —        —        —     

Consumer

Direct Installment

  —        —        —        —     

Direct Installment Purchased

  —        —        —        —     

Indirect Installment

  —        —        —        —     

Home Equity

  1      32      1      146   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

  1      32      1      146   
  —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  2    $ 34      3    $ 544   
  

 

 

    

 

 

    

 

 

    

 

 

 

Troubled debt restructured loans which had payment defaults during the three months ended March 31, 2015 and 2014, 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 non-accrual.

 

     March 31, 2015      March 31, 2014  
Commercial    Number of
Defaults
     Unpaid
Principal
Balance
     Number of
Defaults
     Unpaid
Principal
Balance
 

Owner occupied real estate

     1       $ 2         —         $ —     

Non owner occupied real estate

     —           —           —           —     

Residential development

     —           —           —           —     

Development & Spec Land Loans

     —           —           —           —     

Commercial and industrial

     —           —           2         398   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

  1      2      2      398   

Real estate

Residential mortgage

  —        —        1      154   

Residential construction

  —        —        —        —     

Mortgage warehouse

  —        —        —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

  —        —        1      154   

Consumer

Direct Installment

  —        —        —        —     

Direct Installment Purchased

  —        —        —        —     

Indirect Installment

  —        —        —        —     

Home Equity

  —        —        1      146   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

  —        —        1      146   
  —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  1    $ 2      4    $ 698   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 commercial loans individually evaluated for impairment by class of loan:

 

                          Three Months Ending  
March 31, 2015    Unpaid
Principal
Balance
     Recorded
Investment
     Allowance For
Loan Loss
Allocated
     Average
Balance in
Impaired
Loans
     Cash/Accrual
Interest
Income
Recognized
 

With no recorded allowance

  

           

Commercial

  

           

Owner occupied real estate

   $ 1,076       $ 1,077       $ —         $ 1,329       $ 2   

Non owner occupied real estate

     3,907         3,912         —           4,534         6   

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —     

Commercial and industrial

     609         609         —           649         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

  5,592      5,598      —        6,512      8   

With an allowance recorded

Commercial

Owner occupied real estate

  417      417      165      419      —     

Non owner occupied real estate

  1,590      1,590      184      1,590      —     

Residential development

  —        —        —        —        —     

Development & Spec Land Loans

  —        —        —        —        —     

Commercial and industrial

  942      942      680      949      —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

  2,949      2,949      1,029      2,958      —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 8,541    $ 8,547    $ 1,029    $ 9,470    $ 8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                          Three Months Ending  
March 31, 2014    Unpaid
Principal
Balance
     Recorded
Investment
     Allowance For
Loan Loss
Allocated
     Average
Balance in
Impaired
Loans
    Cash/Accrual
Interest
Income
Recognized
 

With no recorded allowance

  

          

Commercial

  

          

Owner occupied real estate

   $ 1,145       $ 1,148       $ —         $ 1,759      $ 12   

Non owner occupied real estate

     3,443         3,446         —           3,514        5   

Residential development

     —           —           —           —          —     

Development & Spec Land Loans

     24         24         —           24        —     

Commercial and industrial

     333         349         —           608        —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial

  4,945      4,967      —        5,905      17   

With an allowance recorded

Commercial

Owner occupied real estate

  —        —        —        (1   —     

Non owner occupied real estate

  347      347      170      353      —     

Residential development

  —        —        —        —        —     

Development & Spec Land Loans

  138      138      40      142      —     

Commercial and industrial

  1,883      1,883      1,080      1,727      2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial

  2,368      2,368      1,290      2,221      2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

$ 7,313    $ 7,335    $ 1,290    $ 8,126    $ 19   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

22


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:

 

March 31, 2015    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

   $ 266      $ 138      $ —        $ 404      $ 239,623      $ 240,027   

Non owner occupied real estate

     —          84        —          84        308,336        308,420   

Residential development

     —          —          —          —          3,409        3,409   

Development & Spec Land Loans

     —          —          —          —          11,229        11,229   

Commercial and industrial

     320        —          —          320        131,102        131,422   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

  586      222      —        808      693,699      694,507   

Real estate

Residential mortgage

  357      435      —        792      243,289      244,081   

Residential construction

  —        —        —        —        15,763      15,763   

Mortgage warehouse

  —        —        —        —        178,899      178,899   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

  357      435      —        792      437,951      438,743   

Consumer

Direct Installment

  142      7      —        149      41,327      41,476   

Direct Installment Purchased

  —        —        —        —        195      195   

Indirect Installment

  559      80      19      658      146,280      146,938   

Home Equity

  1,038      519      —        1,557      136,901      138,458   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

  1,739      606      19      2,364      324,703      327,067   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 2,682    $ 1,263    $ 19    $ 3,964    $ 1,456,353    $ 1,460,317   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

  0.18   0.09   0.00   0.27   99.73
December 31, 2014    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

   $ 103      $ 645      $ —        $ 748      $ 227,632      $ 228,380   

Non owner occupied real estate

     413        —          —          413        296,886        297,299   

Residential development

     —          —          —          —          2,027        2,027   

Development & Spec Land Loans

     —          —          —          —          12,097        12,097   

Commercial and industrial

     19        1        —          20        133,236        133,256   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

  535      646      —        1,181      671,878      673,059   

Real estate

Residential mortgage

  1,033      193      40      1,266      241,255      242,521   

Residential construction

  —        —        —        —        11,505      11,505   

Mortgage warehouse

  —        —        —        —        129,156      129,156   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

  1,033      193      40      1,266      381,916      383,182   

Consumer

Direct Installment

  113      4      10      127      40,010      40,137   

Direct Installment Purchased

  —        —        —        —        219      219   

Indirect Installment

  1,042      243      47      1,332      140,536      141,868   

Home Equity

  1,084      189      18      1,291      137,716      139,007   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

  2,239      436      75      2,750      318,481      321,231   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 3,807    $ 1,275    $ 115    $ 5,197    $ 1,372,275    $ 1,377,472   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

  0.28   0.09   0.01   0.38   99.62

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 that exceeds the authorities in the respective markets (ranging from $1,000,000 to $2,500,000) are validated by the Loan Committee, which is chaired by the Chief Credit Officer (CCO).

