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, 2016
Commission file number 0-10792
HORIZON BANCORP
(Exact name of registrant as specified in its charter)
Indiana | 35-1562417 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
515 Franklin Square, Michigan City, Indiana | 46360 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (219) 879-0211
Former name, former address and former fiscal year, if changed since last report: N/A
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check One):
Large Accelerated Filer | ¨ | Accelerated Filer | x | |||
Non-accelerated Filer | ¨ Do not check if smaller reporting company | Smaller Reporting Company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 14,776,952 shares of Common Stock, no par value, at August 9, 2016.
HORIZON BANCORP
FORM 10-Q
2
PART 1 FINANCIAL INFORMATION
HORIZON BANCORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollar Amounts in Thousands)
June 30 | December 31 | |||||||
2016 | 2015 | |||||||
(Unaudited) | ||||||||
Assets |
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Cash and due from banks |
$ | 109,224 | $ | 48,650 | ||||
Investment securities, available for sale |
455,239 | 444,982 | ||||||
Investment securities, held to maturity (fair value of $180,059 and $193,703) |
173,696 | 187,629 | ||||||
Loans held for sale |
7,812 | 7,917 | ||||||
Loans, net of allowance for loan losses of $14,226 and $14,534 |
1,923,599 | 1,734,597 | ||||||
Premises and equipment, net |
61,186 | 60,798 | ||||||
Federal Reserve and Federal Home Loan Bank stock |
16,636 | 13,823 | ||||||
Goodwill |
56,458 | 49,600 | ||||||
Other intangible assets |
8,686 | 7,371 | ||||||
Interest receivable |
11,526 | 10,535 | ||||||
Cash value of life insurance |
57,944 | 54,504 | ||||||
Other assets |
36,074 | 31,995 | ||||||
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Total assets |
$ | 2,918,080 | $ | 2,652,401 | ||||
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Liabilities |
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Deposits |
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Non-interest bearing |
$ | 397,412 | $ | 335,955 | ||||
Interest bearing |
1,684,849 | 1,544,198 | ||||||
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Total deposits |
2,082,261 | 1,880,153 | ||||||
Borrowings |
492,883 | 449,347 | ||||||
Subordinated debentures |
32,874 | 32,797 | ||||||
Interest payable |
961 | 507 | ||||||
Other liabilities |
28,099 | 22,765 | ||||||
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Total liabilities |
2,637,078 | 2,385,569 | ||||||
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Commitments and contingent liabilities |
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Stockholders Equity |
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Preferred stock, Authorized, 1,000,000 shares Series B shares $.01 par value, $1,000 liquidation value Issued 0 and 12,500 shares |
| 12,500 | ||||||
Common stock, no par value Authorized, 44,000,000 shares Issued, 12,590,784 and 11,995,324 shares Outstanding, 12,571,534 and 11,939,887 shares |
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Additional paid-in capital |
120,758 | 106,370 | ||||||
Retained earnings |
156,651 | 148,685 | ||||||
Accumulated other comprehensive income (loss) |
3,593 | (723 | ) | |||||
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Total stockholders equity |
281,002 | 266,832 | ||||||
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Total liabilities and stockholders equity |
$ | 2,918,080 | $ | 2,652,401 | ||||
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See notes to condensed consolidated financial statements
3
HORIZON BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Interest Income |
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Loans receivable |
$ | 20,794 | $ | 17,981 | $ | 40,541 | $ | 34,843 | ||||||||
Investment securities |
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Taxable |
2,661 | 2,067 | 5,205 | 4,221 | ||||||||||||
Tax exempt |
1,195 | 1,079 | 2,432 | 2,156 | ||||||||||||
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Total interest income |
24,650 | 21,127 | 48,178 | 41,220 | ||||||||||||
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Interest Expense |
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Deposits |
1,557 | 1,237 | 3,048 | 2,469 | ||||||||||||
Borrowed funds |
1,721 | 1,539 | 3,480 | 3,018 | ||||||||||||
Subordinated debentures |
503 | 501 | 1,007 | 997 | ||||||||||||
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Total interest expense |
3,781 | 3,277 | 7,535 | 6,484 | ||||||||||||
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Net Interest Income |
20,869 | 17,850 | 40,643 | 34,736 | ||||||||||||
Provision for loan losses |
232 | 1,906 | 764 | 2,520 | ||||||||||||
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Net Interest Income after Provision for Loan Losses |
20,637 | 15,944 | 39,879 | 32,216 | ||||||||||||
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Non-interest Income |
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Service charges on deposit accounts |
1,335 | 1,085 | 2,573 | 2,084 | ||||||||||||
Wire transfer fees |
175 | 182 | 296 | 333 | ||||||||||||
Interchange fees |
1,663 | 1,366 | 3,121 | 2,468 | ||||||||||||
Fiduciary activities |
1,465 | 1,216 | 3,100 | 2,513 | ||||||||||||
Gain on sale of investment securities (includes $767 for the three months ended and $875 for the six months ended June 30, 2016 and $0 for the three months ended and $124 for the six months ended June 30, 2015, related to accumulated other comprehensive earnings reclassifications) |
767 | | 875 | 124 | ||||||||||||
Gain on sale of mortgage loans |
3,529 | 2,642 | 5,643 | 5,021 | ||||||||||||
Mortgage servicing income net of impairment |
500 | 300 | 947 | 479 | ||||||||||||
Increase in cash value of bank owned life insurance |
351 | 257 | 696 | 515 | ||||||||||||
Death benefit on bank owned life insurance |
| | | 145 | ||||||||||||
Other income |
84 | 138 | 482 | 570 | ||||||||||||
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Total non-interest income |
9,869 | 7,186 | 17,733 | 14,252 | ||||||||||||
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Non-interest Expense |
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Salaries and employee benefits |
10,317 | 8,385 | 20,382 | 16,889 | ||||||||||||
Net occupancy expenses |
1,901 | 1,375 | 3,837 | 2,926 | ||||||||||||
Data processing |
1,134 | 966 | 2,239 | 1,889 | ||||||||||||
Professional fees |
747 | 660 | 1,578 | 1,187 | ||||||||||||
Outside services and consultants |
2,198 | 918 | 3,297 | 1,544 | ||||||||||||
Loan expense |
1,409 | 1,367 | 2,604 | 2,624 | ||||||||||||
FDIC insurance expense |
409 | 339 | 814 | 676 | ||||||||||||
Other losses |
136 | 150 | 403 | 105 | ||||||||||||
Other expense |
3,304 | 2,490 | 6,148 | 4,878 | ||||||||||||
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Total non-interest expense |
21,555 | 16,650 | 41,302 | 32,718 | ||||||||||||
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Income Before Income Tax |
8,951 | 6,480 | 16,310 | 13,750 | ||||||||||||
Income tax expense (includes $268 for the three months ended and $306 for the six months ended June 30, 2016 and $0 for the three months ended and $43 for the six months ended June 30, 2015, related to income tax expense from reclassification items) |
2,625 | 1,752 | 4,603 | 3,664 | ||||||||||||
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Net Income |
6,326 | 4,728 | 11,707 | 10,086 | ||||||||||||
Preferred stock dividend |
| (31 | ) | (42 | ) | (63 | ) | |||||||||
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Net Income Available to Common Shareholders |
$ | 6,326 | $ | 4,697 | $ | 11,665 | $ | 10,023 | ||||||||
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Basic Earnings Per Share |
$ | 0.52 | $ | 0.51 | $ | 0.97 | $ | 1.09 | ||||||||
Diluted Earnings Per Share |
0.52 | 0.49 | 0.96 | 1.04 |
See notes to condensed consolidated financial statements
4
HORIZON BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(Dollar Amounts in Thousands)
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Net Income |
$ | 6,326 | $ | 4,728 | $ | 11,707 | $ | 10,086 | ||||||||
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Other Comprehensive Income (Loss) |
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Change in fair value of derivative instruments: |
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Change in fair value of derivative instruments for the period |
(83 | ) | 511 | (645 | ) | 182 | ||||||||||
Income tax effect |
29 | (179 | ) | 226 | (64 | ) | ||||||||||
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Changes from derivative instruments |
(54 | ) | 332 | (419 | ) | 118 | ||||||||||
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Change in securities: |
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Unrealized appreciation (depreciation) for the period on AFS securities |
2,691 | (2,364 | ) | 8,637 | (402 | ) | ||||||||||
Amortization from transfer of securities from available-for-sale to held-to-maturity securities |
(248 | ) | (158 | ) | (477 | ) | (272 | ) | ||||||||
Reclassification adjustment for securities gains realized in income |
(767 | ) | | (875 | ) | (124 | ) | |||||||||
Income tax effect |
(511 | ) | 882 | (2,550 | ) | 279 | ||||||||||
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Unrealized gains (losses) on securities |
949 | (1,640 | ) | 4,735 | (519 | ) | ||||||||||
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Other Comprehensive Income (Loss), Net of Tax |
895 | (1,308 | ) | 4,316 | (401 | ) | ||||||||||
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Comprehensive Income |
$ | 7,221 | $ | 3,420 | $ | 16,023 | $ | 9,685 | ||||||||
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See notes to condensed consolidated financial statements
5
HORIZON BANCORP AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders Equity
(Unaudited)
