Form 10-Q
Table of Contents

 

 

HORIZON BANCORP

 

 

FORM 10-Q

 

 

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 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)

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

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

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    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  ☒    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  
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  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 22,172,103 shares of Common Stock, no par value, at November 9, 2016.

 

 

 


Table of Contents

HORIZON BANCORP

FORM 10-Q

INDEX

 

PART I. FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements (Unaudited)

  
 

Condensed Consolidated Balance Sheets

     3   
 

Condensed Consolidated Statements of Income

     4   
 

Condensed Consolidated Statements of Comprehensive Income

     5   
 

Condensed Consolidated Statement of Stockholders’ Equity

     6   
 

Condensed Consolidated Statements of Cash Flows

     7   
 

Notes to Condensed Consolidated Financial Statements

     8   

Item 2.

 

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

     44   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     60   

Item 4.

 

Controls and Procedures

     60   

PART II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     61   

Item 1A.  

 

Risk Factors

     61   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     61   

Item 3.

 

Defaults Upon Senior Securities

     61   

Item 4.

 

Mine Safety Disclosures

     61   

Item 5.

 

Other Information

     61   

Item 6.

 

Exhibits

     62   

Signatures

     63   

Index To Exhibits

     64   

 

2


Table of Contents

PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)

 

     September 30
2016
     December 31
2015
 
     (Unaudited)         

Assets

     

Cash and due from banks

   $ 83,721       $ 48,650   

Investment securities, available for sale

     557,213         444,982   

Investment securities, held to maturity (fair value of $194,294 and $193,703)

     187,027         187,629   

Loans held for sale

     7,369         7,917   

Loans, net of allowance for loan losses of $14,524 and $14,534

     2,175,995         1,734,597   

Premises and equipment, net

     67,265         60,798   

Federal Reserve and Federal Home Loan Bank stock

     20,877         13,823   

Goodwill

     74,308         49,600   

Other intangible assets

     9,583         7,371   

Interest receivable

     12,702         10,535   

Cash value of life insurance

     73,661         54,504   

Other assets

     55,929         31,995   
  

 

 

    

 

 

 

Total assets

   $ 3,325,650       $ 2,652,401   
  

 

 

    

 

 

 

Liabilities

     

Deposits

     

Non-interest bearing

   $ 479,771       $ 335,955   

Interest bearing

     1,856,391         1,544,198   
  

 

 

    

 

 

 

Total deposits

     2,336,162         1,880,153   

Borrowings

     569,908         449,347   

Subordinated debentures

     37,418         32,797   

Interest payable

     1,015         507   

Other liabilities

     35,411         22,765   
  

 

 

    

 

 

 

Total liabilities

     2,979,914         2,385,569   
  

 

 

    

 

 

 

Commitments and contingent liabilities

     

Stockholders’ Equity

     

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, 66,000,000 shares (Restated - See Note 1) Issued, 22,172,103 and 17,992,986 shares (Restated - See Note 1) Outstanding, 22,143,228 and 17,909,831 shares (Restated - See Note 1)

     —           —     

Additional paid-in capital

     181,901         106,370   

Retained earnings

     161,026         148,685   

Accumulated other comprehensive income (loss)

     2,809         (723
  

 

 

    

 

 

 

Total stockholders’ equity

     345,736         266,832   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 3,325,650       $ 2,652,401   
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

3


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

 

     Three Months Ended     Nine Months Ended  
     September 30     September 30  
     2016      2015     2016     2015  
     (Unaudited)      (Unaudited)     (Unaudited)     (Unaudited)  

Interest Income

         

Loans receivable

   $ 25,313       $ 20,297      $ 65,854      $ 55,140   

Investment securities

         

Taxable

     2,498         2,156        7,703        6,377   

Tax exempt

     1,151         1,125        3,583        3,281   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

     28,962         23,578        77,140        64,798   
  

 

 

    

 

 

   

 

 

   

 

 

 

Interest Expense

         

Deposits

     1,875         1,566        4,923        4,035   

Borrowed funds

     2,128         1,729        5,608        4,747   

Subordinated debentures

     549         507        1,556        1,504   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

     4,552         3,802        12,087        10,286   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net Interest Income

     24,410         19,776        65,053        54,512   

Provision for loan losses

     455         300        1,219        2,820   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Loan Losses

     23,955         19,476        63,834        51,692   
  

 

 

    

 

 

   

 

 

   

 

 

 

Non-interest Income

         

Service charges on deposit accounts

     1,483         1,359        4,056        3,443   

Wire transfer fees

     292         160        588        493   

Interchange fees

     2,016         1,625        5,137        4,093   

Fiduciary activities

     1,653         1,520        4,753        4,033   

Gain on sale of investment securities (includes $0 for the three months ended and $875 for the nine months ended September 30, 2016 and $0 for the three months ended and $124 for the nine months ended September 30, 2015, related to accumulated other comprehensive earnings reclassifications)

     —           —          875        124   

Gain on sale of mortgage loans

     3,528         2,794        9,171        7,815   

Mortgage servicing income net of impairment

     409         246        1,356        725   

Increase in cash value of bank owned life insurance

     449         374        1,145        889   

Death benefit on bank owned life insurance

     —           —          —          145   

Other income

     226         322        708        892   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total non-interest income

     10,056         8,400        27,789        22,652   
  

 

 

    

 

 

   

 

 

   

 

 

 

Non-interest Expense

         

