10-Q
Table of Contents

 

 

HORIZON BANCORP

FORM 10-Q

 

 

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

Commission file number 0-10792

 

 

HORIZON BANCORP

(Exact name of registrant as specified in its charter)

 

 

 

Indiana   35-1562417

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

515 Franklin Square, Michigan City, Indiana   46360
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (219) 879-0211

Former name, former address and former fiscal year, if changed since last report: N/A

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large Accelerated Filer   ¨    Accelerated Filer   x
Non-accelerated Filer   ¨  Do not check if smaller reporting company    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 9,256,026 shares of Common Stock, no par value, at August 10, 2015.

 

 

 


Table of Contents

HORIZON BANCORP

FORM 10-Q

INDEX

 

PART I. FINANCIAL INFORMATION   
Item 1.  

Financial Statements (Unaudited)

  
 

Condensed Consolidated Balance Sheets

     3   
 

Condensed Consolidated Statements of Income

     4   
 

Condensed Consolidated Statements of Comprehensive Income

     5   
 

Condensed Consolidated Statement of Stockholders’ Equity

     6   
 

Condensed Consolidated Statements of Cash Flows

     7   
 

Notes to Condensed Consolidated Financial Statements

     8   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     40   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     56   
Item 4.  

Controls and Procedures

     56   
PART II. OTHER INFORMATION   
Item 1.  

Legal Proceedings

     57   
Item 1A.  

Risk Factors

     57   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     57   
Item 3.  

Defaults Upon Senior Securities

     57   
Item 4.  

Mine Safety Disclosures

     57   
Item 5.  

Other Information

     57   
Item 6.  

Exhibits

     58   
Signatures      59   
Index To Exhibits      60   

 

2


Table of Contents

PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)

 

     June 30
2015
     December 31
2014
 
     (Unaudited)         

Assets

     

Cash and due from banks

   $ 43,857       $ 43,476   

Investment securities, available for sale

     330,970         323,764   

Investment securities, held to maturity (fair value of $167,581 and $169,904)

     162,661         165,767   

Loans held for sale

     7,677         6,143   

Loans, net of allowance for loan losses of $16,421 and $16,501

     1,502,862         1,362,053   

Premises and equipment, net

     54,778         52,461   

Federal Reserve and Federal Home Loan Bank stock

     11,080         11,348   

Goodwill

     28,176         28,176   

Other intangible assets

     3,531         3,965   

Interest receivable

     8,823         8,246   

Cash value of life insurance

     39,897         39,382   

Other assets

     24,995         32,141   
  

 

 

    

 

 

 

Total assets

   $ 2,219,307       $ 2,076,922   
  

 

 

    

 

 

 

Liabilities

     

Deposits

     

Non-interest bearing

   $ 307,215       $ 267,667   

Interest bearing

     1,277,508         1,214,652   
  

 

 

    

 

 

 

Total deposits

     1,584,723         1,482,319   

Borrowings

     385,236         351,198   

Subordinated debentures

     32,719         32,642   

Interest payable

     461         497   

Other liabilities

     14,037         15,852   
  

 

 

    

 

 

 

Total liabilities

     2,017,176         1,882,508   
  

 

 

    

 

 

 

Commitments and contingent liabilities

     

Stockholders’ Equity

     

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

     12,500         12,500   

Common stock, no par value Authorized, 22,500,000 shares Issued, 9,313,779 and 9,278,916 shares Outstanding, 9,256,026 and 9,213,036 shares

     —           —     

Additional paid-in capital

     46,622         45,916   

Retained earnings

     141,889         134,477   

Accumulated other comprehensive income

     1,120         1,521   
  

 

 

    

 

 

 

Total stockholders’ equity

     202,131         194,414   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 2,219,307       $ 2,076,922   
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

3


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

 

     Three Months Ended
June 30
    Six Months Ended
June 30
 
     2015     2014     2015     2014  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Interest Income

        

Loans receivable

   $ 17,981      $ 16,631      $ 34,843      $ 29,585   

Investment securities

        

Taxable

     2,067        2,395        4,221        4,785   

Tax exempt

     1,079        1,096        2,156        2,219   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     21,127        20,122        41,220        36,589   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Deposits

     1,237        1,355        2,469        2,632   

Borrowed funds

     1,539        1,478        3,018        2,900   

Subordinated debentures

     501        501        997        997   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     3,277        3,334        6,484        6,529   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     17,850        16,788        34,736        30,060   

Provision for loan losses

     1,906        339        2,520        339   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Loan Losses

     15,944        16,449        32,216        29,721   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Income

        

Service charges on deposit accounts

     1,085        1,038        2,084        1,961   

Wire transfer fees

     182        145        333        257   

Interchange fees

     1,366        1,254        2,468        2,213   

Fiduciary activities

     1,216        1,199        2,513        2,247   

Gain on sale of investment securities (includes $0 for the three months ended and $124 for the six months ended June 30, 2015 and $0 for the three and six months ended June 30, 2014, related to accumulated other comprehensive earnings reclassifications)

     —          —          124        —     

Gain on sale of mortgage loans

     2,642        2,537        5,021        3,948   

Mortgage servicing income net of impairment

     300        233        479        440   

Increase in cash value of bank owned life insurance

     257        252        515        485   

Death benefit on bank owned life insurance

     —          —          145        —     

Other income

     138        (31     570        598   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     7,186        6,627        14,252        12,149   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Expense

        

Salaries and employee benefits

     8,385        8,293        16,889        15,776   

Net occupancy expenses

     1,375        1,360        2,926        2,784   

Data processing

     966        937        1,889        1,807   

Professional fees

     660        419        1,187        1,027   

Outside services and consultants

     918        1,298        1,544        1,959   

Loan expense

     1,367        1,272        2,624        2,287   

FDIC insurance expense

     339        285        676        541   

Other losses

     150        95        105        133   

Other expense

     2,490        2,449        4,878        4,608   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     16,650        16,408        32,718        30,922   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Tax

     6,480        6,668        13,750        10,948   

Income tax expense (includes $0 for the three months ended and $43 for the six months ended June 30, 2015 and $0 for the three and six months ended June 30, 2014, related to income tax expense from reclassification items)

     1,752        1,890        3,664        2,753   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

     4,728        4,778        10,086        8,195   

Preferred stock dividend

     (31     (32     (63     (63
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Available to Common Shareholders

   $ 4,697      $ 4,746      $ 10,023      $ 8,132   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic Earnings Per Share