 

23


Table of Contents

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 CCO or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCO however, lenders must present their factual information to either the Loan Committee or the CCO when recommending an upgrade.

 

    The CCO, 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 by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate owned and personal property 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 residential 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 a nine-grade rating system to determine the credit quality of commercial loans. The first five 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:

 

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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 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:

Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans. Borrower displays acceptable liquidity, leverage, and earnings performance within the Bank’s minimum underwriting guidelines. The level of risk is acceptable but conditioned on the proper level of loan officer supervision. Loans that normally fall into this grade include acquisition, construction and development loans and income producing properties that have not reached stabilization.

Risk Grade 4W Management Watch:

Loans in this category are considered to be of acceptable quality, but with above normal risk. Borrower displays potential indicators of weakness in the primary source of repayment resulting in a higher reliance on secondary sources of repayment. Balance sheet may exhibit weak liquidity and/or high leverage. There is inconsistent earnings performance without the ability to sustain adverse economic conditions. Borrower may be operating in a declining industry or the property type, as for a commercial real estate loan, may be high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion.

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.

 

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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)

 

    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.

 

    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.

 

26


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 loans by credit grades.

 

March 31, 2015    Pass     Special
Mention
    Substandard     Doubtful     Total  

Commercial

  

       

Owner occupied real estate

   $ 227,083      $ 7,728      $ 5,216      $ —        $ 240,027   

Non owner occupied real estate

     296,948        2,330        9,142        —          308,420   

Residential development

     3,409        —          —          —          3,409   

Development & Spec Land Loans

     11,153        76        —          —          11,229   

Commercial and industrial

     128,280        985        2,157        —          131,422   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

  666,873      11,119      16,515      —        694,507   

Real estate

Residential mortgage

  238,280      —        5,801      —        244,081   

Residential construction

  15,502      —        261      —        15,763   

Mortgage warehouse

  178,899      —        —        —        178,899   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

  432,681      —        6,062      —        438,743   

Consumer

Direct Installment

  41,142      —        334      —        41,476   

Direct Installment Purchased

  195      —        —        —        195   

Indirect Installment

  146,413      —        525      —        146,938   

Home Equity

  134,539      —        3,919      —        138,458   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

  322,289      —        4,778      —        327,067   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 1,421,843    $ 11,119    $ 27,355    $ —      $ 1,460,317   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

  97.37   0.76   1.87   0.00
December 31, 2014    Pass     Special
Mention
    Substandard     Doubtful     Total  

Commercial

          

Owner occupied real estate

   $ 215,875      $ 7,623      $ 4,883      $ —        $ 228,381   

Non owner occupied real estate

     283,518        4,458        9,323        —          297,299   

Residential development

     2,027        —          —          —          2,027   

Development & Spec Land Loans

     12,018        79        —          —          12,097   

Commercial and industrial

     128,589        1,799        2,868        —          133,256   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

  642,027      13,959      17,074      —        673,060   

Real estate

Residential mortgage

  236,893      —        5,628      —        242,521   

Residential construction

  11,239      —        266      —        11,505   

Mortgage warehouse

  129,156      —        —        —        129,156   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

  377,288      —        5,894      —        383,182   

Consumer

Direct Installment

  39,900      —        237      —        40,137   

Direct Installment Purchased

  219      —        —        —        219   

Indirect Installment

  141,264      —        604      —        141,868   

Home Equity

  135,155      —        3,852      —        139,007   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

  316,538      —        4,693      —        321,231   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

$ 1,335,854    $ 13,959    $ 27,661    $ —      $ 1,377,473   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

  96.98   1.01   2.01   0.00

 

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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)

 

Note 8 – Derivative Financial Instruments

Cash Flow Hedges

As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 6.14% on a notional amount of $30.5 million at March 31, 2015 and December 31, 2014. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At March 31, 2015, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.

Fair Value Hedges

Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At March 31, 2015, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.

The change in fair value of both the hedge instruments and the underlying loan agreements are recorded as gains or losses in interest income. The fair value hedges are considered to be highly effective and any hedge ineffectiveness was deemed not material. The notional amounts of the loan agreements being hedged were $106.6 million at March 31, 2015 and $102.7 million at December 31, 2014.

Other Derivative Instruments

The Company enters into non-hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At March 31, 2015, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income.

The change in fair value of both the forward sale commitments and commitments to originate mortgage loans were recorded and the net gains or losses included in the Company’s gain on sale of loans.

 

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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 following tables summarize the fair value of derivative financial instruments utilized by Horizon:

 

     Asset Derivative      Liability Derivatives  
     March 31, 2015      March 31, 2015  
Derivatives designated as hedging instruments (Unaudited)    Balance Sheet
Location
   Fair Value      Balance Sheet
Location
     Fair Value  

Interest rate contracts

   Loans    $ —           Other liabilities       $ 2,208   

Interest rate contracts

   Other Assets      2,208         Other liabilities         3,666   
     

 

 

       

 

 

 

Total derivatives designated as hedging instruments

  2,208      5,874   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments

Mortgage loan contracts

Other assets   636      Other liabilities      —     
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

  636      —     
     

 

 

       

 

 

 

Total derivatives

$ 2,844    $ 5,874   
     

 

 

       

 

 

 
     Asset Derivative      Liability Derivatives  
     December 31, 2014      December 31, 2014  
Derivatives designated as hedging instruments (Unaudited)    Balance Sheet
Location
   Fair Value      Balance Sheet
Location
     Fair Value  

Interest rate contracts

   Loans    $ —           Other liabilities       $ 1,208   

Interest rate contracts

   Other Assets      1,208         Other liabilities         3,339   
     

 

 

       

 

 

 

Total derivatives designated as hedging instruments

  1,208      4,547   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments

Mortgage loan contracts

Other assets   447      Other liabilities      —     
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

  447      —     
     

 

 

       

 

 

 

Total derivatives

$ 1,655    $ 4,547   
     

 

 

       

 

 

 

The effect of the derivative instruments on the condensed consolidated statement of income for the three month periods ending is as follows:

 

     Amount of Loss Recognized in Other
Comprehensive Income on Derivative
(Effective Portion)
 
     Three Months Ended March 31  
Derivative in cash flow    2015      2014  

hedging relationship

   (Unaudited)      (Unaudited)  