Salaries and employee benefits

     12,210         10,652        32,592        27,541   

Net occupancy expenses

     2,174         1,723        6,011        4,649   

Data processing

     1,616         1,281        3,855        3,170   

Professional fees

     612         409        2,190        1,596   

Outside services and consultants

     2,686         3,209        5,983        4,753   

Loan expense

     1,482         1,351        4,086        3,975   

FDIC insurance expense

     465         423        1,279        1,099   

Other losses

     107         246        510        351   

Other expense

     3,468         2,941        9,616        7,819   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total non-interest expense

     24,820         22,235        66,122        54,953   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income Before Income Tax

     9,191         5,641        25,501        19,391   

Income tax expense (includes $0 for the three months ended and $306 for the nine months ended September 30, 2016 and $0 for the three months ended and $43 for the nine months ended September 30, 2015, related to income tax expense from reclassification items)

     2,589         1,353        7,192        5,017   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     6,602         4,288        18,309        14,374   

Preferred stock dividend

     —           (31     (42     (94
  

 

 

    

 

 

   

 

 

   

 

 

 

Net Income Available to Common Shareholders

   $ 6,602       $ 4,257      $ 18,267      $ 14,280   
  

 

 

    

 

 

   

 

 

   

 

 

 

Basic Earnings Per Share (Restated - See Note 1)

   $ 0.31       $ 0.24      $ 0.95      $ 0.95   

Diluted Earnings Per Share (Restated - See Note 1)

     0.30         0.24        0.94        0.92   

See notes to condensed consolidated financial statements

 

4


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Dollar Amounts in Thousands)

 

     Three Months Ended September 30     Nine Months Ended September 30  
     2016     2015     2016     2015  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Net Income

   $ 6,602      $ 4,288      $ 18,309      $ 14,374   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss)

        

Change in fair value of derivative instruments:

        

Change in fair value of derivative instruments for the period

     803        (516     158        (334

Income tax effect

     (281     181        (55     117   
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from derivative instruments

     522        (335     103        (217
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in securities:

        

Unrealized appreciation (depreciation) for the period on AFS securities

     (1,927     1,781        6,712        1,379   

Amortization from transfer of securities from available-for-sale to held-to-maturity securities

     (83     (203     (560     (475

Reclassification adjustment for securities gains realized in income

     —          —          (875     (124

Income tax effect

     704        (552     (1,848     (273
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on securities

     (1,306     1,026        3,429        507   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss), Net of Tax

     (784     691        3,532        290   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 5,818      $ 4,979      $ 21,841      $ 14,664   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(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

          18,309          18,309   

Other comprehensive income, net of tax

            3,532        3,532   

Redemption of preferred stock

     (12,500            (12,500

Amortization of unearned compensation

       222             222   

Stock option expense

       247             247   

Stock issued stock plans

       286             286   

Stock issued in KFI acquisition

       14,470             14,470   

Stock issued in LPSB acquisition

       60,306             60,306   

Cash dividends on preferred stock (1.00%)

          (42       (42

Cash dividends on common stock ($.30 per share)

          (5,926       (5,926
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balances, September 30, 2016

   $ —        $ 181,901       $ 161,026      $ 2,809      $ 345,736   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

6


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

 

     Nine Months Ended September 30  
     2016     2015  
     (Unaudited)     (Unaudited)  

Operating Activities

    

Net income

   $ 18,309      $ 14,374   

Items not requiring (providing) cash

    

Provision for loan losses

     1,219        2,820   

Depreciation and amortization

     3,790        3,020   

Share based compensation

     247        216   

Mortgage servicing rights net impairment

     840        389   

Premium amortization on securities available for sale, net

     4,389        2,192   

Gain on sale of investment securities

     (875     (124

Gain on sale of mortgage loans

     (9,171     (7,815

Proceeds from sales of loans

     246,435        247,512   

Loans originated for sale

     (236,719     (239,137

Change in cash value of life insurance

     (1,145     (868

Gain (Loss) on sale of other real estate owned

     118        (214

Net change in

    

Interest receivable

     (687     (1,337

Interest payable

     275        (28

Other assets

     (16,641     (61

Other liabilities

     1,015        1,020   
  

 

 

   

 

 

 

Net cash provided by operating activities

     11,399        21,959   
  

 

 

   

 

 

 

Investing Activities

    

Purchases of securities available for sale

     (152,283     (170,391

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

     88,330        61,785   

Purchases of securities held to maturity

     (35,598     (26,128

Proceeds from maturities of securities held to maturity

     14,654        7,155   

Change in FHLB stock

     (2,443     268   

Net change in loans

     (26,920     (123,326

Proceeds on the sale of OREO and repossessed assets

     1,524        2,425   

Change in premises and equipment, net

     (1,719     (4,757

Acquisition of Peoples, net of cash received

     —          182,413   

Acquisition of Kosciusko, net of cash received

     30,437        —     

Acquisition of LaPorte, net of cash received

     116,521        —     
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     32,503        (70,556
  

 

 

   

 

 

 

Financing Activities

    

Net change in

    

Deposits

     (37,495     79,669   

Borrowings

     46,846        (26,064

Redemption of preferred stock

     (12,500     —     

Proceeds from issuance of stock

     286        4,178   

Dividends paid on common shares

     (5,926     (4,413

Dividends paid on preferred shares

     (42     (94
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (8,831     53,276   
  

 

 

   

 

 

 

Net Change in Cash and Cash Equivalents

     35,071        4,679   

Cash and Cash Equivalents, Beginning of Period

     48,650        43,476   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 83,721      $ 48,155   
  

 

 

   

 

 

 

Additional Supplemental Information

    