   $ 0.51      $ 0.52      $ 1.09      $ 0.91   

Diluted Earnings Per Share

     0.49        0.50        1.04        0.88   

See notes to condensed consolidated financial statements

 

4


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Dollar Amounts in Thousands)

 

     Three Months Ended June 30     Six Months Ended June 30  
     2015     2014     2015     2014  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Net Income

   $ 4,728      $ 4,778      $ 10,086      $ 8,195   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income

        

Change in fair value of derivative instruments:

        

Change in fair value of derivative instruments for the period

     511        (317     182        (542

Income tax effect

     (179     111        (64     190   
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from derivative instruments

     332        (206     118        (352
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in securities available-for-sale:

        

Unrealized appreciation (depreciation) for the period on AFS securities

     (2,364     2,336        (650     6,762   

Unrealized depreciation for the period on held-to-maturity

     (158     (108     (272     (108

Reclassification adjustment for securities gains realized in income

     —          —          124        —     

Income tax effect

     882        (779     279        (2,329
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (1,640     1,449        (519     4,325   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss), Net of Tax

     (1,308     1,243        (401     3,973   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 3,420      $ 6,021      $ 9,685      $ 12,168   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

5


Table of Contents

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

           10,086          10,086   

Other comprehensive income, net of tax

             (401     (401

Amortization of unearned compensation

        179             179   

Exercise of stock options

        290             290   

Tax benefit related to stock options

        99             99   

Stock option expense

        138             138   

Cash dividends on preferred stock (1.00%)

           (63       (63

Cash dividends on common stock ($.28 per share)

           (2,611       (2,611
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances, June 30, 2015

   $ 12,500       $ 46,622       $ 141,889      $ 1,120      $ 202,131   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

6


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

 

     Six Months Ended June 30  
     2015     2014  
     (Unaudited)     (Unaudited)  

Operating Activities

    

Net income

   $ 10,086      $ 8,195   

Items not requiring (providing) cash

    

Provision for loan losses

     2,520        339   

Depreciation and amortization

     1,883        1,805   

Share based compensation

     138        87   

Mortgage servicing rights net (recovery) impairment

     356        (38

Premium amortization on securities available for sale, net

     1,289        1,132   

Gain on sale of investment securities

     (124     —     

Gain on sale of mortgage loans

     (5,021     (3,948

Proceeds from sales of loans

     155,746        93,991   

Loans originated for sale

     (152,259     (94,048

Change in cash value of life insurance

     (515     (485

Gain on sale of other real estate owned

     (206     (173

Net change in

    

Interest receivable

     (577     (432

Interest payable

     (36     (50

Other assets

     4,099        702   

Other liabilities

     (1,511     (1,190
  

 

 

   

 

 

 

Net cash provided by operating activities

     15,868        5,887   
  

 

 

   

 

 

 

Investing Activities

    

Purchases of securities available for sale

     (47,958     (52,484

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

     40,359        35,828   

Purchases of securities held to maturity

     —          (4,839

Proceeds from maturities of securities held to maturity

     1,535        7,900   

Purchase of Federal Reserve Bank stock

     —          (6

Proceeds from the sale of FHLB stock

     268        —     

Net change in loans

     (142,131     (130,424

Proceeds on the sale of OREO and repossessed assets

     1,793        2,095   

Purchases of premises and equipment

     (3,587     (3,326

Acquisition of SCB

     —          7,925   

Purchase of Mortgage Company

     —          (736
  

 

 

   

 

 

 

Net cash used in investing activities

     (149,721     (138,067
  

 

 

   

 

 

 

Financing Activities

    

Net change in

    

Deposits

     102,404        86,564   

Borrowings

     34,115        66,993   

Proceeds from issuance of stock

     389        —     

Dividends paid on common shares

     (2,611     (2,231

Dividends paid on preferred shares

     (63     (63
  

 

 

   

 

 

 

Net cash provided by financing activities

     134,234        151,263   
  

 

 

   

 

 

 

Net Change in Cash and Cash Equivalents

     381        19,083   

Cash and Cash Equivalents, Beginning of Period

     43,476        31,721   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 43,857      $ 50,804   
  

 

 

   

 

 

 

Additional Supplemental Information

    

Interest paid

   $ 6,519      $ 6,527   

Income taxes paid

     3,700        600   

Transfer of loans to other real estate owned

     (1,384     1,999   

Transfer of available-for-sale securities to held-to-maturity

     —          167,047   

The Company purchased all of the capital stock of Summit for $18,896. In conjunction with the acquisition, liabilities were assumed as follows:

     —          158,585   

Fair value of assets acquired

     —          6,207   

Cash paid to retire Summit debt

     —          1,029   

Cash paid for the capital stock

     —          138,660   

See notes to condensed consolidated financial statements

 

7


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 1 - Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of Horizon Bancorp (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank, N.A. (“Bank”). All inter-company balances and transactions have been eliminated. The results of operations for the periods ended June 30, 2015 and June 30, 2014 are not necessarily indicative of the operating results for the full year of 2015 or 2014. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizon’s management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments.

Certain information and note disclosures normally included in Horizon’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon’s Annual Report on Form 10-K for 2014 filed with the Securities and Exchange Commission on March 13, 2015. The condensed consolidated balance sheet of Horizon as of December 31, 2014 has been derived from the audited balance sheet as of that date.

Basic earnings per share is computed by dividing net income available to common shareholders (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted-average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following table shows computation of basic and diluted earnings per share.

 

    

Three Months Ended

June 30

    

Six Months Ended

June 30

 
     2015      2014      2015      2014  
     (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Basic earnings per share

           

Net income

   $ 4,728       $ 4,778       $ 10,086       $ 8,195   

Less: Preferred stock dividends

     31         32         63         63   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 4,697       $ 4,746       $ 10,023       $ 8,132   

Weighted average common shares outstanding

     9,240,005         9,182,986         9,228,075         8,908,492   

Basic earnings per share

   $ 0.51       $ 0.52       $ 1.09       $ 0.91   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

           

Net income available to common shareholders

   $ 4,697       $ 4,746       $ 10,023       $ 8,132   

Weighted average common shares outstanding

     9,240,005         9,182,986         9,228,075         8,908,492   

Effect of dilutive securities:

           

Warrants

     324,698         303,399         323,198         308,060   

Restricted stock

     34,892         38,003         30,816         38,717   

Stock options

     37,991         36,551         33,462         38,154   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     9,637,586         9,560,939         9,615,551         9,293,423   

Diluted earnings per share

   $ 0.49       $ 0.50       $ 1.04       $ 0.88   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were 2,500 and 41,444 shares for the three and six months ended June 30, 2015, respectively, and 45,766 shares for both the three and six months ended June 30, 2014 which were not included in the computation of diluted earnings per share because they were non-dilutive.