Interest rate contracts

   $ (214    $ (146

FASB Accounting Standards Codification (“ASC”) Topic 820-10-20 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820-10-55 establishes a fair value hierarchy that emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

 

29


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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

        Amount of Gain (Loss) Recognized on Derivative  
        Three Months Ended March 31  
Derivative in fair value   Location of gain (loss)   2015     2014  

hedging relationship

  recognized on derivative   (Unaudited)     (Unaudited)  

Interest rate contracts

  Interest income - loans   $ 719      $ 207   

Interest rate contracts

  Interest income - loans     (719     (207
   

 

 

   

 

 

 

Total

$ —      $ —     
   

 

 

   

 

 

 
        Amount of Gain (Loss) Recognized on Derivative  
        Three Months Ended March 31  
Derivative not designated   Location of gain (loss)   2015     2014  

as hedging relationship

  recognized on derivative   (Unaudited)     (Unaudited)  

Mortgage contracts

  Other income - gain on sale of loans   $ 189      $ 240   

Note 9 – Disclosures about Fair Value of Assets and Liabilities

The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are three levels of inputs that may be used to measure fair value:

 

Level 1   Quoted prices in active markets for identical assets or liabilities
Level 2   Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3   Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended March 31, 2015. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available for sale securities

When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency mortgage obligations and mortgage-backed pools, private-label mortgage-backed pools and corporate notes. Level 2 securities are valued by a first party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model, is used to develop prepayment and interest rate scenarios for securities with prepayment features.

 

30


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Hedged loans

Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 2 of the valuation hierarchy based on the unobservable inputs used.

Interest rate swap agreements

The fair value of the Company’s interest rate swap agreements is estimated by a first party using inputs that are primarily unobservable including a yield curve, adjusted for liquidity and credit risk, contracted terms and discounted cash flow analysis, and therefore, are classified within Level 2 of the valuation hierarchy.

The following table presents the fair value measurements of assets and liabilities recognized in the accompanying condensed consolidated financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following:

 

            Quoted Prices in
Active Markets
for Identical
Assets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
     Fair Value      (Level 1)      (Level 2)      (Level 3)  

March 31, 2015

           

Available-for-sale securities

           

U.S. Treasury and federal agencies

   $ 28,421       $ —         $ 28,421       $ —     

State and municipal

     51,576         —           51,576         —     

Federal agency collateralized mortgage obligations

     121,719         —           121,719         —     

Federal agency mortgage-backed pools

     129,267         —           129,267         —     

Private labeled mortgage-backed pools

     —           —           —           —     

Corporate notes

     50         —           50         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

  331,033      —        331,033      —     

Hedged loans

  104,383      —        104,383      —     

Forward sale commitments

  636      —        636      —     

Interest rate swap agreements

  (5,874   —        (5,874   —     

Commitments to originate loans

  —        —        —        —     

December 31, 2014

Available-for-sale securities

U.S. Treasury and federal agencies

$ 26,823    $ —      $ 26,823    $ —     

State and municipal

  47,952      —        47,952      —     

Federal agency collateralized mortgage obligations

  122,860      —        122,860      —     

Federal agency mortgage-backed pools

  125,395      —        125,395      —     

Private labeled mortgage-backed pools

  689      —        689      —     

Corporate notes

  45      —        45      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

  323,764      —        323,764      —     

Hedged loans

  101,445      —        101,445      —     

Forward sale commitments

  447      —        447      —     

Interest rate swap agreements

  (4,546   —        (4,546   —     

Commitments to originate loans

  —        —        —        —     

 

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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)

 

Realized gains and losses included in net income for the periods are reported in the condensed consolidated statements of income as follows:

 

     Three Months Ended March 31  
     2015      2014  
     (Unaudited)      (Unaudited)  

Non Interest Income

     

Total gains and losses from:

     

Hedged loans

   $ 719       $ 207   

Fair value interest rate swap agreements

     (719      (207

Derivative loan commitments

     189         240   
  

 

 

    

 

 

 
$ 189    $ 240   
  

 

 

    

 

 

 

Certain other assets are measured at fair value on a nonrecurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment):

 

            Quoted Prices
in Active
Markets for
Identical Assets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
     Fair Value      (Level 1)      (Level 2)      (Level 3)  

March 31, 2015

           

Impaired loans

   $ 7,512       $ —         $ —         $ 7,512   

Mortgage servicing rights

     7,854         —           —           7,854   

December 31, 2014

           

Impaired loans

   $ 9,464       $ —         $ —         $ 9,464   

Mortgage servicing rights

     7,642         —           —           7,642   

Impaired (collateral dependent): Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms 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.

If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.

Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.

Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs’ fair value decreased by $76,000 during the first three months of 2015 and increased by $5,000 during the first three months of 2014.

The following table presents qualitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements, other than goodwill.

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

     Fair Value at      Valuation         Range (Weighted  
     March 31, 2015     

Technique

  

Unobservable Inputs

   Average)  

Impaired loans

   $ 7,512       Collateral based measurement    Discount to reflect current market conditions and ultimate collectability      10% - 15% (12%)   

Mortgage servicing rights

   $ 7,854       Discounted cashflows    Discount rate, Constant prepayment rate, Probability of default     
 
 
10% - 15% (12%),
4% - 7% (4.6%),
1% - 10%  (4.5%)
  
  
  
     Fair Value at      Valuation         Range (Weighted  
     December 31, 2014     

Technique

  

Unobservable Inputs

   Average)  

Impaired loans

   $ 9,464       Collateral based measurement    Discount to reflect current market conditions and ultimate collectability      10% - 15% (12%)   

Mortgage servicing rights

   $ 7,642       Discounted cashflows    Discount rate, Constant prepayment rate, Probability of default     
 
 
10% - 15% (12%),
4% - 7% (4.6%),
1% - 10% (4.5%)
  
  
  

Note 10 – Fair Value of Financial Instruments

The estimated fair value amounts of the Company’s financial instruments were determined using available market information, current pricing information applicable to Horizon and various valuation methodologies. Where market quotations were not available, considerable management judgment was involved in the determination of estimated fair values. Therefore, the estimated fair value of financial instruments shown below may not be representative of the amounts at which they could be exchanged in a current or future transaction. Due to the inherent uncertainties of expected cash flows of financial instruments, the use of alternate valuation assumptions and methods could have a significant effect on the estimated fair value amounts.