(Dollar Amounts in Thousands, Except Per Share Data)
Accumulated | ||||||||||||||||||||
Additional | Other | |||||||||||||||||||
Preferred | Paid-in | Retained | Comprehensive | |||||||||||||||||
Stock | Capital | Earnings | Income (Loss) | Total | ||||||||||||||||
Balances, January 1, 2016 |
$ | 12,500 | $ | 106,370 | $ | 148,685 | $ | (723 | ) | $ | 266,832 | |||||||||
Net income |
11,707 | 11,707 | ||||||||||||||||||
Other comprehensive loss, net of tax |
4,316 | 4,316 | ||||||||||||||||||
Redemption of preferred stock |
(12,500 | ) | (12,500 | ) | ||||||||||||||||
Amortization of unearned compensation |
150 | 150 | ||||||||||||||||||
Stock option expense |
170 | 170 | ||||||||||||||||||
Stock issued in acquisition |
14,068 | 14,068 | ||||||||||||||||||
Cash dividends on preferred stock (1.00%) |
(42 | ) | (42 | ) | ||||||||||||||||
Cash dividends on common stock ($.30 per share) |
(3,699 | ) | (3,699 | ) | ||||||||||||||||
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Balances, June 30, 2016 |
$ | | $ | 120,758 | $ | 156,651 | $ | 3,593 | $ | 281,002 | ||||||||||
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See notes to condensed consolidated financial statements
6
HORIZON BANCORP AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
Six Months Ended June 30 | ||||||||
2016 | 2015 | |||||||
(Unaudited) | (Unaudited) | |||||||
Operating Activities |
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Net income |
$ | 11,707 | $ | 10,086 | ||||
Items not requiring (providing) cash |
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Provision for loan losses |
764 | 2,520 | ||||||
Depreciation and amortization |
2,463 | 1,883 | ||||||
Share based compensation |
170 | 138 | ||||||
Mortgage servicing rights net impairment |
840 | 356 | ||||||
Premium amortization on securities available for sale, net |
2,673 | 1,289 | ||||||
Gain on sale of investment securities |
(875 | ) | (124 | ) | ||||
Gain on sale of mortgage loans |
(5,643 | ) | (5,021 | ) | ||||
Proceeds from sales of loans |
144,197 | 155,746 | ||||||
Loans originated for sale |
(138,452 | ) | (152,259 | ) | ||||
Change in cash value of life insurance |
(695 | ) | (515 | ) | ||||
Gain (Loss) on sale of other real estate owned |
118 | (206 | ) | |||||
Net change in |
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Interest receivable |
(355 | ) | (577 | ) | ||||
Interest payable |
399 | (36 | ) | |||||
Other assets |
(5,624 | ) | 4,099 | |||||
Other liabilities |
316 | (1,511 | ) | |||||
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Net cash provided by operating activities |
12,003 | 15,868 | ||||||
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Investing Activities |
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Purchases of securities available for sale |
(50,143 | ) | (47,958 | ) | ||||
Proceeds from sales, maturities, calls, and principal repayments of securities available for sale |
65,523 | 40,359 | ||||||
Purchases of securities held to maturity |
(17,960 | ) | | |||||
Proceeds from maturities of securities held to maturity |
12,934 | 1,535 | ||||||
Proceeds from the sale of FHLB stock |
(2,231 | ) | 268 | |||||
Net change in loans |
(88,250 | ) | (142,131 | ) | ||||
Proceeds on the sale of OREO and repossessed assets |
1,253 | 1,793 | ||||||
Change in premises and equipment, net |
(683 | ) | (3,587 | ) | ||||
Acquisition of Kosciusko, net of cash received |
30,437 | | ||||||
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Net cash used in investing activities |
(49,120 | ) | (149,721 | ) | ||||
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Financing Activities |
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Net change in |
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Deposits |
78,622 | 102,404 | ||||||
Borrowings |
35,310 | 34,115 | ||||||
Redemption of preferred stock |
(12,500 | ) | | |||||
Proceeds from issuance of stock |
389 | |||||||
Dividends paid on common shares |
(3,699 | ) | (2,611 | ) | ||||
Dividends paid on preferred shares |
(42 | ) | (63 | ) | ||||
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Net cash provided by financing activities |
97,691 | 134,234 | ||||||
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Net Change in Cash and Cash Equivalents |
60,574 | 381 | ||||||
Cash and Cash Equivalents, Beginning of Period |
48,650 | 43,476 | ||||||
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Cash and Cash Equivalents, End of Period |
$ | 109,224 | $ | 43,857 | ||||
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Additional Supplemental Information |
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Interest paid |
$ | 7,081 | $ | 6,519 | ||||
Income taxes paid |
4,750 | 3,700 | ||||||
Transfer of loans to other real estate owned |
1,971 | (1,384 | ) | |||||
The Company purchased all of the capital stock of Kosciusko for $22,581 on June 1, 2016. In conjunction with the acquisition, liabilities were assumed as follows: |
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Fair value of assets acquired |
155,413 | | ||||||
Less: common stock issued |
14,068 | | ||||||
Cash paid for the capital stock |
8,513 | | ||||||
Liabilities assumed |
132,832 | |
See notes to condensed consolidated financial statements
7
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 1 - Accounting Policies
The accompanying unaudited condensed consolidated financial statements include the accounts of Horizon Bancorp (Horizon or the Company) and its wholly-owned subsidiaries, including Horizon Bank, N.A. (Bank). All inter-company balances and transactions have been eliminated. The results of operations for the periods ended June 30, 2016 and June 30, 2015 are not necessarily indicative of the operating results for the full year of 2016 or 2015. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizons management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments.
Certain information and note disclosures normally included in Horizons annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizons Annual Report on Form 10-K for 2015 filed with the Securities and Exchange Commission on February 29, 2016. The condensed consolidated balance sheet of Horizon as of December 31, 2015 has been derived from the audited balance sheet as of that date.
Basic earnings per share is computed by dividing net income available to common shareholders (net income less dividend requirements for preferred stock and accretion of preferred stock discount) by the weighted-average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The following table shows computation of basic and diluted earnings per share.
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Basic earnings per share |
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Net income |
$ | 6,326 | $ | 4,728 | $ | 11,707 | $ | 10,086 | ||||||||
Less: Preferred stock dividends |
| 31 | 42 | 63 | ||||||||||||
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Net income available to common shareholders |
$ | 6,326 | $ | 4,697 | $ | 11,665 | $ | 10,023 | ||||||||
Weighted average common shares outstanding |
12,179,253 | 9,240,005 | 12,064,335 | 9,228,075 | ||||||||||||
Basic earnings per share |
$ | 0.52 | $ | 0.51 | $ | 0.97 | $ | 1.09 | ||||||||
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Diluted earnings per share |
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Net income available to common shareholders |
$ | 6,326 | $ | 4,697 | $ | 11,665 | $ | 10,023 | ||||||||
Weighted average common shares outstanding |
12,179,253 | 9,240,005 | 12,064,335 | 9,228,075 | ||||||||||||
Effect of dilutive securities: |
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Warrants |
| 324,698 | | 323,198 | ||||||||||||
Restricted stock |
20,721 | 34,892 | 21,050 | 30,816 | ||||||||||||
Stock options |
42,804 | 37,991 | 41,643 | 33,462 | ||||||||||||
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Weighted average shares outstanding |
12,242,778 | 9,637,586 | 12,127,028 | 9,615,551 | ||||||||||||
Diluted earnings per share |
$ | 0.52 | $ | 0.49 | $ | 0.96 | $ | 1.04 | ||||||||
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There were zero shares for both the three and six months ended June 30, 2016, respectively, and 2,500 and 41,444 for the three and six months ended June 30, 2015 which were not included in the computation of diluted earnings per share because they were non-dilutive.
8
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2015 Annual Report on Form 10-K.
Note 2 Acquisitions
On July 1, 2015, Horizon completed the acquisition of Peoples Bancorp, an Indiana corporation (Peoples) and Horizon Bank N.A.s acquisition of Peoples Federal Savings Bank of DeKalb County (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. Horizons 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. The Company had approximately $4.9 million in costs related to the acquisition as of December 31, 2015. These expenses were 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 increased its deposit base and reduced transaction costs. The Company also expects to reduce cost through economies of scale.
Under the purchase method of accounting, the total estimated purchase price is allocated to Peoples net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on managements preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the Peoples acquisition is allocated as follows:
Of the total purchase price of $78.1 million, $4.4 million has been allocated to core deposit intangible. Additionally, $21.0 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over seven years on a straight line basis.
The Company acquired the $228.6 million loan portfolio at a fair value discount of $4.8 million. The performing portion of the portfolio, $223.4 million, had an estimated fair value of $220.0 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.
9
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
The Company acquired certain 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.