 

8


Table of Contents

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 – Acquisitions

On February 18, 2015, Horizon entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for Horizon’s acquisition of Peoples Bancorp, Inc., 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 (“Peoples FSB”), 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.

On July 1, 2015 Horizon completed the acquisition of Peoples and Horizon Bank N.A.’s acquisition of Peoples FSB, through mergers effective July 1, 2015. Under the terms of the acquisition, the exchange ratio was 0.95 shares of Horizon common stock (the “Exchange Ratio”) and $9.75 in cash for each outstanding share of Peoples common stock. Peoples shareholders owning fewer than 100 shares of common stock received $33.14 in cash for each common share. Peoples shares outstanding at the closing were 2,311,858, and the shares of Horizon common stock issued to Peoples shareholders totaled 2,192,202. Horizon’s stock price was $25.32 per share at the close of business on July 1, 2015. Based upon these numbers, the total value of the consideration for the acquisition was $78.1 million.

As of July 1, 2015, Peoples had total assets of approximately $462.7 million, total deposits of approximately $350.6 million and total net loans of approximately $226.6 million.

Utilizing June 30, 2015 financials for both Horizon and Peoples and an estimate of the fair market value adjustments associated with the merger, Horizon would have total assets of approximately $2.7 billion, total deposits of approximately $1.9 billion and total net loans of approximately $1.7 billion on a pro forma basis. The accounting for the business combination is not yet complete and therefore all required disclosures for a business combination have not been provided.

On April 3, 2014 Horizon closed its acquisition of SCB Bancorp, Inc. (“Summit”) and Horizon Bank N.A.’s acquisition of Summit Community Bank, through mergers effective as of that date. Under the final terms of the acquisition, the exchange ratio was 0.4904 shares of Horizon’s common stock and $5.15 in cash for each share of Summit common stock outstanding. Summit shares outstanding at the closing were 1,164,442, and the shares of Horizon common stock issued to Summit shareholders totaled 570,820. Horizon’s stock price was $22.23 per share at the close of business on April 3, 2014. Based upon these numbers, the total value of the consideration for the acquisition was $18.9 million (not including the retirement of Summit debt). The Company had approximately $1.3 million in costs related to the acquisition. These expenses are classified in the other expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce cost through economies of scale.

 

9


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Under the purchase method of accounting, the total estimated purchase price is allocated to Summit’s net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the preliminary purchase price for the Summit acquisition is allocated as follows:

 

ASSETS

     

LIABILITIES

  

Cash and due from banks

   $ 15,161      

Deposits

  
     

Non-interest bearing

   $ 27,274   

Commercial

     70,441      

NOW accounts

     16,332   

Residential mortgage

     43,448      

Savings and money market

     35,045   

 

Consumer

  

 

 

 

10,192

 

  

  

 

Certificates of deposits

     42,368   
  

 

 

       

 

 

 

Total loans

     124,081      

Total deposits

     121,019   

Premises and equipment, net

     2,548      

Borrowings

  

 

 

 

16,990

 

  

FRB and FHLB stock

     2,136      

Interest payable

  

 

 

 

52

 

  

Goodwill

     8,428      

Other liabilities

     599   

Core deposit intangible

     822         

Interest receivable

     347         

Cash value of life insurance

     2,185         

Other assets

     2,877         
  

 

 

       

 

 

 

Total assets purchased

   $ 158,585      

Total liabilities assumed

   $ 138,660   
  

 

 

       

 

 

 

Common shares issued

   $ 12,689         

Cash paid

     6,207         

Retirement of Holding Company Debt

     1,029         
  

 

 

       

Total estimated purchase price

   $ 19,925         
  

 

 

       

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.

 

10


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The following table details the acquired loans that are accounted for in accordance with ASC 310-30 as of April 3, 2014.

 

Contractually required principal and interest at acquisition

   $  14,460   

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

     3,146   
  

 

 

 

Expected cash flows at acquisition

     11,314   

Interest component of expected cash flows (accretable discount)

     1,688   
  

 

 

 

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

   $ 9,626   
  

 

 

 

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

Note 3 – Securities

The fair value of securities is as follows:

 

June 30, 2015    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available for sale

           

U.S. Treasury and federal agencies

   $ 28,308       $ 35       $ (104    $ 28,239   

State and municipal

     49,739         1,212         (168      50,783   

Federal agency collateralized mortgage obligations

     116,674         973         (705      116,942   

Federal agency mortgage-backed pools

     132,762         2,661         (473      134,950   

Corporate notes

     32         24         —           56   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 327,515       $ 4,905       $ (1,450    $ 330,970   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

U.S. Treasury and federal agencies

   $ 9,845       $ 102       $ —         $ 9,947   

State and municipal

     127,452         4,416         (511      131,357   

Federal agency collateralized mortgage obligations

     3,670         33         (22      3,681   

Federal agency mortgage-backed pools

     21,694         1,064         (162      22,596   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 162,661       $ 5,615       $ (695    $ 167,581   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Available for sale

           

U.S. Treasury and federal agencies

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

State and municipal

     46,535         1,462         (45      47,952   

Federal agency collateralized mortgage obligations

     122,930         975         (1,045      122,860   

Federal agency mortgage-backed pools

     122,583         3,172         (360      125,395   

Private labeled mortgage-backed pools

     670         19         —           689   

Corporate notes

     32         13         —           45   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

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

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

U.S. Treasury and federal agencies

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

State and municipal

     129,595         3,398         (106      132,887   

Federal agency collateralized mortgage obligations

     4,039         35         (1      4,073   

Federal agency mortgage-backed pools

     22,329         729         —           23,058   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

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

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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 June 30, 2015, no individual investment security had an unrealized loss that was determined to be other-than-temporary.

The unrealized losses on the Company’s investments in securities of state and municipal governmental agencies, U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at June 30, 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 June 30, 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.

