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) |
Registrants telephone number, including area code: (219) 879-0211
Former name, former address and former fiscal year, if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated Filer | ¨ | Accelerated Filer | x | |||
Non-accelerated Filer | ¨ Do not check if smaller reporting company | Smaller Reporting Company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 9,232,163 shares of Common Stock, no par value, at May 1, 2015.
HORIZON BANCORP
FORM 10-Q
2
PART 1 FINANCIAL INFORMATION
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 | ||||||
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Total assets |
$ | 2,153,965 | $ | 2,076,922 | ||||
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Liabilities |
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Deposits |
||||||||
Non-interest bearing |
$ | 285,181 | $ | 267,667 | ||||
Interest bearing |
1,179,915 | 1,214,652 | ||||||
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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 | ||||||
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Total liabilities |
1,954,474 | 1,882,508 | ||||||
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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 | ||||||
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Total stockholders equity |
199,491 | 194,414 | ||||||
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Total liabilities and stockholders equity |
$ | 2,153,965 | $ | 2,076,922 | ||||
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See notes to condensed consolidated financial statements
3
HORIZON BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
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 | ||||||
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Total interest income |
20,093 | 16,467 | ||||||
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Interest Expense |
||||||||
Deposits |
1,232 | 1,277 | ||||||
Borrowed funds |
1,479 | 1,422 | ||||||
Subordinated debentures |
496 | 496 | ||||||
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Total interest expense |
3,207 | 3,195 | ||||||
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Net Interest Income |
16,886 | 13,272 | ||||||
Provision for loan losses |
614 | | ||||||
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Net Interest Income after Provision for Loan Losses |
16,272 | 13,272 | ||||||
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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 | ||||||
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Total non-interest income |
7,066 | 5,522 | ||||||
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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 | ||||||
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Total non-interest expense |
16,068 | 14,514 | ||||||
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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 | ||||||
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Net Income |
5,358 | 3,417 | ||||||
Preferred stock dividend |
(31 | ) | (31 | ) | ||||
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Net Income Available to Common Shareholders |
$ | 5,327 | $ | 3,386 | ||||
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Basic Earnings Per Share |
$ | 0.58 | $ | 0.39 | ||||
Diluted Earnings Per Share |
0.55 | 0.38 |
See notes to condensed consolidated financial statements
4
HORIZON BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands)
Three Months Ended March 31 |
||||||||
2015 | 2014 | |||||||
(Unaudited) | (Unaudited) | |||||||
Net Income |
$ | 5,358 | $ | 3,417 | ||||
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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 | ||||||
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Changes from derivative instruments |
(214 | ) | (146 | ) | ||||
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Change in securities available-for-sale: |
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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 | ) | ||||
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Unrealized gains on available-for-sale securities |
1,120 | 2,876 | ||||||
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Other Comprehensive Income, Net of Tax |
906 | 2,730 | ||||||
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Comprehensive Income |
$ | 6,264 | $ | 6,147 | ||||
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See notes to condensed consolidated financial statements
5
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 | ) | ||||||||||||||||
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Balances, March 31, 2015 |
$ | 12,500 | $ | 46,064 | $ | 138,500 | $ | 2,427 | $ | 199,491 | ||||||||||
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See notes to condensed consolidated financial statements
6
HORIZON BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
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 | ) | ||||
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Net cash provided by operating activities |
11,184 | 1,821 | ||||||
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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 | ) | |||||
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Net cash used in investing activities |
(86,680 | ) | (40,567 | ) | ||||
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Financing Activities |
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Net change in |
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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 | ) | ||||
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Net cash provided by financing activities |
70,696 | 42,845 | ||||||
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Net Change in Cash and Cash Equivalents |
(4,800 | ) | 4,099 | |||||
Cash and Cash Equivalents, Beginning of Period |
43,476 | 31,721 | ||||||
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Cash and Cash Equivalents, End of Period |
$ | 38,676 | $ | 35,820 | ||||
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Additional Supplemental Information |
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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
7
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 1 Accounting Policies
The accompanying 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 Horizons management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments.
Certain information and note disclosures normally included in Horizons annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizons Annual Report on Form 10-K for 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 | ||||||
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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 | ||||
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Diluted earnings per share |
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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: |
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Warrants |
321,652 | 311,278 | ||||||
Restricted stock |
30,510 | 39,519 | ||||||
Stock options |
41,333 | 40,023 | ||||||
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Weighted average shares outstanding |
9,609,506 | 9,021,786 | ||||||
Diluted earnings per share |
$ | 0.55 | $ | 0.38 | ||||
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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.
8
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 Horizons 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. Horizons 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 Summits net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on managements preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the preliminary purchase price for the Summit acquisition is allocated as follows:
9
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 | |||
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Expected cash flows at acquisition |
11,314 | |||
Interest component of expected cash flows (accretable discount) |
1,688 | |||
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Fair value of acquired loans accounted for under ASC 310-30 |
$ | 9,626 | ||
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Pro-forma statements were not presented due to the materiality of the transaction.