The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon’s significant financial instruments at March 31, 2015 and December 31, 2014. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheet as well as certain off-balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and Due from Banks - The carrying amounts approximate fair value.

Held-to-Maturity Securities - For debt securities held to maturity, fair values are based on quoted market prices or dealer quotes. For those securities where a quoted market price is not available, carrying amount is a reasonable estimate of fair value based upon comparison with similar securities.

Loans Held for Sale - The carrying amounts approximate fair value.

Net Loans - The fair value of portfolio loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amounts of loans held for sale approximate fair value.

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

FHLB and FRB Stock — Fair value of FHLB and FRB stock is based on the price at which it may be resold to the FHLB and FRB.

Interest Receivable/Payable — The carrying amounts approximate fair value.

Deposits — The fair value of demand deposits, savings accounts, interest-bearing checking accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturity.

Borrowings — Rates currently available to Horizon for debt with similar terms and remaining maturities are used to estimate fair values of existing borrowings.

Subordinated Debentures — Rates currently available for debentures with similar terms and remaining maturities are used to estimate fair values of existing debentures.

Commitments to Extend Credit and Standby Letters of Credit — The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Due to the short-term nature of these agreements, carrying amounts approximate fair value.

The following table presents estimated fair values of the Company’s financial instruments and the level within the fair value hierarchy in which the fair value measurements fall (unaudited).

 

     March 31, 2015  
            Quoted
Prices
               
            in Active      Significant         
            Markets for      Other      Significant  
            Identical      Observable      Unobservable  
     Carrying      Assets      Inputs      Inputs  
     Amount      (Level 1)      (Level 2)      (Level 3)  

Assets

           

Cash and due from banks

   $ 38,676       $ 38,676       $ —         $ —     

Investment securities, held to maturity

     164,282         —           171,405         —     

Loans held for sale

     6,229         —           —           6,229   

Loans excluding loan level hedges, net

     1,340,342         —           —           1,379,815   

Stock in FHLB and FRB

     11,348         —           11,348         —     

Interest receivable

     8,431         —           8,431         —     

Liabilities

           

Non-interest bearing deposits

   $ 285,181       $ 285,181       $ —         $ —     

Interest-bearing deposits

     1,179,915         —           1,134,694         —     

Borrowings

     440,415         —           438,547         —     

Subordinated debentures

     32,680         —           32,674         —     

Interest payable

     504         —           504         —     

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

     December 31, 2014  
            Quoted
Prices
               
            in Active                
            Markets
for
    

Significant

Other

     Significant  
            Identical      Observable      Unobservable  
     Carrying      Assets      Inputs      Inputs  
     Amount      (Level 1)      (Level 2)      (Level 3)  

Assets

           

Cash and due from banks

   $ 43,476       $ 43,476       $ —         $ —     

Investment securities, held to maturity

     165,767         —           169,904         —     

Loans held for sale

     6,143         —           —           6,143   

Loans excluding loan level hedges, net

     1,260,608         —           —           1,295,133   

Stock in FHLB and FRB

     11,348         —           11,348         —     

Interest receivable

     8,246         —           8,246         —     

Liabilities

           

Non-interest bearing deposits

   $ 267,667       $ 267,667       $ —         $ —     

Interest-bearing deposits

     1,214,652         —           1,158,912         —     

Borrowings

     351,198         —           348,597         —     

Subordinated debentures

     32,642         —           32,669         —     

Interest payable

     497         —           497         —     

Note 11 – Accumulated Other Comprehensive Income

 

     March 31      December 31  
     2015      2014  

Unrealized gain on securities available for sale

   $ 5,856       $ 4,018   

Unamortized gain on securities held to maturity, previously transferred from AFS

     1,544         1,658   

Unrealized loss on derivative instruments

     (3,666      (3,337

Tax effect

     (1,307      (818
  

 

 

    

 

 

 

Total accumulated other comprehensive income

$ 2,427    $ 1,521   
  

 

 

    

 

 

 

Note 12 – Regulatory Capital

Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined), or leverage ratio. For March 31, 2015, Interim Final Basel III rules require the Bank to maintain minimum amounts and ratios of common equity Tier I capital (as defined in the regulation) to risk-weighted assets (as defined). Additionally under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. For December 31, 2014, regulatory capital ratios were calculated under Basel I rules.

 

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Notes to Condensed Consolidated Financial Statements

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

 

To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, common equity Tier I risk-based (March 31, 2015) and Tier I leverage ratios as set forth in the table below. As of March 31, 2015 and December 31, 2014, the Bank met all capital adequacy requirements to be considered well capitalized. There were no conditions or events since the end of the first quarter of 2015 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well-capitalized status for bank holding companies.

Horizon and the Bank’s actual and required capital ratios as of March 31, 2015 and December 31, 2014 were as follows:

 

                  Required For Capital1     Well Capitalized Under Prompt1  
     Actual     Adequacy Purposes     Corrective Action Provisions  
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

As of March 31, 2015

               

Total capital1 (to risk-weighted assets)

               

Consolidated

   $ 218,613         13.74   $ 127,286         8.00     N/A         N/A   

Bank

     195,409         12.35     126,581         8.00   $ 158,226         10.00

Tier 1 capital1 (to risk-weighted assets)

               

Consolidated

     201,979         12.69     95,498         6.00     N/A         N/A   

Bank

     178,775         11.30     94,925         6.00     126,566         8.00

Common equity tier 1 capital1 (to risk-weighted assets)

               

Consolidated

     156,411         9.83     71,602         4.50     N/A         N/A   

Bank

     178,775         11.30     71,194         4.50     102,835         6.50

Tier 1 capital1 (to average assets)

               

Consolidated

     201,979         9.97     81,035         4.00     N/A         N/A   

Bank

     178,775         8.77     81,539         4.00     101,924         5.00

As of December 31, 2014

               

Total capital1 (to risk-weighted assets)

               

Consolidated

   $ 212,276         14.48   $ 117,280         8.00     N/A         N/A   

Bank

     192,604         13.08     117,801         8.00   $ 147,251         10.00

Tier 1 capital1 (to risk-weighted assets)