 

12


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

     June 30, 2015      December 31, 2014  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Available for sale

           

Within one year

   $ 6,436       $ 6,477       $ 6,098       $ 6,169   

One to five years

     50,332         51,057         44,720         45,093   

Five to ten years

     15,380         15,571         16,147         16,768   

After ten years

     5,931         5,973         6,598         6,790   
  

 

 

    

 

 

    

 

 

    

 

 

 
     78,079         79,078         73,563         74,820   

Federal agency collateralized mortgage obligations

     116,674         116,942         122,930         122,860   

Federal agency mortgage-backed pools

     132,762         134,950         122,583         125,395   

Private labeled mortgage-backed pools

     —           —           670         689   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 327,515       $ 330,970       $ 319,746       $ 323,764   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

Within one year

   $ —         $ —         $ —         $ —     

One to five years

     8,184         8,319         592         593   

Five to ten years

     101,504         105,071         99,225         101,323   

After ten years

     27,609         27,914         39,582         40,857   
  

 

 

    

 

 

    

 

 

    

 

 

 
     137,297         141,304         139,399         142,773   

Federal agency collateralized mortgage obligations

     3,670         3,681         4,039         4,073   

Federal agency mortgage-backed pools

     21,694         22,596         22,329         23,058   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 162,661       $ 167,581       $ 165,767       $ 169,904   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table shows the gross unrealized losses and the fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

 

     Less than 12 Months     12 Months or More     Total  
June 30, 2015    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. Treasury and federal agencies

   $ 4,469       $ (14   $ 13,897       $ (90   $ 18,366       $ (104

State and municipal

     38,471         (667     1,249         (12     39,720         (679

Federal agency collateralized mortgage obligations

     24,435         (170     28,098         (557     52,533         (727

Federal agency mortgage-backed pools

     23,044         (208     26,017         (427     49,061         (635
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 90,419       $ (1,059   $ 69,261       $ (1,086   $ 159,680       $ (2,145
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     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 June 30      Six Months Ended June 30  
     2015      2014      2015      2014  

Sales of securities available for sale (Unaudited)

           

Proceeds

   $ —         $ —         $ 13,332       $ —     

Gross gains

     —           —           147         —     

Gross losses

     —           —           (23      —     

 

13


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 4 Loans

 

     June 30
2015
     December 31
2014
 

Commercial

     

Working capital and equipment

   $ 323,709       $ 300,940   

Real estate, including agriculture

     353,859         343,455   

Tax exempt

     8,665         8,595   

Other

     23,713         21,324   
  

 

 

    

 

 

 

Total

     709,946         674,314   

Real estate

     

1–4 family

     273,753         250,799   

Other

     3,654         3,826   
  

 

 

    

 

 

 

Total

     277,407         254,625   

Consumer

     

Auto

     166,501         154,538   

Recreation

     5,676         5,673   

Real estate/home improvement

     41,309         38,288   

Home equity

     112,095         112,426   

Unsecured

     3,711         3,613   

Other

     6,714         5,921   
  

 

 

    

 

 

 

Total

     336,006         320,459   

Mortgage warehouse

     195,924         129,156   
  

 

 

    

 

 

 

Total loans

     1,519,283         1,378,554   

Allowance for loan losses

     (16,421      (16,501
  

 

 

    

 

 

 

Loans, net

   $ 1,502,862       $ 1,362,053   
  

 

 

    

 

 

 

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, the general economy or fluctuations in interest rates. The properties securing the Company’s commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

 

14


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Real Estate and Consumer

With respect to residential loans that are secured by 1-4 family residences and are generally owner occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Mortgage Warehousing

Horizon’s mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company repurchases the loan under its option within the agreement. Due to the repurchase feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.

Based on the agreements with each mortgage company, at any time a mortgage company can repurchase from Horizon 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 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.

 

15


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

June 30, 2015    Loan
Balance
     Interest Due      Deferred
Fees / (Costs)
     Recorded
Investment
 

Owner occupied real estate

   $ 238,883       $ 471       $ 611       $ 239,965   

Non owner occupied real estate

     313,871         326         488         314,685   

Residential spec homes

     2,606         2         18         2,626   

Development & spec land loans

     13,593         32         27         13,652   

Commercial and industrial

     139,823         802         26         140,651   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     708,776         1,633         1,170         711,579   

Residential mortgage

     257,795         816         525         259,136   

Residential construction

     19,087         34         —           19,121   

Mortgage warehouse

     195,924         480         —           196,404   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     472,806         1,330         525         474,661   

Direct installment

     44,119         138         (398      43,859   

Direct installment purchased

     179         —           —           179   

Indirect installment

     152,268         313         —           152,581   

Home equity

     140,316         555         (478      140,393   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     336,882         1,006         (876      337,012   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     1,518,464         3,969         819         1,523,252   

Allowance for loan losses

     (16,421      —           —           (16,421
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans

   $ 1,502,043       $ 3,969       $ 819       $ 1,506,831   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 5 – Accounting for Certain Loans Acquired in a Transfer

The Company acquired loans in acquisitions and the transferred loans had evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and non-accrual status, borrower credit scores and recent loan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds.

The carrying amounts of those loans included in the balance sheet amounts of loans receivable are as follows:

 

                                                                 
     June 30
2015
Heartland
     June 30
2015
Summit
     June 30
2015
Total
 

Commercial

     14,586         55,822       $ 70,408   

Real estate

     8,284         20,617         28,901   

Consumer

     6,243         7,009         13,252   
  

 

 

    

 

 

    

 

 

 

Outstanding balance

   $ 29,113       $ 83,448       $ 112,561   
  

 

 

    

 

 

    

 

 

 

Carrying amount, net of allowance of $283

         $ 112,278   
        

 

 

 

 

                                                                 
     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 six months ended June 30, is as follows:

 

                                                                    
     Six Months Ended June 30, 2015  
     Heartland      Summit      Total  

Balance at January 1

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

Additions

     —           —           —     

Accretion

     (205      (180      (385

Reclassification from nonaccretable difference

     —           —           —     

Disposals

     (117      (49      (166
  

 

 

    

 

 

    

 

 

 

Balance at June 30

   $ 2,078       $ 1,039       $ 3,117   
  

 

 

    

 

 

    

 

 

 

 

                                                                    
     Six Months Ended June 30, 2014  
     Heartland      Summit      Total  

Balance at January 1

   $ 3,185       $ —         $ 3,185   

Additions

     —           1,758         1,758   

Accretion

     (288      —           (288

Reclassification from nonaccretable difference

     —           —           —     

Disposals

     (95      —           (95
  

 

 

    

 

 

    

 

 

 

Balance at June 30

   $ 2,802       $ 1,758       $ 4,560   
  

 

 

    

 

 

    

 

 

 

During the six months ended June 30, 2015 and 2014, the Company decreased the allowance for loan losses on purchased loans by a recovery to the income statement of $76,000 and $0, respectively.