The 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.
Loans with specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.
The following table details the acquired loans that are accounted for in accordance with ASC 310-30 as of July 1, 2015.
Contractually required principal and interest at acquisition |
$ | 5,730 | ||
Contractual cash flows not expected to be collected (nonaccretable differences) |
715 | |||
|
|
|||
Expected cash flows at acquisition |
5,015 | |||
Interest component of expected cash flows (accretable discount) |
647 | |||
|
|
|||
Fair value of acquired loans accounted for under ASC 310-30 |
$ | 4,368 | ||
|
|
The results of operations of Peoples and Peoples FSB have been included in the Companys consolidated financial statements since the acquisition dates. The following schedule includes pro forma results for the periods ended June 30, 2016 and 2015 as if the Peoples and Peoples FSB acquisitions had occurred as of the beginning of the comparable prior reporting period.
10
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | June 30 | June 30 | |||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Summary of Operations: |
||||||||||||||||
Net Interest Income |
$ | 20,869 | $ | 20,829 | $ | 40,643 | $ | 40,690 | ||||||||
Provision for Loan Losses |
232 | 1,936 | 764 | 2,580 | ||||||||||||
Net Interest Income after Provision for Loan Losses |
20,637 | 18,893 | 39,879 | 38,110 | ||||||||||||
Non-interest Income |
9,869 | 8,086 | 17,733 | 16,145 | ||||||||||||
Non-Interest Expense |
21,555 | 19,852 | 41,302 | 39,014 | ||||||||||||
Income before Income Taxes |
8,951 | 7,127 | 16,310 | 15,241 | ||||||||||||
Income Tax Expense |
2,625 | 1,779 | 4,603 | 3,791 | ||||||||||||
Net Income |
6,326 | 5,348 | 11,707 | 11,450 | ||||||||||||
Net Income Available to Common Shareholders |
$ | 6,326 | $ | 5,317 | $ | 11,665 | $ | 11,387 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic Earnings Per Share |
$ | 0.52 | $ | 0.46 | $ | 0.97 | $ | 0.99 | ||||||||
Diluted Earnings Per Share |
$ | 0.52 | $ | 0.45 | $ | 0.96 | $ | 0.96 |
The pro forma information includes adjustments for interest income on loans, amortization of intangibles arising from the transaction, interest expense on deposits acquired, premises expense for the banking centers acquired and the related income tax effects. The pro forma information for the three and six months ended June 30, 2015 includes $657,000, net of tax, of operating revenue from Peoples and approximately $95,000, net of tax, of non-recurring expenses directly attributable to the Peoples acquisition.
The pro forma financial information is presented for information purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.
On June 1, 2016, Horizon completed the acquisition of Kosciusko Financial, Inc., an Indiana corporation (Kosciusko) and Horizon Banks acquisition of Farmers State Bank, a state-chartered bank and wholly owned subsidiary of Kosciusko, through mergers effective June 1, 2016. Under the terms of the Merger Agreement, shareholders of Kosciusko had the option to receive $81.75 per share in cash or 3.0122 shares of Horizon common stock for each share of Kosciuskos common stock, subject to allocation provisions to assure that in aggregate, Kosciusko shareholders received total consideration that consists of 65% stock and 35% cash. Kosciusko shareholders owning fewer than 100 shares of common stock received $81.75 in cash for each common share. As a result of Kosciusko stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 582,287 shares of its common stock in the merger. Based upon the June 1, 2016 closing price of $24.85 per share of Horizon common stock, the transaction has an implied valuation of approximately $23.0 million. The Company has had approximately $1.6 million in costs related to the acquisition. These expenses are classified in the other expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce cost through economies of scale.
Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the Kosciusko acquisition is detailed in the following table. Prior to the end of the one year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date.
11
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Of the total estimated purchase price of $22.6 million, $1.9 million has been allocated to core deposit intangible. Additionally, $6.9 million has been allocated to goodwill and none of the purchase price is deductible. 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.
Pro-forma statements were not presented due to the immateriality of the transaction.
On July 18, 2016, Horizon completed the acquisition of LaPorte Bancorp, Inc., a Maryland corporation (LaPorte Bancorp) and Horizon Banks acquisition of The LaPorte Savings Bank, a state-chartered savings bank and wholly owned subsidiary of LaPorte Bancorp, through mergers effective July 18, 2016. Under the terms of the Merger Agreement, shareholders of LaPorte Bancorp had the option to receive $17.50 per share in cash or 0.629 shares of Horizon common stock for each share of LaPorte Bancorps common stock, subject to allocation provisions to assure that in aggregate, LaPorte Bancorp shareholders received total consideration that consists of 65% stock and 35% cash. LaPorte Bancorp shareholders owning fewer than 100 shares of common stock received $17.50 in cash for each common share. As a result of LaPorte stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 2,280,992 shares of its common stock in the merger. Based upon the July 18, 2016 closing price of $27.54 per share of Horizon common stock, the transaction has an implied valuation of approximately $101.7 million.
As of July 18, 2016, LaPorte Bancorp had total assets of approximately $536.0 million, total deposits of approximately $370.9 million and total net loans of approximately $316.8 million.
Utilizing July 15, 2016 financials for both Horizon and LaPorte Bancorp and an estimate of the fair market value adjustments associated with the merger, Horizon would have total assets of approximately $3.5 billion, total deposits of approximately $2.5 billion and total net loans of approximately $2.2 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.
12
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 3 Securities
The fair value of securities is as follows:
Gross | Gross | |||||||||||||||
June 30, 2016 | Amortized | Unrealized | Unrealized | Fair | ||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
Available for sale |
||||||||||||||||
U.S. Treasury and federal agencies |
$ | 18,384 | $ | 86 | $ | | $ | 18,470 | ||||||||
State and municipal |
60,961 | 1,654 | (4 | ) | 62,611 | |||||||||||
Federal agency collateralized mortgage obligations |
151,736 | 2,596 | (69 | ) | 154,263 | |||||||||||
Federal agency mortgage-backed pools |
215,445 | 4,654 | (276 | ) | 219,823 | |||||||||||
Corporate notes |
32 | 40 | | 72 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available for sale investment securities |
$ | 446,558 | $ | 9,030 | $ | (349 | ) | $ | 455,239 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Held to maturity |
||||||||||||||||
State and municipal |
$ | 143,093 | $ | 7,586 | $ | (2,606 | ) | $ | 148,073 | |||||||
Federal agency collateralized mortgage obligations |
8,424 | 199 | | 8,623 | ||||||||||||
Federal agency mortgage-backed pools |
22,179 | 1,184 | | 23,363 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total held to maturity investment securities |
$ | 173,696 | $ | 8,969 | $ | (2,606 | ) | $ | 180,059 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
December 31, 2015 | Cost | Gains | Losses | Value | ||||||||||||
Available for sale |
||||||||||||||||
U.S. Treasury and federal agencies |
$ | 5,940 | $ | 3 | $ | (17 | ) | $ | 5,926 | |||||||
State and municipal |
73,829 | 1,299 | (33 | ) | 75,095 | |||||||||||
Federal agency collateralized mortgage obligations |
157,291 | 567 | (1,655 | ) | 156,203 | |||||||||||
Federal agency mortgage-backed pools |
206,970 | 2,080 | (1,346 | ) | 207,704 | |||||||||||
Corporate notes |
32 | 22 | | 54 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available for sale investment securities |
$ | 444,062 | $ | 3,971 | $ | (3,051 | ) | $ | 444,982 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Held to maturity |
||||||||||||||||
U.S. Treasury and federal agencies |
$ | 5,859 | $ | 93 | $ | | $ | 5,952 | ||||||||
State and municipal |
146,331 | 5,375 | (253 | ) | 151,453 | |||||||||||
Federal agency collateralized mortgage obligations |
9,051 | 27 | (124 | ) | 8,954 | |||||||||||
Federal agency mortgage-backed pools |
26,388 | 1,141 | (185 | ) | 27,344 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total held to maturity investment securities |
$ | 187,629 | $ | 6,636 | $ | (562 | ) | $ | 193,703 | |||||||
|
|
|
|
|
|
|
|
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, 2016, no individual investment security had an unrealized loss that was determined to be other-than-temporary.
The unrealized losses on the Companys investments in securities of state and municipal governmental agencies, U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the 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, 2016.