               

Consolidated

     195,775         13.35     58,659         4.00     N/A         N/A   

Bank

     176,103         11.96     58,897         4.00     88,346         6.00

Tier 1 capital1 (to average assets)

               

Consolidated

     195,775         9.76     80,236         4.00     N/A         N/A   

Bank

     176,103         8.80     80,047         4.00     100,059         5.00

 

1  As defined by regulatory agencies

Note 13 – Business Combination

On February 18, 2015, Horizon entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for Horizon’s acquisition of Peoples Bancorp, an Indiana corporation (“Peoples”). Pursuant to the Merger Agreement, Peoples would merge with and into Horizon, with Horizon surviving the merger (the “Merger”), and Peoples Federal Savings Bank of DeKalb County, a federally chartered stock savings bank and wholly-owned subsidiary of Peoples, would merge with and into a wholly-owned subsidiary of Horizon, Horizon Bank, N.A. (“Horizon Bank”), with Horizon Bank as the surviving bank.

The boards of directors of each of Horizon and Peoples have approved the Merger and the Merger Agreement. Subject to the approval of the issuance of shares related to the Merger by Horizon shareholders, the Merger by Peoples shareholders, regulatory approvals and other closing conditions, the parties anticipate completing the Merger during the third quarter of 2015.

 

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Notes to Condensed Consolidated Financial Statements

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

 

In connection with the Merger, each Peoples shareholder will receive 0.95 shares of Horizon common stock (the “Exchange Ratio”) and $9.75 in cash for each share of Peoples common stock owned by them. Based on Horizon’s February 18, 2015 closing price of $23.02 per share as reported on the NASDAQ Global Select Market, the implied transaction value is estimated at $73.1 million.

Subject to certain terms and conditions, the board of directors of Peoples has agreed to recommend the approval and adoption of the Merger Agreement to the Peoples shareholders and will solicit proxies voting in favor of the Merger from Peoples’ shareholders.

The Merger Agreement also provides for certain termination rights for both Horizon and Peoples, and further provides that upon termination of the Merger Agreement under certain circumstances, Peoples will be obligated to pay Horizon a termination fee.

As of December 31, 2014, Peoples reported total assets of approximately $486.6 million, total deposits of approximately $368.7 million and total loans of approximately $235.1 million.

Note 14 – Future Accounting Matters

The FASB has issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.

Existing GAAP does not include explicit guidance about a customer’s accounting for fees paid in a cloud computing arrangement. Examples of cloud computing arrangements include: (a) software as a service; (b) platform as a service; (c) infrastructure as a service; and (d) other similar hosting arrangements.

The amendments add guidance to Subtopic 350-40, Intangibles—Goodwill and Other—Internal-Use Software, which will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The guidance already exists in the FASB Accounting Standards Codification™ in paragraphs 985-605-55-121 through 55-123, but it is included in a Subtopic applied by cloud service providers to determine whether an arrangement includes the sale or license of software.

For public business entities, the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015.

The FASB has issued an Accounting Standards Update (ASU) No. 2015-02, Consolidation (Topic 810):

Amendments to the Consolidation Analysis, which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions).

The ASU focuses on the consolidation evaluation for reporting organizations (public and private companies and not-for-profit organizations) that are required to evaluate whether they should consolidate certain legal entities.

In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification™ (Codification) and improves current GAAP by:

 

    Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met.

 

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Notes to Condensed Consolidated Financial Statements

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

 

    Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE).

 

    Changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs.

The ASU will be effective for periods beginning after December 15, 2015, for public companies. Early adoption is permitted, including adoption in an interim period.

 

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward–Looking Statements

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp (“Horizon” or the “Company”) and Horizon Bank, N.A. (the “Bank”). Horizon intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Statements in this report should be considered in conjunction with the other information available about Horizon, including the information in the other filings we make with the Securities and Exchange Commission. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “expect,” “estimate,” “project,” “intend,” “plan,” “believe,” “could,” “will” and similar expressions in connection with any discussion of future operating or financial performance. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements.

Actual results may differ materially, adversely or positively, from the expectations of the Company that are expressed or implied by any forward-looking statement. Risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward-looking statement include but are not limited to:

 

    economic conditions and their impact on Horizon and its customers;

 

    changes in the level and volatility of interest rates, spreads on earning assets and interest-bearing liabilities, and interest rate sensitivity;

 

    rising interest rates and their impact on mortgage loan volumes;

 

    estimates of fair value of certain of Horizon’s assets and liabilities;

 

    volatility and disruption in financial markets;

 

    prepayment speeds, loan originations, credit losses and market values, collateral securing loans and other assets;

 

    sources of liquidity;

 

    potential risk of environmental liability related to lending activities;

 

    changes in the competitive environment in Horizon’s market areas and among other financial service providers;

 

    legislation and/or regulation affecting the financial services industry as a whole, and Horizon and its subsidiaries in particular, including the effects resulting from the reforms enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the adoption of regulations by regulatory bodies under the Dodd-Frank Act;

 

    the impact of the new Basel III capital rules;

 

    changes in regulatory supervision and oversight, including monetary policy and capital requirements;

 

    changes in accounting policies or procedures as may be adopted and required by regulatory agencies;

 

    rapid technological developments and changes;

 

    the risks presented by cyber terrorism and data security breaches;

 

    containing costs and expenses;

 

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

    the slowing or failure of economic recovery;

 

    the ability of the U.S. federal government to manage federal debt limits; and

 

    the risks of expansion through mergers and acquisitions, including unexpected credit quality problems with acquired loans, difficulty integrating acquired operations and material differences in the actual financial results of such transactions compared with Horizon’s initial expectations, including the full realization of anticipated cost savings.

The foregoing list of important factors is not exclusive, and you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of us. For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward-looking statements, see “Risk Factors” in Item 1A of Part I of our 2014 Annual Report on Form 10-K and in the subsequent reports we file with the SEC.

Overview

Horizon is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking services in Northwestern and Central Indiana and Southwestern and South Central Michigan through its bank subsidiary. Horizon operates as a single segment, which is commercial banking. Horizon’s common stock is traded on the NASDAQ Global Select Market under the symbol HBNC. The Bank was chartered as a national banking association in 1873 and has operated continuously since that time. The Bank is a full-service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking.