Interest paid

   $ 11,579      $ 10,292   

Income taxes paid

     7,310        4,900   

Transfer of loans to other real estate owned

     3,035        2,825   

The Company purchased all of the capital stock of Kosciusko for $22,983 on June 1, 2016 and Peoples for $78,147 on July 1, 2015. In conjunction with the acquisition, liabilities were assumed as follows:

    

Fair value of assets acquired

     155,873        485,077   

Less: common stock issued

     14,470        22,641   

Cash paid for the capital stock

     8,513        55,506   

Liabilities assumed

     132,890        406,930   

The Company purchased all of the capital stock of LaPorte Bancorp for $98,634 on July 18, 2016. In conjunction with the acquisition, liabilities were assumed as follows:

    

Fair value of assets acquired

     546,770        —     

Less: common stock issued

     60,306        —     

Cash paid for the capital stock

     38,328        —     

Liabilities assumed

     448,136        —     

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 1 - Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of Horizon Bancorp (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank, N.A. (“Bank”). All inter-company balances and transactions have been eliminated. The results of operations for the periods ended September 30, 2016 and September 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 Horizon’s management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments.

Certain information and note disclosures normally included in Horizon’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon’s Annual Report on Form 10-K for 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.

On October 18, 2016, the Board of Directors of the Company approved a three-for-two stock split of the Company’s authorized common stock, no par value. All share and per share amounts in the condensed consolidated financial statements and notes thereto have been retroactively adjusted, where necessary, to reflect this three-for-two stock split. The effect of the three-for-two stock split on the outstanding common shares is that shareholders of record as of the close of business on October 31, 2016, the record date, will receive an additional half share of common stock held, with shareholders receiving cash in lieu of any fractional shares. The additional shares issued in the stock split are expected to be payable and issued on November 14, 2016, and that the common shares will begin trading on a split-adjusted basis on or about November 15, 2016.

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      Nine Months Ended  
     September 30      September 30  
     2016      2015      2016      2015  
     (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Basic earnings per share

           

Net income

   $ 6,602       $ 4,288       $ 18,309       $ 14,374   

Less: Preferred stock dividends

     —           31         42         94   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 6,602       $ 4,257       $ 18,267       $ 14,280   

Weighted average common shares outstanding(1)

     21,538,752         17,408,964         19,252,295         15,044,129   

Basic earnings per share

   $ 0.31       $ 0.24       $ 0.95       $ 0.95   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

           

Net income available to common shareholders

   $ 6,602       $ 4,257       $ 18,267       $ 14,280   

Weighted average common shares outstanding(1)

     21,538,752         17,408,964         19,252,295         15,044,129   

Effect of dilutive securities:

           

Warrants

     —           321,888         —           436,044   

Restricted stock

     33,650         50,207         27,590         46,092   

Stock options

     79,551         58,823         66,491         54,446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     21,651,953         17,839,882         19,346,376         15,580,711   

Diluted earnings per share

   $ 0.30       $ 0.24       $ 0.94       $ 0.92   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Adjusted for 3:2 stock split on November 14, 2016

There were no shares for both the three and nine months ended September 30, 2016, respectively, and 3,750 for both the three and nine months ended September 30, 2015 which were not included in the computation of diluted earnings per share because they were non-dilutive.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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 1.425 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 3,288,303. Horizon’s stock price was $16.88 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 non-interest 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 management’s preliminary valuation of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on estimates and assumptions that are subject to change, the final purchase price for the Peoples acquisition is allocated as follows:

 

ASSETS

  

Cash and due from banks

   $ 205,054   

Investment securities, held to maturity

     2,038   

Commercial

     67,435   

Residential mortgage

     137,331   

Consumer

     19,593   
  

 

 

 

Total loans

     224,359   

Premises and equipment, net

     5,524   

FRB and FHLB stock

     2,743   

Goodwill

     21,424   

Core deposit intangible

     4,394   

Interest receivable

     1,279   

Cash value of life insurance

     13,898   

Other assets

     4,364   
  

 

 

 

Total assets purchased

   $ 485,077   
  

 

 

 

Common shares issued

   $ 55,506   

Cash paid

     22,641   
  

 

 

 

Total estimated purchase price

   $ 78,147   
  

 

 

 

LIABILITIES

  

Deposits

  

Non-interest bearing

   $ 28,251   

NOW accounts

     65,771   

Savings and money market

     125,176   

Certificates of deposits

     131,889   
  

 

 

 

Total deposits

     351,087   

Borrowings

     48,884   

Interest payable

     21   

Other liabilities

     6,938   
  

 

 

 

Total liabilities assumed

   $ 406,930   
  

 

 

 

 

 

 

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.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The 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.

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   
  

 

 

 

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The results of operations of Peoples and Peoples FSB have been included in the Company’s consolidated financial statements since the acquisition dates. The following schedule includes pro forma results for the periods ended September 30, 2016 and 2015 as if the Peoples and Peoples FSB acquisitions had occurred as of the beginning of the comparable prior reporting period.