 

17


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 6 – 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

June 30

    

Six Months Ended

June 30

 
     2015      2014      2015      2014  
     (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Balance at beginning of the period

   $ 16,634       $ 16,102       $ 16,501       $ 15,992   

Loans charged-off:

           

Commercial

           

Owner occupied real estate

     1,422         —           1,422         —     

Non owner occupied real estate

     —           —           16         22   

Residential development

     —           —           —           —     

Development & Spec Land Loans

     —           166         —           173   

Commercial and industrial

     253         127         253         127   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     1,675         293         1,691         322   

Real estate

           

Residential mortgage

     164         172         186         194   

Residential construction

     —           —           —           —     

Mortgage warehouse

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     164         172         186         194   

Consumer

           

Direct Installment

     96         44         155         77   

Direct Installment Purchased

     —           —           —           —     

Indirect Installment

     196         341         565         568   

Home Equity

     304         247         504         431   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     596         632         1,224         1,076   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans charged-off

     2,435         1,097         3,101         1,592   

Recoveries of loans previously charged-off:

           

Commercial

           

Owner occupied real estate

     78         2         86         6   

Non owner occupied real estate

     —           74         —           75   

Residential development

     —           —           —           —     

Development & Spec Land Loans

     —           —           —           —     

Commercial and industrial

     14         32         33         417   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     92         108         119         498   

Real estate

           

Residential mortgage

     3         3         5         7   

Residential construction

     —           —           —           —     

Mortgage warehouse

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     3         3         5         7   

Consumer

           

Direct Installment

     47         21         76         39   

Direct Installment Purchased

     —           —           —           —     

Indirect Installment

     134         147         235         266   

Home Equity

     40         37         66         111   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     221         205         377         416   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loan recoveries

     316         316         501         921   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans charged-off (recovered)

     2,119         781         2,600         671   
  

 

 

    

 

 

    

 

 

    

 

 

 

Provision charged to operating expense

           

Commercial

     2,093         (93      2,048         119   

Real estate

     (29      (383      904         (987

Consumer

     (158      815         (432      1,207   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total provision charged to operating expense

     1,906         339         2,520         339   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at the end of the period

   $ 16,421       $ 15,660       $ 16,421       $ 15,660   
  

 

 

    

 

 

    

 

 

    

 

 

 

Certain loans are individually evaluated for impairment, and the Company’s general practice is to proactively charge down impaired loans to the fair value of the underlying collateral.

 

18


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down or specific allocation of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the value is known but no later than when a loan is 180 days past due. Pursuant to such guidelines, the Company also charges-off unsecured open-end loans when the loan is 90 days past due, and charges down to the net realizable value other secured loans when they are 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off.

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment analysis:

 

June 30, 2015    Commercial      Real Estate      Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

              

Individually evaluated for impairment

   $ 1,291       $ —         $ —         $ —         $ 1,291   

Collectively evaluated for impairment

     6,841         3,044         1,319         3,672         14,876   

Loans acquired with deteriorated credit quality

     254         —           —           —           254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 8,386       $ 3,044       $ 1,319       $ 3,672       $ 16,421   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated for impairment

   $ 10,274       $ —         $ —         $ —         $ 10,274   

Collectively evaluated for impairment

     699,576         278,257         196,404         337,012         1,511,249   

Loans acquired with deteriorated credit quality

     1,729         —           —           —           1,729   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 711,579       $ 278,257       $ 196,404       $ 337,012       $ 1,523,252   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 7 – Non-performing Loans and Impaired Loans

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

 

June 30, 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

   $ 4,447       $ —         $ —         $ 150       $ 4,597   

Non owner occupied real estate

     4,898         207         2,352         68         7,525   

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —     

Commercial and industrial

     477         —           785         —           1,262   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     9,822         207         3,137         218         13,384   

Real estate

              

Residential mortgage

     2,319         —           760         2,482         5,561   

Residential construction

     —           —           258         —           258   

Mortgage warehouse

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     2,319         —           1,018         2,482         5,819   

Consumer

              

Direct Installment

     447         —           —           —           447   

Direct Installment Purchased

     —           —           —           —           —     

Indirect Installment

     405         —           —           —           405   

Home Equity

     2,057         —           368         571         2,996   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     2,909         —           368         571         3,848   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,050       $ 207       $ 4,523       $ 3,271       $ 23,051   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Included in the $15.1 million of non-accrual loans and the $4.5 million of non-performing TDRs at June 30, 2015 were $679,000 and $302,000, respectively, of loans acquired for which accretable yield was recognized.

From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is management’s policy to convert the loan from an “earning asset” to a non-accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is management’s policy to place a loan on a non-accrual status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief Credit Officer or the senior collection officer must review all loans placed on non-accrual status. Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms. The Company requires a period of satisfactory performance of not less than six months before returning a non-accrual loan to accrual status.

A loan becomes impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor. The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement. However, if a particular loan has a determinable market value for its collateral, the creditor may use that value. Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral, which is the appraised value less estimated selling costs. Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 1–4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to non-accrual status when they are 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, including TDRs, are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At June 30, 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 June 30, 2015, the Company had $7.8 million in TDRs and $3.3 million were performing according to the restructured terms and four TDR were returned to accrual status during the first six months of 2015. There was $792,000 of specific reserves allocated to TDRs at June 30, 2015 based on the discounted cash flows or when appropriate the fair value of the collateral.

 

21


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Loans transferred and classified as troubled debt restructuring during the three and six months ended June 30, 2015 and 2014, segregated by class, are shown in the table below.