On November 12, 2013, Horizon entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for Horizon’s acquisition of SCB Bancorp, Inc., a Michigan corporation (“Summit”). Pursuant to the Merger Agreement, Summit would merge with and into Horizon, with Horizon surviving the merger (the “Merger”), and Summit Community Bank, a Michigan-chartered commercial bank and wholly owned subsidiary of SCB Bancorp, Inc., would merge with and into a wholly owned subsidiary of Horizon, Horizon Bank, N.A. (“Horizon Bank”), with Horizon Bank as the surviving bank.

On April 3, 2014, Horizon completed the acquisition of Summit and Horizon Bank’s acquisition of Summit Community Bank, through mergers effective April 3, 2014. Under the terms of the acquisition, the exchange ratio was 0.4904 shares of Horizon common stock and $5.15 in cash for each outstanding share of Summit common stock. Summit shares outstanding at the closing were 1,164,442, and the shares of Horizon’s common stock issued to Summit shareholders totaled 570,820. Horizon’s stock price was $22.23 per share at the close of business on April 3, 2014. Based upon these numbers, the total value of the consideration for the acquisition was $18.9 million (not including the retirement of Summit debt).

Following are some highlights of Horizon’s financial performance through the first quarter of 2015:

 

    Net income for the first quarter of 2015 increased 56.8% or $1.9 million compared to the same period in 2014 to $5.4 million or $.55 diluted earnings per share.

 

    Total loans increased 24.3% on an annualized basis during the first quarter of 2015.

 

    Excluding mortgage warehouse loans, total loans increased 10.7% on an annualized basis during the first quarter of 2015.

 

    Commercial loans increased 12.9% on an annualized basis during the first quarter of 2015.

 

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

    Net interest income for the first quarter of 2015 increased 27.2% or $3.6 million compared to the same period in 2014.

 

    Non-interest income for the first quarter of 2015 increased 28.0% or $1.5 million compared to the same period in 2014.

 

    Net interest margin, excluding the impact of acquisitions (“core net interest margin”), was 3.47% for the first quarter of 2015 compared to 3.38% for the same period in 2014.

 

    Return on average assets was 1.05% for the first quarter of 2015.

 

    Return on average common equity was 11.66% for the first quarter of 2015.

 

    Horizon’s tangible book value per share rose to $16.80 at March 31, 2015, compared to $16.26 at December 31, 2014 and $15.52 at March 31, 2014. $16.80 is the highest tangible book value per share in the company’s history.

 

    On February 19, 2015, Horizon announced a planned merger agreement with Peoples Bancorp and its wholly-owned subsidiary, Peoples Federal Savings Bank of DeKalb County, headquartered in Auburn, Indiana.

 

    Horizon’s full-service Carmel, Indiana office opened on February 23, 2015.

Critical Accounting Policies

The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10-K for 2014 contain a summary of the Company’s significant accounting policies. Certain of these policies are important to the portrayal of the Company’s financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified as critical accounting policies the allowance for loan losses, intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.

Allowance for Loan Losses

An allowance for loan losses is maintained to absorb probable incurred loan losses inherent in the loan portfolio. The determination of the allowance for loan losses is a critical accounting policy that involves management’s ongoing quarterly assessments of the probable incurred losses inherent in the loan portfolio. The identification of loans that have probable incurred losses is subjective; therefore, a general reserve is maintained to cover all probable losses within the entire loan portfolio. Horizon utilizes a loan grading system that helps identify, monitor and address asset quality problems in an adequate and timely manner. Each quarter, various factors affecting the quality of the loan portfolio are reviewed. Large credits are reviewed on an individual basis for loss potential. Other loans are reviewed as a group based upon previous trends of loss experience. Horizon also reviews the current and anticipated economic conditions of its lending market as well as transaction risk to determine the effect they may have on the loss experience of the loan portfolio.

Goodwill and Intangible Assets

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. FASB ASC 350-10 establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At March 31, 2015, Horizon had core deposit intangibles of $3.7 million subject to amortization and $28.2 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC 350-10 requires

 

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

an annual evaluation of goodwill for impairment. The evaluation of goodwill for impairment requires the use of estimates and assumptions. Market price at the close of business on March 31, 2015 was $23.39 per share compared to a book value of $20.25 per common share.

Horizon has concluded that, based on its own internal evaluation, the recorded value of goodwill is not impaired.

Mortgage Servicing Rights

Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets on a servicing-retained basis. Capitalized servicing rights are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment can adversely affect the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets was to increase in the future, Horizon can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact Horizon’s financial condition and results of operations either positively or negatively.

Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayments as customers refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is prepaid, the anticipated cash flows associated with servicing that loan are terminated, resulting in a reduction of the fair value of the capitalized mortgage servicing rights. To the extent that actual borrower prepayments do not react as anticipated by the prepayment model (i.e., the historical data observed in the model does not correspond to actual market activity), it is possible that the prepayment model could fail to accurately predict mortgage prepayments and could result in significant earnings volatility. To estimate prepayment speeds, Horizon utilizes a first-party prepayment model, which is based upon statistically derived data linked to certain key principal indicators involving historical borrower prepayment activity associated with mortgage loans in the secondary market, current market interest rates and other factors, including Horizon’s own historical prepayment experience. For purposes of model valuation, estimates are made for each product type within the mortgage servicing rights portfolio on a monthly basis. In addition, on a quarterly basis Horizon engages a first party to independently test the value of its servicing asset.

Derivative Instruments

As part of the Company’s asset/liability management program, Horizon utilizes, from time-to-time, interest rate floors, caps or swaps to reduce the Company’s sensitivity to interest rate fluctuations. These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated income statements or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

Horizon’s accounting policies related to derivatives reflect the guidance in FASB ASC 815-10. Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of the fair value of the recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). For fair value hedges, the cumulative change in fair value of both the hedge instruments and the underlying loans is recorded in non-interest income. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated income statement in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, Horizon establishes the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized currently in the consolidated statements of income. Horizon excludes the time value expiration of the hedge when measuring ineffectiveness.