 

     Three Months Ended      Nine Months Ended  
     September 30      September 30      September 30      September 30  
     2016      2015      2016      2015  

Summary of Operations:

           

Net Interest Income

   $ 24,410       $ 19,776       $ 65,053       $ 60,466   

Provision for Loan Losses

     455         300         1,219         2,880   

Net Interest Income after Provision for Loan Losses

     23,955         19,476         63,834         57,586   

Non-interest Income

     10,056         8,400         27,789         24,545   

Non-Interest Expense

     24,820         22,235         66,122         61,192   

Income before Income Taxes

     9,191         5,641         25,501         20,939   

Income Tax Expense

     2,589         1,353         7,192         5,164   

Net Income

     6,602         4,288         18,309         15,776   

Net Income Available to Common Shareholders

   $ 6,602       $ 4,257       $ 18,267       $ 15,682   

Basic Earnings Per Share

   $ 0.31       $ 0.24       $ 0.95       $ 0.91   

Diluted Earnings Per Share

   $ 0.30       $ 0.24       $ 0.94       $ 0.89   

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 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 Bank’s 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 4.5183 shares of Horizon common stock for each share of Kosciusko’s common stock, subject to allocation provisions to assure that in aggregate, Kosciusko shareholders received total consideration that consisted 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 873,430 shares of its common stock in the merger. Based upon the June 1, 2016 closing price of $16.57 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 non-interest 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. The final valuation numbers were received in September 2016 which changed the goodwill estimate from $6.9 million to $6.4 million.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

ASSETS

  

Cash and due from banks

   $ 38,950   

Investment securities, held to maturity

     1,191   

Commercial

     70,006   

Residential mortgage

     26,244   

Consumer

     6,319   
  

 

 

 

Total loans

     102,569   

Premises and equipment, net

     1,466   

FRB and FHLB stock

     582   

Goodwill

     6,443   

Core deposit intangible

     526   

Interest receivable

     636   

Cash value of life insurance

     2,745   

Other assets

     765   
  

 

 

 

Total assets purchased

   $ 155,873   
  

 

 

 

Common shares issued

   $ 14,470   

Cash paid

     8,513   
  

 

 

 

Total estimated purchase price

   $ 22,983   
  

 

 

 

LIABILITIES

  

Deposits

  

Non-interest bearing

   $ 27,871   

NOW accounts

     35,213   

Savings and money market

     26,953   

Certificates of deposits

     32,771   
  

 

 

 

Total deposits

     122,808   

Borrowings

     9,038   

Interest payable

     55   

Other liabilities

     989   
  

 

 

 

Total liabilities assumed

   $ 132,890   
  

 

 

 
 

 

Of the total estimated purchase price of $23.0 million, $526,000 has been allocated to core deposit intangible. Additionally, $6.4 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.

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.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The following table details the acquired loans that are accounted for in accordance with ASC 310-30 as of June 1, 2016.

 

Contractually required principal and interest at acquisition

   $ 2,682   

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

     25   
  

 

 

 

Expected cash flows at acquisition

     2,657   

Interest component of expected cash flows (accretable discount)

     634   
  

 

 

 

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

   $ 2,023   
  

 

 

 

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 Bank’s 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 0.9435 shares of Horizon common stock for each share of LaPorte Bancorp’s common stock, subject to allocation provisions to assure that in aggregate, LaPorte Bancorp shareholders received total consideration that consisted of 65% stock and 35% cash. As a result of LaPorte Bancorp stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 3,421,488 shares of its common stock in the merger. Based upon the July 18, 2016 closing price of $18.36 per share of Horizon common stock, less the consideration used to pay off LaPorte’s ESOP loan receivable, the transaction has an implied valuation of approximately $98.6 million.

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 LaPorte Bancorp acquisition is detailed in the following table. Final estimates of fair value on the date of acquisition have not been received yet. 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.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

ASSETS

  

Cash and due from banks

   $ 154,849   

Investment securities, held to maturity

     23,779   

Commercial

     154,223   

Residential mortgage

     42,603   

Consumer

     16,801   

Mortgage Warehousing

     99,752   
  

 

 

 

Total loans

     313,379   

Premises and equipment, net

     6,022   

FHLB stock

     4,029   

Goodwill

     18,265   

Core deposit intangible

     2,514   

Interest receivable

     844   

Cash value of life insurance

     15,267   

Other assets

     7,822   
  

 

 

 

Total assets purchased

   $ 546,770   
  

 

 

 

Common shares issued

   $ 60,306   

Cash paid

     38,328   
  

 

 

 

Total estimated purchase price

   $ 98,634   
  

 

 

 

LIABILITIES

  

Deposits

  

Non-interest bearing

   $ 66,733   

NOW accounts

     99,346   

Savings and money market

     117,688   

Certificates of deposits

     86,929   
  

 

 

 

Total deposits

     370,696   

Borrowings

     64,793   

Interest payable

     178   

Subordinated debt

     4,504   

Other liabilities

     7,965   
  

 

 

 

Total liabilities assumed

   $ 448,136   
  

 

 

 
 

 

Of the total estimated purchase price of $98.6 million, $2.5 million has been allocated to core deposit intangible. Additionally, $18.3 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.

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.

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The following table details an estimate of the acquired loans that are accounted for in accordance with ASC 310-30 as of July 18, 2016. Final valuation estimates have not yet been determined for acquired loans as of September 30, 2016. If information becomes available which would indicate adjustments to the purchase price allocation, such adjustments would be made prospectively.

 

Contractually required principal and interest at acquisition

   $ 12,551   

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

     3,411   
  

 

 

 

Expected cash flows at acquisition

     9,140   

Interest component of expected cash flows (accretable discount)

     1,736   
  

 

 

 

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

   $ 7,404   
  

 

 

 

Estimates of certain loans, those for which specific credit-related deterioration, since origination, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition of these loans is based on reasonable expectation about the timing and amount of cash flows to be collected.

The results of operations of LaPorte Bancorp and The LaPorte Savings Bank have been included in the Company’s consolidated financial statements since the acquisition dates. The following schedule includes pro forma results for the periods ended September 30, 2016 and 2015 as if the LaPorte Bancorp and The LaPorte Savings Bank acquisitions had occurred as of the beginning of the comparable prior reporting periods.