 

     Three Months Ending
June 30, 2015
     Three Months Ending
June 30, 2014
     Six Months Ending
June 30, 2015
     Six Months Ending
June 30, 2014
 
     Number of
Defaults
     Unpaid
Principal
Balance
     Number of
Defaults
     Unpaid
Principal
Balance
     Number of
Defaults
     Unpaid
Principal
Balance
     Number of
Defaults
     Unpaid
Principal
Balance
 

Commercial

                       

Owner occupied real estate

     2       $ 111         —         $ —           3       $ 2,462         —         $ —     

Non owner occupied real estate

     —           —           —           —           —           —           —           —     

Residential development

     —           —           —           —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —           —           —           —     

Commercial and industrial

     —           —           —           —           —           —           2         371   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     2         111         —           —           3         2,462         2         371   

Real estate

                       

Residential mortgage

     1         81         1         226         1         81         1         226   

Residential construction

     —           —           —           —           —           —           —           —     

Mortgage warehouse

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     1         81         1         226         1         81         1         226   

Consumer

                       

Direct Installment

     —           —           —           —           —           —           —           —     

Direct Installment Purchased

     —           —           —           —           —           —           —           —     

Indirect Installment

     —           —           —           —           —           —           —           —     

Home Equity

     —           —           1         51         1         32         2         196   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     —           —           1         51         1         32         2         196   
     —           —                 —           —           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 192         2       $ 277         5       $ 2,575         5       $ 793   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ending
June 30, 2015
     Three Months Ending
June 30, 2014
     Six Months Ending
June 30, 2015
     Six Months Ending
June 30, 2014
 
     Number of
Defaults
     Unpaid
Principal
Balance
     Number of
Defaults
     Unpaid
Principal
Balance
     Number of
Defaults
     Unpaid
Principal
Balance
     Number of
Defaults
     Unpaid
Principal
Balance
 

Commercial

                       

Owner occupied real estate

     —         $ —           —         $ —           1       $ 2,352         —         $ —     

Non owner occupied real estate

     —           —           —           —           —           —           —           —     

Residential development

     —           —           —           —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —           —           —           —     

Commercial and industrial

     —           —           —           —           —           —           2         371   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     —           —           —           —           1         2,352         2         371   

Real estate

                       

Residential mortgage

     1         81         1         223         1         81         2         377   

Residential construction

     —           —           —           —           —           —           —           —     

Mortgage warehouse

     —           —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     1         81         1         223         1         81         2         377   

Consumer

                       

Direct Installment

     —           —           —           —           —           —           —           —     

Direct Installment Purchased

     —           —           —           —           —           —           —           —     

Indirect Installment

     —           —           —           —           —           —           —           —     

Home Equity

     1         32         1         51         1         32         2         196   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     1         32         1         51         1         32         2         196   
     —           —                 —           —           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 113         2       $ 274         3       $ 2,465         6       $ 944   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The following table presents commercial loans individually evaluated for impairment by class of loan:

 

                          Three Months Ending      Six Months Ending  
June 30, 2015    Unpaid
Principal
Balance
     Recorded
Investment
     Allowance For
Loan Loss
Allocated
     Average
Balance in
Impaired
Loans
     Cash/Accrual
Interest
Income
Recognized
     Average
Balance in
Impaired
Loans
     Cash/Accrual
Interest
Income
Recognized
 

With no recorded allowance

                    

Commercial

                    

Owner occupied real estate

   $ 1,605       $ 1,606       $ —         $ 1,350       $ 17       $ 1,118       $ 17   

Non owner occupied real estate

     2,820         2,824         —           3,168         7         3,270         14   

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —           —           —     

Commercial and industrial

     379         379         —           639         —           599         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     4,804         4,809         —           5,157         24         4,987         31   

With an allowance recorded

                    

Commercial

                    

Owner occupied real estate

     2,991         2,991         593         4,366         54         1,992         54   

Non owner occupied real estate

     1,590         1,590         200         1,590         —           1,590         —     

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —           —           —     

Commercial and industrial

     884         884         498         1,008         —           974         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     5,465         5,465         1,291         6,964         54         4,556         54   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,269       $ 10,274       $ 1,291       $ 12,121       $   78       $ 9,543       $   85   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                          Three Months Ending      Six Months Ending  
June 30, 2014    Unpaid
Principal
Balance
     Recorded
Investment
     Allowance For
Loan Loss
Allocated
     Average
Balance in
Impaired
Loans
     Cash/Accrual
Interest
Income
Recognized
     Average
Balance in
Impaired
Loans
     Cash/Accrual
Interest
Income
Recognized
 

With no recorded allowance

                    

Commercial

                    

Owner occupied real estate

   $ 2,121       $ 2,124       $ —         $ 1,885       $ 40       $ 1,432       $ 51   

Non owner occupied real estate

     3,244         3,246         —           3,270         93         3,283         98   

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —           —           —     

Commercial and industrial

     283         283         —           441         —           466         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     5,648         5,653         —           5,596         133         5,181         149   

With an allowance recorded

                    

Commercial

                    

Owner occupied real estate

     —           —           —           —           —           —           —     

Non owner occupied real estate

     340         340         170         342         —           347         —     

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —           —           —     

Commercial and industrial

     1,722         1,722         965         1,710         —           1,570         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     2,062         2,062         1,135         2,052         —           1,917         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $   7,710       $   7,715       $ 1,135       $   7,648       $ 133       $ 7,098       $ 151   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The following table presents the payment status by class of loan:

 

June 30, 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

   $ 157      $ 21      $ —        $ 178      $ 238,705      $ 238,883   

Non owner occupied real estate

     82        —          207        289        313,582        313,871   

Residential development

     —          —          —          —          2,606        2,606   

Development & Spec Land Loans

     —          —          —          —          13,593        13,593   

Commercial and industrial

     591        46        —          637        139,186        139,823   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     830        67        207        1,104        707,672        708,776   

Real estate

            

Residential mortgage

     308        147        —          455        257,340        257,795   

Residential construction

     —          —          —          —          19,087        19,087   

Mortgage warehouse

     —          —          —          —          195,924        195,924   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     308        147        —          455        472,351        472,806   

Consumer

            

Direct Installment

     138        41        —          179        43,940        44,119   

Direct Installment Purchased

     —          —          —          —          179        179   

Indirect Installment

     721        130        —          851        151,417        152,268   

Home Equity

     699        245        —          944        139,372        140,316   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     1,558        416        —          1,974        334,908        336,882   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,696      $ 630      $ 207      $ 3,533      $ 1,514,931      $ 1,518,464   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     0.18     0.04     0.01     0.23     99.77  

 

December 31, 2014    30 - 59 Days
Past Due
    60 - 89 Days
Past Due
    Greater than 90
Days Past Due
    Total Past Due     Loans Not Past
Due
    Total  

Commercial

            

Owner occupied real estate

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

Non owner occupied real estate

     413        —          —          413        296,886        297,299   

Residential development

     —          —          —          —          2,027        2,027   

Development & Spec Land Loans

     —          —          —          —          12,097        12,097   

Commercial and industrial

     19        1        —          20        133,236        133,256   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

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

Real estate

            

Residential mortgage

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

Residential construction

     —          —          —          —          11,505        11,505   

Mortgage warehouse

     —          —          —          —          129,156        129,156   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

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

Consumer

            

Direct Installment

     113        4        10        127        40,010        40,137   

Direct Installment Purchased

     —          —          —          —          219        219   

Indirect Installment

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

Home Equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     0.28     0.09     0.01     0.38     99.62  

The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

Horizon Bank’s processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re-evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade.