Valuation Measurements

Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities, residential mortgage loans held for sale and derivatives are carried at fair value, as defined in FASB ASC 820, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts of goodwill, mortgage servicing rights, and pension and other post-retirement benefit obligations. To determine the values of these assets and liabilities, as well as the extent, to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment speeds and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect Horizon’s results of operations.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

Financial Condition

On March 31, 2015, Horizon’s total assets were $2.2 billion, an increase of approximately $77.0 million compared to December 31, 2014. The increase was primarily due to the growth in net loans of $82.7 million.

Investment securities were comprised of the following as of (dollars in thousands):

 

     March 31, 2015      December 31, 2014  
     Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value  

Available for sale

           

U.S. Treasury and federal agencies

   $ 28,400       $ 28,421       $ 26,996       $ 26,823   

State and municipal

     50,036         51,576         46,535         47,952   

Federal agency collateralized mortgage obligations

     120,785         121,719         122,930         122,860   

Federal agency mortgage-backed pools

     125,923         129,267         122,583         125,395   

Private labeled mortgage-backed pools

     —           —           670         689   

Corporate notes

     32         50         32         45   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

$ 325,176    $ 331,033    $ 319,746    $ 323,764   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

U.S. Treasury and federal agencies

$ 9,824    $ 9,981    $ 9,804    $ 9,886   

State and municipal

  128,558      134,594      129,595      132,887   

Federal agency collateralized mortgage obligations

  3,873      3,918      4,039      4,073   

Federal agency mortgage-backed pools

  22,027      22,912      22,329      23,058   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

$ 164,282    $ 171,405    $ 165,767    $ 169,904   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities increased by approximately $5.8 million at March 31, 2015 compared to December 31, 2014 due to the reinvestment of investment security cash flows held at December 31, 2014 during the first quarter.

Total loans increased $82.8 million since December 31, 2014 to $1.5 billion as of March 31, 2015. This increase was the result of an increase in commercial loans of $21.4 million, mortgage warehouse loans of $49.7 million, residential mortgage loans of $5.8 million and consumer loans of $5.9 million. The growth in total loans during the three months ended March 31, 2015 is the direct result of increased calling efforts to increase Horizon’s market share within the Company’s footprint and market expansion.

The following table presents the amount and growth rate of loans by product type for the three months ended March 31, 2015.

Loan Growth by Type

Three Months Ended March 31, 2015

(Dollars in Thousands)

 

                                Annualized  
     March 31      December 31      Amount      Percent     Percent  
     2015      2014      Change      Change     Change  
     (Unaudited)                             

Commercial loans

   $ 695,736       $ 674,314       $ 21,422         3.2     12.9

Residential mortgage loans

     260,390         254,625         5,765         2.3     9.2

Consumer loans

     326,334         320,459         5,875         1.8     7.4

Held for sale loans

     6,229         6,143         86         1.4     5.7
  

 

 

    

 

 

    

 

 

      

Subtotal

  1,288,689      1,255,541      33,148      2.6   10.7

Mortgage warehouse loans

  178,899      129,156      49,743      38.5   156.2
  

 

 

    

 

 

    

 

 

      

Total loans

$ 1,467,588    $ 1,384,697    $ 82,891      6.0   24.3
  

 

 

    

 

 

    

 

 

      

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

Total deposits decreased $17.2 million since December 31, 2014. This decrease was primarily the result of a decrease in municipal deposits and time deposits, partially offset by an increase in non-interest bearing deposits. The decrease in municipal deposits is seasonal and is impacted by the timing of property tax payment collection and disbursement. Non-interest bearing deposit accounts increased by $17.5 million, interest-bearing transaction accounts decreased by $25.4 million and time deposits decreased by $9.4 million during the three months ended March 31, 2015.

The Company’s borrowings increased $89.2 million from December 31, 2014 as total loan growth of $82.8 million outpaced the decrease in deposits of $17.2 million during the three months ended March 31, 2015, thereby increasing the Company’s reliance on borrowings to fund loan growth during the period. At March 31, 2015, the Company had $166.0 million in short-term funds borrowed compared to $95.0 million at December 31, 2014. The Company’s current balance sheet strategy is to utilize a reasonable level of short-term borrowings during extended low rate environments in addition to what is needed for the fluctuations in municipal deposits and mortgage warehouse lending.

Stockholders’ equity totaled $199.5 million at March 31, 2015 compared to $194.4 million at December 31, 2014. The increase in stockholders’ equity during the period was the result of the generation of net income and an increase in accumulated other comprehensive income, net of dividends declared. At March 31, 2015, the ratio of average stockholders’ equity to average assets was 9.56% compared to 9.56% for December 31, 2014. Book value per common share at March 31, 2015 increased to $20.25 compared to $19.75 at December 31, 2014.

Results of Operations

Overview

Consolidated net income for the three-month period ended March 31, 2015 was $5.4 million, an increase of 56.8% from the $3.4 million for the same period in 2014. Earnings per common share for the three months ended March 31, 2015 were $0.58 basic and $0.55 diluted, compared to $0.39 basic and $0.38 diluted for the same three-month period in 2014. Diluted earnings per share increased by $.17 compared to the same three-month period in 2014 due to an increase in interest income due to loan growth and an increase in accretion income from acquisition-related purchase accounting adjustments and an increase in non-interest income primarily due to an increase in gain in sale of loans and fiduciary activities, partially offset by an increase in non-interest expense primarily due to an increase in salaries and employee benefits from company growth and an increase in loan volume and an increase in the amount of shares outstanding as a result of the Summit acquisition.

Net Interest Income

The largest component of net income is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on deposits and borrowings. Changes in the net interest income are the result of changes in volume and the net interest spread, which affects the net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.

Net interest income during the three months ended March 31, 2015 was $16.9 million, an increase of $3.6 million from the $13.3 million earned during the same period in 2014. Yields on the Company’s interest-earning assets increased by 10 basis points to 4.39% for the three months ending March 31, 2015 from 4.29% for the three months ended March 31, 2014. Interest income increased $3.6 million from $16.5 million for the three months ended March 31, 2014 to $20.1 million for the same period in 2014. This increase was due

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

to an increase in interest-earning assets offset by lower yields on loans and investment securities and an increase in interest income from acquisition-related purchase accounting adjustments from $389,000 for the first quarter of 2014 to $1.1 million for the same period of 2015.