 

     Three Months Ended      Nine Months Ended  
     September 30      September 30      September 30      September 30  
     2016      2015      2016      2015  

Summary of Operations:

           

Net Interest Income

   $ 25,044       $ 23,981       $ 74,512       $ 67,243   

Provision for Loan Losses

     455         400         1,219         3,075   

Net Interest Income after Provision for Loan Losses

     24,589         23,581         73,293         64,168   

Non-interest Income

     11,056         9,099         33,052         24,767   

Non-Interest Expense

     31,611         25,541         80,937         64,956   

Income before Income Taxes

     4,034         7,139         25,408         23,979   

Income Tax Expense

     1,855         1,670         8,070         5,932   

Net Income

     2,179         5,469         17,338         18,047   

Net Income Available to Common Shareholders

   $ 2,179       $ 5,438       $ 17,296       $ 17,953   

Basic Earnings Per Share

   $ 0.10       $ 0.31       $ 0.90       $ 1.19   

Diluted Earnings Per Share

   $ 0.10       $ 0.30       $ 0.89       $ 1.15   

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 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.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 3 – Securities

The fair value of securities is as follows:

 

            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
September 30, 2016    Cost      Gains      Losses      Value  

Available for sale

           

U.S. Treasury and federal agencies

   $ 27,383       $ 54       $ (15    $ 27,422   

State and municipal

     62,825         1,321         (107      64,039   

Federal agency collateralized mortgage obligations

     188,072         1,894         (282      189,684   

Federal agency mortgage-backed pools

     272,144         4,240         (411      275,973   

Corporate notes

     32         63         —           95   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 550,456       $ 7,572       $ (815    $ 557,213   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

State and municipal

   $ 158,543       $ 6,718       $ (761    $ 164,500   

Federal agency collateralized mortgage obligations

     6,828         144         —           6,972   

Federal agency mortgage-backed pools

     21,656         1,166         —           22,822   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 187,027       $ 8,028       $ (761    $ 194,294   
  

 

 

    

 

 

    

 

 

    

 

 

 
            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 September 30, 2016, no individual investment security had an unrealized loss that was determined to be other-than-temporary.

The unrealized losses on the Company’s investments in securities of state and municipal governmental agencies, U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at September 30, 2016.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The amortized cost and fair value of securities available for sale and held to maturity at September 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.

 

     September 30, 2016      December 31, 2015  
     Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value  

Available for sale

           

Within one year

   $ 6,921       $ 6,953       $ 7,192       $ 7,232   

One to five years

     52,105         52,482         38,197         38,894   

Five to ten years

     12,934         13,325         16,807         17,152   

After ten years

     18,280         18,796         17,605         17,797   
  

 

 

    

 

 

    

 

 

    

 

 

 
     90,240         91,556         79,801         81,075   

Federal agency collateralized mortgage obligations

     188,072         189,684         157,291         156,203   

Federal agency mortgage-backed pools

     272,144         275,973         206,970         207,704   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 550,456       $ 557,213       $ 444,062       $ 444,982   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

Within one year

   $ —         $ —         $ —         $ —     

One to five years

     22,801         23,965         17,815         18,403   

Five to ten years

     88,924         93,501         106,167         110,026   

After ten years

     46,818         47,034         28,208         28,976   
  

 

 

    

 

 

    

 

 

    

 

 

 
     158,543         164,500         152,190         157,405   

Federal agency collateralized mortgage obligations

     6,828         6,972         9,051         8,954   

Federal agency mortgage-backed pools

     21,656         22,822         26,388         27,344   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 187,027       $ 194,294       $ 187,629       $ 193,703   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Less than 12 Months     12 Months or More     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
September 30, 2016    Value      Losses     Value      Losses     Value      Losses  

U.S. Treasury and federal agencies

   $ 6,594       $ (15   $ —         $ —        $ 6,594       $ (15

State and municipal

     26,360         (868     —           —          26,360         (868

Federal agency collateralized mortgage obligations

     48,837         (184     12,304         (98     61,141         (282

Federal agency mortgage-backed pools

     47,054         (365     6,779         (46     53,833         (411
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 128,845       $ (1,432   $ 19,083       $ (144   $ 147,928       $ (1,576
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     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 September 30      Nine Months Ended September 30  
     2016      2015      2016      2015  

Sales of securities available for sale (Unaudited)

           

Proceeds

   $ —         $ —         $ 25,077       $ 13,332   

Gross gains

     —           —           1,060         147   

Gross losses

     —           —           (185      (23

 

17


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 4 Loans

 

     September 30      December 31  
     2016      2015  

Commercial

     

Working capital and equipment

   $ 440,599       $ 381,245   

Real estate, including agriculture

     564,602         391,668   

Tax exempt

     12,621         8,674   

Other

     29,628         23,408   
  

 

 

    

 

 

 

Total

     1,047,450         804,995   

Real estate

     

1–4 family

     523,721         433,015   

Other

     6,441         4,129   
  

 

 

    

 

 

 

Total

     530,162         437,144   

Consumer

     

Auto

     167,541         168,397   

Recreation

     5,458         5,365   

Real estate/home improvement

     55,505         47,015   

Home equity

     140,156         127,113   

Unsecured

     4,230         4,120   

Other

     13,141         10,290   
  

 

 

    

 

 

 

Total

     386,031         362,300   

Mortgage warehouse

     226,876         144,692   
  

 

 

    

 

 

 

Total loans

     2,190,519         1,749,131   

Allowance for loan losses

     (14,524      (14,534
  

 

 

    

 

 

 

Loans, net

   $ 2,175,995       $ 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 Company’s commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

 

18


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Real Estate and Consumer

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

Mortgage Warehousing

Horizon’s mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage 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.