13
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
The amortized cost and fair value of securities available for sale and held to maturity at June 30, 2016 and December 31, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
June 30, 2016 | December 31, 2015 | |||||||||||||||
Amortized | Fair | Amortized | Fair | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Available for sale |
||||||||||||||||
Within one year |
$ | 7,123 | $ | 7,153 | $ | 7,192 | $ | 7,232 | ||||||||
One to five years |
46,104 | 46,664 | 38,197 | 38,894 | ||||||||||||
Five to ten years |
11,351 | 11,804 | 16,807 | 17,152 | ||||||||||||
After ten years |
14,799 | 15,532 | 17,605 | 17,797 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
79,377 | 81,153 | 79,801 | 81,075 | |||||||||||||
Federal agency collateralized mortgage obligations |
151,736 | 154,263 | 157,291 | 156,203 | ||||||||||||
Federal agency mortgage-backed pools |
215,445 | 219,823 | 206,970 | 207,704 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available for sale investment securities |
$ | 446,558 | $ | 455,239 | $ | 444,062 | $ | 444,982 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Held to maturity |
||||||||||||||||
Within one year |
$ | | $ | | $ | | $ | | ||||||||
One to five years |
20,415 | 20,436 | 17,815 | 18,403 | ||||||||||||
Five to ten years |
88,183 | 92,551 | 106,167 | 110,026 | ||||||||||||
After ten years |
34,495 | 35,086 | 28,208 | 28,976 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
143,093 | 148,073 | 152,190 | 157,405 | |||||||||||||
Federal agency collateralized mortgage obligations |
8,424 | 8,623 | 9,051 | 8,954 | ||||||||||||
Federal agency mortgage-backed pools |
22,179 | 23,363 | 26,388 | 27,344 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total held to maturity investment securities |
$ | 173,696 | $ | 180,059 | $ | 187,629 | $ | 193,703 | ||||||||
|
|
|
|
|
|
|
|
The following table shows the gross unrealized losses and the fair value of the Companys investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
June 30, 2016 | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
State and municipal |
$ | 1,763 | $ | (2,609 | ) | $ | 132 | $ | (1 | ) | $ | 1,895 | $ | (2,610 | ) | |||||||||
Federal agency collateralized mortgage obligations |
4,059 | (23 | ) | 9,079 | (46 | ) | 13,138 | (69 | ) | |||||||||||||||
Federal agency mortgage-backed pools |
23,361 | (276 | ) | | | 23,361 | (276 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 29,183 | $ | (2,908 | ) | $ | 9,211 | $ | (47 | ) | $ | 38,394 | $ | (2,955 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
December 31, 2015 | Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
U.S. Treasury and federal agencies |
$ | 5,468 | $ | (17 | ) | $ | | $ | | $ | 5,468 | $ | (17 | ) | ||||||||||
State and municipal |
17,353 | (280 | ) | 446 | (6 | ) | 17,799 | (286 | ) | |||||||||||||||
Federal agency collateralized mortgage obligations |
89,459 | (1,124 | ) | 25,428 | (655 | ) | 114,887 | (1,779 | ) | |||||||||||||||
Federal agency mortgage-backed pools |
113,244 | (1,212 | ) | 16,506 | (319 | ) | 129,750 | (1,531 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 225,524 | $ | (2,633 | ) | $ | 42,380 | $ | (980 | ) | $ | 267,904 | $ | (3,613 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Sales of securities available for sale (Unaudited) |
||||||||||||||||
Proceeds |
$ | 17,536 | $ | | $ | 25,077 | $ | 13,332 | ||||||||
Gross gains |
952 | | 1,060 | 147 | ||||||||||||
Gross losses |
(185 | ) | | (185 | ) | (23 | ) |
14
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Note 4 Loans
June 30 | December 31 | |||||||
2016 | 2015 | |||||||
Commercial |
||||||||
Working capital and equipment |
$ | 416,205 | $ | 381,245 | ||||
Real estate, including agriculture |
424,300 | 391,668 | ||||||
Tax exempt |
11,458 | 8,674 | ||||||
Other |
22,617 | 23,408 | ||||||
|
|
|
|
|||||
Total |
874,580 | 804,995 | ||||||
Real estate |
||||||||
14 family |
489,133 | 433,015 | ||||||
Other |
4,493 | 4,129 | ||||||
|
|
|
|
|||||
Total |
493,626 | 437,144 | ||||||
Consumer |
||||||||
Auto |
162,172 | 168,397 | ||||||
Recreation |
5,005 | 5,365 | ||||||
Real estate/home improvement |
50,121 | 47,015 | ||||||
Home equity |
130,017 | 127,113 | ||||||
Unsecured |
4,175 | 4,120 | ||||||
Other |
12,430 | 10,290 | ||||||
|
|
|
|
|||||
Total |
363,920 | 362,300 | ||||||
Mortgage warehouse |
205,699 | 144,692 | ||||||
|
|
|
|
|||||
Total loans |
1,937,825 | 1,749,131 | ||||||
Allowance for loan losses |
(14,226 | ) | (14,534 | ) | ||||
|
|
|
|
|||||
Loans, net |
$ | 1,923,599 | $ | 1,734,597 | ||||
|
|
|
|
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 Companys commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.
15
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
Horizons mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizons agreement with the mortgage company. Each individual mortgage and the related mortgagee are underwritten by Horizon to the end investor guidelines and 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 reacquires the loan under its option within the agreement. Due to the reacquire 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 reacquire 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 reacquire 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 reacquire its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement.
16
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
The following table shows the recorded investment of individual loan categories.
Loan | Deferred | Recorded | ||||||||||||||
June 30, 2016 | Balance | Interest Due | Fees / (Costs) | Investment | ||||||||||||
Owner occupied real estate |
$ | 298,481 | $ | 1,068 | $ | 1,134 | $ | 300,683 | ||||||||
Non owner occupied real estate |
343,360 | 346 | 566 | 344,272 | ||||||||||||
Residential spec homes |
7,660 | 13 | 13 | 7,686 | ||||||||||||
Development & spec land loans |
23,171 | 58 | 16 | 23,245 | ||||||||||||
Commercial and industrial |
199,933 | 1,419 | 246 | 201,598 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
872,605 | 2,904 | 1,975 | 877,484 | ||||||||||||
Residential mortgage |
473,563 | 1,434 | 2,277 | 477,274 | ||||||||||||
Residential construction |
17,786 | 36 | | 17,822 | ||||||||||||
Mortgage warehouse |
205,699 | 480 | | 206,179 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total real estate |
697,048 | 1,950 | 2,277 | 701,275 | ||||||||||||
Direct installment |
59,105 | 164 | (383 | ) | 58,886 | |||||||||||
Direct installment purchased |
131 | | | 131 | ||||||||||||
Indirect installment |
144,935 | 300 | | 145,235 | ||||||||||||
Home equity |
160,955 | 621 | (823 | ) | 160,753 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer |
365,126 | 1,085 | (1,206 | ) | 365,005 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans |
1,934,779 | 5,939 | 3,046 | 1,943,764 | ||||||||||||
Allowance for loan losses |
(14,226 | ) | | | (14,226 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loans |
$ | 1,920,553 | $ | 5,939 | $ | 3,046 | $ | 1,929,538 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Loan | Deferred | Recorded | ||||||||||||||
December 31, 2015 | Balance | Interest Due | Fees / (Costs) | Investment | ||||||||||||
Owner occupied real estate |
$ | 268,281 | $ | 613 | $ | 1,328 | $ | 270,222 | ||||||||
Non owner occupied real estate |
326,399 | 306 | 497 | 327,202 | ||||||||||||
Residential spec homes |
5,018 | 9 | 17 | 5,044 | ||||||||||||
Development & spec land loans |
18,183 | 33 | 26 | 18,242 | ||||||||||||
Commercial and industrial |
184,911 | 1,246 | 335 | 186,492 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
802,792 | 2,207 | 2,203 | 807,202 | ||||||||||||
Residential mortgage |
414,924 | 1,275 | 2,470 | 418,669 | ||||||||||||
Residential construction |
19,751 | 34 | | 19,785 | ||||||||||||
Mortgage warehouse |
144,692 | 480 | | 145,172 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total real estate |
579,367 | 1,789 | 2,470 | 583,626 | ||||||||||||
Direct installment |
54,341 | 168 | (359 | ) | 54,150 | |||||||||||
Direct installment purchased |
153 | | | 153 | ||||||||||||
Indirect installment |
151,523 | 323 | | 151,846 | ||||||||||||
Home equity |
157,164 | 628 | (522 | ) | 157,270 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer |
363,181 | 1,119 | (881 | ) | 363,419 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans |
1,745,340 | 5,115 | 3,792 | 1,754,247 | ||||||||||||
Allowance for loan losses |
(14,534 | ) | | | (14,534 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loans |
$ | 1,730,806 | $ | 5,115 | $ | 3,792 | $ | 1,739,713 | ||||||||
|
|
|
|
|
|
|
|
17
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. Amounts for Kosciusko were estimated as of June 30, 2016 as the final analysis of loans with deterioration was not completed.