10
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 3 Securities
The fair value of securities is as follows:
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 | ||||||||||||
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Total available for sale investment securities |
$ | 325,176 | $ | 6,725 | $ | (868 | ) | $ | 331,033 | |||||||
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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 | |||||||||||
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Total held to maturity investment securities |
$ | 164,282 | $ | 7,342 | $ | (219 | ) | $ | 171,405 | |||||||
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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 | ||||||||||||
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Total available for sale investment securities |
$ | 319,746 | $ | 5,697 | $ | (1,679 | ) | $ | 323,764 | |||||||
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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 | ||||||||||||
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Total held to maturity investment securities |
$ | 165,767 | $ | 4,244 | $ | (107 | ) | $ | 169,904 | |||||||
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|
|
|
|
|
|
|
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 Companys 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
11
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 Companys investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
12
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 |
||||||||
14 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 | ||||
|
|
|
|
13
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 Companys commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.
Real Estate and Consumer
With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.
Mortgage Warehousing
Horizons mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizons agreement with the mortgage company. Each individual mortgage is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company repurchases the loan under its option within the agreement. Due to the repurchase feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.
Based on the agreements with each mortgage company, at any time a mortgage company can repurchase from Horizon 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
14
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 | ||||||||
|
|
|
|
|
|
|
|
15
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
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
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Certain loans are individually evaluated for impairment, and the Companys general practice is to proactively charge down impaired loans to the fair value of the underlying collateral.
Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Companys policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.
For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrowers ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.
The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down or specific allocation of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the value is known but no later than when a loan is 180 days past due. Pursuant to such guidelines, the Company also charges-off unsecured open-end loans when the loan is 90 days past due, and charges down to the net realizable value other secured loans when they are 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off.
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment analysis:
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
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
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 managements policy to convert the loan from an earning asset to a non-accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is managements policy to place a loan on a non-accrual status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief 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 14 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrowers business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to non-accrual status when they are 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, including TDRs, are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.
The Companys TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At 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
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
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
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 Banks processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re-evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade.
| For new and renewed commercial loans, the Banks Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure 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
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 managements 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:
24
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 Banks 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. |
25
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
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 | % |
27
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 Companys cash flow hedge was effective and is not expected to have a significant impact on the Companys 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 Companys fair value hedges were effective and are not expected to have a significant impact on the Companys 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 Companys fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Companys 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 Companys gain on sale of loans.
28
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
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 bonds 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
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 Companys 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 |
| | | |
31
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 Companys 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.
32
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 Companys 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 Horizons 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.
33
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 Companys 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 | |
34
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 Banks 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 Banks assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks 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.
35
HORIZON BANCORP AND SUBSIDIARIES
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 Banks classification as well capitalized. There is no threshold for well-capitalized status for bank holding companies.
Horizon and the Banks 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 Horizons 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.
36
HORIZON BANCORP AND SUBSIDIARIES
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 Horizons 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, IntangiblesGoodwill and OtherInternal-Use Software (Subtopic 350-40): Customers Accounting for Fees Paid in a Cloud Computing Arrangement.
Existing GAAP does not include explicit guidance about a customers 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, IntangiblesGoodwill and OtherInternal-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. |
37
HORIZON BANCORP AND SUBSIDIARIES
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.
38
HORIZON BANCORP AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months Ended March 31, 2015
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ForwardLooking 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 managements 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 Companys 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 Horizons 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 Horizons 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; |
39
HORIZON BANCORP AND SUBSIDIARIES
Managements 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 Horizons 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. Horizons 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 Horizons 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 Banks 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 Horizons common stock issued to Summit shareholders totaled 570,820. Horizons 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 Horizons 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. |
40
HORIZON BANCORP AND SUBSIDIARIES
Managements 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. |
| Horizons 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 companys 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. |
| Horizons 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 Companys Annual Report on Form 10-K for 2014 contain a summary of the Companys significant accounting policies. Certain of these policies are important to the portrayal of the Companys 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 managements 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. Horizons 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
41
HORIZON BANCORP AND SUBSIDIARIES
Managements 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 managements 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 Horizons 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 Horizons 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 Companys asset/liability management program, Horizon utilizes, from time-to-time, interest rate floors, caps or swaps to reduce the Companys 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.
42
HORIZON BANCORP AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months Ended March 31, 2015
Horizons 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 Horizons results of operations.
43
HORIZON BANCORP AND SUBSIDIARIES
Managements Discussion and Analysis of Financial Condition
And Results of Operations
For the Three Months Ended March 31, 2015
Financial Condition
On March 31, 2015, Horizons 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 Horizons market share within the Companys 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 | % | ||||||||||
|
|
|
|
|
|
44
HORIZON BANCORP AND SUBSIDIARIES
Managements 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 Companys 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 Companys 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 Companys 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 Companys 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
45
HORIZON BANCORP AND SUBSIDIARIES
Managements 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.
46
HORIZON BANCORP AND SUBSIDIARIES
Managements 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 securitiestaxable |
360,554 | 2,149 | 2.42 | % | 386,793 | 2,383 | 2.50 | % | ||||||||||||||||
Investment securitiesnon-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
47
HORIZON BANCORP AND SUBSIDIARIES
Managements 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.
Horizons 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 Horizons 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 managements 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.
48
HORIZON BANCORP AND SUBSIDIARIES
Managements 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):