 

19


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

     Loan             Deferred      Recorded  
September 30, 2016    Balance      Interest Due      Fees / (Costs)      Investment  

Owner occupied real estate

   $ 321,762       $ 1,151       $ 1,192       $ 324,105   

Non owner occupied real estate

     457,555         627         529         458,711   

Residential spec homes

     7,949         20         6         7,975   

Development & spec land loans

     39,798         79         74         39,951   

Commercial and industrial

     218,414         1,992         171         220,577   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     1,045,478         3,869         1,972         1,051,319   

Residential mortgage

     506,545         1,599         2,556         510,700   

Residential construction

     21,061         38         —           21,099   

Mortgage warehouse

     226,876         498         —           227,374   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     754,482         2,135         2,556         759,173   

Direct installment

     66,495         178         (439      66,234   

Direct installment purchased

     124         —           —           124   

Indirect installment

     147,829         296         —           148,125   

Home equity

     172,905         665         (883      172,687   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     387,353         1,139         (1,322      387,170   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     2,187,313         7,143         3,206         2,197,662   

Allowance for loan losses

     (14,524      —           —           (14,524
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans

   $ 2,172,789       $ 7,143       $ 3,206       $ 2,183,138   
  

 

 

    

 

 

    

 

 

    

 

 

 
     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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 5 – Accounting for Certain Loans Acquired in a Transfer

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

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

 

     September 30      September 30      September 30      September 30      September 30      September 30  
     2016      2016      2016      2016      2016      2016  
     Heartland      Summit      Peoples      Kosciusko      LaPorte      Total  

Commercial

   $ 867       $ 5,323       $ 724       $ 1,667       $ 5,731       $ 14,312   

Real estate

     605         989         204         492         1,673         3,963   

Consumer

     2         9         —           —           —           11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding balance

   $ 1,474       $ 6,321       $ 928       $ 2,159       $ 7,404       $ 18,286   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Carrying amount, net of allowance of $0

                  $ 18,286   
                 

 

 

 
     December 31      December 31      December 31      December 31      December 31      December 31  
     2015      2015      2015      2015      2015      2015  
     Heartland      Summit      Peoples      Kosciusko      LaPorte      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 nine months ended September 30, is as follows:

 

     Nine Months Ended September 30, 2016  
     Heartland     Summit     Peoples     Kosciusko     LaPorte      Total  

Balance at January 1

   $ 795      $ 708      $ 555      $ —        $ —         $ 2,058   

Additions

     —          —          —          634        1,736         2,370   

Accretion

     (127     (139     (92     (38     —           (396

Reclassification from nonaccretable difference

     —          —          —          —          —           —     

Disposals

     (74     (35     (59     (23     —           (191
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30

   $ 594      $ 534      $ 404      $ 573      $ 1,736       $ 3,841   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     Nine Months Ended September 30, 2015  
     Heartland     Summit     Peoples     Kosciusko     LaPorte      Total  

Balance at January 1

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

Additions

     —          —          647        —          —           647   

Accretion

     (272     (254     —          —          —           (526

Reclassification from nonaccretable difference

     —          —          —          —          —           —     

Disposals

     (1,210     (237     —          —          —           (1,447
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at September 30

   $ 918      $ 777      $ 647      $ —        $ —         $ 2,342   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

During the nine months ended September 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 $87,000, respectively.

 

21


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 6 – Allowance for Loan Losses

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior one to five years. Management believes the five-year historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. The actual allowance for loan loss activity is provided below.

 

     Three Months Ended      Nine Months Ended  
     September 30      September 30  
     2016      2015      2016      2015  
     (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Balance at beginning of the period

   $ 14,226       $ 16,421       $ 14,534       $ 16,501   

Loans charged-off:

           

Commercial

           

Owner occupied real estate

     4         56         182         1,478   

Non owner occupied real estate

     (1      —           471         16   

Residential development

     —           —           —           —     

Development & Spec Land Loans

     —           —           —           —     

Commercial and industrial

     8         38         47         291   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     11         94         700         1,785   

Real estate

           

Residential mortgage

     12         101         127         287   

Residential construction

     —           —           —           —     

Mortgage warehouse

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     12         101         127         287   

Consumer

           

Direct Installment

     55         51         159         206   

Direct Installment Purchased

     —           —           —           —     

Indirect Installment

     296         218         851         783   

Home Equity

     32         262         271         766   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     383         531         1,281         1,755   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans charged-off

     406         726         2,108         3,827   

Recoveries of loans previously charged-off:

           

Commercial

           

Owner occupied real estate

     2         8         31         94   

Non owner occupied real estate

     1         1         55         1   

Residential development

     2         —           6         —     

Development & Spec Land Loans

     —           —           —           —     

Commercial and industrial

     12         8         107         41   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     17         17         199         136   

Real estate

           

Residential mortgage

     12         5         75         10   

Residential construction

     —           —           —           —     

Mortgage warehouse

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     12         5         75         10   

Consumer

           

Direct Installment

     26         15         70         91   

Direct Installment Purchased

     —           —           —           —     

Indirect Installment

     160         112         400         347   

Home Equity

     34         24         135         90   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     220         151         605         528   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loan recoveries

     249         173         879         674   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans charged-off (recovered)

     157         553         1,229         3,153   
  

 

 

    

 

 

    

 

 

    

 

 

 

Provision charged to operating expense

           

Commercial

     165         532         (471      2,580   

Real estate

     102         (955      (147      (51

Consumer

     188         723         1,837         291   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total provision charged to operating expense

     455         300         1,219         2,820   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at the end of the period

   $ 14,524       $ 16,168       $ 14,524       $ 16,168   
  

 

 

    

 

 

    

 

 

    

 

 

 

Certain loans are individually evaluated for impairment, and the Company’s 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.

 

22


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

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

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

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

 

September 30, 2016    Commercial      Real Estate      Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

              

Individually evaluated for impairment

   $ —         $ —         $ —         $ —         $ —     

Collectively evaluated for impairment

     6,222         1,947         1,337         5,018         14,524   

Loans acquired with deteriorated credit quality

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 6,222       $ 1,947       $ 1,337       $ 5,018       $ 14,524   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated for impairment

   $ 5,855       $ —         $ —         $ —         $ 5,855   

Collectively evaluated for impairment

     1,045,464         531,799         227,374         387,170         2,191,807   

Loans acquired with deteriorated credit quality

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 1,051,319       $ 531,799       $ 227,374       $ 387,170       $ 2,197,662   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 7 – Non-performing Loans and Impaired Loans

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

 

September 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

   $ 566       $ —         $ —         $ —         $ 566   

Non owner occupied real estate

     2,734         —           240         60         3,034   

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     137         —           —           —           137   

Commercial and industrial

     1,740         —           —           —           1,740   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     5,177         —           240         60         5,477   

Real estate

              

Residential mortgage

     1,094         44         870         863         2,871   

Residential construction

     —           —           238         —           238   

Mortgage warehouse

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     1,094         44         1,108         863         3,109   

Consumer

              

Direct Installment

     1,505         —           —           —           1,505   

Direct Installment Purchased

     —           —           —           —           —     

Indirect Installment

     970         15         —           —           985   

Home Equity

     1,345         —           175         241         1,761   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     3,820         15         175         241         4,251   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,091       $ 59       $ 1,523       $ 1,164       $ 12,837   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Included in the $10.1 million of non-accrual loans and the $1.5 million of non-performing TDRs at September 30, 2016 were $1.2 million and $238,000, respectively, of loans acquired for which accretable yield was recognized.

From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is management’s policy to convert the loan from an “earning asset” to a non-accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is management’s policy to 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 1–4 family residences, residential construction loans, automobile, home equity, second mortgage loans and mortgage warehouse loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. When analysis of borrower operating results and financial condition indicate that underlying cash flows of a borrower’s business are not adequate to meet its debt service requirements, the loan is evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30 days or more. Loans are generally moved to non-accrual status when they are 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

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

The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At September 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 September 30, 2016, the Company had $2.7 million in TDRs and $1.5 million were performing according to the restructured terms and zero TDRs were returned to accrual status during the first nine months of 2016. There was $84,000 of specific reserves allocated to TDRs at September 30, 2016 based on the discounted cash flows or when appropriate the fair value of the collateral.

 

25


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

                      Three Months Ending     Nine Months Ending  
September 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

  $ 994      $ 995      $ —        $ 1,029      $ —        $ 1,062      $ —     

Non owner occupied real estate

    3,106        3,120        —          3,150        1        3,776        3   

Residential development

    —          —          —          —          —          —          —     

Development & Spec Land Loans

    —          —          —          —          —          —          —     

Commercial and industrial

    1,740        1,740        —          1,984        —          878        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    5,840        5,855        —          6,163        1        5,716        3   

With an allowance recorded

             

Commercial

             

Owner occupied real estate

    —          —          —          —          —          —          —     

Non owner occupied real estate

    —          —          —          —          —          —          —     

Residential development

    —          —          —          —          —          —          —     

Development & Spec Land Loans

    —          —          —          —          —          —          —     

Commercial and industrial

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 5,840      $ 5,855      $ —        $ 6,163      $ 1      $ 5,716      $ 3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
                      Three Months Ending     Nine Months Ending  
September 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

  $ 1,235      $ 1,238      $ —        $ 1,262      $ 1      $ 1,041      $ 10   

Non owner occupied real estate

    2,798        2,801        —          2,815        1        2,846        4   

Residential development

    —          —          —          —          —          —          —     

Development & Spec Land Loans

    —          —          —          —          —          —          —     

Commercial and industrial

    239        239        —          583        4        415        4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    4,272        4,278        —          4,660        6        4,302        18   

With an allowance recorded

             

Commercial

             

Owner occupied real estate

    2,967        2,966        598        2,968        —          2,191        55   

Non owner occupied real estate

    2,817        2,828        550        2,858        —          2,942        —     

Residential development

    —          —          —          —          —          —          —     

Development & Spec Land Loans

    —          —          —          —          —          —          —     

Commercial and industrial

    776        776        451        776        —          836        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    6,560        6,570        1,599        6,602        —          5,969        55   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 10,832      $ 10,848      $ 1,599      $ 11,262      $ 6      $ 10,271      $ 73   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

September 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

   $ 282      $ 17      $ —        $ 299      $ 321,463      $ 321,762   

Non owner occupied real estate

     180        103        —          283        457,272        457,555   

Residential development

     —          —          —          —          7,949        7,949   

Development & Spec Land Loans

     32        —          —          32        39,766        39,798   

Commercial and industrial

     361        267        —          628        217,786        218,414   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     855        387        —          1,242        1,044,236        1,045,478   

Real estate

            

Residential mortgage

     982        210        43        1,235        505,310        506,545   

Residential construction

     —          —          —          —          21,061        21,061   

Mortgage warehouse

     —          —          —          —          226,876        226,876   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     982        210        43        1,235        753,247        754,482   

Consumer

            

Direct Installment

     42        30        —          72        66,423        66,495   

Direct Installment Purchased

     —          —          —          —          124        124   

Indirect Installment

     805        49        15        869        146,960        147,829   

Home Equity

     436        26        —          462        172,443        172,905   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     1,283        105        15        1,403        385,950        387,353   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 3,120      $ 702      $ 58      $ 3,880      $ 2,183,433      $ 2,187,313   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     0.14     0.03     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 Bank’s processes for determining credit quality differ slightly depending on whether a new loan or a renewed loan is being underwritten, or whether an existing loan is being re-evaluated for credit quality. The latter usually occurs upon receipt of current financial information or other pertinent data that would trigger a change in the loan grade.

 

27


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

  For new and renewed commercial loans, the Bank’s Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure 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 management’s analysis of the adequacy of the Allowance for Loan and Lease Losses.

For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non-accrual, or are classified as a TDR are graded “Substandard.” After being 90 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.

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

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

 

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

 

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

 

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

Risk Grade 4 Satisfactory/Monitored:

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

Risk Grade 4W Management Watch:

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

Risk Grade 5: Special Mention

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

Risk Grade 6: Substandard

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

 

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

 

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

 

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

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

    Loans 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.

 

30


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The following table presents loans by credit grades.

 

September 30, 2016    Pass     Special
Mention
    Substandard     Doubtful     Total  

Commercial

          

Owner occupied real estate

   $ 305,849      $ 5,258      $ 10,655      $ —        $ 321,762   

Non owner occupied real estate

     450,811        344        6,400        —          457,555   

Residential development

     7,949        —          —          —          7,949   

Development & Spec Land Loans

     39,571        —          227        —          39,798   

Commercial and industrial

     207,998        1,419        8,997        —          218,414   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     1,012,178        7,021        26,279        —          1,045,478   

Real estate

          

Residential mortgage

     503,821        —          2,724        —          506,545   

Residential construction

     20,823        —          238        —          21,061   

Mortgage warehouse

     226,876        —          —          —          226,876   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     751,520        —          2,962        —          754,482   

Consumer

          

Direct Installment

     64,990        —          1,505        —          66,495   

Direct Installment Purchased

     124        —          —          —          124   

Indirect Installment

     146,844        —          985        —          147,829   

Home Equity

     171,152        —          1,753        —          172,905   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

     383,110        —          4,243        —          387,353   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,146,808      $ 7,021      $ 33,484      $ —        $ 2,187,313   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     98.15     0.32     1.53     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  

 

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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 Bank’s control.

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

 

September 30, 2016

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

Repurchase Agreements and repurchase-to-maturity transactions

                 

Repurchase Agreements

   $ 62,703      $ 35,000       $ 50,000       $ 10,000       $ —        $ —        $ 157,703   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Securities lending transactions

                 

U.S. Treasury and federal agencies

     4,025        —           —           —           —          —          4,025   

Federal agency collateralized mortgage obligations

     50,255        —           316         258         21,514        30,621        102,964   

Federal agency mortgage-backed pools

     14,501        —           89         2,146         20,778        29,388        66,902   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     68,781        —           405         2,404         42,292        60,009        173,891   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total borrowings

   $ (6,078   $ 35,000       $ 49,595       $ 7,596       $ (42,292   $ (60,009   $ (16,188
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Gross amount of recognized liabilities for repurchase agreements and securities lending

                  $ 157,703   
                 

 

 

 

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 September 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 September 30, 2016, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.

Fair Value Hedges

Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At September 30, 2016, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.

 

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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 $118.1 million at September 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 September 30, 2016, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income.

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

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

 

     Asset Derivatives      Liability Derivatives  
     September 30, 2016      September 30, 2016  
Derivatives designated as hedging instruments (Unaudited)    Balance Sheet
Location
     Fair Value      Balance Sheet
Location
     Fair Value  

Interest rate contracts

     Loans       $ —           Other liabilities       $ 4,563   

Interest rate contracts

     Other Assets         4,563         Other liabilities         3,002   
     

 

 

       

 

 

 

Total derivatives designated as hedging instruments

        4,563            7,565   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments

           

Mortgage loan contracts

     Other assets         787         Other liabilities         —     
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

        787            —     
     

 

 

       

 

 

 

Total derivatives

      $ 5,350          $ 7,565   
     

 

 

       

 

 

 
     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   
     

 

 

       

 

 

 

 

33


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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 nine month periods ending September 30 is as follows:

 

     Comprehensive Income on Derivative
(Effective Portion)
     Comprehensive Income on Derivative
(Effective Portion)
 
     Three Months Ended September 30      Nine Months Ended September 30  

Derivative in cash flow hedging relationship

   2016      2015      2016      2015  
   (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Interest rate contracts

   $ 522       $ (335    $ 103       $ (217

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 September 30     Nine Months Ended September 30  

Derivative in fair value
hedging relationship

 

Location of gain (loss)

recognized on derivative

  2016     2015     2016     2015  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Interest rate contracts

 

Interest income - loans

  $ (830   $ 765      $ 2,781      $ 579   

Interest rate contracts

 

Interest income - loans

    830        (765     (2,781     (579
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ —        $ —        $ —        $ —     
   

 

 

   

 

 

   

 

 

   

 

 

 
        Amount of Gain (Loss) Recognized on Derivative     Amount of Gain (Loss) Recognized on Derivative  
        Three Months Ended September 30     Nine Months Ended September 30  </