The carrying amounts of those loans included in the balance sheet amounts of loans receivable are as follows:
June 30 | June 30 | June 30 | June 30 | June 30 | ||||||||||||||||
2016 | 2016 | 2016 | 2016 | 2016 | ||||||||||||||||
Heartland | Summit | Peoples | Kosciusko | Total | ||||||||||||||||
Commercial |
$ | 1,243 | $ | 5,409 | $ | 750 | $ | 7,576 | $ | 14,978 | ||||||||||
Real estate |
641 | 1,181 | 281 | 316 | 2,419 | |||||||||||||||
Consumer |
1 | 9 | | 22 | 32 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Outstanding balance |
$ | 1,885 | $ | 6,599 | $ | 1,031 | $ | 7,914 | $ | 17,429 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Carrying amount, net of allowance of $0 |
$ | 17,429 | ||||||||||||||||||
|
|
|||||||||||||||||||
December 31 | December 31 | December 31 | December 31 | December 31 | ||||||||||||||||
2015 | 2015 | 2015 | 2015 | 2015 | ||||||||||||||||
Heartland | Summit | Peoples | Kosciusko | Total | ||||||||||||||||
Commercial |
$ | 1,633 | $ | 5,567 | $ | 1,061 | $ | | $ | 8,261 | ||||||||||
Real estate |
693 | 1,216 | 179 | | 2,088 | |||||||||||||||
Consumer |
6 | 35 | | | 41 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Outstanding balance |
$ | 2,332 | $ | 6,818 | $ | 1,240 | $ | | $ | 10,390 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Carrying amount, net of allowance of $63 |
$ | 10,327 | ||||||||||||||||||
|
|
Accretable yield, or income expected to be collected for the six months ended June 30, is as follows:
Six Months Ended June 30, 2016 | ||||||||||||||||||||
Heartland | Summit | Peoples | Kosciusko | Total | ||||||||||||||||
Balance at January 1 |
$ | 795 | $ | 708 | $ | 555 | $ | | $ | 2,058 | ||||||||||
Additions |
| | | 950 | 950 | |||||||||||||||
Accretion |
(89 | ) | (103 | ) | (69 | ) | | (261 | ) | |||||||||||
Reclassification from nonaccretable difference |
| | | | | |||||||||||||||
Disposals |
(24 | ) | (4 | ) | (58 | ) | | (86 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at June 30 |
$ | 682 | $ | 601 | $ | 428 | $ | 950 | $ | 2,661 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Six Months Ended June 30, 2015 | ||||||||||||||||||||
Heartland | Summit | Peoples | Kosciusko | 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 | ||||||||||
|
|
|
|
|
|
|
|
|
|
18
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
During the six months ended June 30, 2016 and 2015, the Company decreased the allowance for loan losses on purchased loans by a recovery to the income statement of $0 and $76,000, respectively.
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 | Six Months Ended | |||||||||||||||
June 30 | June 30 | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Balance at beginning of the period |
$ | 14,236 | $ | 16,634 | $ | 14,534 | $ | 16,501 | ||||||||
Loans charged-off: |
||||||||||||||||
Commercial |
||||||||||||||||
Owner occupied real estate |
31 | 1,422 | 178 | 1,422 | ||||||||||||
Non owner occupied real estate |
173 | | 472 | 16 | ||||||||||||
Residential development |
| | | | ||||||||||||
Development & Spec Land Loans |
| | | | ||||||||||||
Commercial and industrial |
| 253 | 39 | 253 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
204 | 1,675 | 689 | 1,691 | ||||||||||||
Real estate |
||||||||||||||||
Residential mortgage |
| 164 | 115 | 186 | ||||||||||||
Residential construction |
| | | | ||||||||||||
Mortgage warehouse |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total real estate |
| 164 | 115 | 186 | ||||||||||||
Consumer |
||||||||||||||||
Direct Installment |
46 | 96 | 104 | 155 | ||||||||||||
Direct Installment Purchased |
| | | | ||||||||||||
Indirect Installment |
279 | 196 | 555 | 565 | ||||||||||||
Home Equity |
64 | 304 | 239 | 504 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer |
389 | 596 | 898 | 1,224 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans charged-off |
593 | 2,435 | 1,702 | 3,101 | ||||||||||||
Recoveries of loans previously charged-off: |
||||||||||||||||
Commercial |
||||||||||||||||
Owner occupied real estate |
4 | 78 | 29 | 86 | ||||||||||||
Non owner occupied real estate |
31 | | 54 | | ||||||||||||
Residential development |
2 | | 4 | | ||||||||||||
Development & Spec Land Loans |
| | | | ||||||||||||
Commercial and industrial |
63 | 14 | 95 | 33 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total commercial |
100 | 92 | 182 | 119 | ||||||||||||
Real estate |
||||||||||||||||
Residential mortgage |
31 | 3 | 63 | 5 | ||||||||||||
Residential construction |
| | | | ||||||||||||
Mortgage warehouse |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total real estate |
31 | 3 | 63 | 5 | ||||||||||||
Consumer |
||||||||||||||||
Direct Installment |
28 | 47 | 44 | 76 | ||||||||||||
Direct Installment Purchased |
| | | | ||||||||||||
Indirect Installment |
146 | 134 | 240 | 235 | ||||||||||||
Home Equity |
46 | 40 | 101 | 66 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total consumer |
220 | 221 | 385 | 377 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loan recoveries |
351 | 316 | 630 | 501 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net loans charged-off (recovered) |
242 | 2,119 | 1,072 | 2,600 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Provision charged to operating expense |
||||||||||||||||
Commercial |
(305 | ) | 2,093 | (639 | ) | 2,048 | ||||||||||
Real estate |
343 | (29 | ) | (249 | ) | 904 | ||||||||||
Consumer |
194 | (158 | ) | 1,652 | (432 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total provision charged to operating expense |
232 | 1,906 | 764 | 2,520 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance at the end of the period |
$ | 14,226 | $ | 16,421 | $ | 14,226 | $ | 16,421 | ||||||||
|
|
|
|
|
|
|
|
19
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Certain loans are individually evaluated for impairment, and the Companys general practice is to proactively charge down impaired loans to the fair value, which is the appraised value less estimated selling costs, of the underlying collateral.
Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Companys policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.
For all loan portfolio segments except 1-4 family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrowers ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.
The Company charges-off 1-4 family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down or specific allocation of 1-4 family first and junior lien mortgages to the net realizable value less costs to sell when the value is known but no later than when a loan is 180 days past due. Pursuant to such guidelines, the Company also charges-off unsecured open-end loans when the loan is 90 days past due, and charges down to the net realizable value other secured loans when they are 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off.
The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment analysis:
June 30, 2016 | Commercial | Real Estate | Mortgage Warehousing |
Consumer | Total | |||||||||||||||
Allowance For Loan Losses |
||||||||||||||||||||
Ending allowance balance attributable to loans: |
|
|||||||||||||||||||
Individually evaluated for impairment |
$ | 500 | $ | | $ | | $ | | $ | 500 | ||||||||||
Collectively evaluated for impairment |
5,551 | 2,102 | 1,080 | 4,993 | 13,726 | |||||||||||||||
Loans acquired with deteriorated credit quality |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total ending allowance balance |
$ | 6,051 | $ | 2,102 | $ | 1,080 | $ | 4,993 | $ | 14,226 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 4,344 | $ | | $ | | $ | | $ | 4,344 | ||||||||||
Collectively evaluated for impairment |
873,140 | 495,096 | 206,179 | 365,005 | 1,939,420 | |||||||||||||||
Loans acquired with deteriorated credit quality |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total ending loans balance |
$ | 877,484 | $ | 495,096 | $ | 206,179 | $ | 365,005 | $ | 1,943,764 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2015 | Commercial | Real Estate | Mortgage Warehousing |
Consumer | Total | |||||||||||||||
Allowance For Loan Losses |
||||||||||||||||||||
Ending allowance balance attributable to loans: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 202 | $ | | $ | | $ | | $ | 202 | ||||||||||
Collectively evaluated for impairment |
6,739 | 2,476 | 1,007 | 3,856 | 14,078 | |||||||||||||||
Loans acquired with deteriorated credit quality |
254 | | | | 254 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total ending allowance balance |
$ | 7,195 | $ | 2,476 | $ | 1,007 | $ | 3,856 | $ | 14,534 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans: |
||||||||||||||||||||
Individually evaluated for impairment |
$ | 7,019 | $ | | $ | | $ | | $ | 7,019 | ||||||||||
Collectively evaluated for impairment |
798,454 | 438,454 | 145,172 | 363,419 | 1,745,499 | |||||||||||||||
Loans acquired with deteriorated credit quality |
1,729 | | | | 1,729 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total ending loans balance |
$ | 807,202 | $ | 438,454 | $ | 145,172 | $ | 363,419 | $ | 1,754,247 | ||||||||||
|
|
|
|
|
|
|
|
|
|
20
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, 2016 | Non-accrual | Loans Past Due Over 90 Days Still Accruing |
Non- Performing TDRs |
Performing TDRs |
Total Non- Performing Loans |
|||||||||||||||
Commercial |
|
|||||||||||||||||||
Owner occupied real estate |
$ | 1,054 | $ | | $ | | $ | | $ | 1,054 | ||||||||||
Non owner occupied real estate |
2,901 | | 243 | 60 | 3,204 | |||||||||||||||
Residential development |
| | | | | |||||||||||||||
Development & Spec Land Loans |
| | | | | |||||||||||||||
Commercial and industrial |
71 | | | | 71 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
4,026 | | 243 | 60 | 4,329 | |||||||||||||||
Real estate |
||||||||||||||||||||
Residential mortgage |
3,664 | 1 | 803 | 950 | 5,418 | |||||||||||||||
Residential construction |
| | 242 | | 242 | |||||||||||||||
Mortgage warehouse |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total real estate |
3,664 | 1 | 1,045 | 950 | 5,660 | |||||||||||||||
Consumer |
||||||||||||||||||||
Direct Installment |
345 | | | | 345 | |||||||||||||||
Direct Installment Purchased |
| | | | | |||||||||||||||
Indirect Installment |
837 | 23 | | | 860 | |||||||||||||||
Home Equity |
1,554 | | 178 | 246 | 1,978 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Consumer |
2,736 | 23 | 178 | 246 | 3,183 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 10,426 | $ | 24 | $ | 1,466 | $ | 1,256 | $ | 13,172 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2015 | Non-accrual | Loans Past Due Over 90 Days Still Accruing |
Non- Performing TDRs |
Performing TDRs |
Total Non- Performing Loans |
|||||||||||||||
Commercial |
|
|||||||||||||||||||
Owner occupied real estate |
$ | 1,749 | $ | | $ | | $ | | $ | 1,749 | ||||||||||
Non owner occupied real estate |
3,034 | | 1,915 | 60 | 5,009 | |||||||||||||||
Residential development |
| | | | | |||||||||||||||
Development & Spec Land Loans |
71 | | | | 71 | |||||||||||||||
Commercial and industrial |
176 | | | | 176 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
5,030 | | 1,915 | 60 | 7,005 | |||||||||||||||
Real estate |
||||||||||||||||||||
Residential mortgage |
4,354 | 1 | 824 | 808 | 5,987 | |||||||||||||||
Residential construction |
| | 250 | | 250 | |||||||||||||||
Mortgage warehouse |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total real estate |
4,354 | 1 | 1,074 | 808 | 6,237 | |||||||||||||||
Consumer |
||||||||||||||||||||
Direct Installment |
541 | | | | 541 | |||||||||||||||
Direct Installment Purchased |
| | | | | |||||||||||||||
Indirect Installment |
601 | 27 | | | 628 | |||||||||||||||
Home Equity |
1,736 | | 183 | 350 | 2,269 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Consumer |
2,878 | 27 | 183 | 350 | 3,438 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 12,262 | $ | 28 | $ | 3,172 | $ | 1,218 | $ | 16,680 | ||||||||||
|
|
|
|
|
|
|
|
|
|
21
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Included in the $10.4 million of non-accrual loans and the $1.5 million of non-performing TDRs at June 30, 2016 were $2.1 million and $94,000, respectively, of loans acquired for which accretable yield was recognized.