 

  For new and renewed commercial loans, the Bank’s Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective markets (ranging from $1,000,000 to $2,500,000) are validated by the Loan Committee, which is chaired by the Chief Credit Officer (CCO).

 

24


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

  The CCO, or his designee, meets weekly with loan officers to discuss the status of past-due loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade.

 

  Monthly, senior management meets with the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate owned and personal property repossessions. The information reviewed in this meeting acts as a precursor for developing management’s analysis of the adequacy of the Allowance for Loan and Lease Losses.

For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non-accrual, or are classified as a TDR are graded “Substandard.” After being 90 days delinquent a loan is charged off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on non-accrual. Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass.

Horizon Bank employs a nine-grade rating system to determine the credit quality of commercial loans. The first five grades represent acceptable quality, and the last four grades mirror the criticized and classified grades used by the bank regulatory agencies (special mention, substandard, doubtful, and loss). The loan grade definitions are detailed below.

Risk Grade 1: Excellent (Pass)

Loans secured by liquid collateral, such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.

Risk Grade 2: Good (Pass)

Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits; loans supported by unaudited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets and unblemished credit history; or loans to publicly held companies with current long-term debt ratings of Baa or better.

Risk Grade 3: Satisfactory (Pass)

Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered.

 

25


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

    At inception, the loan was properly underwritten, did not possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory;

 

    At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss.

 

    The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance.

 

    During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants, or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.

Risk Grade 4 Satisfactory/Monitored:

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

Risk Grade 4W Management Watch:

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

Risk Grade 5: Special Mention

Loans which possess some credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered “potential,” not “defined,” impairments to the primary source of repayment. These loans may be to borrowers with adverse trends in financial performance, collateral value and/or marketability, or balance sheet strength.

Risk Grade 6: Substandard

One or more of the following characteristics may be exhibited in loans classified Substandard:

 

    Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.

 

    Loans are inadequately protected by the current net worth and paying capacity of the obligor.

 

    The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.

 

26


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

    Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

 

    Unusual courses of action are needed to maintain a high probability of repayment.

 

    The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments.

 

    The lender is forced into a subordinated or unsecured position due to flaws in documentation.

 

    Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms.

 

    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.

 

27


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The following table presents loans by credit grades.

 

June 30, 2015    Pass     Special
Mention
    Substandard     Doubtful     Total  

Commercial

          

Owner occupied real estate

   $ 224,414      $ 6,299      $ 8,170      $ —        $ 238,883   

Non owner occupied real estate

     303,292        2,442        8,137        —          313,871   

Residential development

     2,606        —          —          —          2,606   

Development & Spec Land Loans

     13,520        73        —          —          13,593   

Commercial and industrial

     136,586        991        2,246        —          139,823   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     680,416        9,805        18,553        —          708,776   

Real estate

          

Residential mortgage

     252,234        —          5,561        —          257,795   

Residential construction

     18,829        —          258        —          19,087   

Mortgage warehouse

     195,924        —          —          —          195,924   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     466,987        —          5,819        —          472,806   

Consumer

          

Direct Installment

     43,672        —          447        —          44,119   

Direct Installment Purchased

     179        —          —          —          179   

Indirect Installment

     151,863        —          405        —          152,268   

Home Equity

     137,320        —          2,996        —          140,316   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

     333,034        —          3,848        —          336,882   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,480,437      $   9,805      $ 28,220      $ —        $ 1,518,464   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     97.50     0.65     1.86     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  

 

28


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 8 – Repurchase Agreements

The Company transfers various securities to customers in exchange for cash at the end of each business day and agrees to reaquire the securities at the end of the next business day for the cash exchanged plus interest. The process is repeated at the end of each business day until the agreement is terminated. The securities underlying the agreement remained under the Bank’s control.

The following table shows repurchase agreements accounted for as secured borrowings (in thousands):

 

     Remaining Contractual Maturity of the Agreements  
     Overnight
and
Continuous
    Up to one
year
     One to
three years
     Three to
five years
     Five to ten
years
    Beyond ten
years
    Total  

Repurchase Agreements and repurchase-to-maturity transactions

                 

Repurchase Agreements - Long-term

   $ 57,731      $ —         $ 35,000       $ 50,000       $ 10,000      $ —        $ 152,731   

Securities lending transactions

                 

U.S. Treasury and federal agencies

   $ 8,468      $ —         $ —         $ —         $ —        $ —        $ 8,468   

Federal agency collateralized mortgage obligations

     41,140        —           87         1,020         7,413        46,412        96,071   

Federal agency mortgage-backed pools

     10,560        —           —           541         8,574        41,476        61,151   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     60,168        —           87         1,561         15,987        87,888        165,691   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total borrowings

   $ (2,437   $ —         $ 34,913       $ 48,439       $ (5,987   $ (87,888   $ (12,960
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Gross amount of recognized liabilities for repurchase agreements and securities lending

                  $ 152,731   
                 

 

 

 

Note 9 – 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 June 30, 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 June 30, 2015, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.

Fair Value Hedges

Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At June 30, 2015, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.

 

29


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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 $111.7 million at June 30, 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 June 30, 2015, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income.