Rates paid on interest-bearing liabilities decreased by 15 basis points for the three months ended March 31, 2015 compared to the same period in 2014 due to the continued low interest rate environment. Interest expense increased $12,000 compared to the three months ended March 31, 2014 to $3.2 million for the same period in 2015. This increase was due to higher balances of both interest-bearing deposits and borrowings. The net interest margin increased 22 basis points from 3.48% for the three months ended March 31, 2014 to 3.70% for the same period in 2015. The increase in the margin for the three months ended March 31, 2015 compared to the same period in 2014 was due to loan growth resulting in a higher ratio of loans to average earning assets, lower funding costs and an increase of $694,000 of interest income from acquisition-related purchase accounting adjustments, partially offset by a decrease in yield on loans and investment securities. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.47% for the three-month period ending March 31, 2015 compared to 3.38% for the same period in 2014.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

The following are the average balance sheets for the three months ending (dollars in thousands):

 

     Three Months Ended     Three Months Ended  
     March 31, 2015     March 31, 2014  
     Average            Average     Average            Average  
     Balance     Interest      Rate     Balance     Interest      Rate  

ASSETS

              

Interest-earning assets

              

Federal funds sold

   $ 4,804      $ 2         0.17   $ 7,439      $ 4         0.22

Interest-earning deposits

     10,772        3         0.11     5,722        3         0.21

Investment securities—taxable

     360,554        2,149         2.42     386,793        2,383         2.50

Investment securities—non-taxable (1)

     140,748        1,077         4.31     147,840        1,123         4.28

Loans receivable (2)(3)

     1,382,992        16,862         4.96     1,050,491        12,954         5.00
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets (1)

  1,899,870      20,093      4.39   1,598,285      16,467      4.29

Non-interest-earning assets

Cash and due from banks

  28,994      24,890   

Allowance for loan losses

  (16,489   (16,166

Other assets

  157,553      138,322   
  

 

 

        

 

 

      
$ 2,069,928    $ 1,745,331   
  

 

 

        

 

 

      

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest-bearing liabilities

Interest-bearing deposits

$ 1,215,862    $ 1,232      0.41 $ 1,079,514    $ 1,277      0.48

Borrowings

  337,430      1,479      1.78   228,138      1,422      2.53

Subordinated debentures

  32,657      496      6.16   32,502      496      6.19
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

  1,585,949      3,207      0.82   1,340,154      3,195      0.97

Non-interest-bearing liabilities

Demand deposits

  271,158      223,974   

Accrued interest payable and other liabilities

  14,989      12,807   

Shareholders’ equity

  197,832      168,396   
  

 

 

        

 

 

      
$ 2,069,928    $ 1,745,331   
  

 

 

        

 

 

      

Net interest income/spread

$ 16,886      3.57 $ 13,272      3.32
    

 

 

        

 

 

    

Net interest income as a percent of average interest earning assets (1)

  3.70   3.48

 

(1) Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. Interest rate is presented on a tax equivalent basis.
(2) Includes loan fees and late fees. The inclusion of these fees does not have a material effect on the average interest rate.
(3) Non-accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loans fees.

Provision for Loan Losses

Horizon assesses the adequacy of its Allowance for Loan and Lease Losses (“ALLL”) by regularly reviewing the performance of its loan portfolios. During the three-month period ended March 31, 2015, a provision of $614,000 was required to adequately fund the ALLL compared to no provision for the same period of 2014. Commercial loan net charge-offs during the three months ended March 31, 2015 were negative $11,000, residential mortgage loan net charge-offs were $20,000 and consumer loan net charge-offs were $472,000. The higher provision for loan losses in the first quarter of 2015 compared to the same period of 2014 was primarily due to continued loan growth. The ALLL balance at March 31, 2015 was $16.6 million or 1.13% of

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

total loans. This compares to an ALLL balance of $16.5 million at December 31, 2014 or 1.19% of total loans. The decrease in the ratio at March 31, 2015 compared to December 31, 2014 was due to an increase in total loans of $82.8 million and improving trends in classified and non-performing loans.

Horizon’s loan loss reserve ratio, excluding loans with credit-related purchase accounting adjustments, stood at 1.22% as of March 31, 2015. The table below details Horizon’s loan loss reserve ratio composition as of March 31, 2015.

Allowance for Loan and Lease Loss Detail

As of March 31, 2015

(Dollars in Thousands, Unaudited)

 

     Horizon                    
     Legacy     Heartland     Summit     Total  

Pre-discount loan balance

   $ 1,341,040      $ 32,854      $ 93,760      $ 1,467,654   

Allowance for loan losses (ALLL)

     16,380        254        —          16,634   

Loan discount

     N/A        2,061        4,234        6,295   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total ALLL+loan discount

  16,380      2,315      4,234      22,929   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loans, net

$ 1,324,660    $ 30,539    $ 89,526    $ 1,444,725   
  

 

 

   

 

 

   

 

 

   

 

 

 

ALLL/ pre-discount loan balance

  1.22   0.77   0.00   1.13

Loan discount/ pre-discount loan balance

  N/A      6.27   4.52   0.43

Total ALLL+loan discount/ pre-discount loan balance

  1.22   7.05   4.52   1.56

No assurance can be given that Horizon will not, in any particular period, sustain loan losses that are significant in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions and management’s ongoing quarterly assessments of the portfolio, will not require increases in the allowance for loan losses. Horizon considers the allowance for loan losses to be appropriate to cover probable incurred losses in the loan portfolio as of March 31, 2015.

Non-performing loans totaled $22.4 million on March 31, 2015 and December 31, 2014. Compared to December 31, 2014, non-performing real estate loans and consumer loans increased by $168,000 and $85,000, respectively, offset by a decrease of $315,000 in non-performing commercial loans.

At March 31, 2015, loans acquired represented $3.6 million in non-performing, $4.7 million in substandard and $242,000 in delinquent loans.

Other Real Estate Owned (OREO) totaled $749,000 on March 31, 2015, down from $1.2 million on December 31, 2014 and $1.7 million on March 31, 2014.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2015

 

Non-interest Income

The following is a summary of changes in non-interest income (table dollar amounts in thousands):