From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is managements policy to convert the loan from an earning asset to a non-accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is managements policy to generally 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 Operations Officer or the senior collection officer must review all loans placed on non-accrual status. Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms. The Company requires a period of satisfactory performance of not less than six months before returning a non-accrual loan to accrual status.
A loan becomes impaired when, based on current information, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is classified as impaired, the degree of impairment must be recognized by estimating future cash flows from the debtor. The present value of these cash flows is computed at a discount rate based on the interest rate contained in the loan agreement. However, if a particular loan has a determinable market value for its collateral, the creditor may use that value. Also, if the loan is secured and considered collateral dependent, the creditor may use the fair value of the collateral. Interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.
Smaller-balance, homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by 14 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrowers business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to non-accrual status when they are 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms, including TDRs, are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.
The Companys TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At June 30, 2016, 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, 2016, the Company had $2.7 million in TDRs and $1.3 million were performing according to the restructured terms and zero TDRs were returned to accrual status during the first six months of 2016. There was $107,000 of specific reserves allocated to TDRs at June 30, 2016 based on the discounted cash flows or when appropriate the fair value of the collateral.
22
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, 2016 | 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 |
$ | 1,054 | $ | 1,054 | $ | | $ | 1,062 | $ | | $ | 1,079 | $ | | ||||||||||||||
Non owner occupied real estate |
476 | 480 | | 600 | 1 | 1,331 | 2 | |||||||||||||||||||||
Residential development |
| | | | | | | |||||||||||||||||||||
Development & Spec Land Loans |
| | | | | | | |||||||||||||||||||||
Commercial and industrial |
71 | 71 | | 320 | | 325 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial |
1,601 | 1,605 | | 1,982 | 1 | 2,735 | 2 | |||||||||||||||||||||
With an allowance recorded |
|
|||||||||||||||||||||||||||
Commercial |
|
|||||||||||||||||||||||||||
Owner occupied real estate |
| | | | | | | |||||||||||||||||||||
Non owner occupied real estate |
2,729 | 2,739 | 500 | 2,747 | | 2,757 | | |||||||||||||||||||||
Residential development |
| | | | | | | |||||||||||||||||||||
Development & Spec Land Loans |
| | | | | | | |||||||||||||||||||||
Commercial and industrial |
| | | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total commercial |
2,729 | 2,739 | 500 | 2,747 | | 2,757 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 4,330 | $ | 4,344 | $ | 500 | $ | 4,729 | $ | 1 | $ | 5,492 | $ | 2 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
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, 2016 | 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 |
$ | 98 | $ | 437 | $ | | $ | 535 | $ | 297,946 | $ | 298,481 | ||||||||||||
Non owner occupied real estate |
20 | | | 20 | 343,340 | 343,360 | ||||||||||||||||||
Residential development |
| | | | 7,660 | 7,660 | ||||||||||||||||||
Development & Spec Land Loans |
2 | | | 2 | 23,169 | 23,171 | ||||||||||||||||||
Commercial and industrial |
| 91 | | 91 | 199,842 | 199,933 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
120 | 528 | | 648 | 871,957 | 872,605 | ||||||||||||||||||
Real estate |
||||||||||||||||||||||||
Residential mortgage |
1,023 | 300 | 1 | 1,324 | 472,239 | 473,563 | ||||||||||||||||||
Residential construction |
| 271 | | 271 | 17,515 | 17,786 | ||||||||||||||||||
Mortgage warehouse |
| | | | 205,699 | 205,699 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total real estate |
1,023 | 571 | 1 | 1,595 | 695,453 | 697,048 | ||||||||||||||||||
Consumer |
||||||||||||||||||||||||
Direct Installment |
155 | 16 | | 171 | 58,934 | 59,105 | ||||||||||||||||||
Direct Installment Purchased |
| | | | 131 | 131 | ||||||||||||||||||
Indirect Installment |
493 | 75 | 23 | 591 | 144,344 | 144,935 | ||||||||||||||||||
Home Equity |
310 | 134 | | 444 | 160,511 | 160,955 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer |
958 | 225 | 23 | 1,206 | 363,920 | 365,126 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 2,101 | $ | 1,324 | $ | 24 | $ | 3,449 | $ | 1,931,330 | $ | 1,934,779 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Percentage of total loans |
0.11 | % | 0.07 | % | 0.00 | % | 0.18 | % | 99.82 | % | ||||||||||||||
December 31, 2015 | 30 - 59 Days Past Due |
60 - 89 Days Past Due |
Greater than 90 Days Past Due |
Total Past Due | Loans Not Past Due |
Total | ||||||||||||||||||
Commercial |
|
|||||||||||||||||||||||
Owner occupied real estate |
$ | 481 | $ | 18 | $ | | $ | 499 | $ | 267,782 | $ | 268,281 | ||||||||||||
Non owner occupied real estate |
49 | | | 49 | 326,350 | 326,399 | ||||||||||||||||||
Residential development |
| | | | 5,018 | 5,018 | ||||||||||||||||||
Development & Spec Land Loans |
| | | | 18,183 | 18,183 | ||||||||||||||||||
Commercial and industrial |
32 | | | 32 | 184,879 | 184,911 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total commercial |
562 | 18 | | 580 | 802,212 | 802,792 | ||||||||||||||||||
Real estate |
||||||||||||||||||||||||
Residential mortgage |
1,121 | 344 | 1 | 1,466 | 413,458 | 414,924 | ||||||||||||||||||
Residential construction |
| | | | 19,751 | 19,751 | ||||||||||||||||||
Mortgage warehouse |
| | | | 144,692 | 144,692 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total real estate |
1,121 | 344 | 1 | 1,466 | 577,901 | 579,367 | ||||||||||||||||||
Consumer |
||||||||||||||||||||||||
Direct Installment |
106 | 10 | | 116 | 54,225 | 54,341 | ||||||||||||||||||
Direct Installment Purchased |
| | | | 153 | 153 | ||||||||||||||||||
Indirect Installment |
1,186 | 268 | 27 | 1,481 | 150,042 | 151,523 | ||||||||||||||||||
Home Equity |
1,193 | 203 | | 1,396 | 155,768 | 157,164 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total consumer |
2,485 | 481 | 27 | 2,993 | 360,188 | 363,181 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 4,168 | $ | 843 | $ | 28 | $ | 5,039 | $ | 1,740,301 | $ | 1,745,340 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Percentage of total loans |
0.24 | % | 0.05 | % | 0.00 | % | 0.29 | % | 99.71 | % |
The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.
Horizon Banks processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re-evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade.
24
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
| For new and renewed commercial loans, the Banks Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective markets (ranging from $1,000,000 to $2,500,000) are validated by the Loan Committee, which is chaired by the Chief Credit Officer (CCO). |
| Commercial loan officers are responsible for reviewing their loan portfolios and report any adverse material change to the CCO or Loan Committee. When circumstances warrant a change in the credit quality grade, loan officers are required to notify the CCO and the Credit Department of the change in the loan grade. Downgrades are accepted immediately by the CCO, however, lenders must present their factual information to either the Loan Committee or the CCO when recommending an upgrade. |
| The CCO, or his designee, meets weekly with loan officers to discuss the status of past-due loans and classified loans. These meetings are also designed to give the loan officers an opportunity to identify an existing loan that should be downgraded to a classified grade. |
| Monthly, senior management meets with the Watch Committee, which reviews all of the past due, classified, and impaired loans and the relative trends of these assets. This committee also reviews the actions taken by management regarding foreclosure mitigation, loan extensions, troubled debt restructures, other real estate owned and personal property repossessions. The information reviewed in this meeting acts as a precursor for developing managements analysis of the adequacy of the Allowance for Loan and Lease Losses. |
For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non-accrual, or are classified as a TDR are graded Substandard. After being 90 to 120 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
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 Banks minimum underwriting guidelines. The level of risk is acceptable but conditioned on the proper level of loan officer supervision. Loans that normally fall into this grade include acquisition, construction and development loans and income producing properties that have not reached stabilization.
Risk Grade 4W Management Watch:
Loans in this category are considered to be of acceptable quality, but with above normal risk. Borrower displays potential indicators of weakness in the primary source of repayment resulting in a higher reliance on secondary sources of repayment. Balance sheet may exhibit weak liquidity and/or high leverage. There is inconsistent earnings performance without the ability to sustain adverse economic conditions. Borrower may be operating in a declining industry or the property type, as for a commercial real estate loan, may be high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion.
Risk Grade 5: Special Mention
Loans which possess some credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered potential, not defined, impairments to the primary source of repayment. These loans may be to borrowers with adverse trends in financial performance, collateral value and/or marketability, or balance sheet strength.
Risk Grade 6: Substandard
One or more of the following characteristics may be exhibited in loans classified Substandard:
| Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss. |
| Loans are inadequately protected by the current net worth and paying capacity of the obligor. |
| The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees. |
26
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
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, 2016 | Pass | Special Mention |
Substandard | Doubtful | Total | |||||||||||||||
Commercial |
|
|||||||||||||||||||
Owner occupied real estate |
$ | 282,204 | $ | 8,716 | $ | 7,561 | $ | | $ | 298,481 | ||||||||||
Non owner occupied real estate |
336,897 | 3,033 | 3,430 | | 343,360 | |||||||||||||||
Residential development |
7,660 | | | | 7,660 | |||||||||||||||
Development & Spec Land Loans |
23,171 | | | | 23,171 | |||||||||||||||
Commercial and industrial |
188,713 | 2,342 | 8,878 | | 199,933 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
838,645 | 14,091 | 19,869 | | 872,605 | |||||||||||||||
Real estate |
||||||||||||||||||||
Residential mortgage |
468,145 | | 5,418 | | 473,563 | |||||||||||||||
Residential construction |
17,544 | | 242 | | 17,786 | |||||||||||||||
Mortgage warehouse |
205,699 | | | | 205,699 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total real estate |
691,388 | | 5,660 | | 697,048 | |||||||||||||||
Consumer |
||||||||||||||||||||
Direct Installment |
58,760 | | 345 | | 59,105 | |||||||||||||||
Direct Installment Purchased |
131 | | | | 131 | |||||||||||||||
Indirect Installment |
144,075 | | 860 | | 144,935 | |||||||||||||||
Home Equity |
158,977 | | 1,978 | | 160,955 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Consumer |
361,943 | | 3,183 | | 365,126 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 1,891,976 | $ | 14,091 | $ | 28,712 | $ | | $ | 1,934,779 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Percentage of total loans |
97.79 | % | 0.73 | % | 1.48 | % | 0.00 | % | ||||||||||||
December 31, 2015 | Pass | Special Mention |
Substandard | Doubtful | Total | |||||||||||||||
Commercial |
|
|||||||||||||||||||
Owner occupied real estate |
$ | 257,181 | $ | 4,954 | $ | 6,146 | $ | | $ | 268,281 | ||||||||||
Non owner occupied real estate |
320,216 | 585 | 5,598 | | 326,399 | |||||||||||||||
Residential development |
5,018 | | | | 5,018 | |||||||||||||||
Development & Spec Land Loans |
18,112 | | 71 | | 18,183 | |||||||||||||||
Commercial and industrial |
180,581 | 693 | 3,637 | | 184,911 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total commercial |
781,108 | 6,232 | 15,452 | | 802,792 | |||||||||||||||
Real estate |
||||||||||||||||||||
Residential mortgage |
408,937 | | 5,987 | | 414,924 | |||||||||||||||
Residential construction |
19,501 | | 250 | | 19,751 | |||||||||||||||
Mortgage warehouse |
144,692 | | | | 144,692 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total real estate |
573,130 | | 6,237 | | 579,367 | |||||||||||||||
Consumer |
||||||||||||||||||||
Direct Installment |
53,800 | | 541 | | 54,341 | |||||||||||||||
Direct Installment Purchased |
153 | | | | 153 | |||||||||||||||
Indirect Installment |
150,895 | | 628 | | 151,523 | |||||||||||||||
Home Equity |
154,895 | | 2,269 | | 157,164 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total Consumer |
359,743 | | 3,438 | | 363,181 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 1,713,981 | $ | 6,232 | $ | 25,127 | $ | | $ | 1,745,340 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Percentage of total loans |
98.20 | % | 0.36 | % | 1.44 | % | 0.00 | % |
28
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 acquire 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 Banks 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- |
|
|||||||||||||||||||||||||||
Repurchase Agreements |
$ | 50,348 | $ | 25,000 | $ | 60,000 | $ | 10,000 | $ | | $ | | $ | 145,348 | ||||||||||||||
Securities lending transactions |
||||||||||||||||||||||||||||
U.S. Treasury and federal agencies |
$ | 4,038 | $ | | $ | | $ | | $ | | $ | | $ | 4,038 | ||||||||||||||
Federal agency collateralized mortgage obligations |
44,521 | | 388 | 173 | 21,541 | 30,301 | 96,924 | |||||||||||||||||||||
Federal agency mortgage-backed pools |
15,003 | | 110 | 2,404 | 21,304 | 28,396 | 67,217 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
63,562 | | 498 | 2,577 | 42,845 | 58,697 | 168,179 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total borrowings |
$ | (13,214 | ) | $ | 25,000 | $ | 59,502 | $ | 7,423 | $ | (42,845 | ) | $ | (58,697 | ) | $ | (22,831 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2016 and December 31, 2015. 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, 2016, the Companys cash flow hedge was effective and is not expected to have a significant impact on the Companys net income over the next 12 months.
Fair Value Hedges
Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At June 30, 2016, the Companys fair value hedges were effective and are not expected to have a significant impact on the Companys net income over the next 12 months.
29
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 $121.7 million at June 30, 2016 and $117.3 million at December 31, 2015.
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, 2016, the Companys fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Companys net income.
The change in fair value of both the forward sale commitments and commitments to originate mortgage loans were recorded and the net gains or losses included in the Companys gain on sale of loans.
The following tables summarize the fair value of derivative financial instruments utilized by Horizon:
Asset Derivatives | Liability Derivatives | |||||||||||||||
June 30, 2016 | June 30, 2016 | |||||||||||||||
Derivatives designated as hedging instruments (Unaudited) | Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value | ||||||||||||
Interest rate contracts |
Loans | $ | | Other liabilities | $ | 5,393 | ||||||||||
Interest rate contracts |
Other Assets | 5,393 | Other liabilities | 3,786 | ||||||||||||
|
|
|
|
|||||||||||||
Total derivatives designated as hedging instruments |
5,393 | 9,179 | ||||||||||||||
|
|
|
|
|||||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||
Mortgage loan contracts |
Other assets | 1,111 | Other liabilities | | ||||||||||||
|
|
|
|
|||||||||||||
Total derivatives not designated as hedging instruments |
1,111 | | ||||||||||||||
|
|
|
|
|||||||||||||
Total derivatives |
$ | 6,504 | $ | 9,179 | ||||||||||||
|
|
|
|
|||||||||||||
Asset Derivatives | Liability Derivatives | |||||||||||||||
December 31, 2015 | December 31, 2015 | |||||||||||||||
Derivatives designated as hedging instruments (Unaudited) | Balance Sheet Location |
Fair Value |
Balance Sheet Location |
Fair Value | ||||||||||||
Interest rate contracts |
Loans | $ | | Other liabilities | $ | 1,782 | ||||||||||
Interest rate contracts |
Other Assets | 1,782 | Other liabilities | 3,141 | ||||||||||||
|
|
|
|
|||||||||||||
Total derivatives designated as hedging instruments |
1,782 | 4,923 | ||||||||||||||
|
|
|
|
|||||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||
Mortgage loan contracts |
Other assets | 642 | Other liabilities | | ||||||||||||
|
|
|
|
|||||||||||||
Total derivatives not designated as hedging instruments |
642 | | ||||||||||||||
|
|
|
|
|||||||||||||
Total derivatives |
$ | 2,424 | $ | 4,923 | ||||||||||||
|
|
|
|
30
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 statements of income for the three and six month periods ending June 30 is as follows:
Amount of Loss Recognized in Other (Effective Portion) |
Amount of Loss Recognized in Other Comprehensive Income on Derivative (Effective Portion) |
|||||||||||||||
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
Derivative in cash flow | 2016 | 2015 | 2016 | 2015 | ||||||||||||
hedging relationship |
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||
Interest rate contracts |
$ | (54 | ) | $ | 332 | $ | (419 | ) | $ | 118 |
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 | Location of gain (loss) | 2016 | 2015 | 2016 | 2015 | |||||||||||||
hedging relationship |
recognized on derivative |
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Interest rate contracts |
Interest income - loans |
$ | 1,110 | $ | (1,186 | ) | $ | 3,611 | $ | (186 | ) | |||||||
Interest rate contracts |
Interest income - loans |
(1,110 | ) | 1,186 | (3,611 | ) | 186 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | | $ | | $ | | $ | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Amount of Gain (Loss) Recognized on Derivative Three Months Ended June 30 |
Amount of Gain (Loss) Recognized on Derivative Six Months Ended June 30 |
|||||||||||||||||
Derivative not designated | Location of gain (loss) | 2016 | 2015 | 2016 | 2015 | |||||||||||||
as hedging relationship |
recognized on derivative |
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Mortgage contracts |
Other income - gain on sale of loans |
$ | 468 | $ | 83 | $ | 471 | $ | 272 |
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, 2016. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.
31
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
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 collateralized mortgage obligations and mortgage-backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bonds terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model, is used to develop prepayment and interest rate scenarios for securities with prepayment features.
Hedged loans
Certain fixed rate loans have been converted to variable rate loans by entering into interest rate swap agreements. The fair value of those fixed rate loans is based on discounting the estimated cash flows using interest rates determined by the respective interest rate swap agreement. Loans are classified within Level 2 of the valuation hierarchy based on the unobservable inputs used.
Interest rate swap agreements
The fair value of the Companys interest rate swap agreements is estimated by a third 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:
32
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
June 30, 2016 |
||||||||||||||||
Available-for-sale securities |
||||||||||||||||
U.S. Treasury and federal agencies |
$ | 18,470 | $ | | $ | 18,470 | $ | | ||||||||
State and municipal |
62,611 | | 62,611 | | ||||||||||||
Federal agency collateralized mortgage obligations |
154,263 | | 154,263 | | ||||||||||||
Federal agency mortgage-backed pools |
219,823 | | 219,823 | | ||||||||||||
Corporate notes |
72 | | 72 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale securities |
455,239 | | 455,239 | | ||||||||||||
Hedged loans |
116,338 | | 116,338 | | ||||||||||||
Forward sale commitments |
1,111 | | 1,111 | | ||||||||||||
Interest rate swap agreements |
(9,179 | ) | | (9,179 | ) | | ||||||||||
Commitments to originate loans |
| | | | ||||||||||||
December 31, 2015 |
||||||||||||||||
Available-for-sale securities |
||||||||||||||||
U.S. Treasury and federal agencies |
$ | 5,926 | $ | | $ | 5,926 | $ | | ||||||||
State and municipal |
75,095 | | 75,095 | | ||||||||||||
Federal agency collateralized mortgage obligations |
156,203 | | 156,203 | | ||||||||||||
Federal agency mortgage-backed pools |
207,704 | | 207,704 | | ||||||||||||
Corporate notes |
54 | | 54 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale securities |
444,982 | | 444,982 | | ||||||||||||
Hedged loans |
115,472 | | 115,472 | | ||||||||||||
Forward sale commitments |
642 | | 642 | | ||||||||||||
Interest rate swap agreements |
(4,923 | ) | | (4,923 | ) | |
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 | 2016 | 2015 | 2016 | 2015 | ||||||||||||
Total gains and losses from: | (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||
Hedged loans |
$ | 1,110 | $ | (1,186 | ) | $ | 3,611 | $ | (186 | ) | ||||||
Fair value interest rate swap agreements |
(1,110 | ) | 1,186 | (3,611 | ) | 186 | ||||||||||
Derivative loan commitments |
468 | 83 | 471 | 272 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 468 | $ | 83 | $ | 471 | $ | 272 | |||||||||
|
|
|
|
|
|
|
|
Certain other assets are measured at fair value on a nonrecurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment):
Quoted Prices in Active Markets for Identical Assets |
Significant Other Observable Inputs |
Significant Unobservable Inputs |
||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
June 30, 2016 |
||||||||||||||||
Impaired loans |
$ | 3,830 | $ | | $ | | $ | 3,830 | ||||||||
Mortgage servicing rights |
9,714 | | | 9,714 | ||||||||||||
December 31, 2015 |
||||||||||||||||
Impaired loans |
$ | 6,803 | $ | | $ | | $ | 6,803 | ||||||||
Mortgage servicing rights |
8,874 | | | 8,874 |
33
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
Impaired (collateral dependent): Loans for which it is probable that the Company will not collect all principal and interest due according to contractual terms are measured for impairment. Allowable methods for determining the amount of impairment include estimating fair value using the fair value of the collateral for collateral-dependent loans.
If the impaired loan is identified as collateral dependent, then the fair value method of measuring the amount of impairment is utilized. This method requires obtaining a current independent appraisal of the collateral and applying a discount factor to the value.
Impaired loans that are collateral dependent are classified within Level 3 of the fair value hierarchy when impairment is determined using the fair value method.
Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Companys month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs fair value due to impairment decreased by $46,000 during the first six months of 2016 and decreased by $18,000 during the first six months of 2015.
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 | Valuation | Range (Weighted | ||||||||
June 30, 2016 | Technique | Unobservable Inputs | Average) | |||||||
Impaired loans |
$ | 3,830 | Collateral based measurement | Discount to reflect current market conditions and ultimate collectability |
10% - 15% (12%) | |||||
Mortgage servicing rights |
$ | 9,714 | Discounted cashflows | Discount rate, Constant prepayment rate, Probability of default |
10% - 15% (12%), 4% - 7% (4.6%), 1% - 10% (4.5%) | |||||
Fair Value at | Valuation | Range (Weighted | ||||||||
December 31, 2015 | Technique | Unobservable Inputs | Average) | |||||||
Impaired loans |
$ | 6,803 | Collateral based measurement | Discount to reflect current market conditions and ultimate collectability |
10% - 15% (12%) | |||||
Mortgage servicing rights |
$ | 8,874 | 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 Companys financial instruments were determined using available market information, current pricing information applicable to Horizon and various valuation methodologies. Where market quotations were not available, considerable management judgment was involved in the determination of estimated fair values. Therefore, the estimated fair value of financial instruments shown below may not be representative of the amounts at which they could be exchanged in a current or future transaction. Due to the inherent uncertainties of expected cash flows of financial instruments, the use of alternate valuation assumptions and methods could have a significant effect on the estimated fair value amounts.
34
HORIZON BANCORP AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Table Dollar Amounts in Thousands, Except Per Share Data)
The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizons significant financial instruments at June 30, 2016 and December 31, 2015. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheet as well as certain off-balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy.
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and Due from Banks The carrying amounts approximate fair value.
Held-to-Maturity Securities For debt securities held to maturity, fair values are based on quoted market prices or dealer quotes. For those securities where a quoted market price is not available, carrying amount is a reasonable estimate of fair value based upon comparison with similar securities.
Loans Held for Sale The carrying amounts approximate fair value.
Net Loans The fair value of portfolio loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amounts of loans held for sale approximate fair value.
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
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 Companys financial instruments and the level within the fair value hierarchy in which the fair value measurements fall (unaudited).
June 30, 2016 | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Carrying | Assets | Inputs | Inputs | |||||||||||||
Amount | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Assets |
||||||||||||||||
Cash and due from banks |
$ | 109,224 | $ | 109,224 | $ | | $ | | ||||||||
Investment securities, held to maturity |
173,696 | | 180,059 | | ||||||||||||
Loans held for sale |
7,812 | | | 7,812 | ||||||||||||
Loans excluding loan level hedges, net |
1,807,261 | | | 1,798,943 | ||||||||||||
Stock in FHLB and FRB |
16,636 | | 16,636 | | ||||||||||||
Interest receivable |
11,526 |