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

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

 

     Asset Derivative
        June 30, 2015        
     Liability Derivatives
June 30, 2015
 
Derivatives designated as hedging instruments (Unaudited)    Balance Sheet
Location
   Fair Value      Balance Sheet
Location
   Fair Value  

Interest rate contracts

   Loans    $ —         Other liabilities    $ 1,022   

Interest rate contracts

   Other Assets      1,022       Other liabilities      3,155   
     

 

 

       

 

 

 

Total derivatives designated as hedging instruments

        1,022            4,177   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments

           

Mortgage loan contracts

   Other assets      751       Other liabilities      32   
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

        751            32   
     

 

 

       

 

 

 

Total derivatives

      $ 1,773          $ 4,209   
     

 

 

       

 

 

 

 

     Asset Derivative
December 31, 2014
     Liability Derivatives
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   
     

 

 

       

 

 

 

 

30


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The effect of the derivative instruments on the condensed consolidated statement of income for the three and six-month periods ending June 30 is as follows:

 

     Comprehensive Income on Derivative
(Effective Portion)
     Comprehensive Income on Derivative
(Effective Portion)
 
     Three Months Ended June 30      Six Months Ended June 30  

Derivative in cash flow hedging relationship

   2015
(Unaudited)
     2014
(Unaudited)
     2015
(Unaudited)
     2014
(Unaudited)
 

Interest rate contracts

   $ 332       $ (206    $ 118       $ (352

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.

 

        Amount of Gain (Loss) Recognized on Derivative     Amount of Gain (Loss) Recognized on Derivative  
        Three Months Ended June 30     Six Months Ended June 30  

Derivative in fair value
hedging relationship

 

Location of gain (loss)
recognized on derivative

  2015
(Unaudited)
    2014
(Unaudited)
    2015
(Unaudited)
    2014
(Unaudited)
 

Interest rate contracts

 

Interest income - loans

  $ (1,186   $ 544      $ (186   $ 751   

Interest rate contracts

 

Interest income - loans

    1,186        (544     186        (751
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ —        $ —        $ —        $ —     
   

 

 

   

 

 

   

 

 

   

 

 

 

 

        Amount of Gain (Loss) Recognized on Derivative     Amount of Gain (Loss) Recognized on Derivative  
        Three Months Ended June 30     Six Months Ended June 30  

Derivative not designated as
hedging relationship

 

Location of gain (loss)
recognized on derivative

  2015
(Unaudited)
    2014
(Unaudited)
    2015
(Unaudited)
    2014
(Unaudited)
 

Mortgage contracts

 

Other income - gain on sale of loans

  $       83      $  210      $  272      $  450   

Note 10 – 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 June 30, 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

 

31


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

Hedged loans

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

Interest rate swap agreements

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

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

 

     Fair Value      Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

June 30, 2015

           

Available-for-sale securities

           

U.S. Treasury and federal agencies

   $ 28,239       $ —         $ 28,239       $ —     

State and municipal

     50,783         —           50,783         —     

Federal agency collateralized mortgage obligations

     116,942         —           116,942         —     

Federal agency mortgage-backed pools

     134,950         —           134,950         —     

Corporate notes

     56         —           56         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     330,970         —           330,970         —     

Hedged loans

     109,448         —           109,448         —     

Forward sale commitments

     751         —           751         —     

Interest rate swap agreements

     (4,177      —           (4,177      —     

Commitments to originate loans

     (32      —           (32      —     

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      —     

 

32


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

     Three Months Ended June 30      Six Months Ended June 30  

Non Interest Income

Total gains and losses from:

   2015
(Unaudited)
     2014
(Unaudited)
     2015
(Unaudited)
     2014
(Unaudited)
 

Hedged loans

   $ (1,186    $ 544       $ (186    $ 751   

Fair value interest rate swap agreements

     1,186         (544      186         (751

Derivative loan commitments

     83         210         272         450   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 83       $ 210       $ 272       $ 450   
  

 

 

    

 

 

    

 

 

    

 

 

 

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):

 

     Fair Value      Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

June 30, 2015

           

Impaired loans

   $ 8,978       $ —         $ —         $ 8,978   

Mortgage servicing rights

     8,279         —           —           8,279   

December 31, 2014

           

Impaired loans

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

Mortgage servicing rights

     7,642         —           —           7,642   

Impaired (collateral dependent): Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.

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

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

Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs’ fair value decreased by $18,000 during the first six months of 2015 and increased by $38,000 during the first six months of 2014.

 

33


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

     Fair Value at
June 30, 2015
    

Valuation

Technique

  

Unobservable Inputs

   Range (Weighted
Average)

Impaired loans

   $ 8,978       Collateral based measurement    Discount to reflect current market conditions and ultimate collectability    10% - 15% (12%)

Mortgage servicing rights

   $ 8,279       Discounted cashflows    Discount rate, Constant prepayment rate, Probability of default    10% - 15% (12%),
4% - 7% (4.6%),
1% - 10%  (4.5%)
     Fair Value at
December 31, 2014
    

Valuation

Technique

  

Unobservable Inputs

   Range (Weighted
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 11 – Fair Value of Financial Instruments

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

The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon’s significant financial instruments at June 30, 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.

 

34


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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.

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.

 

35


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

     June 30, 2015  
     Carrying
Amount
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets

           

Cash and due from banks

   $ 43,857       $ 43,857       $ —         $ —     

Investment securities, held to maturity

     162,661         —           167,581         —     

Loans held for sale

     7,677         —           —           7,677   

Loans excluding loan level hedges, net

     1,393,414         —           —           1,426,252   

Stock in FHLB and FRB

     11,080         —           11,080         —     

Interest receivable

     8,823         —           8,823         —     

Liabilities

           

Non-interest bearing deposits

   $ 307,215       $ 307,215       $ —         $ —     

Interest-bearing deposits

     1,277,508         —           1,204,516         —     

Borrowings

     385,236         —           381,302         —     

Subordinated debentures

     32,719         —           32,698         —     

Interest payable

     461         —           461         —     
     December 31, 2014  
     Carrying
Amount
     Quoted Prices
in Active
Markets for
Identical
Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(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         —     

 

36


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 12 – Accumulated Other Comprehensive Income

 

     June 30
2015
     December 31
2014
 

Unrealized gain on securities available for sale

   $ 3,455       $ 4,018   

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

     1,423         1,658   

Unrealized loss on derivative instruments

     (3,155      (3,337

Tax effect

     (603      (818
  

 

 

    

 

 

 

Total accumulated other comprehensive income

   $ 1,120       $ 1,521   
  

 

 

    

 

 

 

Note 13 – Regulatory Capital

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

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined), or leverage ratio. For June 30, 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.

To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, common equity Tier I risk-based (June 30, 2015) and Tier I leverage ratios as set forth in the table below. As of June 30, 2015 and December 31, 2014, the Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the end of the second quarter of 2015 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well-capitalized status for bank holding companies.

 

37


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Horizon and the Bank’s actual and required capital ratios as of June 30, 2015 and December 31, 2014 were as follows: