FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
Commission file number 0-10792
Horizon Bancorp
(Exact name of registrant as specified in its charter)
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Indiana
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35-1562417 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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515 Franklin Square, Michigan City
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46360 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: 219-879-0211
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
Common Stock, no par value
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The NASDAQ Stock Market, LLC |
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K o
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):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the registrants common stock held by non-affiliates of the registrant, based on the average bid price of such stock as of June 30, 2008, the
last day of the registrants most recently completed second fiscal quarter, was approximately $44,802,075.
As of March 16, 2009, the registrant had 3,254,482 shares of Common Stock outstanding.
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Part of Form 10-K into which |
Documents Incorporated by Reference Document
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portion of document is incorporated |
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Portions of the Registrants Proxy Statement to be filed for its
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III |
May 7, 2009 annual meeting of shareholders
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Horizon Bancorp
2008 Annual Report on Form 10-K
Table of Contents
2
PART I
ITEM 1. BUSINESS
The disclosures in this Item 1 are qualified by the disclosures below in Item 1A, Risk Factors, and
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operation, and
in other cautionary statements set forth elsewhere in this Annual Report on Form 10-K.
General
Horizon Bancorp (Horizon or the Company) is a registered bank holding company incorporated in
Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking
services in Northwestern Indiana and Southwestern Michigan through its bank subsidiary, Horizon
Bank, N.A. (the Bank) and other affiliated entities. Horizon operates as a single segment, which
is commercial banking. Horizons Common Stock is traded on the Nasdaq Global Market under the
symbol HBNC. The Bank was chartered as a national banking association in 1873 and has operated
continuously since that time. The Bank is a full-service commercial bank offering commercial and
retail banking services, corporate and individual trust and agency services and other services
incident to banking.
On January 28, 2008, the Bank opened its second full service branch in Valparaiso, Indiana and on
July 14, 2008, the Bank opened a full service office in Merrillville, Indiana. In total, the Bank
maintains 17 full service offices in Northwest Indiana and Southwest Michigan. At December 31,
2008, the Bank had total assets of $1.307 billion and total deposits of $841 million. The Bank has
four wholly-owned subsidiaries: Horizon Trust & Investment Management, N.A. (Horizon Trust),
Horizon Investments, Inc. (Horizon Investments), Horizon Insurance Services, Inc. (Horizon
Insurance) and Horizon Grantor Trust. Horizon Trust offers corporate and individual trust and
agency services and investment management services. Horizon Investments manages the investment
portfolio of the Bank. Horizon Insurance offered a full line of personal insurance products until
March 2005, at which time the majority of its assets were sold to a third party. Horizon Grantor
Trust holds title to certain company owned life insurance policies.
Horizon formed Horizon Bancorp Capital Trust II in 2004 (Trust II) and Horizon Bancorp Capital
Trust III in 2006 (Trust III) for the purpose of participating in pooled trust preferred
securities offerings. The Company assumed additional debentures as the result of the acquisition
of Alliance Financial Corporation in 2005, which formed Alliance Financial Statutory Trust I
(Alliance Trust). See Note 10 of the Consolidated Financial Statements for further discussion
regarding these previously consolidated entities that are now reported separately. The business of
Horizon is not seasonal to any material degree.
No material part of Horizons business is dependent upon a single or small group of customers, the
loss of any one or more of whom would have a materially adverse effect on the business of Horizon.
In 2008, revenues from loans accounted for 69% of the total consolidated revenue, and revenues from
investment securities accounted for 15% of total consolidated revenue.
Employees
The Bank, Horizon Trust and Horizon Investments employed approximately 285 full and part-time
employees as of December 31, 2008. Horizon and Horizon Grantor Trust do not have any employees.
3
Competition
A high degree of competition exists in all major areas where Horizon engages in business. The
Banks primary market consists of Porter, LaPorte, St. Joseph, Elkhart and Lake Counties Indiana,
and Berrien County, Michigan. The Bank competes with other commercial banks as well as with
savings and loan associations, consumer finance companies and credit unions. To a more moderate
extent, the Bank competes with Chicago money center banks, mortgage banking companies, insurance
companies, brokerage houses, other institutions engaged in money market financial services and
certain government agencies.
Based on deposits as of June 30, 2008, Horizon was the largest of the 10 bank and thrift
institutions in LaPorte County with a 34.01% market share and the sixth largest of the 15
institutions in Porter County with a 7.07% market share. In Berrien County, Michigan, Horizon was
the fourth largest of the 10 bank and thrift institutions with an 7.35% market share. Horizons
market share of deposits in Lake, St. Joseph and Elkhart Counties was less than 2.00% in each of
these counties. (Source: FDIC Summary of Deposits Market Share Reports, available at
www.fdic.gov).
Supervision and Regulation
The Bank Holding Company Act
Horizon is registered as a bank holding company and is subject to the supervision of, and
regulation by, the Board of Governors of the Federal Reserve System (Federal Reserve) under the
Bank Holding Company Act of 1956, as amended (BHC Act). Pursuant to Federal Reserve regulations,
a bank holding company is required to serve as a source of financial and managerial strength to its
subsidiary banks. It is the policy of the Federal Reserve that, pursuant to this requirement, a
bank holding company should stand ready to use its resources to provide adequate capital funds to
its subsidiary banks during periods of financial stress or adversity.
The BHC Act requires the prior approval of the Federal Reserve to acquire more than a 5% voting
interest of any bank or bank holding company. Additionally, the BHC Act restricts Horizons
non-banking activities to those which are determined by the Federal Reserve to be so closely
related to banking and a proper incident thereto.
Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the FDICIA), a bank
holding company is required to guarantee the compliance of any insured depository institution
subsidiary that may become undercapitalized (as defined in FDICIA) with the terms of any capital
restoration plan filed by such subsidiary with its appropriate federal bank regulatory agency.
Bank holding companies are required to comply with the Federal Reserves risk-based capital
guidelines. The Federal Deposit Insurance Corporation (the FDIC) and the Office of the
Comptroller of the Currency (the OCC) also have risk-based capital ratio guidelines to which
depository institutions under their respective supervision are subject. The guidelines establish a
systematic analytical framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Risk-based capital ratios are determined
by allocating assets and specified off-balance sheet commitments to four risk weighted categories,
with higher levels of capital being required for the categories perceived as representing greater
risk. For Horizons regulatory capital ratios and regulatory requirements as of December 31, 2008,
see the information in Managements Discussion and Analysis of Financial Condition and Results of
Operation in Item 7 below, which is incorporated herein by reference.
4
National Bank Act
The Bank is (i) subject to the provisions of the National Bank Act; (ii) supervised, regulated, and
examined by the OCC; and (iii) subject to the rules and regulations of the OCC, Federal Reserve,
and the FDIC.
Deposit Insurance
The Banks deposits are insured to applicable limits by the Federal Deposit Insurance Corporation
(FDIC).
The Bank is subject to deposit insurance assessments by the FDIC, which is a risk-related deposit
insurance assessment system where premiums are based upon the institutions capital levels and risk
profile. Under this system, insured institutions are assigned to one of four risk-weighted
categories based on supervisory evaluations, regulatory capital levels, and certain other factors
with less risky institutions paying lower assessments. An institutions assessment rate depends
upon the category to which it is assigned. For 2008, assessments ranged from 5 to 43 basis points
of assessable deposits, and the Bank paid assessments at the rate of seven basis points for each
$100 of insured deposits. In December 2008, the FDIC adopted a rule uniformly increasing the
risk-based assessment rates by seven basis points, annually, resulting in a range of risk-based
assessment of 12 basis points to 50 basis points.
On February 27, 2009, the FDIC announced the imposition of a special assessment and changes to
assessment rates, to the risk-based assessment system that will take effect beginning April 1,
2009, and to the restoration plan. The FDIC adopted an interim rule that imposes a special
assessment of 10 basis points as of June 30, 2009, which is to be collected on September 30, 2009.
Assuming that deposit levels remain constant, we anticipate that the special assessment for the
Bank would total approximately $779,000. The FDICs interim rule also provides for the imposition
of additional special assessments of up to 10 basis points if necessary. Comments on the interim
rule are due within 30 days of publication in the Federal Register. Under the new assessment
system, banks in the best risk category will pay from 12 cents to 16 cents per $100 of insured
deposits. The FDIC also announced an amendment to the restoration plan to extend the period of the
plan from five to seven years.
Effective October 14, 2008, the deposit insurance coverage was increased from $100,000 to $250,000
per depositor until January 1, 2010, subject to aggregation rules, and to unlimited coverage for
non-interest bearing transaction accounts. Horizon is providing this additional coverage to its
deposit customers.
The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC
determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe and unsound condition to continue operations or has violated any
applicable law, regulation, order or any condition imposed in writing by, or written agreement
with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process
for a permanent termination of insurance if the institution has no tangible capital.
Federal law also provides for the possibility that the FDIC may pay dividends to insured
institutions once the Deposit Insurance Fund reserve ratio equals or exceeds 1.35% of estimated
insured deposits.
Insured depository institutions that were in existence on December 31, 1996, and paid assessments
prior to that date (or their successors) were entitled to a one-time credit against future
assessments based on their past contributions to the BIF or SAIF. In 2006, the Bank received a
one-time credit of $458,000 against future assessments. Of our initial credit, $314,000 was
utilized in 2007 and the remaining $144,000 was utilized in 2008.
5
The Federal Deposit Insurance Reform Act of 2005 (the Reform Act), resulted in significant
changes to the federal deposit insurance program effective March 31, 2006, the Bank Insurance Fund
(BIF) and the Savings Association Insurance Fund (SAIF) were merged to create a new fund,
called the Deposit Insurance Fund (DIF)
Pursuant to the Reform Act, the FDIC is authorized to set the reserve ratio for the DIF annually at
between 1.15% and 1.5% of estimated insured deposits, and the FDIC has been given discretion to set
assessment rates according to risk regardless of the level of the fund reserve ratio. The
designated reserve ratio for the DIF is currently set at1.25% of estimated insured deposits.
Recent failures, as well as deterioration in banking and economic conditions, have significantly
increased the funds loss provisions, resulting in a decline in the reserve ratio. As of June 30,
2008, the reserve ratio was 1.01%. The FDIC expects a higher rate of insured institution failures
in the next few years; thus, the reserve ratio may continue to decline. Because the reserve ratio
has fallen below 1.15%, the FDIC has established a restoration plan to restore the reserve ratio to
1.15%. The FDIC has increased the assessment rates and is making other changes to the assessment
system to ensure that riskier institutions bear a greater share of the proposed increase in
assessments.
The FDIC proposed further refinements to its risk-based assessment that will be effective April 1,
2009 and will effectively make the range 8 to 77 1/2 basis points of assessable deposits. The FDIC
may adjust the scale uniformly from one quarter to the next, except that no adjustment can exceed
three basis points from the base scale without notice and comment rulemaking. No institution may
pay a dividend if in default of its federal deposit insurance assessment.
As a result, our insurance premiums for 2008 increased significantly and totaled $546,000 after
utilizing our remaining credit of $144,000 in the first quarter of 2008. Due to the continued
failures of unaffiliated FDIC insured depository institutions, we anticipate that our FDIC deposit
insurance premiums will increase in the future, perhaps significantly, which will adversely impact
our future earnings, but management cannot predict what insurance assessment rates will be in the
future.
FDIC-insured institutions also remain subject to the requirement to pay assessments to the FDIC to
fund interest payments on bonds issued by the Financing Corporation (FICO), an agency of the
Federal government established to recapitalize the predecessor to the SAIF. The amount assessed on
individual institutions, including the Bank, by FICO is in addition to the amount paid for deposit
insurance according to the risk-related assessment rate schedule. These assessments will continue
until the FICO bonds are repaid between 2017 and 2019. During 2008, the FICO assessment rate ranged
between 1.10 and 1.14 basis points for each $100 of insured deposits per quarter. For the first
quarter of 2009, the FICO assessment rate is 1.14 basis points. The Bank paid deposit insurance
assessments (including the FICO assessments) of $546,000 during the year ended December 31, 2008.
Future increases in deposit insurance premiums or changes in risk classification would increase the
Banks deposit related costs.
General Regulatory Supervision
Both federal and state law extensively regulate various aspects of the banking business, such as
reserve requirements, truth-in-lending and truth-in-savings disclosures, equal credit opportunity,
fair credit reporting, trading in securities and other aspects of banking operations. Branching by
the Bank is subject to the jurisdiction and requires notice to, or the prior approval of, the OCC.
6
Transactions With Affiliates and Insiders
Horizon and the Bank are subject to the Federal Reserve Act, which restricts financial transactions
between banks, affiliated companies and their executive officers, including limits on credit
transactions between these parties. The statute prescribes terms and conditions for bank affiliate
transactions deemed to be consistent with safe and sound banking practices, and restricts the types
of collateral security permitted in connection with a banks extension of credit to an affiliate.
Capital Regulation
Capital Regulations. The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make regulatory capital
requirements more sensitive to differences in risk profiles among banks and bank holding companies
and account for off-balance sheet items. Risk-based capital ratios are determined by allocating
assets and specified off-balance sheet commitments to four risk weighted categories of 0%, 20%,
50%, or 100%, with higher levels of capital being required for the categories perceived as
representing greater risk.
The capital guidelines divide a bank holding companys or banks capital into two tiers. The first
tier (Tier I) includes common equity, certain non-cumulative perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, less goodwill and certain other
intangible assets (except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary capital (Tier II) includes, among other items,
cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities,
certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease
losses, subject to certain limitations, less required deductions. Banks and bank holding companies
are required to maintain a total risk-based capital ratio of at least 8%, of which 4% must be Tier
I capital. The federal banking regulators may, however, set higher capital requirements when a
banks particular circumstances warrant. Banks experiencing or anticipating significant growth are
expected to maintain capital ratios, including tangible capital positions, well above the minimum
levels.
Also required by the regulations is the maintenance of a leverage ratio designed to supplement the
risk-based capital guidelines. This ratio is computed by dividing Tier I capital, net of all
intangibles, by the quarterly average of total assets. The minimum leverage ratio is 3% for the
most highly rated institutions, and 1% to 2% higher for institutions not meeting those standards.
Pursuant to the regulations, banks must maintain capital levels commensurate with the level of
risk, including the volume and severity of problem loans to which they are exposed.
In December 2008, the Company received $25,000,000 in exchange for 25,000 shares of its Fixed Rate
Cumulative Preferred Stock, Series A, issued to the Treasury Department, and related warrants. Of
that amount, $20,000,000 was contributed to the Bank. As a result, the Companys and the Banks
regulatory capital have increased significantly from the capital reported in prior periods.
7
The following is a summary of Horizons and the Banks regulatory capital and capital requirements
at December 31, 2008.
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To Be Categorized As |
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Well Capitalized |
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Under Prompt |
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For Capital |
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Corrective Action |
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Actual |
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Adequacy Purposes |
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Provisions |
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Amount |
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Ratio |
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Amount |
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Ratio |
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Amount |
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Ratio |
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As of December 31, 2008 |
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Total risk-based capital
(to risk-weighted assets) |
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Horizon Bank, N.A. |
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$ |
122,538 |
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13.11 |
% |
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$ |
74,790 |
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8.00 |
% |
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$ |
93,488 |
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10.00 |
% |
Horizon Bancorp Consolidated |
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$ |
134,546 |
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14.38 |
% |
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$ |
74,877 |
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8.00 |
% |
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N/A |
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N/A |
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Tier 1 risk-based capital
(to risk-weighted assets) |
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Horizon Bank, N.A. |
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$ |
111,128 |
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11.89 |
% |
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$ |
37,395 |
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4.00 |
% |
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$ |
56,093 |
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6.00 |
% |
Horizon Bancorp Consolidated |
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$ |
123,136 |
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13.16 |
% |
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$ |
37,438 |
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4.00 |
% |
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N/A |
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N/A |
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Tier 1 leverage capital
(to average assets) |
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Horizon Bank, N.A. |
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$ |
111,128 |
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9.44 |
% |
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$ |
47,074 |
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4.00 |
% |
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$ |
58,868 |
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5.00 |
% |
Horizon Bancorp Consolidated |
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$ |
123,136 |
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10.45 |
% |
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$ |
47,124 |
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4.00 |
% |
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N/A |
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N/A |
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Prompt Corrective Regulatory Action.
Federal law provides the federal banking regulators with broad powers to take prompt corrective
action to resolve the problems of undercapitalized institutions. The extent of the regulators
powers depends on whether the institution in question is well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, or critically
undercapitalized, as defined by regulation. Depending upon the capital category to which an
institution is assigned, the regulators corrective powers include: (i) requiring the submission of
a capital restoration plan; (ii) placing limits on asset growth and restrictions on activities;
(iii) requiring the institution to issue additional capital stock (including additional voting
stock) or to be acquired; (iv) restricting transactions with affiliates; (v) restricting the
interest rate the institution may pay on deposits; (vi) ordering a new election of directors of the
institution; (vii) requiring that senior executive officers or directors be dismissed; (viii)
prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the
institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on
subordinated debt; and (xi) ultimately, appointing a receiver for the institution. At December 31,
2008, the Bank was categorized as well capitalized, meaning that the Banks total risk-based
capital ratio exceeded 10%, the Banks Tier I risk-based capital ratio exceeded 6%, the Banks
leverage ratio exceeded 5%, and the Bank was not subject to a regulatory order, agreement or
directive to meet and maintain a specific capital level for any capital measure.
Anti-Money Laundering and the USA Patriot Act
Horizon is subject to the provisions of the USA PATRIOT Act of 2001, which contains anti-money
laundering and financial transparency laws and requires financial institutions to implement
additional policies and procedures with respect to, or additional measures designed to address, any
or all the following matters, among others: money laundering, suspicious activities and currency
transaction reporting, and currency crimes.
8
Sarbanes-Oxley Act of 2002
Horizon also is subject to the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), which revised
the laws affecting corporate governance, accounting obligations and corporate reporting. The
Sarbanes-Oxley Act applies to all companies with equity or debt securities registered under the
Securities Exchange Act of 1934. In particular, the Sarbanes-Oxley Act established: (i) new
requirements for audit committees, including independence, expertise and responsibilities; (ii)
additional responsibilities regarding financial statements for the Chief Executive Officer and
Chief Financial Officer of the reporting company; (iii) new standards for auditors and regulation
of audits; (iv) increased disclosure and reporting obligations for the reporting company and their
directors and executive officers; and (v) new and increased civil and criminal penalties for
violation of the securities laws. Management expects that significant additional efforts and
expense will continue to be required to comply with the provisions of the Sarbanes-Oxley Act.
The Securities and Exchange Commission has adopted final rules implementing Section 404 of the
Sarbanes-Oxley Act of 2002. In each Form 10-K it files, Horizon is required to include a report of
management on Horizons internal control over financial reporting. The internal control report
must include a statement of managements responsibility for establishing and maintaining adequate
control over financial reporting of Horizon, identify the framework used by management to evaluate
the effectiveness of Horizons internal control over financial reporting, provide managements
assessment of the effectiveness of Horizons internal control over financial reporting and state
that Horizons independent accounting firm has issued an attestation report on managements
assessment of Horizons internal control over financial reporting. Significant efforts were
required to comply with Section 404 in 2005 and Horizon anticipates additional efforts will be
required in future years.
Recent Legislative Developments
Emergency Economic Stabilization Act of 2008 and Troubled Asset Relief Programs Capital Purchase
Program
The global and U.S. economies are experiencing significantly reduced business activity as a result
of, among other factors, disruptions in the financial system during the past year, and in
particular, the last several weeks. Dramatic declines in the housing market during the past year,
with falling home prices and increasing foreclosures and unemployment, have resulted in write-downs
of asset values by financial institutions, including government-sponsored entities and major
commercial and investment banks. These write-downs, initially of mortgage-backed securities but
spreading to credit default swaps and other derivative securities, have caused many financial
institutions to seek additional capital, to merge with larger and stronger institutions and, in
some cases, to fail.
Reflecting concern about the stability of the financial markets generally and the strength of
counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to
provide funding to borrowers, including other financial institutions. The availability of credit,
confidence in the financial sector, and level of volatility in the financial markets have been
adversely affected as a result. In recent weeks, volatility and disruption in the capital and
credit markets has reached unprecedented levels. In some cases, the markets have produced downward
pressure on stock prices and credit capacity for certain issuers without regard to those issuers
underlying financial strength.
In response to the financial crises affecting the banking system and financial markets and going
concern threats to investment banks and other financial institutions, on October 3, 2008, the
Emergency Economic Stabilization Act of 2008 (the EESA) was signed into law. Pursuant to the
EESA, the U.S. Department of Treasury (the Treasury) has the authority to, among other things,
purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial
instruments from financial institutions for the purpose of stabilizing and providing liquidity to
the U.S. financial markets.
9
On October 14, 2008, the Treasury also announced it would offer to qualifying U.S. banking
organizations the opportunity to sell preferred stock, along with warrants to purchase common
stock, to the Treasury on what may be considered attractive terms under the Troubled Asset Relief
Program (TARP) Capital Purchase Program (the CPP). The CPP allows financial institutions, like
Horizon, to issue non-voting preferred stock to the Treasury in an amount ranging between 1% and 3%
of the institutions total risk-weighted assets.
Although both Horizon and the Bank met all applicable regulatory capital requirements and were well
capitalized, Horizon determined that obtaining additional capital pursuant to the CPP for
contribution in whole or in part to the Bank was advisable. As a result, Horizon decided to
participate in the CPP Program and sold $25,000,000 of its Fixed Rate Cumulative Preferred Stock,
Series A to the Treasury on December 19, 2008.
The general terms of the preferred stock issued by Horizon under the CPP are as follows:
|
|
|
Dividends at the rate of 5% per annum, payable quarterly in arrears, are required to
be paid on the preferred stock for the first five years and dividends at the rate of 9%
per annum are required thereafter until the stock is redeemed by Horizon; |
|
|
|
|
Without the prior consent of the Treasury, Horizon will be prohibited from
increasing its common stock dividends or repurchasing its common stock for the first
three years while Treasury is an investor; |
|
|
|
|
During the first three years the preferred stock is outstanding, Horizon will be
prohibited from repurchasing such preferred stock, except with the proceeds from a sale
of Tier 1 qualifying common or other preferred stock of Horizon in an offering that
raises at least 25% of the initial offering price of the preferred stock sold to the
Treasury ($6,250,000). After the first three years, the preferred stock can be
redeemed at any time with any available cash; |
|
|
|
|
Under the CPP, Horizon also issued to the Treasury warrants entitling the Treasury
to buy 212,104 shares of Horizons common stock at an exercise price of $17.68 per
share; and |
|
|
|
|
Horizon agreed to certain compensation restrictions for its senior executive
officers and restrictions on the amount of executive compensation which is tax
deductible. |
EESA followed, and has been followed by, numerous actions by the Federal Reserve, Congress,
Treasury, the SEC and others to address the current liquidity and credit crisis that has followed
the sub-prime meltdown that commenced in 2007. These measures include homeowner relief that
encourage loan restructuring and modification; the establishment of significant liquidity and
credit facilities for financial institutions and investment banks; the lowering of the federal
funds rate, including two 50 basis point decreases in October of 2008; emergency action against
short selling practices; a temporary guaranty program for money market funds; the establishment of
a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers;
coordinated international efforts to address illiquidity and other weaknesses in the banking
sector.
It is not clear at this time what impact the EESA, the TARP Capital Purchase Program, the Temporary
Liquidity Guarantee Program, other liquidity and funding initiatives of the Federal Reserve and
other agencies that have been previously announced, and any additional programs that may be
initiated in the future will have on the financial markets and the other difficulties described
above, including the extreme levels of volatility and limited credit availability currently being
experienced, or on the U.S. banking and financial industries and the broader U.S. and global
economies. Further adverse effects could have an adverse effect on the Company and its business.
10
Other Regulation
In addition to the matters discussed above, the Bank is subject to additional regulation of its
activities, including a variety of consumer protection regulations affecting its lending, deposit,
and collection activities and regulations affecting secondary mortgage market activities.
Effect of Governmental Monetary Policies
The Banks earnings are affected by domestic economic conditions and the monetary and fiscal
policies of the United States government and its agencies. The Federal Reserves monetary policies
have had, and are likely to continue to have, an important impact on the operating results of
commercial banks through its power to implement national monetary policy in order, among other
things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve have
major effects upon the levels of bank loans, investments and deposits through its open market
operations in United States government securities and through its regulation of the discount rate
on borrowings of member banks and the reserve requirements against member bank deposits. It is not
possible to predict the nature or impact of future changes in monetary and fiscal policies.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Indianapolis, which is one of twelve regional FHLBs. Each FHLB
serves as a reserve or central bank for its members within its assigned region. The FHLB is funded
primarily from funds deposited by banks and savings associations and proceeds derived from the sale
of consolidated obligations of the FHLB system. It makes loans to members (i.e., advances) in
accordance with policies and procedures established by the Board of Directors of the FHLB. All FHLB
advances must be fully secured by sufficient collateral as determined by the FHLB. The Federal
Housing Finance Board (FHFB), an independent agency, controls the FHLB System, including the FHLB
of Indianapolis.
As a member of the FHLB, the Bank is required to purchase and maintain stock in the FHLB of
Indianapolis in an amount equal to at least 1% of its aggregate unpaid residential mortgage loans,
home purchase contracts, or similar obligations at the beginning of each year. At December 31,
2008, the Banks investment in stock of the FHLB of Indianapolis was $11.0 million. The FHLB
imposes various limitations on advances such as limiting the amount of certain types of real estate
related collateral to 30% of a members capital and limiting total advances to a member. Interest
rates charged for advances vary depending upon maturity, the cost of funds to the FHLB of
Indianapolis and the purpose of the borrowing.
The FHLBs are required to provide funds for the resolution of troubled savings associations and to
contribute to affordable housing programs through direct loans or interest subsidies on advances
targeted for community investment and low and moderate income housing projects. For the year ended
December 31, 2008, dividends paid by the FHLB of Indianapolis to the Bank totaled approximately
$520,000, for an annualized rate of 4.7%.
11
Limitations on Rates Paid for Deposits
FDIC regulations place limitations on the ability of insured depository institutions to accept,
renew or roll over deposits by offering rates of interest which are significantly higher than the
prevailing rates of interest on deposits offered by other insured depository institutions having
the same type of charter in the institutions normal market area. Under these regulations, well
capitalized depository institutions may accept, renew or roll such deposits over without
restriction, adequately capitalized depository institutions may accept, renew or roll such
deposits over with a waiver from the FDIC (subject to certain restrictions on payments of rates)
and undercapitalized depository institutions may not accept, renew or roll such deposits over.
The regulations contemplate that the definitions of well capitalized, adequately capitalized
and undercapitalized will be the same as the definition adopted by the agencies to implement the
corrective action provisions of federal law. Management does not believe that these regulations
will have a materially adverse effect on the Banks current operations.
Legislative Initiatives
Additional legislative and administrative actions affecting the banking industry may be considered
by the United States Congress, state legislatures and various regulatory agencies, including those
referred to above. It cannot be predicted with certainty whether such legislative or
administrative action will be enacted or the extent to which the banking industry in general or
Horizon and its affiliates will be affected.
BANK HOLDING COMPANY STATISTICAL DISCLOSURES
|
I. |
|
DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS EQUITY; INTEREST RATES
AND INTEREST DIFFERENTIAL |
Information required by this section of Securities Act Industry Guide 3 is presented in
Managements Discussion and Analysis as set forth in Item 7 below, herein incorporated by
reference.
12
|
A. |
|
The following is a schedule of the amortized cost and fair value of investment
securities available for sale and held to maturity at December 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands) |
|
2008 |
|
2007 |
|
2006 |
Available for Sale |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
Cost |
|
Fair Value |
|
U.S. Treasury and U.S.
Government agencies and
corporations |
|
$ |
23,661 |
|
|
$ |
24,914 |
|
|
$ |
25,660 |
|
|
$ |
26,220 |
|
|
$ |
58,595 |
|
|
$ |
58,445 |
|
State and municipal |
|
|
88,282 |
|
|
|
86,985 |
|
|
|
86,389 |
|
|
|
86,931 |
|
|
|
81,363 |
|
|
|
81,800 |
|
Mortgage-backed securities |
|
|
174,227 |
|
|
|
176,389 |
|
|
|
108,247 |
|
|
|
107,371 |
|
|
|
93,591 |
|
|
|
91,174 |
|
Collateralized mortgage
obligations |
|
|
13,063 |
|
|
|
12,951 |
|
|
|
13,650 |
|
|
|
13,552 |
|
|
|
11,215 |
|
|
|
11,010 |
|
Corporate notes |
|
|
587 |
|
|
|
399 |
|
|
|
632 |
|
|
|
601 |
|
|
|
632 |
|
|
|
649 |
|
|
|
|
|
Total investment
securities |
|
$ |
299,820 |
|
|
$ |
301,638 |
|
|
$ |
234,578 |
|
|
$ |
234,675 |
|
|
$ |
245,396 |
|
|
$ |
243,078 |
|
|
|
|
Held to maturity, State and
municipal |
|
$ |
1,630 |
|
|
$ |
1,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B. |
|
The following is a schedule of maturities of each category of available for
sale and held to maturity debt securities and the related weighted-average yield of
such securities as of December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After One Year |
|
|
After Five Years |
|
|
|
|
(dollar amounts in thousands) |
|
One Year or Less |
|
|
Through Five Years |
|
|
Through Ten Years |
|
|
After Ten Years |
|
Available for Sale |
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
Amount |
|
|
Yield |
|
|
|
|
U.S. Treasury and
U.S. Government
agency securities
(1) |
|
$ |
|
|
|
|
|
|
|
$ |
4,567 |
|
|
|
4.53 |
% |
|
$ |
3,611 |
|
|
|
5.15 |
% |
|
$ |
16,736 |
|
|
|
5.88 |
% |
Obligations of
states and
political
subdivisions |
|
|
1,190 |
|
|
|
3.62 |
% |
|
|
6,360 |
|
|
|
4.31 |
|
|
|
25,053 |
|
|
|
4.22 |
|
|
|
54,382 |
|
|
|
4.20 |
|
Mortgage-backed
securities (2) |
|
|
829 |
|
|
|
5.17 |
|
|
|
62,741 |
|
|
|
4.50 |
|
|
|
75,326 |
|
|
|
5.09 |
|
|
|
37,493 |
|
|
|
5.49 |
|
Collateralized
mortgage
obligations (2) |
|
|
864 |
|
|
|
4.52 |
|
|
|
12,087 |
|
|
|
4.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
399 |
|
|
|
7.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,883 |
|
|
|
4.34 |
|
|
$ |
85,755 |
|
|
|
4.55 |
|
|
$ |
103,990 |
|
|
|
4.88 |
|
|
$ |
109,010 |
|
|
|
4.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity,
state and municipal |
|
$ |
91 |
|
|
|
2.85 |
|
|
$ |
1,543 |
|
|
|
3.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fair value is based on contractual maturity or call date where a call option
exists |
|
(2) |
|
Maturity based upon final maturity date |
The weighted-average interest rates are based on coupon rates for securities purchased at par value
and on effective interest rates considering amortization or accretion if the securities were
purchased at a premium or discount. Yields are not presented on a tax-equivalent basis.
Excluding those holdings of the investment portfolio in U.S. Treasury securities and other agencies
and corporations of the U.S. Government, there were no investments in securities of any one issuer
that exceeded 10% of the consolidated stockholders equity of Horizon at December 31, 2008.
13
|
A. |
|
Types of Loans Total loans on the balance sheet are comprised of the
following classifications at December 31 for the years indicated. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands) |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
|
|
Commercial, financial,
agricultural and commercial
tax-exempt loans |
|
$ |
310,842 |
|
|
$ |
307,535 |
|
|
$ |
271,457 |
|
|
$ |
273,310 |
|
|
$ |
203,966 |
|
Mortgage warehouse loans |
|
|
123,287 |
|
|
|
78,225 |
|
|
|
112,267 |
|
|
|
97,729 |
|
|
|
127,992 |
|
Real estate mortgage loans |
|
|
167,766 |
|
|
|
216,019 |
|
|
|
222,235 |
|
|
|
159,312 |
|
|
|
89,139 |
|
Installment loans |
|
|
280,072 |
|
|
|
287,073 |
|
|
|
237,875 |
|
|
|
202,383 |
|
|
|
142,945 |
|
|
|
|
|
Total loans |
|
$ |
881,967 |
|
|
$ |
888,852 |
|
|
$ |
843,834 |
|
|
$ |
732,734 |
|
|
$ |
564,042 |
|
|
|
|
|
B. |
|
Maturities and Sensitivities of Loans to Changes in Interest Rates The
following is a schedule of maturities and sensitivities of loans to changes in
interest rates, excluding real estate mortgage, mortgage warehousing and installment
loans, as of December 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturing or repricing |
|
One Year or |
|
|
One Through |
|
|
|
|
|
|
|
(dollar amounts in thousands) |
|
Less |
|
|
Five Years |
|
|
After Five Years |
|
|
Total |
|
|
|
|
Commercial, financial,
agricultural and
commercial tax-exempt
loans |
|
$ |
196,159 |
|
|
$ |
111,917 |
|
|
$ |
2,766 |
|
|
$ |
310,842 |
|
The following is a schedule of fixed-rate and variable-rate commercial, financial,
agricultural and commercial tax-exempt loans due after one year. (Variable-rate loans
are those loans with floating or adjustable interest rates.)
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
Variable |
|
(dollar amounts in thousands) |
|
Rate |
|
|
Rate |
|
|
|
|
Total commercial, financial, agricultural and
commercial tax-exempt loans due after one year |
|
$ |
70,437 |
|
|
$ |
44,246 |
|
|
1. |
|
Non-accrual, Past Due and Restructured Loans The following
schedule summarizes non-accrual, past due and restructured loans. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 (dollar amounts in thousands) |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
|
|
a. Loans accounted for on a
non-accrual basis |
|
$ |
7,031 |
|
|
$ |
2,862 |
|
|
$ |
2,481 |
|
|
$ |
1,822 |
|
|
$ |
1,358 |
|
b. Accruing loans which are
contractually past due 90 days
or more as to interest and
principal payments |
|
|
832 |
|
|
|
87 |
|
|
|
144 |
|
|
|
251 |
|
|
|
|
|
c. Loans not included in (a)
or (b) which are Troubled
Debt Restructurings as
defined by SFAS No. 15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
7,863 |
|
|
$ |
2,949 |
|
|
$ |
2,625 |
|
|
$ |
2,073 |
|
|
$ |
1,358 |
|
|
|
|
14
The increase in non-accrual loans in 2008 is primarily due to an increase in commercial loans of
$3.248 million and residential real estate loans of $928 thousand. The increase in loans 90 days
past due but still accruing is primarily due to an increase of $464 thousand in residential real
estate loans and an increase of $230 thousand in installment loans. The increase in non-accrual
loans in 2007 was primarily due to an increase in commercial real estate loans of $281 thousand and
an increase in consumer loans of $381 thousand. This increase was partially offset by a decrease
in mortgage loans of $281 thousand. The increase in non-accrual loans in 2006 was primarily due to an
increase in commercial real estate loans of $761 thousand. This increase was partially offset by a
decrease in mortgage loans and consumer loans of $67 thousand and $36 thousand, respectively. The
increase in non-accrual loans in 2005 was primarily due to non-accrual loans acquired from Alliance
of $389 thousand, an increase in consumer and commercial loans of $44 thousand and $189 thousand,
respectively.
|
|
|
|
|
(dollar amounts in thousands) |
|
|
|
|
Gross interest income that would have been
recorded on non-accrual loans outstanding as
of December 31, 2008, in the period if the
loans had been current, in accordance with
their original terms and had been outstanding
throughout the period or since origination if
held for part of the period. |
|
$ |
582 |
|
Interest income actually recorded on
non-accrual loans outstanding as of December
31, 2008, and included in net income for the
period. |
|
|
299 |
|
|
|
|
|
Interest income not recognized during the
period on non-accrual loans outstanding as of
December 31, 2008. |
|
$ |
283 |
|
|
|
|
|
Discussion of Non-Accrual Policy
|
1. |
|
From time to time, the Bank obtains information, which may lead management to
believe that the collection of payments may be doubtful on a particular loan. In
recognition of such, it is managements policy to convert the loan from an earning
asset to a non-accruing loan. Further, it is managements policy to place a
commercial loan on a non-accrual status when delinquent in excess of 90 days, unless
the Loan Committee approves otherwise. The officer responsible for the loan, the Chief
Operating Officer and the senior collection officer must review all loans placed on
non-accrual status. The senior collection officer monitors the loan portfolio for any
potential problem loans. |
|
|
2. |
|
Potential Problem Loans |
|
|
|
|
Impaired loans for which the discounted cash flows or collateral value exceeded the
carrying value of the loan totaled $6,012,000 and $1,870,000 at December 31, 2008 and
2007, respectively. The allowance for impaired loans, included in the Banks allowance
for loan losses totaled $1,327,000 and $345,000 at those respective dates. The average
balance of impaired loans during 2008 and 2007 was $3,977,000 and $1,673,000,
respectively. |
|
|
3. |
|
Foreign Outstandings |
|
|
|
|
None |
|
|
4. |
|
Loan Concentrations |
|
|
|
|
As of December 31, 2008, there are no significant concentrations of loans exceeding 10%
of total loans. See Item III A above for a listing of the types of loans by
concentration. |
15
|
D. |
|
Other Interest-Bearing Assets |
|
|
|
|
There are no other interest-bearing assets as of December 31, 2008, which would be
required to be disclosed under
Item III C.1 or 2 if such assets were loans.
|
|
IV. |
|
SUMMARY OF LOAN LOSS EXPERIENCE |
|
A. |
|
The following is an analysis of the activity in the allowance for loan losses
account: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands) |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
|
|
LOANS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans outstanding at
the end of the period
(1)
|
|
$ |
881,967 |
|
|
$ |
888,852 |
|
|
$ |
843,834 |
|
|
$ |
732,734 |
|
|
$ |
564,042 |
|
Average loans
outstanding during
the period (1)
|
|
|
840,960 |
|
|
|
839,591 |
|
|
|
780,555 |
|
|
|
640,758 |
|
|
|
514,916 |
|
|
|
|
(1) |
|
Net of unearned
income and deferred
loan fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
|
|
ALLOWANCE FOR LOAN LOSSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of the period |
|
$ |
9,791 |
|
|
$ |
8,738 |
|
|
$ |
8,368 |
|
|
$ |
7,193 |
|
|
$ |
6,909 |
|
|
|
|
Loans charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural loans |
|
|
1,358 |
|
|
|
|
|
|
|
23 |
|
|
|
305 |
|
|
|
161 |
|
Real estate mortgage loans |
|
|
351 |
|
|
|
36 |
|
|
|
|
|
|
|
29 |
|
|
|
41 |
|
Installment loans |
|
|
5,277 |
|
|
|
2,701 |
|
|
|
1,120 |
|
|
|
1,096 |
|
|
|
863 |
|
|
|
|
Total loans charged-off |
|
|
6,986 |
|
|
|
2,737 |
|
|
|
1,143 |
|
|
|
1,430 |
|
|
|
1,065 |
|
|
|
|
Recoveries of loans previously
charged-off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural loans |
|
|
15 |
|
|
|
48 |
|
|
|
201 |
|
|
|
161 |
|
|
|
79 |
|
Real estate mortgage loans |
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
2 |
|
Installment loans |
|
|
972 |
|
|
|
674 |
|
|
|
407 |
|
|
|
364 |
|
|
|
278 |
|
|
|
|
Total loan recoveries |
|
|
1,037 |
|
|
|
722 |
|
|
|
608 |
|
|
|
527 |
|
|
|
359 |
|
|
|
|
Net loans charged-off |
|
|
5,949 |
|
|
|
2,015 |
|
|
|
535 |
|
|
|
903 |
|
|
|
706 |
|
Provision charged to operating
expense |
|
|
7,568 |
|
|
|
3,068 |
|
|
|
905 |
|
|
|
1,521 |
|
|
|
990 |
|
Acquired through acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
557 |
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
11,410 |
|
|
$ |
9,791 |
|
|
$ |
8,738 |
|
|
$ |
8,368 |
|
|
$ |
7,193 |
|
|
|
|
Ratio of net charge-offs to
average loans outstanding for the
period |
|
|
.70 |
% |
|
|
.24 |
% |
|
|
.07 |
% |
|
|
.14 |
% |
|
|
.14 |
% |
|
|
|
|
B. |
|
The following schedule is a breakdown of the allowance for loan losses
allocated by type of loan and the percentage of loans in each category to total loans. |
Allocation of the Allowance for Loan Losses at December 31 (dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
% of |
|
|
|
|
|
|
% of Loans |
|
|
|
|
|
Loans to |
|
|
|
|
|
Loans to |
|
|
|
|
|
Loans to |
|
|
|
|
|
Loans to |
|
|
Allowance |
|
to Total |
|
Allowance |
|
Total |
|
Allowance |
|
Total |
|
Allowance |
|
Total |
|
Allowance |
|
Total |
|
|
Amount |
|
Loans |
|
Amount |
|
Loans |
|
Amount |
|
Loans |
|
Amount |
|
Loan |
|
Amount |
|
Loans |
|
|
|
Commercial,
financial and
agricultural |
|
$ |
3,202 |
|
|
|
35 |
% |
|
$ |
2,656 |
|
|
|
35 |
% |
|
$ |
2,987 |
|
|
|
32 |
% |
|
$ |
2,733 |
|
|
|
37 |
% |
|
|
2,469 |
|
|
|
36 |
% |
Real estate mortgage |
|
|
973 |
|
|
|
19 |
|
|
|
779 |
|
|
|
24 |
|
|
|
768 |
|
|
|
27 |
|
|
|
585 |
|
|
|
22 |
|
|
|
808 |
|
|
|
16 |
|
Mortgage warehousing |
|
|
1,354 |
|
|
|
14 |
|
|
|
1,309 |
|
|
|
9 |
|
|
|
1,762 |
|
|
|
13 |
|
|
|
1,958 |
|
|
|
13 |
|
|
|
2,029 |
|
|
|
23 |
|
Installment |
|
|
5,881 |
|
|
|
32 |
|
|
|
5,047 |
|
|
|
32 |
|
|
|
3,181 |
|
|
|
28 |
|
|
|
2,958 |
|
|
|
28 |
|
|
|
1,860 |
|
|
|
25 |
|
Unallocated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
134 |
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
Total |
|
$ |
11,410 |
|
|
|
100 |
% |
|
$ |
9,791 |
|
|
|
100 |
% |
|
$ |
8,738 |
|
|
|
100 |
% |
|
$ |
8,368 |
|
|
|
100 |
% |
|
$ |
7,193 |
|
|
|
100 |
% |
|
|
|
16
In 1999, Horizon began a mortgage warehousing program. This program is described in Managements
Discussion and Analysis of Financial Condition and Results of Operation in Item 7 below and in the
Notes to the Financial Statements in Item 8 below, which are incorporated herein by reference. The
greatest risk related to these loans is transaction and fraud risk. During 2008, Horizon processed
over $2.0 billion in mortgage warehouse loans.
Information required by this section is found in Managements Discussion and Analysis of Financial
Condition and Results of Operation in Item 7 below and in the Consolidated Financial Statements and
related notes in Item 8 below, which are incorporated herein by reference.
|
VI. |
|
RETURN ON EQUITY AND ASSETS |
Information required by this section is found in Managements Discussion and Analysis of Financial
Condition and Results of Operation in Item 7 below and in the Consolidated Financial Statements and
related notes in Item 8 below, which are incorporated herein by reference.
|
VII. |
|
SHORT TERM BORROWINGS |
The following is a schedule of statistical information relative to securities sold under agreements
to repurchase which are secured by U.S. Treasury and U.S. Government agency securities and mature
within one year. There were no other categories of short-term borrowings for which the average
balance outstanding during the period was 30 percent or more of stockholders equity at the end of
the period.
|
|
|
|
|
|
|
|
|
December 31 (dollar amounts in thousands) |
|
2008 |
|
2007 |
|
|
|
Outstanding at year end |
|
$ |
39,995 |
|
|
$ |
41,369 |
|
Approximate weighted-average interest rate at year-end |
|
|
1.28 |
% |
|
|
2.54 |
% |
Highest amount outstanding as of any month-end during the year |
|
$ |
53,618 |
|
|
$ |
42,961 |
|
Approximate average outstanding during the year |
|
$ |
41,522 |
|
|
$ |
39,931 |
|
Approximate weighted-average interest during the year |
|
|
1.72 |
% |
|
|
2.94 |
% |
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
A cautionary note about forward-looking statements: In its oral and written statements, Horizon
from time to time includes forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements can include statements about
estimated cost savings, plans and objectives for future operations and expectations about Horizons
financial and business performance as well as economic and market conditions. They often can be
identified by the use of words like expect, may, could, intend, project, estimate,
believe or anticipate.
Horizon may include forward-looking statements in filings with the Securities and Exchange
Commission (SEC), such as this Form 10-K, in other written materials, and in oral statements made
by senior management to analysts, investors, representatives of the media, and others. It is
intended that these forward-looking statements speak only as of the date they are made, and Horizon
undertakes no obligation to update any forward-looking statement to reflect events or circumstances
after the date on which the forward-looking statement is made or to reflect the occurrence of
unanticipated events.
17
By their nature, forward-looking statements are based on assumptions and are subject to risks,
uncertainties, and other factors. You are cautioned that actual results may differ materially from
those contained in the forward-looking statement. The discussion in Managements Discussion and
Analysis of Financial Condition and Results of Operation in Item 7 of this Form 10-K lists some of
the factors that could cause Horizons actual results to vary materially from those expressed in or
implied by any forward-looking statements. Your attention is directed to this discussion.
Other risks and uncertainties that could affect Horizons future performance are set forth
immediately below in Item 1A Risk Factors
ITEM 1A. RISK FACTORS
Risks Related to our Business
As a financial institution, we are subject to a number of risks relating to our day-to-day
business.
As a financial institution, we are subject to a number of risks relating to our daily business.
Although we undertake a variety of efforts to manage and control those risks, many of the risks are
outside of our control. Among the risks we face are the following:
|
|
|
credit risk: the risk that loan customers or other parties will be unable to perform
their contractual obligations; |
|
|
|
|
market risk: the risk that changes in market rates and prices will adversely affect
our financial condition or results of operation; |
|
|
|
|
liquidity risk: the risk that Horizon or the Bank will have insufficient cash or
access to cash to meet its operating needs; and |
|
|
|
|
operational risk: the risk of loss resulting from inadequate or failed internal
processes, people and systems or external events. |
|
|
|
|
economic risk: the risk that the economy in our markets could decline further
resulting in increased unemployment, decreased real estate values and increased loan
charge-offs. |
|
|
|
|
compliance risk: The risk of additional action by Horizons regulators or additional
regulation could hinder our ability to do business profitably. |
Investors should consider carefully these risks and the other risks and uncertainties described
below. Any of these risks could materially adversely affect our business, financial condition or
operating results which could cause our stock price to decline. The risks and uncertainties
described below are not, however, the only ones that we may face. Additional risks and
uncertainties not currently known to us, or that we currently believe are not material, could also
materially adversely affect our business, financial condition or operating results
18
The current economic environment poses significant challenges for us and could adversely affect our
financial condition and results of operations.
We are operating in a challenging and uncertain economic environment, including generally uncertain
national conditions and local conditions in our markets. The capital and credit markets have been
experiencing volatility and disruption for more than 12 months. This presents financial
institutions with unprecedented circumstances and challenges which in some cases have resulted in
large declines in the fair values of investments and other assets, constraints on liquidity and
significant credit quality problems, including severe volatility in the valuation of real estate
and other collateral supporting loans. Our financial statements have been prepared using values
and information currently available to us, but given this volatility, the values of assets and
liabilities recorded in the financial statements could change rapidly, resulting in material future
adjustments in asset values and the allowance for loan losses, which could negatively impact our
ability to meet regulatory capital requirements and maintain sufficient liquidity. The risks
associated with our business become more acute in periods of a slowing economy or slow growth such
as we experienced in the latter half of 2008 and which has continued into 2009. Financial
institutions continue to be affected by sharp declines in the real estate market and constrained
financial markets. While we are taking steps to decrease and limit our exposure to residential
construction and land development loans and home equity loans, we nonetheless retain direct
exposure to the residential and commercial real estate markets, and we are affected by these
events.
Continued declines in real estate values, home sales volumes and financial stress on borrowers as a
result of the uncertain economic environment, including job loss, could have an adverse effect on
our borrowers or their customers, which could adversely affect our financial condition and results
of operations. In addition, the national economic recession or further deterioration in local
economic conditions in our markets could drive losses beyond that which is provided for in our
allowance for loan losses and result in the following other consequences: increases in loan
delinquencies, problem assets and foreclosures may increase; demand for our products and services
may decline; deposits may decrease, which would adversely impact our liquidity position; and
collateral for our loans, especially real estate, may decline in value, in turn reducing customers
borrowing power, and reducing the value of assets and collateral associated with our existing
loans.
Our financial performance may be adversely impacted if we are unable to continue to grow our
commercial and consumer loan portfolios, obtain low-cost funds and compete with other providers of
financial services.
Our ability to maintain our history of record earnings year after year will depend, in large part,
on our ability to continue to grow our loan portfolios and obtain low-cost funds. For the past
three years, we focused on increasing consumer loans, and we intend to continue to emphasize and
grow consumer, as well as commercial loans in the foreseeable future. This represented a shift in
our emphasis from 2002 and 2003 when we focused on mortgage banking services, which generated a
large portion of our income during those years.
We have also funded our growth with low-cost consumer deposits, and our ability to sustain our
growth will depend in part on our continued success in attracting and retaining such deposits or
finding other sources of low-cost funds.
Another factor in maintaining our history of record earnings will be our ability to expand our
scope of available financial services to our customers in an increasingly competitive environment.
In addition to other banks, our competitors include credit unions, securities brokers and dealers,
mortgage brokers, mortgage bankers, investment advisors, and finance and insurance companies.
Competition is intense in most of our markets. We compete on price and service with our
competitors. Competition could intensify in the future as a result of industry consolidation, the
increasing availability of products and services from non-banks, greater technological developments
in the industry, and banking reform.
19
Our commercial and consumer loans expose us to increased credit risks.
We have a large percentage of commercial and consumer loans. Commercial loans generally have
greater credit risk than residential mortgage loans because repayment of these loans often depends
on the successful business operations of the borrowers. These loans also typically have much
larger loan balances than residential mortgage loans. Consumer loans generally involve greater
risk than residential mortgage loans because they are unsecured or secured by assets that
depreciate in value. Although we undertake a variety of underwriting, monitoring and reserving
protections with respect to these types of loans, there can be no guarantee that we will not suffer
unexpected losses, and recently, we have experienced an increase in the default rates in our
consumer loan portfolio, particularly relating to indirect auto loans.
Our holdings of construction, land and home equity loans, may pose more credit risk than other
types of mortgage loans.
In light of current economic conditions, construction loans, loans secured by commercial real
estate and home equity loans are considered more risky than other types of mortgage loans. Due to
the disruptions in credit and housing markets, real estate values have decreased in most areas of
the U.S., and many of the developers to whom we lend experienced a decline in sales of new homes
from their projects. As a result of this market disruption, some of our land and construction
loans have become non-performing as developers are unable to build and sell homes in volumes large
enough for orderly repayment of loans and as other owners of such real estate (including
homeowners) were unable to keep up with their payments. We believe we have established adequate
reserves on our financial statements to cover the credit risk of these loan portfolios. However,
there can be no assurance that losses will not exceed our reserves, and ultimately result in a
material level of charge-offs, which could adversely impact our results of operations, liquidity
and capital.
Changes in market interest rates could adversely affect our financial condition and results of
operations.
Our financial condition and results of operations are significantly affected by changes in market
interest rates. Our results of operations depend substantially on our net interest income, which is
the difference between the interest income that we earn on our interest-earning assets and the
interest expense that we pay on our interest-bearing liabilities. Our profitability depends on our
ability to manage our assets and liabilities during periods of changing market interest rates. If
rates increase rapidly as a result of an improving economy, we may have to increase the rates paid
on our deposits and borrowed funds more quickly than loans and investments re-price, resulting in a
negative impact on interest spreads and net interest income. The impact of rising rates could be
compounded if deposit customers move funds from savings accounts to higher rate certificate of
deposit accounts. Conversely, should market interest rates fall below current levels, our net
interest margin could also be negatively affected, as competitive pressures could keep us from
further reducing rates on our deposits, and prepayments and curtailments on assets may continue.
Such movements may cause a decrease in our interest rate spread and net interest margin, and
therefore, decrease our profitability.
We also are subject to reinvestment risk associated with changes in interest rates. Changes in
interest rates may affect the average life of loans and mortgage-related securities. Increases in
interest rates may decrease loan demand and/or may make it more difficult for borrowers to repay
adjustable rate loans. Decreases in interest rates often result in increased prepayments of loans
and mortgage-related securities, as borrowers refinance their loans to reduce borrowing costs.
Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to
reinvest the cash received from such prepayments in loans or other investments that have interest
rates that are comparable to the interest rates on existing loans and securities.
20
An economic slowdown in Northwestern Indiana and Southwestern Michigan could affect our business.
Our primary market area for deposits and loans consists of LaPorte and Porter Counties in
Northwestern Indiana and Berrien County in Southwestern Michigan. An economic slowdown, which
could cause a rise in unemployment and a decline in real estate values in our market areas, could
hurt our business. Possible consequences of such a downturn could include the following:
|
|
|
increases in loan delinquencies and foreclosures; |
|
|
|
|
declines in the value of real estate and other collateral for loans; |
|
|
|
|
increase in loans charged off; |
|
|
|
|
a decline in the demand for our products and services; |
|
|
|
|
increase in non-accrual loans and other real estate owned. |
Our deposit insurance premiums could be substantially higher in the future which will have an
adverse effect on our future earnings.
Under the Federal Deposit Insurance Act, the FDIC, absent extraordinary circumstances, must
establish and implement a plan to restore the deposit insurance reserve ratio to 1.15% of insured
deposits, over a five-year period, at any time that the reserve ratio falls below 1.15%. The
recent failures of financial institutions have increased the Deposit Insurance Funds loss
provisions, resulting in a decline in the reserve ratio to 1.01% as of June 30, 2008, 18 basis
points below the reserve ratio as of March 31, 2008. The FDIC expects a higher rate of insured
institution failures in the next few years, which may result in a continued decline in the reserve
ratio.
On October 7, 2008, the FDIC released a five-year recapitalization plan and a proposal to raise
premiums to recapitalize the fund. In order to implement the restoration plan, the FDIC proposed to
change both its risk-based assessment system and its base assessment rates. Assessment rates would
increase by seven basis points across the range of risk weightings. Changes to the risk-based
assessment system would include increasing premiums for institutions that rely on excessive amounts
of brokered deposits, increasing premiums for excessive use of secured liabilities, and lowering
premiums for smaller institutions with very high capital levels.
On February 27, 2009, the FDIC announced the imposition of a special assessment and changes to
assessment rates, to the risk-based assessment system that will take effect beginning April 1,
2009, and to the restoration plan. The FDIC adopted an interim rule that imposes a special
assessment of 10 basis points as of June 30, 2009, which is to be collected on September 30, 2009.
Assuming that deposit levels remain constant, we anticipate that the special assessment for the
Bank would total approximately $779,000. The FDICs interim rule also provides for the imposition
of additional special assessments of up to 10 basis points if necessary. Comments on the interim
rule are due within 30 days of publication in the Federal Register. Under the new assessment
system, banks in the best risk category will pay from 12 cents to 16 cents per $100 of insured
deposits. The FDIC also announced an amendment to the restoration plan to extend the period of the
plan from five to seven years.
As a member institution of the FDIC, we are required to pay quarterly deposit insurance premium
assessments to the FDIC. Insured depository institutions that were in existence on December 31,
1996, and paid assessments prior to that date (or their successors) were entitled to a one-time
credit against future assessments based on their past contributions to the BIF or SAIF. In 2006,
the Bank received a one-time credit of $457,534 against future assessments. Of our initial credit,
$313,911 was utilized in 2007, which reduced our FDIC expense to $99,000. Our insurance premiums
for 2008 increased significantly and totaled $546,000 after utilizing our remaining credit of
$143,623 in the first quarter of 2008.
21
Financial problems at the Federal Home Loan Bank of Indianapolis may adversely affect our ability
to borrow monies in the future and our income.
Horizon owns $11.0 million of stock of the Federal Home Loan Bank of Indianapolis (FHLBI) and has
outstanding borrowings of over $177 million with the FHLBI. The FHLBI stock entitles us to
dividends from the FHLBI. Horizon recognized dividend income of approximately $476 thousand and
$520 thousand in 2007 and 2008, respectively. Due to various financial difficulties in the
financial institution industry in 2008, including the write-down of various mortgage backed
securities held by the FHLBI (which lowered its regulatory capital levels), the FHLBI initially
deferred the declaration of a fourth quarter dividend pending a review of private-label
mortgage-backed securities for other-than-temporary impairment. Although the deferred dividend has
now been paid, continued and additional financial difficulties at the FHLBI could further reduce or
eliminate the dividends we receive from the FHLBI.
Horizons total borrowing capacity with the FHLBI is currently $244 million. Generally, the loan
terms from the FHLBI are better than the terms Horizon can receive from other sources making it
cheaper to borrow money from the FHLBI. Continued and additional financial difficulties at the
FHLBI could reduce or eliminate our additional borrowing capacity with the FHLBI which could force
us to borrow money from other sources. Such other monies may not be available when we need them
or, more likely, will be available at higher interest rates and on less advantageous terms, which
will impact our net income and could impact our ability to grow.
The preparation of our financial statements requires the use of estimates that may vary from actual
results.
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make significant
estimates that affect the financial statements. One of our most critical estimates is the level of
the allowance for loan losses. Due to the inherent nature of these estimates, we cannot provide
absolute assurance that we will not have to increase the allowance for loan losses and/or sustain
loan losses that are significantly higher than the provided allowance.
Our mortgage warehouse and indirect lending operations are subject to a higher fraud risk than our
other lending operations.
We buy loans originated by mortgage bankers and automobile dealers. Because we must rely on the
mortgage bankers and automobile dealers in making and documenting these loans, there is an
increased risk of fraud to us on the part of the third-party originators and the underlying
borrowers. In order to guard against this increased risk, we perform investigations on the loan
originators with whom we do business, and we review the loan files and loan documents we purchase
to attempt to detect any irregularities or legal noncompliance. However, there is no guarantee
that our procedures will detect all cases of fraud or legal noncompliance.
We are subject to extensive regulation and changes in laws, regulations and policies could
adversely affect our business.
Our operations are subject to extensive regulation by federal agencies. See Supervision and
Regulation in the description of our Business in Part I of this Form 10-K for detailed information
on the laws and regulations to which we are subject. As apparent from the recent Emergency
Economic Stabilization Act (EESA) and Troubled Asset Relief Program (TARP) legislation, changes in
applicable laws, regulations or regulator policies can materially affect our business. The
likelihood of any major changes in the future and their effects are impossible to determine.
22
In addition to the EESA and TARP legislation mentioned above, federal and state governments could
pass additional legislation responsive to current credit conditions. As an example, Horizon Bank
could experience higher credit losses because of federal or state legislation or regulatory action
that reduces the amount the Banks borrowers are otherwise contractually required to pay under
existing loan contracts. Also, Horizon Bank could experience higher credit losses because of
federal or state legislation or regulatory action that limits its ability to foreclose on property
or other collateral or makes foreclosure less economically feasible.
The new laws described above, together with additional actions announced by the U.S. Treasury
Department (Treasury) and other regulatory agencies continue to develop. It is not clear at this
time what impact, EESA, TARP, other liquidity and funding initiatives of the Treasury and other
bank regulatory agencies that have been previously announced, and any additional programs that may
be initiated in the future, will have on the financial markets and the financial services industry.
The extreme levels of volatility and limited credit availability currently being experienced could
continue to effect the U.S. banking industry and the broader U.S. and global economies, which will
have an affect on all financial institutions, including Horizon.
Our inability to continue to accurately process large volumes of transactions could adversely
impact our business and financial results.
In the normal course of business, we process large volumes of transactions. If systems of internal
control should fail to work as expected, if systems are used in an unauthorized manner, or if
employees subvert the system of internal controls, significant losses could result.
We process large volumes of transactions on a daily basis and are exposed to numerous types of
operational risk. Operational risk resulting from inadequate or failed internal processes, people
and systems includes the risk of fraud by persons inside or outside the company, the execution of
unauthorized transactions by employees, errors relating to transaction processing and systems, and
breaches of the internal control system and compliance requirements. This risk of loss also
includes the potential legal actions that could arise as a result of the operational deficiency or
as a result of noncompliance with applicable regulatory standards.
We establish and maintain systems of internal operational controls that are designed to provide us
with timely and accurate information about our level of operational risk. While not foolproof,
these systems have been designed to manage operational risk at appropriate, cost-effective levels.
Procedures also exist that are designed to ensure that policies relating to conduct, ethics and
business practices are followed. From time to time, losses from operational risk may occur,
including the effects of operational errors.
While we continually monitor and improve the system of internal controls, data processing systems
and corporate-wide processes and procedures, there can be no assurance that future losses will not
occur.
The
soundness of other financial institutions could adversely affect
us.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or
other relationships. We have exposure to many different industries and counterparties, and we
routinely execute transactions with counterparties in the financial services industry, including
brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other
institutional clients. Many of these transactions expose us to credit risk in the event of default
by our counterparty or client. In addition, our credit risk may be exacerbated when the collateral
held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount
of the loan or derivative exposure due us. There is no assurance that any such losses would not
materially and adversely affect our results of operations or earnings.
23
Risks Related to our Common Stock
The price of our common stock may fluctuate significantly, and this may make it difficult for you
to resell our common stock at times or at prices you find attractive.
Although our common stock is listed on the NASDAQ Global Market, our stock price constantly
changes (sometimes dramatically), and we expect our stock price to continue to fluctuate in
the future. Our stock price is impacted by a variety of factors, some of which are beyond
our control.
These factors include:
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variations in our operating results or the quality of our assets; |
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operating results that vary from the expectations of management, securities analysts
and investors; |
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increase in loan losses, non-performing loans and other real estate owned; |
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changes in expectations as to our future financial performance; |
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announcements of new products, strategic developments, acquisitions and other
material events by us or our competitors; |
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the operating and securities price performance of other companies that investors
believe are comparable to us; |
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actual or anticipated sales of our equity or equity-related securities; |
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our past and future dividend practice; |
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our creditworthiness; |
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interest rates; |
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the credit, mortgage and housing markets, the markets for securities relating to
mortgages or housing; |
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developments with respect to financial institutions generally; and |
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economic, financial, geopolitical, regulatory, congressional or judicial events that
affect us or the financial markets. |
In addition the stock market in general has recently experienced extreme price and volume
fluctuations. This volatility has had a significant effect on the market price of securities
issued by many companies and particularly those in the financial services and banking sector,
including for reasons unrelated to their operating performance. These broad market fluctuations
may adversely affect our stock price, notwithstanding our operating results.
Our participation in the Treasurys Capital Purchase Program may adversely affect the value of our
common stock and the rights of our common stockholders.
The terms of the preferred stock Horizon issued under the Treasurys Capital Purchase Program could
reduce investment returns to Horizons common stockholders by restricting dividends, diluting
existing stockholders ownership interests, and restricting capital management practices. Without
the prior consent of the Treasury, Horizon will be prohibited from increasing its common stock
dividends for the first three years while the Treasury holds the preferred stock.
24
Also, the preferred stock requires quarterly dividends to be paid at the rate of 5% per annum for
the first five years and 9% per annum thereafter until the stock is redeemed by Horizon. The
payments of these dividends will decrease the excess cash Horizon otherwise has available to pay
dividends on its common stock and to use for general corporate purposes, including working capital.
Finally, Horizon will be prohibited from continuing to pay dividends on its common stock unless it
has fully paid all required dividends on the preferred stock issued to the Treasury. Although
Horizon fully expects to be able to pay all required dividends on the preferred stock (and to
continue to pay dividends on its common stock at current levels), there is no guarantee that it
will be able to do so in the future.
Because our stock is thinly traded, it may be more difficult for you to sell your shares or buy
additional shares when you desire to do so and the price may be volatile.
Although our common stock has been listed on the NASDAQ stock market since December 2001, our
common stock is thinly traded. The prices of thinly traded stocks, such as ours, are typically
more volatile than stocks traded in a large, active public market and can be more easily impacted
by sales or purchases of large blocks of stock. Thinly traded stocks are also less liquid, and
because of the low volume of trades, you may be unable to sell your shares when you desire to do
so.
Provisions in our articles of incorporation, our by-laws, and Indiana law may delay or prevent an
acquisition of us by a third party.
Our articles of incorporation and by-laws and Indiana law contain provisions which have certain
anti-takeover effects. While the purpose of these provisions is to strengthen the negotiating
position of the board in the event of a hostile takeover attempt, the overall effects of these
provisions may be to render more difficult or discourage a merger, tender offer or proxy contest,
the assumption of control by a holder of a larger block of our shares, and the removal of incumbent
directors and key management.
Our articles of incorporation provide for a staggered board, which means that only one-third of our
board can be replaced by shareholders at any annual meeting. Our articles also provide that our
directors may only be removed without cause by shareholders owning 70% or more of our outstanding
common stock. Furthermore, our articles provide that only our board of directors, and not our
shareholders, may adopt, alter, amend and repeal our by-laws.
Our articles also preempt Indiana law with respect to business combinations with a person who
acquires 10% or more of our common stock and provide that such transactions are subject to
independent and super-majority shareholder approval requirements unless certain pricing and board
pre-approval requirements are satisfied.
Our by-laws do not permit cumulative voting of shareholders in the election of directors, allowing
the holders of a majority of our outstanding shares to control the election of all our directors,
and our directors are elected by plurality (not majority) voting. Our by-laws also establish
detailed procedures that shareholders must follow if they desire to nominate directors for election
or otherwise present issues for consideration at a shareholders meeting. We also have a mandatory
retirement age for directors.
These and other provisions of our governing documents and Indiana law are intended to provide the
board of directors with the negotiating leverage to achieve a more favorable outcome for our
shareholders in the event of an offer for the company. However, there is no assurance that these
same anti-takeover provisions could not have the effect of delaying, deferring or preventing a
transaction or a change in control that might be in the best interest of our shareholders.
25
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
The main office and full service branch of Horizon and the Bank is located at 515 Franklin
Square, Michigan City, Indiana. The building located across the street from the main office
of Horizon and the Bank, at 502 Franklin Square, houses the credit administration,
operations, facilities and purchasing and information technology departments of the Bank.
In addition to these principal facilities, the Bank has 16 sales offices located at:
3631 South Franklin Street, Michigan City, Indiana
113 W. First St., Wanatah, Indiana
1500 W. Lincolnway, LaPorte, Indiana
423 South Roosevelt Street, Chesterton, Indiana
4208 N. Calumet, Valparaiso, Indiana
902 Lincolnway, Valparaiso, Indiana
2650 Willowcreek Road, Portage, Indiana
8590 Broadway, Merrillville, Indiana
811 Ship Street, St. Joseph, Michigan
2608 Niles Road, St. Joseph, Michigan
1041 E. Napier Ave., Benton Harbor, Michigan
233 South Main Street, South Bend, Indiana
1909 East Bristol Street, Elkhart, Indiana
500 West Buffalo Street, New Buffalo, Michigan
13696 Redarrow Highway, Harbert, Michigan
6801 West U.S. 12 Three Oaks, Michigan
Horizon owns all of the facilities, except for the South Bend, Indiana office, which are
leased from third party.
ITEM 3. LEGAL PROCEEDINGS
On August 5, 2008, Maria Coto filed a putative class action complaint in the Porter County Superior
Court, Porter County, Indiana, on behalf of herself and others who have had their vehicles
repossessed by the Bank during the four years prior to the filing of the action. The complaint
alleged that the Banks post-repossession notice to defaulting borrowers did not comply with
certain aspects of Indiana law. The plaintiff was seeking statutory damages and costs. The parties
have agreed to a tentative settlement of this action.
Horizon is continuing to investigate the legitimacy of claims made by First Horizon National
Corporation, headquartered in Memphis, Tennessee (FHNC), regarding FHNCs trademark rights in the
name Horizon Bank (and other names that include the word Horizon). An attorney representing
FNHC raised the claims in a letter dated October 27, 2008, and proposed that Horizon assign its
common law rights in that name to FHNC in exchange for a license back to use the Horizon name in
Horizons current trade area and a reasonable zone of expansion.
26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Horizons stockholders during the fourth quarter of
the 2008 fiscal year.
SPECIAL ITEM: EXECUTIVE OFFICERS OF REGISTRANT
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Robert C. Dabagia
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70 |
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Chairman of Horizon since 1998; Chief Executive
Officer of Horizon and the Bank until July 1,
2001. |
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Craig M. Dwight
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Chairman and Chief Executive Officer of the
Bank since January 2003; President and Chief
Executive Officer of Horizon and the Bank since
July 1, 2001. |
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Thomas H. Edwards
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President and Chief Operating Officer of the
Bank since January 2003. |
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Mark E. Secor
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Chief Financial Officer of Horizon and the Bank
since January 2009. Vice President, Chief
Investment and Asset Liability Manager since
June 2007, Chief Financial Officer of St.
Joseph Capital Corp., Mishawaka, Indiana since
January 2004. |
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James D. Neff
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Corporate Secretary of Horizon since 2007;
Executive Vice President-Mortgage Banking of
the Bank since January 2004; Senior Vice
President of the Bank since October 1999. |
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Donald E. Radde
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Market President for Southwest Michigan for the
Bank since January 2004. |
27
PART II
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ITEM 5. |
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES |
Repurchases of Securities
There were no purchases by the Company of its common stock during the fourth quarter of 2008.
Performance Graph
The Securities and Exchange Commission requires Horizon to include a line graph comparing Horizons
cumulative five-year total shareholder returns on the Common Shares with market and industry
returns over the past five years. SNL Financial LC prepared the following graph. The return
represented in the graph assumes the investment of $100 on January 1, 2004, and further assumes
reinvestment of all dividends. The Common Shares began trading on the NASDAQ Global Market February
1, 2007. Prior to that date, the Common Shares were traded on the NASDAQ Capital Market.
Horizon Bancorp
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Period Ending |
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Index |
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12/31/03 |
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12/31/04 |
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12/31/05 |
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12/31/06 |
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12/31/07 |
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12/31/08 |
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Horizon Bancorp |
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100.00 |
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99.74 |
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98.89 |
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105.13 |
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100.46 |
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51.16 |
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Russell 2000 |
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100.00 |
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118.33 |
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123.72 |
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146.44 |
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144.15 |
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95.44 |
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SNL Bank $1B-$5B |
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100.00 |
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123.42 |
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121.31 |
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140.38 |
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102.26 |
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84.81 |
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Source : SNL Financial LC,
Charlottesville, VA
© 2009
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(434) 977-1600
www.snl.com |
28
The following chart, prepared by the investment banking firm of Keefe, Bruyette and Woods compares
the change in market price of Horizons stock to that of publically traded banks in Indiana and
Michigan.
Relative Price Performance Over Time
Price Performance of HBNC, Indiana and Michigan Indices from December 31, 2003 December 31, 2008
Source: SNL Financial
The other information regarding Horizons common stock is included under the caption Horizons
Common Stock and Related Stockholders Matters in Item 8 below, which is incorporated by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required under this item is incorporated by reference to the information appearing
under the caption Summary of Selected Financial Data in Item 8 of this Form 10-K.
29
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ITEM 7. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION |
Horizon Bancorp and Subsidiaries
Managements Discussion and Analysis of
Financial Condition and Results of Operations
(Table Dollar Amounts in Thousands)
Overview
Horizon continues to operate in a challenging and uncertain economic environment. Within our
primary market areas of Northwest Indiana and Southwest Michigan unemployment rates have increased
over the prior year. This rise in unemployment has been driven by factors including slowdowns in
the steel and recreational vehicle industries as well as a continued slowdown in the housing
industry. Like numerous other parts of the country, Northwest Indiana and Southwest Michigan are
experiencing a rise in mortgage delinquencies and bankruptcy filings as a result of increased
unemployment rates. Despite these economic factors, Horizon reported its ninth consecutive year of
record earnings. Following are some of the major factors that influenced Horizons financial
performance for 2008:
Horizons net interest margin at 3.38% for 2008 increased 35 basis points from 2007. Average
earning assets increased approximately $23 million. These two factors were the primary cause of an
increase of $4.5 million or 13.8% in net interest income. Horizons cost of funds has dropped
approximately 108 basis points since the fourth quarter of 2007 while the yield on earning assets
declined approximately 72 basis points. Horizon reduced rates on NOW and money market accounts in
line with short-term rate decreases put in place during the year by the Federal Open Market
Committee. In addition, a large amount of Certificates of Deposit (CDs) matured during the first
half of 2008 and were renewed at lower rates. Additionally, at December 31, 2008, all mortgage
warehouse loans ($123 million) and certain home equity and commercial loans (totaling approximately
$136 million) reached contractual rate floors. This improved the net interest margin as funding
costs continued to decline.
In 2008, Horizon experienced an increase net loan charge-offs and non-performing loans. This
resulted in a provision for loan losses of $7.6 million, which is more than double the prior year.
There was also an significant increase in loan collection expense of $412 thousand.
Horizon began hedging fixed rate commercial loans to swap them to an adjustable rate to help
maintain a balanced asset-liability rate sensitivity position.
In December of 2008, Horizon issued $25 million of perpetual preferred stock to the U.S. Treasury
under the Treasurys Capital Purchase Program under TARP, to gain access to relatively low-cost
Tier I Capital.
Critical Accounting Policies
Horizon has established various accounting policies, which govern the application of accounting
principles generally accepted in the United States in the preparation the Companys financial
statements. The significant accounting policies of the Company are described in the notes to the
consolidated financial statements included in Part II, Item 8 on Form 10-K. Certain of these
policies are important to the portrayal of the Companys financial condition, since they require
management to make difficult, complex or subjective judgments, some of which may relate to matters
that are inherently uncertain. Management has identified the following as critical accounting
policies:
30
Allowance for Loan Losses
An allowance for loan losses is maintained to absorb probable incurred loan losses inherent in the
loan portfolio. The determination of the allowance for loan losses is a critical accounting policy
that involves managements ongoing quarterly assessments of the probable incurred losses inherent
in the loan portfolio. The identification of loans that have probable incurred losses is
subjective, therefore, a general reserve is maintained to cover all probable losses within the
entire loan portfolio. Horizon utilizes a loan grading system that helps identify, monitor and
address asset quality problems in an adequate and timely manner. Each quarter, various factors
affecting the quality of the loan portfolio are reviewed. Large credits are reviewed on an
individual basis for loss potential. Other loans are reviewed as a group based upon previous
trends of loss experience. Horizon also reviews the current and anticipated economic conditions of
its lending market as well as transaction risk to determine the effect they may have on the loss
experience of the loan portfolio.
Goodwill and Intangible Assets
Management believes that the accounting for goodwill and other intangible assets also involves a
higher degree of judgment than most other significant accounting policies. Statement of Financial
Accounting Standard (SFAS) No. 142, Accounting for Goodwill and Other Intangible Assets,
establishes standards for the amortization of acquired intangible assets and impairment assessment
of goodwill. At December 31, 2008, Horizon had core deposit intangibles of $1.751 million subject
to amortization and $5.787 million of goodwill, which is not subject to amortization. Goodwill
arising from business combinations represents the value attributable to unidentifiable intangible
assets in the business acquired. Horizons goodwill relates to the value inherent in the banking
industry and that value is dependent upon the ability of Horizon to provide quality, cost effective
banking services in a competitive marketplace. The goodwill value is supported by revenue that is
in part driven by the volume of business transacted. A decrease in earnings resulting from a
decline in the customer base or the inability to deliver cost effective services over sustained
periods can lead to impairment of goodwill that could adversely impact earnings in future periods.
SFAS No. 142 requires an annual evaluation of goodwill for impairment. The evaluation of goodwill
for impairment requires the use of estimates and assumptions. For the first time in Horizons
history, the market value for Horizons stock dropped below the book value during the fourth
quarter of 2008. Market price at the close of business on December 31, 2008 was $12.50 per share
compared to a book value of $24.46 per common share. Horizon reported record earnings for the ninth
consecutive year in 2008 and believes the decline in market price relates to an overall decline in
the financial industry sector and are not specific to Horizon. Horizon engaged a third party to
perform an impairment test of its goodwill. The evaluation included three approaches: 1) income
approach using a discounted cash flow based on earnings capacity, 2) price to earnings multiples
and 3) price to book value ratios. Approaches 2 & 3 use median results from 17 bank sale
transactions that occurred during 2007 and 2008. The selling banks ranged in size from $763
million to $2.1 billion. The impairment test was performed as of November 30, 2008 and yielded an
implied fair value for the Bank well above the book value.
Financial results for December 2008 (and for the full year of 2008) were as anticipated by the
analysis. An additional $20 million of capital was injected into Horizon Bank by the holding
company but the calculated fair value of Horizon Bank is still well above its book value. Horizon
has concluded that, based on its own internal evaluation and the independent impairment test
conducted by a third party, the recorded value of goodwill is not impaired.
31
Mortgage Servicing Rights
Servicing assets are recognized as separate assets when rights are acquired through purchase or
through the sale of financial assets on a servicing-retained basis. Capitalized servicing rights
are amortized into non-interest income in proportion to, and over the period of, the estimated
future net servicing income of the underlying financial assets. Servicing assets are evaluated
regularly for impairment based upon the fair value of the rights as compared to amortized cost.
Impairment is determined by stratifying servicing rights by predominant characteristics, such as
interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages.
Fair value is determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions. When the book value
of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each
individual stratum is carried at the lower of its amortized book value or fair value. In periods of
falling market interest rates, accelerated loan prepayment speeds can adversely impact the fair
value of these mortgage-servicing rights relative to their book value. In the event that the fair
value of these assets was to increase in the future, Horizon can recognize the increased fair value
to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized
book value. Future changes in managements assessment of the impairment of these servicing assets,
as a result of changes in observable market data relating to market interest rates, loan prepayment
speeds, and other factors, could impact Horizons financial condition and results of operations
either positively or adversely.
Generally, when market interest rates decline and other factors favorable to prepayments occur,
there is a corresponding increase in prepayments as customers refinance existing mortgages under
more favorable interest rate terms. When a mortgage loan is prepaid, the anticipated cash flows
associated with servicing that loan are terminated, resulting in a reduction of the fair value of
the capitalized mortgage servicing rights. To the extent that actual borrower prepayments do not
react as anticipated by the prepayment model (i.e., the historical data observed in the model does
not correspond to actual market activity), it is possible that the prepayment model could fail to
accurately predict mortgage prepayments and could result in significant earnings volatility. To
estimate prepayment speeds, Horizon utilizes a third-party prepayment model, which is based upon
statistically derived data linked to certain key principal indicators involving historical borrower
prepayment activity associated with mortgage loans in the secondary market, current market interest
rates and other factors, including Horizons own historical prepayment experience. For purposes of
model valuation, estimates are made for each product type within the mortgage servicing rights
portfolio on a monthly basis.
Derivative Instruments
As part of our asset/liability management program, Horizon utilizes, from time-to-time, interest
rate floors, caps or swaps to reduce our sensitivity to interest rate fluctuations. These are
derivative instruments, which are recorded as assets or liabilities in the consolidated balance
sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated
income statements or other comprehensive income (OCI) depending on the use of the derivative and
whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting
is that the hedged relationship must be highly effective in achieving offsetting changes in those
cash flows that are attributable to the hedged risk, both at inception of the hedge and on an
ongoing basis.
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Horizons accounting policies related to derivatives reflect the guidance in SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as revised and further interpreted by
SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, (SFAS
133) and other related accounting guidance. Derivatives that qualify for the hedge accounting
treatment are designated as either: a hedge of the fair value of the recognized asset or liability
or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction
or the variability of cash flows to be received or paid related to a recognized asset or liability
(a cash flow hedge). For fair value hedges, the cumulative change in fair value of both the hedge
instruments and the underlying loans is recorded in non-interest income. For cash flow hedges,
changes in the fair values of the derivative instruments are reported in OCI to the extent the
hedge is effective. The gains and losses on derivative instruments that are reported in OCI are
reflected in the consolidated income statement in the periods in which the results of operations
are impacted by the variability of the cash flows of the hedged item. Generally, net interest
income is increased or decreased by amounts receivable or payable with respect to the derivatives,
which qualify for hedge accounting. At inception of the hedge, Horizon establishes the method it
uses for assessing the effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is
recognized currently in the consolidated statements of income. Horizon excludes the time value
expiration of the hedge when measuring ineffectiveness.
Valuation Measurements
Valuation methodologies often involve a significant degree of judgment, particularly when there are
no observable active markets for the items being valued. Investment securities, residential
mortgage loans held for sale and derivatives are carried at fair value, as defined in SFAS No. 157
Fair Value Measurement (SFAS 157), which requires key judgments affecting how fair value for such
assets and liabilities is determined. In addition, the outcomes of valuations have a direct
bearing on the carrying amounts of goodwill, mortgage servicing rights, and pension and other
post-retirement benefit obligations. To determine the values of these assets and liabilities, as
well as the extent to which related assets may be impaired, management makes assumptions and
estimates related to discount rates, asset returns, prepayment rates and other factors. The use of
different discount rates or other valuation assumptions could produce significantly different
results, which could affect Horizons results of operations.
Analysis of Financial Condition
Investment Securities
Investment securities totaled $303.268 million at December 31, 2008, and consisted of U.S. Treasury
and Government Agency securities of $24.914 million (8.2%); Municipal securities of $88.619 million
($86.985 million are available for sale and $1.634 million are held to maturity)(29.2%);
Mortgage-backed securities of $176.389 million (58.2%); collateralized mortgage obligations of
$12.951 million (4.3%); and corporate securities of $399 thousand (.1%).
33
As indicated above, 62.5% of the investment portfolio consists of mortgage-backed securities and
collateralized mortgage obligations. Approximately 1.3% of the portfolio or $4.0 million are
private label collateralized mortgage obligations, the remainder are issued by Agencies of the
Federal Government. The private label securities generally have loan to value ratios of
approximately 50% and management feels these securities are not impaired. These instruments are
secured by residential mortgages of varying maturities. Principal and interest payments are
received monthly as the underlying mortgages are repaid. These payments also include prepayments
of mortgage balances as borrowers either sell their homes or refinance their mortgages. Therefore,
mortgage-backed securities and collateralized mortgage obligations have maturities that are stated
in terms of average life. The average life is the average amount of time that each dollar of
principal is expected to be outstanding. As of December 31, 2008, the mortgage-backed securities
and collateralized mortgage obligations in the investment portfolio had an average life of 7.47
years. Securities that have interest rates above current market rates are purchased at a premium.
These securities may experience a significant increase in prepayments when lower market interest
rates create an incentive for the borrower to refinance the underlying mortgage. This may result
in a decrease of current income, however, this risk is mitigated by a shorter average life.
Management currently believes that prepayments on these securities could increase during 2009.
Available-for-sale municipal securities are priced by a third party using a pricing grid which
estimates prices based on recent sales of similar securities. All municipal securities are
investment grade or local non-rated issues and management does not believe there is permanent
deterioration in market value.
At December 31, 2008, 99.5% of investment securities, and at December 31, 2007, all investment
securities were classified as available for sale. Securities classified as available for sale are
carried at their fair value, with both unrealized gains and losses recorded, net of tax, directly
to stockholders equity. Net appreciation on these securities totaled $1.818 million, which
resulted in a balance of $1.182 million , net of tax, included in stockholders equity at December
31, 2008. This compared to a $63 thousand, net of tax, included in stockholders equity at
December 31, 2007.
Effective January 1, 2008, Horizon adopted Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. The standard describes
three levels of inputs that may be used to measure fair value:
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Level 1
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Quoted prices in active markets for identical assets or liabilities |
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Level 2
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Observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the assets or liabilities |
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Level 3
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Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities |
34
When quoted market prices are available in an active market, securities are classified within Level
1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities and corporate
notes. If quoted market prices are not available, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2
securities include Federal agency securities, State and municipal securities, Federal agency
collateralized mortgage obligations and Federal agency mortgage-backed pools. For level 2
securities, Horizon uses a third party service to determine fair value. In performing the
valuations, the pricing service relies on models that consider security-specific details as well as
relevant industry and economic factors. The most significant of these inputs are quoted market
prices, interest rate spreads on relevant benchmark securities and certain prepayment assumptions.
To verify the reasonableness of the fair value determination by the service, Horizon has a portion
of the level 2 securities priced by an independent securities broker dealer. At December 31, 2008,
19% of the level 2 securities were tested. The test showed a variance of 0.3% between the two
determinations so the valuation service was deemed to be accurate and those values were used for
financial reporting.
Unrealized gains and losses on available-for-sale securities, deemed temporary, are recorded, net
of income tax, in a separate component of other comprehensive income on the balance sheet. No
unrealized losses were deemed to be other-than-temporary.
As a member of the Federal Reserve and Federal Home Loan Bank systems, Horizon is required to
maintain an investment in the common stock of each entity. The investment in common stock is based
on a predetermined formula. At December 31, 2008 and 2007, Horizon had investments in the common
stock of the Federal Reserve and Federal Home Loan Bank totaling $12.625 million.
At December 31, 2008, Horizon does not maintain a trading account.
For more information about securities, see Note 2 (Investment Securities) to the consolidated
financial statements.
35
Loans
Total loans, the principal earning asset of the Bank, were $881.967 million at December 31, 2008.
The current level of loans is a decrease of 0.8% from the December 31, 2007, level of $888.852
million. The table below provides comparative detail on the loan categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands) |
|
|
|
|
|
|
|
|
|
Dollar |
|
Percent |
December 31 |
|
2008 |
|
2007 |
|
Change |
|
Change |
|
Real estate loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 4 family |
|
$ |
160,661 |
|
|
$ |
206,914 |
|
|
$ |
(46,253 |
) |
|
|
(22.35 |
)% |
Other |
|
|
7,105 |
|
|
|
9,105 |
|
|
|
(2,000 |
) |
|
|
(21.97 |
) |
|
|
|
|
|
|
|
Total |
|
|
167,766 |
|
|
|
216,019 |
|
|
|
(48,253 |
) |
|
|
(22.34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital and equipment |
|
|
164,237 |
|
|
|
154,459 |
|
|
|
9,778 |
|
|
|
6.33 |
|
Real estate, including agriculture |
|
|
137,442 |
|
|
|
141,733 |
|
|
|
(4,291 |
) |
|
|
(3.03 |
) |
Tax exempt |
|
|
3,258 |
|
|
|
3,809 |
|
|
|
(551 |
) |
|
|
(14.47 |
) |
Other |
|
|
5,905 |
|
|
|
7,534 |
|
|
|
(1,629 |
) |
|
|
(21.62 |
) |
|
|
|
|
|
|
|
Total |
|
|
310,842 |
|
|
|
307,535 |
|
|
|
3,307 |
|
|
|
1.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto |
|
|
160,685 |
|
|
|
174,331 |
|
|
|
(13,646 |
) |
|
|
(7.83 |
) |
Recreation |
|
|
6,985 |
|
|
|
7,074 |
|
|
|
(89 |
) |
|
|
(1.26 |
) |
Real estate/home improvement |
|
|
34,582 |
|
|
|
41,684 |
|
|
|
(7,102 |
) |
|
|
(17.04 |
) |
Home equity |
|
|
73,008 |
|
|
|
59,131 |
|
|
|
13,877 |
|
|
|
23.47 |
|
Unsecured |
|
|
2,438 |
|
|
|
1,979 |
|
|
|
459 |
|
|
|
23.19 |
|
Other |
|
|
2,374 |
|
|
|
2,874 |
|
|
|
(500 |
) |
|
|
(17.40 |
) |
|
|
|
|
|
|
|
Total |
|
|
280,072 |
|
|
|
287,073 |
|
|
|
(7,001 |
) |
|
|
(2.44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage warehouse loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime |
|
|
115,939 |
|
|
|
69,894 |
|
|
|
46,045 |
|
|
|
65.88 |
|
Sub-Prime |
|
|
7,348 |
|
|
|
8,331 |
|
|
|
(983 |
) |
|
|
(11.80 |
) |
|
|
|
|
|
|
|
Total |
|
|
123,287 |
|
|
|
78,225 |
|
|
|
45,062 |
|
|
|
57.61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand total |
|
$ |
881,967 |
|
|
$ |
888,852 |
|
|
$ |
(6,885 |
) |
|
|
(0.77 |
)% |
|
|
|
|
|
|
|
The acceptance and management of credit risk is an integral part of the Banks business as a
financial intermediary. The Bank has established underwriting standards including a policy that
monitors the lending function through strict administrative and reporting requirements as well as
an internal loan review of consumer and small business loans. The Bank also uses an independent
third-party loan review function that regularly reviews asset quality.
Real Estate Loans
Real estate loans totaled $167.766 million or 19.0% of total loans as of December 31, 2008,
compared to $216.019 million or 24.3% of total loans as of December 31, 2007. This category
consists of home mortgages that generally require a loan to value of no more than 80%. Some special
guaranteed or insured real estate loan programs do permit a higher loan to collateral value ratio.
36
In addition to the customary real estate loans described above, the Bank also has outstanding on
December 31, 2008, $73.008 million in home equity lines of credit compared to $59.131 million at
December 31, 2007. Credit lines normally limit the loan to collateral value to no more than 89%.
These loans are classified as consumer loans in the table above and in Note 4 of the consolidated
financial statements.
Residential real estate lending is a highly competitive business. As of December 31, 2008, the
real estate loan portfolio reflected a wide range of interest rates and repayment patterns, but
could generally be categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
Percent of |
|
|
(dollar amounts in thousands) |
|
Amount |
|
Portfolio |
|
Yield |
|
Amount |
|
Portfolio |
|
Yield |
|
|
|
Fixed rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly payment |
|
$ |
36,278 |
|
|
|
21.62 |
% |
|
|
6.29 |
% |
|
$ |
41,491 |
|
|
|
19.21 |
% |
|
|
6.47 |
% |
Biweekly payment |
|
|
2,276 |
|
|
|
1.36 |
|
|
|
6.45 |
|
|
|
2,663 |
|
|
|
1.23 |
|
|
|
6.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustable rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly payment |
|
|
129,201 |
|
|
|
77.01 |
|
|
|
5.96 |
|
|
|
171,845 |
|
|
|
79.55 |
|
|
|
5.90 |
|
Biweekly payment |
|
|
11 |
|
|
|
0.01 |
|
|
|
5.78 |
|
|
|
20 |
|
|
|
0.01 |
|
|
|
7.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
167,766 |
|
|
|
100.00 |
% |
|
|
6.04 |
% |
|
$ |
216,019 |
|
|
|
100.00 |
% |
|
|
6.03 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2008 and 2007, approximately $178 million and $135 million, respectively, of residential
mortgages were sold into the secondary market. The 2008 amount includes approximately $38 million
of loans that were transferred to held for sale from the real estate loan portfolio and were
subsequently sold during the first quarter to reduce Horizons reliance on non-core funding and
improve Horizon Banks capital ratios.
In addition to the real estate loan portfolio, the Bank sells real estate loans and retains the
servicing rights. Loans serviced for others are not included in the consolidated balance sheets.
The unpaid principal balances and number of loans serviced for others totaled approximately
$79,544,000 and 706 and $26,191,000 and 324 at December 31, 2008 and 2007, respectively.
The Bank began capitalizing mortgage servicing rights during 2000 and the aggregate fair value of
capitalized mortgage servicing rights at December 31, 2008, totaled approximately $1,208,000.
Comparable market values and a valuation model that calculates the present value of future cash
flows were used to estimate fair value. For purposes of measuring impairment, risk characteristics
including product type, investor type and interest rates, were used to stratify the originated
mortgage servicing rights.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands) |
|
2008 |
|
2007 |
|
2006 |
|
Mortgage Servicing Rights |
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1 |
|
$ |
276 |
|
|
$ |
248 |
|
|
$ |
1,278 |
|
Servicing rights capitalized |
|
|
634 |
|
|
|
79 |
|
|
|
83 |
|
Amortization of servicing rights |
|
|
(178 |
) |
|
|
(51 |
) |
|
|
(251 |
) |
Servicing rights sold |
|
|
|
|
|
|
|
|
|
|
(862 |
) |
|
|
|
|
|
|
732 |
|
|
|
276 |
|
|
|
248 |
|
Impairment allowance |
|
|
(4 |
) |
|
|
(7 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31 |
|
$ |
728 |
|
|
$ |
269 |
|
|
$ |
245 |
|
|
|
|
37
Commercial Loans
Commercial loans totaled $310.842 million, or 35.2% of total loans as of December 31, 2008,
compared to $307.535 million, or 34.6% as of December 31, 2007.
Commercial loans consisted of the following types of loans at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
|
|
|
Percent of |
(dollar amounts in thousands) |
|
Number |
|
Amount |
|
Portfolio |
|
Number |
|
Amount |
|
Portfolio |
|
|
|
SBA guaranteed loans |
|
|
21 |
|
|
$ |
4,079 |
|
|
|
1.31 |
% |
|
|
17 |
|
|
$ |
3,863 |
|
|
|
1.26 |
% |
Municipal government |
|
|
18 |
|
|
|
3,258 |
|
|
|
1.05 |
|
|
|
26 |
|
|
|
3,809 |
|
|
|
1.24 |
|
Lines of credit |
|
|
369 |
|
|
|
54,023 |
|
|
|
17.38 |
|
|
|
346 |
|
|
|
59,025 |
|
|
|
19.19 |
|
Real estate and equipment
term loans |
|
|
994 |
|
|
|
249,482 |
|
|
|
80.26 |
|
|
|
959 |
|
|
|
240,838 |
|
|
|
78.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,402 |
|
|
$ |
310,842 |
|
|
|
100.00 |
% |
|
|
1,348 |
|
|
$ |
307,535 |
|
|
|
100.00 |
% |
|
|
|
Fixed rate term loans with a book value of $23.3 million and a fair value of $25.0 million have
been swapped to a variable rate using derivative instruments. The loans are carried at fair value
in the financial statements and the related swap is carried at fair value and is included with
other liabilities in the balance sheet. The recognition of the loan and swap fair values are
recorded in the income statement and for 2008 equally offset each other. Fair values are
determined by the counter party using a proprietary model that uses live market inputs to value
interest rate swaps. The model is subject to daily market tests as current and future positions
are priced and valued. These are level 3 inputs under FAS 157 fair value hierarchy as described
above.
Consumer Loans
Consumer loans totaled $280.072 million, or 31.8% of total loans as of December 31, 2008, compared
to $287.073 million, or 32.3% as of December 31, 2007. The total consumer loan portfolio decreased
2.4% in 2008. The decline occurred in the indirect automobile and direct installment loan
segments. Horizon tightened its underwriting standards for indirect loans in the fourth quarter of
2007. This, combined with the downturn in the automobile market, caused the drop in loans, as
existing loans paid off at a faster rate than new loans that were booked. Direct installment loan
declines were the result of a poor economy as consumer loan demand dried up.
38
Mortgage Warehouse Loans
Horizons mortgage warehousing business line has specific mortgage companies as customers of
Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a
secured borrowing with pledge of collateral under Horizons agreement with the mortgage company.
Each individual mortgage is assigned to Horizon until the loan is sold to the secondary market by
the mortgage company. In addition, Horizon takes possession of each original note and forwards
such note to the end investor once the mortgage company has sold the loan. At the time a loan is
transferred to the secondary market, the mortgage company repurchases the loan under its option
within the agreement. Due to the repurchase feature contained in the agreement, the transaction
does not qualify as a sale under SFAS 140 paragraph 9 (c) and therefore is accounted for as a
secured borrowing with pledge of collateral under paragraph 12 of SFAS 140 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 payoff
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 is typically less than 30 days.
Based on the agreements with each mortgage company, at any time a mortgage company can repurchase
from Horizon their outstanding loan balance on an individual mortgage and regain possession of the
original note. Horizon also has the option to request that the mortgage company repurchase an
individual mortgage. Should this occur, Horizon would return the original note and reassign the
assignment of the mortgage to the mortgage company. Also, in the event that the end investor would
not be able to honor the sales commitment and the mortgage company would not be able to repurchase
its loan on an individual mortgage, Horizon would be able to exercise its rights under the
agreement.
Allowance and Provision for Loan Losses/Critical Accounting Policy
At December 31, 2008, the allowance for loan losses was $11.410 million, or 1.29% of total loans
outstanding, compared to $9.791 million, or 1.10% at December 31, 2007. During 2008, the provision
for loan losses totaled $7.568 million compared to $3.068 million in 2007.
Horizon assesses the adequacy of its Allowance for Loan and Lease Losses (ALLL) by regularly
reviewing the performance of all of its loan portfolios. As a result of its quarterly reviews, a
provision for loan losses is determined to bring the total ALLL to a level called for by the
analysis. For the year 2008, the provision of $7.6 million is more than double the prior year.
This increase is primarily due to the deterioration of loan quality in all segments of the
portfolio except the mortgage warehouse area. At December 31, 2008, Horizons non-performing loans
of approximately $7.9 million or .89% of total loans represents an increase from the end of the
prior year when non-performing loans totaled $2.9 million or .33% of total loans. Horizons
non-performing loan statistics, while having increased from the prior year, still compare favorably
to
39
National1
and State of Indiana2 peer group bank averages for the same ratio as of September 30, 2008
of 1.99% and 1.87 %, respectively. As a result of the deterioration in the loan portfolio, Horizon
has adjusted the historical ratios used to determine the ALLL to reflect these recent trends.
Also, loans with specific reserves increased from the prior year-end.
Despite the increased allowance, no assurance can be given that Horizon will not, in any particular
period, sustain loan losses that are significant in relation to the amount reserved, or that
subsequent evaluations of the loan portfolio, in light of factors then prevailing, including
economic conditions and managements ongoing quarterly assessments of the portfolio, will not
require increases in the allowance for loan losses. Horizon considers the allowance for loan
losses to be adequate to cover losses inherent in the loan portfolio as of December 31, 2008.
Non-performing Loans
Non-performing loans are defined as loans that are greater than 90 days delinquent or have had the
accrual of interest discontinued by management. Management continues to work diligently toward
returning non-performing loans to an earning asset basis. Non-performing loans for the previous
three years ending December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands) |
|
2008 |
|
2007 |
|
2006 |
|
Non-performing loans |
|
$ |
7,864 |
|
|
$ |
2,949 |
|
|
$ |
2,625 |
|
Non-performing loans total 69% of the allowance for loan losses at December 31, 2008, compared to
31% and 30% of the allowance for loan losses on December 31, 2007 and 2006, respectively.
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, 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. (See Note-4
of the audited financial statements for further discussion of impaired loans)
|
|
|
(1) |
|
National peer group: Consists of all insured
commercial banks having assets between $1 Billion and $3 Billion as reported by
the Uniform Bank Performance Report as of September 30, 2008 |
|
(2) |
|
Indiana peer group: Consists of 22 publicly traded
banks all head quartered in the State of Indiana as reported by the Uniform
Bank Performance Reports as of September 30, 2008. |
40
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 borrowers business are not adequate to meet its debt service requirements, the loan is
evaluated for impairment. Often this is associated with a delay or shortfall in payments of 30
days or more. Loans are generally moved to non-accrual status when 90 days or more past due. These
loans are often considered impaired. Impaired loans, or portions thereof, are charged off when
deemed uncollectible.
Other real estate owned (OREO) net of any related allowance for OREO losses for the previous three
years ending December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands) |
|
2008 |
|
2007 |
|
2006 |
|
Other real estate owned |
|
$ |
2,772 |
|
|
$ |
238 |
|
|
$ |
75 |
|
Deferred Tax Asset
Horizon had a deferred tax asset at December 31, 2008 and 2007 totaling $2.58 million and $2.40
million respectively. The following table shows the major components of deferred tax:
|
|
|
|
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
4,516 |
|
|
$ |
3,944 |
|
Director and employee benefits |
|
|
1,133 |
|
|
|
829 |
|
|
|
|
Total assets |
|
|
5,649 |
|
|
|
4,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Depreciation |
|
|
(1,146 |
) |
|
|
(899 |
) |
Difference in expense recognition |
|
|
(130 |
) |
|
|
(111 |
) |
Federal Home Loan Bank stock dividends |
|
|
(319 |
) |
|
|
(326 |
) |
Difference in basis of intangible assets |
|
|
(685 |
) |
|
|
(826 |
) |
Difference in basis of assets |
|
|
(91 |
) |
|
|
|
|
Unrealized gain on securities available for sale |
|
|
(338 |
) |
|
|
(34 |
) |
Other |
|
|
(360 |
) |
|
|
(178 |
) |
|
|
|
Total liabilities |
|
|
(3,069 |
) |
|
|
(2,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
2,580 |
|
|
$ |
2,399 |
|
|
|
|
Horizon anticipates continued earnings and therefore feels there is no impairment to this asset.
41
Deposits
The primary source of funds for the Bank comes from the acceptance of demand and time deposits.
However, at times the Bank will use its ability to borrow funds from the Federal Home Loan Bank and
other sources when it can do so at interest rates and terms that are superior to those required for
deposited funds or loan demand is greater than the ability to grow deposits. Total deposits were
$841.169 million at December 31, 2008, compared to $893.664 million at December 31, 2007, or a
decrease of 5.9%. Average deposits and rates by category for the pervious three years ended
December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Balance Outstanding for the |
|
Average Rate Paid for the Year |
|
|
Year Ended December 31 |
|
Ended December 31 |
(dollar amounts in thousands) |
|
2008 |
|
2007 |
|
2006 |
|
2008 |
|
2007 |
|
2006 |
|
Noninterest-bearing demand
deposits |
|
$ |
77,600 |
|
|
$ |
76,530 |
|
|
$ |
78,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing demand deposits |
|
|
234,527 |
|
|
|
202,453 |
|
|
|
178,773 |
|
|
|
1.36 |
% |
|
|
2.73 |
% |
|
|
2.33 |
% |
Savings deposits |
|
|
31,182 |
|
|
|
31,431 |
|
|
|
34,637 |
|
|
|
.29 |
|
|
|
.28 |
|
|
|
.28 |
|
Money market |
|
|
95,483 |
|
|
|
112,266 |
|
|
|
139,177 |
|
|
|
1.56 |
|
|
|
3.30 |
|
|
|
3.28 |
|
Time deposits |
|
|
372,677 |
|
|
|
402,287 |
|
|
|
387,365 |
|
|
|
3.96 |
|
|
|
4.75 |
|
|
|
4.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
811,469 |
|
|
$ |
824,967 |
|
|
$ |
818,606 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Horizon continually revises and enhances its interest-bearing consumer and commercial demand
deposit products based on local market conditions and its need for funding to support various types
of assets. These product changes caused the changes in the average balances and rates paid as
displayed in the table above.
Certificates of deposit of $100,000 or more, which are considered to be rate sensitive and are not
considered a part of core deposits, mature as follows as of December 31, 2008:
|
|
|
|
|
(dollar amounts in thousands) |
|
|
|
|
Due in three months or less |
|
$ |
16,942 |
|
Due after three months through six months |
|
|
14,503 |
|
Due after six months through one year |
|
|
35,083 |
|
Due after one year |
|
|
78,358 |
|
Interest expense on time certificates of $100,000 or more was approximately $3.909 million, $5.134
million and $5.533 million for 2008, 2007 and 2006, respectively.
Off-Balance Sheet Arrangements
As of December 31, 2008, Horizon does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Companys financial condition, change
in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors. The term off-balance sheet
arrangement generally means any transaction, agreement, or other contractual arrangement to which
an entity unconsolidated with the Company is a party under which the Company has (i) any obligation
arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained
or contingent interest in assets transferred to such entity or similar arrangement that serves as
credit, liquidity or market risk support for such assets.
42
Contractual Obligations
The following tables summarize Horizons contractual obligations and other commitments to make
payment as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within One |
|
One to |
|
Three to |
|
After Five |
(dollar amounts in thousands) |
|
Total |
|
Year |
|
Three Years |
|
Five Years |
|
Years |
|
|
|
Deposits |
|
$ |
841,169 |
|
|
$ |
674,238 |
|
|
$ |
146,247 |
|
|
$ |
18,139 |
|
|
$ |
2,545 |
|
Borrowings (1) |
|
|
324,383 |
|
|
|
162,577 |
|
|
|
95,991 |
|
|
|
45,569 |
|
|
|
20,246 |
|
Subordinated debentures (2) |
|
|
27,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,837 |
|
|
|
|
(1) |
|
Includes debt obligations to the Federal Home Loan Bank and term repurchase
agreements with maturities beyond one year borrowed by Horizons banking subsidiary. See Note
8 in Horizons Consolidated Financial Statements. |
|
(2) |
|
Includes Trust Preferred Capital Securities issued by Horizon Statutory Trusts II
and III and those assumed in the acquisition of Alliance. See Note 11 in Horizons
Consolidated Financial Statements. |
|
|
|
|
|
|
|
|
|
|
|
Expiration by Period |
|
|
|
|
|
|
Greater |
|
|
Within One |
|
Than One |
|
|
Year |
|
Year |
|
|
|
Letters of credit |
|
$ |
1,183 |
|
|
$ |
494 |
|
Unfunded loan commitments |
|
|
122,467 |
|
|
|
58,250 |
|
Capital Resources
The capital resources of Horizon and the Bank exceed regulatory capital ratios for well
capitalized banks at December 31, 2008. Stockholders equity totaled $103.350 million as of
December 31, 2008, compared to $70.645 million as of December 31, 2007. At year-end 2008, the ratio
of stockholders equity to assets was 7.91% compared to 5.61% for 2007. Tangible equity to
tangible assets was 7.37% at December 31, 2008 compared to 5.02% at December 31, 2007. Book value
per common share at December 31, 2008 increased to $24.41 compared to $22.03 at December 31, 2007.
Horizons capital increased during the year 2007 as a result of increased earnings, net of
dividends declared, exercise of stock options net of tax, improvement in unrealized gain (loss) on
securities available for sale, the amortization of unearned compensation and the issuance of
perpetual preferred stock.
In December of 2008, Horizon received an investment of $25 million through participation in the
U.S. Department of Treasurys (Treasury) Capital Purchase Program. Under the program, the Treasury
acquired 25,000 Series A shares of Horizons Fixed Rate Cumulative Perpetual Preferred Stock that
will pay a 5% per annum dividend for the first five years of the investment (which will total
$1,250,000 a year) and 9% per annum thereafter (which will total $2,250,000 a year) unless Horizon
redeems the shares. The preferred shares qualify as Tier I capital and are callable by Horizon
after three years. As part of its investment, the Treasury also received a warrant to purchase
212,104 shares of common stock of Horizon, with an exercise price of $17.68 per share. The warrant
is expected to give the Treasury the opportunity to benefit from an increase in the common stock
price of the company. At December 31, 2008, the ratio of stockholders equity to total assets was
7.91% compared to 5.61% at December 31, 2007.
Horizon declared dividends in the amount of $.66 per share in 2008, and $.59 per share in 2007 and
$.56 per share in 2006. The dividend payout ratio (dividends as a percent of net income) was 23.9%
for 2008, 23.5% for 2007 and 24.2% for 2006. For additional information regarding dividend
conditions, see Note 1 of the Notes to the Consolidated Financial Statements.
43
In October of 2004, Horizon formed Horizon Statutory Trust II (Trust II), a wholly owned statutory
business trust. Trust II issued $10.310 million of Trust Preferred Capital Securities as a
participant in a pooled trust preferred securities offering. The proceeds from the sale of the
trust preferred securities were used by the trust to purchase an equivalent amount of subordinated
debentures from Horizon. The junior subordinated debentures are the sole assets of Trust II and
are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the
trust preferred securities pay interest and dividends, respectively, on a quarterly basis. The
junior subordinated debentures and the securities bear interest at a rate of 90 day LIBOR plus
1.95% and mature on October 21, 2034, and are non-callable for five years from the issue date.
After that period, the securities may be called at any quarterly interest payment date at par.
Costs associated with the issuance of the securities totaling $17,500 were capitalized and are
being amortized to the first call date of the securities.
In December of 2006, Horizon formed Horizon Bancorp Capital Trust III (Trust III), a wholly owned
statutory business trust. Trust III issued $12.372 million of Trust Preferred Capital Securities
as a participant in a pooled trust preferred securities offering. The proceeds from the sale of
the trust preferred securities were used by the trust to purchase an equivalent amount of
subordinated debentures from Horizon. The junior subordinated debentures are the sole assets of
Trust III and are fully and unconditionally guaranteed by Horizon. The junior subordinated
debentures and the trust preferred securities pay interest and dividends, respectively, on a
quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of
90 day LIBOR plus 1.65% and mature on January 30, 2037, and are non-callable for five years from
the issue date. After that period, the securities may be called at any quarterly interest payment
date at par. Costs associated with the issuance of the securities totaling $12,647 were
capitalized and are being amortized to the first call date of the securities. The proceeds of this
issue were used to redeem the securities issued by Trust I on March 26, 2007.
The Company assumed additional debentures as the result of the acquisition of Alliance in 2005. In
June 2004, Alliance formed Alliance Financial Statutory Trust I a wholly owned business trust
(Alliance Trust) to sell $5.155 million in trust preferred securities. The proceeds from the sale
of the trust preferred securities were used by the trust to purchase an equivalent amount of
subordinated debentures from Alliance. The junior subordinated debentures are the sole assets of
Alliance Trust and are fully and unconditionally guaranteed by Horizon. The junior subordinated
debentures and the trust preferred securities pay interest and dividends, respectively, on a
quarterly basis. The junior subordinated debentures and the securities bear interest at a rate of
90-day LIBOR plus 2.65%, mature in June 2034, and are non-callable for five years from the issue
date. After that period, the securities may be called at any quarterly interest payment date at
par.
The Trust Preferred Capital Securities, subject to certain limitations, are included in Tier 1
Capital for regulatory purposes. Dividends on the Trust Preferred Capital Securities are recorded
as interest expense.
Results of Operations
Net Income
Consolidated net income was $8.972 million or $2.75 per diluted share in 2008, $8.140 million or
$2.51 per diluted share in 2007 and $7.484 million or $2.33 per share in 2006.
44
Net Interest Income
The primary source of earnings for Horizon is net interest income. Net interest income is the
difference between what Horizon has earned on assets it has invested and the interest paid on
deposits and other funding sources. The net interest margin is net interest income expressed as a
percentage of average earning assets. Horizons earning assets consist of loans, investment
securities and interest-bearing balances in banks.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
|
Average |
|
|
|
|
|
|
Yield/ |
|
(dollar amounts in thousands) |
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
Balance |
|
|
Interest |
|
|
Rate |
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans total (1) (3) |
|
$ |
848,278 |
|
|
$ |
57,801 |
|
|
|
6.81 |
% |
|
$ |
853,314 |
|
|
$ |
63,619 |
|
|
|
7.45 |
% |
|
$ |
785,448 |
|
|
$ |
57,282 |
|
|
|
7.29 |
% |
Taxable investment securities, including FRB and
FHLB stock |
|
|
174,705 |
|
|
|
8,510 |
|
|
|
4.87 |
|
|
|
169,295 |
|
|
|
8,121 |
|
|
|
4.80 |
|
|
|
190,670 |
|
|
|
8,348 |
|
|
|
4.38 |
|
Nontaxable investment securities (2) |
|
|
79,873 |
|
|
|
3,323 |
|
|
|
4.16 |
|
|
|
74,222 |
|
|
|
3,061 |
|
|
|
4.12 |
|
|
|
65,773 |
|
|
|
2,796 |
|
|
|
4.25 |
|
Interest-bearing balances and money market
investments (4) |
|
|
6,430 |
|
|
|
158 |
|
|
|
2.46 |
|
|
|
2,602 |
|
|
|
125 |
|
|
|
4.80 |
|
|
|
4,469 |
|
|
|
153 |
|
|
|
3.42 |
|
Federal funds sold |
|
|
16,151 |
|
|
|
443 |
|
|
|
2.74 |
|
|
|
2,854 |
|
|
|
142 |
|
|
|
4.97 |
|
|
|
1,890 |
|
|
|
101 |
|
|
|
5.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets |
|
|
1,125,437 |
|
|
|
70,235 |
|
|
|
6.24 |
|
|
|
1,102,287 |
|
|
|
75,068 |
|
|
|
6.81 |
|
|
|
1,048,250 |
|
|
|
68,680 |
|
|
|
6.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-earning
assets |
Cash and due from banks |
|
|
18,287 |
|
|
|
|
|
|
|
|
|
|
|
20,312 |
|
|
|
|
|
|
|
|
|
|
|
21,525 |
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
(9,930 |
) |
|
|
|
|
|
|
|
|
|
|
(8,680 |
) |
|
|
|
|
|
|
|
|
|
|
(8,723 |
) |
|
|
|
|
|
|
|
|
Other assets |
|
|
69,769 |
|
|
|
|
|
|
|
|
|
|
|
66,481 |
|
|
|
|
|
|
|
|
|
|
|
57,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,203,563 |
|
|
|
|
|
|
|
|
|
|
$ |
1,180,400 |
|
|
|
|
|
|
|
|
|
|
$ |
1,118,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits |
|
$ |
31,181 |
|
|
|
90 |
|
|
|
.29 |
% |
|
$ |
31,431 |
|
|
|
88 |
|
|
|
.28 |
% |
|
$ |
34,637 |
|
|
|
96 |
|
|
|
.28 |
% |
Money market |
|
|
95,483 |
|
|
|
1,486 |
|
|
|
1.56 |
|
|
|
112,266 |
|
|
|
3,701 |
|
|
|
3.30 |
|
|
|
139,177 |
|
|
|
4,559 |
|
|
|
3.28 |
|
Interest-bearing demand deposits |
|
|
234,527 |
|
|
|
3,190 |
|
|
|
1.36 |
|
|
|
202,453 |
|
|
|
5,531 |
|
|
|
2.73 |
|
|
|
178,773 |
|
|
|
4,164 |
|
|
|
2.33 |
|
Time deposits |
|
|
372,677 |
|
|
|
14,770 |
|
|
|
3.96 |
|
|
|
402,287 |
|
|
|
19,122 |
|
|
|
4.75 |
|
|
|
387,365 |
|
|
|
16,915 |
|
|
|
4.37 |
|
Borrowings |
|
|
280,766 |
|
|
|
11,772 |
|
|
|
4.19 |
|
|
|
251,740 |
|
|
|
11,505 |
|
|
|
4.57 |
|
|
|
207,530 |
|
|
|
9,135 |
|
|
|
4.40 |
|
Subordinated debentures |
|
|
27,837 |
|
|
|
1,577 |
|
|
|
5.67 |
|
|
|
30,599 |
|
|
|
2,313 |
|
|
|
7.56 |
|
|
|
28,396 |
|
|
|
2,266 |
|
|
|
7.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
|
|
1,042,471 |
|
|
|
32,885 |
|
|
|
3.15 |
|
|
|
1,030,776 |
|
|
|
42,260 |
|
|
|
4.10 |
|
|
|
975,878 |
|
|
|
37,135 |
|
|
|
3.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
77,600 |
|
|
|
|
|
|
|
|
|
|
|
76,530 |
|
|
|
|
|
|
|
|
|
|
|
78,654 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
7,001 |
|
|
|
|
|
|
|
|
|
|
|
6,870 |
|
|
|
|
|
|
|
|
|
|
|
6,138 |
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
76,491 |
|
|
|
|
|
|
|
|
|
|
|
66,224 |
|
|
|
|
|
|
|
|
|
|
|
57,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,203,563 |
|
|
|
|
|
|
|
|
|
|
$ |
1,180,400 |
|
|
|
|
|
|
|
|
|
|
$ |
1,118,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
|
$ |
37,350 |
|
|
|
|
|
|
|
|
|
|
$ |
32,808 |
|
|
|
|
|
|
|
|
|
|
$ |
31,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income as a percent of interest earning assets |
|
|
|
|
|
|
|
|
|
|
3.32 |
% |
|
|
|
|
|
|
|
|
|
|
2.98 |
% |
|
|
|
|
|
|
|
|
|
|
3.01 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Non-accruing loans for the purpose of the computations above are included in the
daily average loan amounts outstanding. Loan totals are shown net of unearned income and
deferred loans fees. |
|
(2) |
|
Yields are not presented on a tax-equivalent basis. |
|
(3) |
|
Loan fees and late fees included in interest on loans aggregated $3,481,000,
$3,296,000 and $3,470,000 in 2008, 2007 and 2006 respectively. |
|
(4) |
|
Horizon has no foreign office and, accordingly, no assets or liabilities to foreign
operations. Horizons subsidiary bank had no funds invested in Eurodollar Certificates of
Deposit at December 31, 2008. |
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20082007 |
|
20072006 |
|
|
Increase/(Decrease) |
|
Increase/(Decrease) |
|
|
|
|
|
|
Change |
|
Change |
|
|
|
|
|
Change |
|
Change |
|
|
Total |
|
Due to |
|
Due to |
|
Total |
|
Due to |
|
Due to |
(dollar amounts in thousands) |
|
Change |
|
Volume |
|
Rate |
|
Change |
|
Volume |
|
Rate |
|
|
|
Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans total |
|
$ |
5,818 |
|
|
$ |
(373 |
) |
|
$ |
(5,445 |
) |
|
$ |
6,337 |
|
|
$ |
5,037 |
|
|
$ |
1,300 |
|
Taxable investment securities |
|
|
389 |
|
|
|
262 |
|
|
|
127 |
|
|
|
(227 |
) |
|
|
(984 |
) |
|
|
757 |
|
Nontaxable investment securities |
|
|
262 |
|
|
|
235 |
|
|
|
27 |
|
|
|
265 |
|
|
|
350 |
|
|
|
(85 |
) |
Interest-bearing balances and money market investments |
|
|
33 |
|
|
|
116 |
|
|
|
(83 |
) |
|
|
(28 |
) |
|
|
(77 |
) |
|
|
49 |
|
Federal funds sold |
|
|
301 |
|
|
|
391 |
|
|
|
(90 |
) |
|
|
41 |
|
|
|
48 |
|
|
|
(7 |
) |
|
|
|
Total interest income |
|
|
(4,833 |
) |
|
|
631 |
|
|
|
(5,464 |
) |
|
|
6,388 |
|
|
|
4,375 |
|
|
|
2,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings deposits |
|
|
2 |
|
|
|
(1 |
) |
|
|
3 |
|
|
|
(8 |
) |
|
|
(9 |
) |
|
|
1 |
|
Money market |
|
|
(2,215 |
) |
|
|
(489 |
) |
|
|
(1,726 |
) |
|
|
(858 |
) |
|
|
(887 |
) |
|
|
29 |
|
Interest-bearing demand deposits |
|
|
(2,341 |
) |
|
|
771 |
|
|
|
(3,112 |
) |
|
|
1,367 |
|
|
|
593 |
|
|
|
774 |
|
Time deposits |
|
|
(4,352 |
) |
|
|
(1,336 |
) |
|
|
(3,016 |
|
|
|
2,207 |
|
|
|
669 |
|
|
|
1,538 |
|
Borrowings |
|
|
267 |
|
|
|
1,263 |
|
|
|
(996 |
) |
|
|
895 |
|
|
|
(160 |
) |
|
|
1,055 |
|
Subordinated debentures |
|
|
(736 |
) |
|
|
(195 |
) |
|
|
(541 |
) |
|
|
1,522 |
|
|
|
2,826 |
|
|
|
(1,304 |
) |
|
|
|
Total interest expense |
|
|
(9,375 |
) |
|
|
13 |
|
|
|
(9,388 |
) |
|
|
5,125 |
|
|
|
3,032 |
|
|
|
2,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Earnings |
|
$ |
4,542 |
|
|
$ |
618 |
|
|
$ |
3,924 |
|
|
$ |
1,263 |
|
|
$ |
1,343 |
|
|
$ |
(80 |
) |
|
|
|
Horizons average earning assets were $1.125 billion in 2008 compared to $1.102 billion in 2007 and
$1.048 billion in 2006. The net interest margin for 2008 was 3.32% compared to 2.98% and 3.01% in
2007 and 2006, respectively. Short-term interest rates increased during the first half of 2006 and
were then stable until the fourth quarter of 2007 at which point they began to decline and
continued their descent through the end of 2008.
The decline in short term rates reduced Horizons funding costs by an amount that exceeded the
decline in yields on earning assets. Horizons cost of funds has dropped approximately 108 basis
points since the fourth quarter of 2007 while the yield on earning assets declined approximately 72
basis points. Horizon reduced rates on NOW and money market accounts in line with short-term rate
decreases put in place by the Federal Open Market Committee. In addition, a large amount of
Certificates of Deposit (CDs) matured during the first half of 2008 and were renewed at lower
rates. Additionally, at December 31, 2008, all mortgage warehouse loans ($123 million) and certain
home equity and commercial loans (totaling approximately $136 million) reached contractual rate
floors. This improved the net interest margin as funding costs continued to decline.
Changes in the mix of the loan portfolio are shown in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollar amounts in thousands) |
|
2008 |
|
2007 |
|
2006 |
|
Commercial loans |
|
$ |
305,126 |
|
|
$ |
291,656 |
|
|
$ |
267,263 |
|
Mortgage warehouse loans |
|
|
77,091 |
|
|
|
70,279 |
|
|
|
96,334 |
|
Real estate loans |
|
|
182,963 |
|
|
|
228,466 |
|
|
|
201,756 |
|
Installment loans |
|
|
283,098 |
|
|
|
262,913 |
|
|
|
220,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average loans outstanding |
|
$ |
848,278 |
|
|
$ |
853,314 |
|
|
$ |
785,448 |
|
|
|
|
46
Gross loans for 2008 decreased $7 million since December 31, 2007. Mortgage warehouse loans
increased late in the fourth quarter of 2008 due to increased refinance activity which is expected
to continue through the first quarter of 2009. Real estate loans declined during the year as
approximately $37 million of loans were transferred to held for sale and were subsequently sold
during the first quarter to reduce Horizons reliance on non-core funding and improve Horizon
Banks capital ratios. In addition, Horizon sold a high percentage of its 2008 residential
mortgage loan production, which contributed to the reduction in the mortgage loan portfolio.
Installment loans declined due to a lower volume of automobile loans. Commercial loans showed
modest growth as efforts were concentrated on maintaining existing relationships and closely
monitoring the portfolio for any challenges to asset quality.
Total deposits have declined $52 million since December 31, 2007. The decrease came in high cost,
short-term consumer certificates of deposit (CDs). The decrease in deposits was funded by an
increase in borrowed funds and additional capital. Brokered CDs were approximately $50 million at
both December 31, 2008 and 2007. The increase in wholesale funding is in part caused by several
large regional banks pricing certificates of deposit well above wholesale funding rates. Horizon
has maintained its deposit pricing discipline and has not chased the large bank pricing
strategies.
The increase in net interest income during 2008 is primarily the result of an increase in the net
interest margin. The 2007 increase is primarily the result of increased earning assets.
Non-interest Income
The major components of non-interest income consist of service charges on deposit accounts, gain on
sale of loans and fiduciary fees. Service charges on deposit accounts are based upon: a) recovery
of direct operating expenses associated with providing the service, b) allowing for a profit margin
that provides an adequate return on assets and stockholders equity and c) competitive factors
within the Banks markets. Service charges on deposits were $3.885 million, $3.469 million and
$3.102 million, for 2008, 2007 and 2006, respectively. The increase in 2008 relates primarily to
an increase in non-sufficient check charges implemented during the first quarter.
Gain on sale of loans was $2.979 million for 2008, $2.566 million for 2007 and $1.681 million in
2006. Horizon has sold approximately 55% of its residential mortgage loan production in 2006, 77%
in 2007 and over 80% in 2008. The loans retained are predominantly adjustable rate mortgage loans.
During 2008, Horizon sold $141 million of current production of residential mortgage loans into the
secondary market compared to $135 million in 2007 and $96 million in 2006. The increase from gain
on sale of loans resulted from (i) Horizons transfer of loans from the loan portfolio to held for
sale and subsequent sale of these loans generating a gain of approximately $194 thousand and (ii)
Horizons adoption of Securities and Exchange Commission Staff Accounting Bulletin 109 (which
requires the inclusion of a servicing component when calculating the value of a mortgage derivative
instrument) which created an additional $231 thousand gain.
Fiduciary fees were $3.713 million in 2008 compared to $3.556 million in 2007 and $3.100 million in
2006. Fiduciary income increased due to additional income from the ESOP line of business and a fee
increase implemented in January of 2008.
47
Non-interest Expense
Non-interest expense totaled $32.779 million in 2008 compared to $31.144 million in 2007 and
$30.455 million in 2006.
The increase in 2008 was driven primarily by two factors: (a) loan expense increased from the prior
year due to higher collection expense and less deferred costs on new loans and (b) increased FDIC
insurance costs as the one time credits granted in 2006 were fully utilized during the first
quarter of 2008. Salaries and benefits decreased due to the staff reduction, which occurred during
the third quarter of 2007.
Salaries and benefits decreased 2.4% during 2008 compared to an increase of 4.4% during 2007.
Incentive compensation accruals for various Horizon employees were reduced during the fourth
quarter of 2006, as incentive targets were not met, while normal incentive compensation accruals
continued all of 2007 and 2008 as incentive targets were met. The reduction to the incentive
accruals in 2006 is the main cause of the increase in salaries and employee benefits in 2007. The
staff reductions, which took place in 2006 and 2007, are now favorably impacting compensation
expense. The staff reductions in 2006 were accomplished through normal attrition and were the
result of an efficiency study. The staff reduction in 2007 was the result of a reduction in force
by eliminating certain positions. The 2007 expense includes approximately $262 thousand of
severance benefits paid to the terminated employees.
Income Taxes
Income tax expense totaled $1.862 million in 2008 compared to $2.727 million in 2007 and $2.838
million in 2006. The effective tax rate was 17.2%, 25.1% and 27.5% for 2008, 2007 and 2006,
respectively. The decrease in the effective tax rate was due to $163 thousand of income tax
refunds related to amended returns filed for prior years. Also, increased tax-exempt income,
including a life insurance death benefit on a deceased Bank officer caused a reduction in the
effective tax rate.
Liquidity and Rate Sensitivity Management
Management and the Board of Directors meet regularly to review both the liquidity and rate
sensitivity position of Horizon. Effective asset and liability management ensures Horizons
ability to monitor the cash flow requirements of depositors along with the demands of borrowers and
to measure and manage interest rate risk. Horizon utilizes an interest rate risk assessment model
designed to highlight sources of existing interest rate risk and consider the effect of these risks
on strategic planning. Management maintains (within certain parameters) an essentially balanced
ratio of interest sensitive assets to liabilities in order to protect against the effects of wide
interest rate fluctuations.
48
Liquidity
The Bank maintains a stable base of core deposits provided by long standing relationships with
consumers and local businesses. These deposits are the principal source of liquidity for Horizon.
Other sources of liquidity for Horizon include earnings, loan repayments, investment security sales
and maturities, sale of real estate loans and borrowing relationships with correspondent banks,
including the Federal Home Loan Bank (FHLB). At December 31, 2008, Horizon has available
approximately $142.4 million in available credit from various money center banks, including the
FHLB and the Federal Reserve Bank Discount Window. Factors which could impact Horizons funding
needs in the future include:
Horizon has outstanding borrowings of over $177 million with the FHLB and total borrowing capacity
with the FHLB of $244 million. Due to various financial difficulties in the financial institution
industry in 2008, including the write-down of various mortgage backed securities held by the FHLB
(which lowered its regulatory capital levels), the FHLB initially deferred the declaration of a
fourth quarter dividend pending a review of private-label mortgage-backed securities for
other-than-temporary impairment. Horizons total borrowing capacity with the FHLB is currently
$244 million. Generally, the loan terms from the FHLB are better than the terms Horizon can
receive from other sources making it cheaper to borrow money from the FHLB. Continued and
additional financial difficulties at the FHLB could reduce or eliminate Horizons additional
borrowing capacity with the FHLB.
If residential mortgage loan rates remain low, Horizons mortgage warehouse loans could increase
creating an additional need for funding.
Horizon has a total of $80 million of Federal Fund lines from various money center banks. These are
uncommitted lines and could be pulled at any time by the correspondent banks.
A downgrade in Horizons public credit rating by a rating agency due to factors such as
deterioration in asset quality, a large charge to earnings, a decline in profitability or other
financial measures, or a significant merger or acquisition.
An act of terrorism or war, natural disasters, political events, or the default or bankruptcy of a
major corporation, mutual fund or hedge fund.
Market speculation or rumors about Horizon or the banking industry in general may adversely affect
the cost and availability of normal funding sources.
Horizon anticipates spending $3.4 million for premises and equipment during 2009, including two new
full service offices. These purchases will be funded through normal operations.
If any of these events occur, they could force Horizon to borrow money from other sources including
negotiable certificates of deposit. Such other monies may only be available at higher interest
rates and on less advantageous terms, which will impact our net income and could impact our ability
to grow. Management believes Horizon has adequate funding sources to meet short and long term
needs.
Horizon maintains a liquidity contingency plan that outlines the process for addressing a liquidity
crisis. The plan provides for an evaluation of funding sources under various market conditions. It
also assigns specific roles and responsibilities for effectively managing liquidity through a
problem period.
Recent market conditions have made it difficult or uneconomical to access the capital markets. As a
result, the United States Congress, the Treasury, and the FDIC have announced various programs
designed to enhance market liquidity and bank capital.
49
In response to the ongoing financial crisis affecting the banking system and financial markets,
EESA was signed into law on October 3, 2008, and established TARP. As part of TARP, the Treasury
established the CPP to provide up to $700 billion of funding to eligible financial institutions
through the purchase of mortgages, mortgage-backed securities, capital stock and other financial
instruments for the purpose of stabilizing and providing liquidity to the U.S. financial markets.
On December 19, 2008 Horizon completed the sale to the Treasury of $25.0 million of Series A
Preferred Shares as part of the CPP.
The American Recovery and Reinvestment Act of 2009 (ARRA), more commonly known as the economic
stimulus or economic recovery package, was signed into law on February 17, 2009, by President
Obama. ARRA includes a wide variety of programs intended to stimulate the economy and provide for
extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain
new executive compensation and corporate expenditure limits on all current and future TARP
recipients, including Horizon, until the institution has repaid the Treasury, which is permitted
under ARRA without penalty and without the need to raise new capital, subject to the Treasurys
consultation with the recipients appropriate regulatory agency.
During 2008, cash flows were generated primarily from net proceeds from borrowings of $65.5
million, sales, maturities, and prepayments of investment securities of $50.9 million, sale of
loans transferred to held for sale of $37.7 million and $25.0 million from the issuance of
preferred stock. Cash flows were used to purchase investments totaling $115.9 million, increase
loans $37.6 million and reduce deposits by a net $52.5 million. The net cash and cash equivalent
position decreased by $19.0 million during 2008.
Interest Sensitivity
The degree by which net interest income may fluctuate due to changes in interest rates is monitored
by Horizon using computer simulation models, incorporating not only the current GAP position but
the effect of expected repricing of specific financial assets and liabilities. When repricing
opportunities are not properly aligned, net interest income may be affected when interest rates
change. Forecasting results of the possible outcomes determines the exposure to interest rate risk
inherent in Horizons balance sheet. The goal is to manage imbalanced positions that arise when
the total amount of assets that reprice or mature in a given time period differs significantly from
liabilities that reprice or mature in the same time period. The theory behind managing the
difference between repricing assets and liabilities is to have more assets repricing in a rising
rate environment and more liabilities repricing in a declining rate environment. At December 31,
2008, the amount of assets that reprice within one year were 109% of liabilities that reprice
within one year. During 2008, as interest rates declined, rate sensitive liabilities were repriced
more rapidly than was modeled by reducing rates on interest bearing deposits. The impact of
interest rate reduction along with interest rate floors on certain loans positively impacted the
net interest margin during 2008. At December 31, 2007, the amount of assets that reprice within
one year were approximately 103% of the amount of liabilities that reprice within the same time
period.
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Sensitivity |
|
|
|
|
|
|
|
> 3 Months |
|
|
|
|
|
|
|
|
|
|
|
|
3 Months or |
|
|
and < 6 |
|
|
> 6 Months |
|
|
Greater Than |
|
|
|
|
|
|
Less |
|
|
Months |
|
|
and < 1 Year |
|
|
1 Year |
|
|
Total |
|
|
|
|
Loans |
|
$ |
348,538 |
|
|
$ |
75,885 |
|
|
$ |
108,197 |
|
|
$ |
355,302 |
|
|
$ |
887,922 |
|
Interest-bearing balances with Banks |
|
|
2,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,679 |
|
Investment securities and FRB and
FHLB stock |
|
|
26,350 |
|
|
|
9,769 |
|
|
|
17,310 |
|
|
|
262,464 |
|
|
|
315,893 |
|
Other assets |
|
|
23,045 |
|
|
|
|
|
|
|
|
|
|
|
77,318 |
|
|
|
100,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
400,612 |
|
|
$ |
85,654 |
|
|
$ |
125,507 |
|
|
$ |
695,084 |
|
|
$ |
1,306,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate Sensitivity |
|
|
|
|
|
|
|
> 3 Months |
|
|
|
|
|
|
|
|
|
|
|
|
3 Months or |
|
|
and < 6 |
|
|
> 6 Months |
|
|
Greater Than |
|
|
|
|
|
|
Less |
|
|
Months |
|
|
and < 1 Year |
|
|
1 Year |
|
|
Total |
|
|
|
|
Non-interest bearing deposits |
|
$ |
7,051 |
|
|
$ |
6,921 |
|
|
$ |
11,552 |
|
|
$ |
58,118 |
|
|
$ |
83,642 |
|
Interest-bearing deposits |
|
|
136,543 |
|
|
|
87,276 |
|
|
|
160,905 |
|
|
|
372,803 |
|
|
|
757,527 |
|
Borrowed funds |
|
|
60,196 |
|
|
|
33,085 |
|
|
|
55,217 |
|
|
|
203,722 |
|
|
|
352,220 |
|
Other liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,118 |
|
|
|
10,118 |
|
Stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,350 |
|
|
|
103,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and
stockholders
equity |
|
$ |
203,790 |
|
|
$ |
127,282 |
|
|
$ |
227,674 |
|
|
$ |
748,111 |
|
|
$ |
1,306,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAP |
|
$ |
196,822 |
|
|
$ |
(41,628 |
) |
|
$ |
(102,167 |
) |
|
$ |
(53,027 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative GAP |
|
$ |
196,822 |
|
|
$ |
155,194 |
|
|
$ |
53,027 |
|
|
|
|
|
|
|
|
|
Included in the GAP analysis are certain interest-bearing demand accounts and savings accounts.
These interest-bearing accounts are subject to immediate withdrawal. However, Horizon considers
approximately 51% of these deposits to be insensitive to gradual changes in interest rates and
generally to behave like deposits with longer maturities based upon historical experience.
51
Quantitative and Qualitative Disclosures About Market Risk
Horizons primary market risk exposure is interest rate risk. Interest rate risk (IRR) is the risk
that Horizons earnings and capital will be adversely affected by changes in interest rates. The
primary approach to IRR management is one that focuses on adjustments to the asset/liability mix in
order to limit the magnitude of IRR.
Horizons exposure to interest rate risk is due to repricing or mismatch risk, embedded options
risk, and yield curve risk. Repricing risk is the risk of adverse consequence from a change in
interest rates that arise because of differences in the timing of when those interest rate changes
affect Horizons assets and liabilities. Basis risk is the risk that the spread, or rate
difference, between instruments of similar maturities will change. Options risk arises whenever
products give the customer the right, but not the obligation, to alter the quantity or timing of
cash flows. Yield curve risk is the risk that changes in prevailing interest rates will affect
instruments of different maturities by different amounts. Horizons objective is to remain
reasonably neutral with respect to IRR. Horizon utilizes a variety of strategies to maintain this
position including the sale of mortgage loans on the secondary market, hedging certain balance
sheet items using derivatives, varying maturities of FHLB advances, certificates of deposit funding
and investment securities.
The table, which follows, provides information about Horizons financial instruments that are
sensitive to changes in interest rates as of December 31, 2008. The table incorporates Horizons
internal system generated data related to the maturity and repayment/withdrawal of interest-earning
assets and interest-bearing liabilities. For loans, securities and liabilities with contractual
maturities, the table presents principal cash flows and related weighted-average interest rates by
contractual maturities as well as the historical experience of Horizon related to the impact of
interest rate fluctuations on the prepayment of residential loans and mortgage-backed securities.
From a risk management perspective, Horizon believes that repricing dates are more relevant than
contractual maturity dates when analyzing the value of financial instruments. For deposits with no
contractual maturity dates, the table presents principal cash flows and weighted average rate, as
applicable, based upon Horizons experience and managements judgment concerning the most likely
withdrawal behaviors.
52
Quantitative Disclosure of Market Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 and |
|
|
|
|
|
|
Fair Value |
|
|
|
2009 |
|
|
2010 |
|
|
2011 |
|
|
2011 |
|
|
2013 |
|
|
Beyond |
|
|
Total |
|
|
12/31/08 |
|
|
|
|
Rate-sensitive assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest rate loans |
|
$ |
167,201 |
|
|
$ |
87,421 |
|
|
$ |
60,256 |
|
|
$ |
38,825 |
|
|
$ |
19,922 |
|
|
$ |
17,794 |
|
|
$ |
391,238 |
|
|
$ |
376,604 |
|
Average interest rate |
|
|
7.15 |
% |
|
|
7.60 |
% |
|
|
7.75 |
% |
|
|
7.85 |
% |
|
|
7.81 |
% |
|
|
7.33 |
% |
|
|
7.46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable interest rate loans |
|
|
367,221 |
|
|
|
51,790 |
|
|
|
43,898 |
|
|
|
16,797 |
|
|
|
16,545 |
|
|
|
433 |
|
|
|
496,684 |
|
|
|
511,090 |
|
Average interest rate |
|
|
4.75 |
% |
|
|
6.03 |
% |
|
|
6.15 |
% |
|
|
6.31 |
% |
|
|
6.10 |
% |
|
|
6.22 |
% |
|
|
5.11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
|
534,242 |
|
|
|
139,210 |
|
|
|
104,154 |
|
|
|
55,622 |
|
|
|
36,467 |
|
|
|
18,227 |
|
|
|
887,922 |
|
|
|
887,694 |
|
Average interest rate |
|
|
5.50 |
% |
|
|
7.02 |
% |
|
|
7.07 |
% |
|
|
7.39 |
% |
|
|
7.03 |
% |
|
|
7.31 |
% |
|
|
6.14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities, including FRB and
FHLB stock |
|
|
53,429 |
|
|
|
37,531 |
|
|
|
31,052 |
|
|
|
34,087 |
|
|
|
22,333 |
|
|
|
137,460 |
|
|
|
315,893 |
|
|
|
315,897 |
|
Average interest rate |
|
|
4.75 |
% |
|
|
5.25 |
% |
|
|
5.29 |
% |
|
|
4.69 |
% |
|
|
4.85 |
% |
|
|
4.82 |
% |
|
|
4.89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest-bearing assets |
|
|
2,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,679 |
|
|
|
2,679 |
|
Average interest rate |
|
|
.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earnings assets |
|
|
590,350 |
|
|
|
176,742 |
|
|
|
135,207 |
|
|
|
89,709 |
|
|
|
58,801 |
|
|
|
153,687 |
|
|
|
1,206,494 |
|
|
|
1,206,270 |
|
Average interest rate |
|
|
5.41 |
% |
|
|
6.64 |
% |
|
|
6.66 |
% |
|
|
6.36 |
% |
|
|
6.20 |
% |
|
|
5.11 |
% |
|
|
5.80 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate-sensitive liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
$ |
25,394 |
|
|
$ |
17,684 |
|
|
$ |
12,315 |
|
|
$ |
8,576 |
|
|
$ |
5,972 |
|
|
$ |
13,669 |
|
|
$ |
83,642 |
|
|
$ |
83,642 |
|
NOW accounts |
|
|
137,490 |
|
|
|
41,172 |
|
|
|
28,077 |
|
|
|
19,194 |
|
|
|
11,435 |
|
|
|
77,637 |
|
|
|
315,005 |
|
|
|
293,897 |
|
Average interest rate |
|
|
.51 |
% |
|
|
.72 |
% |
|
|
.77 |
% |
|
|
.80 |
% |
|
|
.89 |
% |
|
|
.90 |
% |
|
|
.69 |
% |
|
|
|
|
Savings and money market accounts |
|
|
39,768 |
|
|
|
23,920 |
|
|
|
16,047 |
|
|
|
10,704 |
|
|
|
7,174 |
|
|
|
15,959 |
|
|
|
113,572 |
|
|
|
111,483 |
|
Average interest rate |
|
|
.77 |
% |
|
|
.75 |
% |
|
|
.74 |
% |
|
|
.73 |
% |
|
|
.71 |
% |
|
|
.68 |
% |
|
|
.74 |
% |
|
|
|
|
Certificates of deposit |
|
|
162,020 |
|
|
|
78,934 |
|
|
|
67,313 |
|
|
|
9,317 |
|
|
|
8,821 |
|
|
|
2,545 |
|
|
|
328,950 |
|
|
|
334,487 |
|
Average interest rate |
|
|
3.33 |
% |
|
|
4.23 |
% |
|
|
3.58 |
% |
|
|
4.10 |
% |
|
|
3.65 |
% |
|
|
3.64 |
% |
|
|
3.63 |
% |
|
|
|
|
Total deposits |
|
|
364,672 |
|
|
|
161,710 |
|
|
|
123,752 |
|
|
|
47,791 |
|
|
|
33,402 |
|
|
|
109,843 |
|
|
|
841,169 |
|
|
|
823,509 |
|
Average interest rate |
|
|
1.75 |
% |
|
|
2.36 |
% |
|
|
2.22 |
% |
|
|
1.28 |
% |
|
|
1.42 |
% |
|
|
.82 |
% |
|
|
1.78 |
% |
|
|
|
|
Fixed interest rate borrowings |
|
|
117,864 |
|
|
|
55,528 |
|
|
|
40,463 |
|
|
|
30,520 |
|
|
|
15,050 |
|
|
|
20,263 |
|
|
|
279,688 |
|
|
|
290,951 |
|
Average interest rate |
|
|
2.77 |
% |
|
|
5.10 |
% |
|
|
4.76 |
% |
|
|
5.07 |
% |
|
|
3.76 |
% |
|
|
4.12 |
% |
|
|
3.92 |
% |
|
|
|
|
Variable interest rate borrowings |
|
|
72,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,532 |
|
|
|
72,532 |
|
Average interest rate |
|
|
2.62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.62 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funds |
|
|
555,100 |
|
|
|
217,238 |
|
|
|
164,215 |
|
|
|
78,311 |
|
|
|
48,452 |
|
|
|
130,073 |
|
|
|
1,193,389 |
|
|
|
1,186,992 |
|
Average interest rate |
|
|
2.08 |
% |
|
|
3.06 |
% |
|
|
2.84 |
% |
|
|
2.76 |
% |
|
|
2.15 |
% |
|
|
1.34 |
% |
|
|
2.30 |
% |
|
|
|
|
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required under this item is incorporated by reference to the information appearing
in Managements Discussion and Analysis of Financial Condition and Results of Operation included in
Item 7.
53
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Horizon Bancorp
Consolidated Financial Statements
Table of Contents
|
|
|
|
|
|
|
Page(s) |
|
|
Consolidated Financial Statements |
|
|
|
|
|
|
|
|
55 |
|
|
|
|
|
56 |
|
|
|
|
|
57 |
|
|
|
|
|
59 |
|
|
|
|
|
60-97 |
|
|
|
|
|
97 |
|
|
Other Information |
|
|
|
|
|
|
|
|
99 |
|
|
|
|
|
100-101 |
|
|
|
|
|
102 |
|
Horizon Bancorp
Consolidated Balance Sheets
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
December 31 |
|
2008 |
|
|
2007 |
|
|
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
36,000 |
|
|
$ |
19,714 |
|
Interest-bearing demand deposits |
|
|
1 |
|
|
|
1 |
|
Federal funds sold |
|
|
|
|
|
|
35,314 |
|
|
|
|
Cash and cash equivalents |
|
|
36,001 |
|
|
|
55,029 |
|
Interest-bearing deposits |
|
|
2,679 |
|
|
|
249 |
|
Investment securities, available for sale |
|
|
301,638 |
|
|
|
234,675 |
|
Investment securities, held to maturity |
|
|
1,630 |
|
|
|
|
|
Loans held for sale |
|
|
5,955 |
|
|
|
8,413 |
|
Loans, net of allowance for loan losses of $11,410 and $9,791 |
|
|
870,557 |
|
|
|
879,061 |
|
Premises and equipment |
|
|
28,280 |
|
|
|
24,607 |
|
Federal Reserve and Federal Home Loan Bank stock |
|
|
12,625 |
|
|
|
12,625 |
|
Goodwill |
|
|
5,787 |
|
|
|
5,787 |
|
Other intangible assets |
|
|
1,751 |
|
|
|
2,068 |
|
Interest receivable |
|
|
5,708 |
|
|
|
5,897 |
|
Cash value life insurance |
|
|
22,451 |
|
|
|
22,384 |
|
Deferred tax asset |
|
|
2,580 |
|
|
|
2,399 |
|
Other assets |
|
|
9,215 |
|
|
|
5,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,306,857 |
|
|
$ |
1,258,874 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
Non-interest bearing |
|
$ |
83,642 |
|
|
$ |
84,097 |
|
Interest bearing |
|
|
757,527 |
|
|
|
809,567 |
|
|
|
|
Total deposits |
|
|
841,169 |
|
|
|
893,664 |
|
Borrowings |
|
|
324,383 |
|
|
|
258,852 |
|
Subordinated debentures |
|
|
27,837 |
|
|
|
27,837 |
|
Interest payable |
|
|
1,910 |
|
|
|
2,700 |
|
Other liabilities |
|
|
8,208 |
|
|
|
5,176 |
|
|
|
|
Total liabilities |
|
|
1,203,507 |
|
|
|
1,188,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity |
|
|
|
|
|
|
|
|
Preferred stock, no par value |
|
|
|
|
|
|
|
|
Authorized, 1,000,000 shares |
|
|
|
|
|
|
|
|
Issued 25,000 and 0- shares |
|
|
24,154 |
|
|
|
|
|
Common stock, $.2222 stated value |
|
|
|
|
|
|
|
|
Authorized, 22,500,000 shares |
|
|
|
|
|
|
|
|
Issued, 5,013,906 and 5,011,656 shares |
|
|
1,114 |
|
|
|
1,114 |
|
Additional paid-in capital |
|
|
26,802 |
|
|
|
25,638 |
|
Retained earnings |
|
|
67,804 |
|
|
|
60,982 |
|
Accumulated other comprehensive income |
|
|
628 |
|
|
|
63 |
|
Less treasury stock, at cost, 1,759,424 shares |
|
|
(17,152 |
) |
|
|
(17,152 |
) |
|
|
|
Total stockholders equity |
|
|
103,350 |
|
|
|
70,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,306,857 |
|
|
$ |
1,258,874 |
|
|
|
|
See notes to consolidated financial statements
55
Horizon Bancorp
Consolidated
Statements of Income
(Dollar Amounts in Thousands, Except Per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
|
Interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable |
|
$ |
57,801 |
|
|
$ |
63,618 |
|
|
$ |
57,282 |
|
Investment securities |
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
|
9,111 |
|
|
|
8,389 |
|
|
|
8,602 |
|
Tax exempt |
|
|
3,323 |
|
|
|
3,061 |
|
|
|
2,796 |
|
|
|
|
Total interest income |
|
|
70,235 |
|
|
|
75,068 |
|
|
|
68,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
19,536 |
|
|
|
28,442 |
|
|
|
25,734 |
|
Borrowings |
|
|
11,772 |
|
|
|
11,505 |
|
|
|
9,135 |
|
Subordinated debentures |
|
|
1,577 |
|
|
|
2,313 |
|
|
|
2,266 |
|
|
|
|
Total interest expense |
|
|
32,885 |
|
|
|
42,260 |
|
|
|
37,135 |
|
|
|
|
Net Interest Income |
|
|
37,350 |
|
|
|
32,808 |
|
|
|
31,545 |
|
Provision for loan losses |
|
|
7,568 |
|
|
|
3,068 |
|
|
|
905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Income After Provision for Loan Losses |
|
|
29,782 |
|
|
|
29,740 |
|
|
|
30,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income |
|
|
|
|
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
|
3,885 |
|
|
|
3,469 |
|
|
|
3,102 |
|
Wire-transfer fee income |
|
|
528 |
|
|
|
357 |
|
|
|
396 |
|
Fiduciary activities |
|
|
3,713 |
|
|
|
3,556 |
|
|
|
3,100 |
|
Gain on sale of loans |
|
|
2,979 |
|
|
|
2,566 |
|
|
|
1,681 |
|
Gain on sale of mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
656 |
|
Increase in cash surrender value of life insurance |
|
|
920 |
|
|
|
920 |
|
|
|
470 |
|
Death benefit officer life insurance |
|
|
538 |
|
|
|
|
|
|
|
|
|
Gain (loss) on sale of securities available for sale |
|
|
(15 |
) |
|
|
2 |
|
|
|
(764 |
) |
Other income |
|
|
1,283 |
|
|
|
1,401 |
|
|
|
1,496 |
|
|
|
|
Total other income |
|
|
13,831 |
|
|
|
12,271 |
|
|
|
10,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
|
16,749 |
|
|
|
17,154 |
|
|
|
16,433 |
|
Net occupancy expenses |
|
|
2,600 |
|
|
|
2,418 |
|
|
|
2,338 |
|
Data processing and equipment expenses |
|
|
2,611 |
|
|
|
2,516 |
|
|
|
2,560 |
|
Professional fees |
|
|
1,133 |
|
|
|
1,169 |
|
|
|
1,386 |
|
Outside services and consultants |
|
|
1,147 |
|
|
|
1,022 |
|
|
|
1,100 |
|
Loan and collection expenses |
|
|
2,223 |
|
|
|
1,402 |
|
|
|
1,238 |
|
Other expenses |
|
|
6,316 |
|
|
|
5,463 |
|
|
|
5,400 |
|
|
|
|
Total other expenses |
|
|
32,779 |
|
|
|
31,144 |
|
|
|
30,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Tax |
|
|
10,834 |
|
|
|
10,867 |
|
|
|
10,322 |
|
Income tax expense |
|
|
1,862 |
|
|
|
2,727 |
|
|
|
2,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
8,972 |
|
|
$ |
8,140 |
|
|
$ |
7,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share |
|
$ |
2.78 |
|
|
$ |
2.54 |
|
|
$ |
2.36 |
|
Diluted Earnings Per Share |
|
$ |
2.75 |
|
|
$ |
2.51 |
|
|
$ |
2.33 |
|
See notes to consolidated financial statements.
56
Horizon Bancorp
Consolidated
Statements of Stockholders Equity
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock, |
|
|
Other |
|
|
|
|
|
|
|
|
|
Preferred |
|
|
Common |
|
|
Additional |
|
|
Comprehensive |
|
|
Retained |
|
|
Unearned |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
|
|
Stock |
|
|
Stock |
|
|
Paid-in Capital |
|
|
Income |
|
|
Earnings |
|
|
Compensation |
|
|
Income (Loss) |
|
|
Stock |
|
|
Total |
|
|
Balances, January 1, 2006 |
|
|
|
|
|
$ |
1,092 |
|
|
$ |
24,552 |
|
|
|
|
|
|
$ |
48,523 |
|
|
$ |
(760 |
) |
|
$ |
(2,853 |
) |
|
$ |
17,024 |
) |
|
$ |
53,530 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
7,484 |
|
|
|
7,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,484 |
|
Other comprehensive loss, net
of tax, unrealized holding
gains on securities, net of
reclassification adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,346 |
|
|
|
|
|
|
|
|
|
|
|
1,346 |
|
|
|
|
|
|
|
1,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($.56 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,811 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,811 |
) |
Reclassification of
restricted
stock,
unearned
compensation
to
paid- in capital upon
adoption of SFAS 123 (R) |
|
|
|
|
|
|
|
|
|
|
(760 |
) |
|
|
|
|
|
|
|
|
|
|
760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
|
|
|
|
19 |
|
|
|
716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
735 |
|
Tax benefit related to stock
options |
|
|
|
|
|
|
|
|
|
|
469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
469 |
|
Stock option expense |
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40 |
|
Purchase treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128 |
) |
|
|
(128 |
) |
Amortization of unearned
compensation |
|
|
|
|
|
|
|
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2006 |
|
|
|
|
|
|
1,111 |
|
|
|
25,229 |
|
|
|
|
|
|
|
54,196 |
|
|
|
|
|
|
|
(1,507 |
) |
|
|
(17,152 |
) |
|
|
61,877 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,140 |
|
|
|
8,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,140 |
|
Other comprehensive income,
net of tax, unrealized holding
gains on securities, net of
reclassification adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,570 |
|
|
|
|
|
|
|
|
|
|
|
1,570 |
|
|
|
|
|
|
|
1,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,710 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment to accrued income
taxes upon adoption of
financial interpretation 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
563 |
|
Cash dividends ($.59 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,917 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,917 |
) |
Issuance of restricted stock |
|
|
|
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
|
|
|
|
3 |
|
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135 |
|
Tax benefit related to stock
options |
|
|
|
|
|
|
|
|
|
|
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68 |
|
Stock option expense |
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
Reversal of compensation
expense for forfeiture of
non-vested shares |
|
|
|
|
|
|
(2 |
) |
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84 |
) |
Amortization of unearned
compensation |
|
|
|
|
|
|
|
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
57
Horizon Bancorp
Consolidated Statements of Stockholders Equity (continued)
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock, |
|
|
Other |
|
|
|
|
|
|
|
|
|
Preferred |
|
|
Common |
|
|
Additional |
|
|
Comprehensive |
|
|
Retained |
|
|
Unearned |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
|
|
Stock |
|
|
Stock |
|
|
Paid-in Capital |
|
|
Income |
|
|
Earnings |
|
|
Compensation |
|
|
Income (Loss) |
|
|
Stock |
|
|
Total |
|
|
Balances, December 31, 2007 |
|
|
|
|
|
$ |
1,114 |
|
|
$ |
25,638 |
|
|
|
|
|
|
$ |
60,982 |
|
|
$ |
|
|
|
$ |
63 |
|
|
$ |
(17,152 |
) |
|
$ |
70,645 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,972 |
|
|
|
8,972 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,972 |
|
Issuance of preferred stock |
|
$ |
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
Discount on preferred stock |
|
|
(849 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(849 |
) |
Warrants granted |
|
|
|
|
|
|
|
|
|
|
849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
849 |
|
Amortization of discount on
preferred stock |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income,
net of tax, Unrealized holding
gains on securities, net of
reclassification adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,118 |
|
|
|
|
|
|
|
|
|
|
|
1,118 |
|
|
|
|
|
|
|
1,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivative
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(553 |
) |
|
|
|
|
|
|
|
|
|
|
(553 |
) |
|
|
|
|
|
|
(553 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($.66 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35 |
|
Tax benefit related to stock
options |
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
Stock option expense |
|
|
|
|
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 |
|
Amortization of unearned
compensation |
|
|
|
|
|
|
|
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2008 |
|
$ |
24,154 |
|
|
$ |
1,114 |
|
|
$ |
26,802 |
|
|
|
|
|
|
$ |
67,804 |
|
|
$ |
|
|
|
$ |
628 |
|
|
$ |
(17,152 |
) |
|
$ |
103,350 |
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
58
Horizon Bancorp
Consolidated Statements of Cash Flows
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,972 |
|
|
$ |
8,140 |
|
|
$ |
7,484 |
|
Items not requiring (providing) cash
|
Provision for loan losses |
|
|
7,568 |
|
|
|
3,068 |
|
|
|
905 |
|
Depreciation and amortization |
|
|
2,321 |
|
|
|
2,278 |
|
|
|
2,471 |
|
Share based compensation |
|
|
39 |
|
|
|
53 |
|
|
|
40 |
|
Premium amortization on securities available for sale |
|
|
(266 |
) |
|
|
121 |
|
|
|
240 |
|
Deferred income tax |
|
|
(485 |
) |
|
|
(225 |
) |
|
|
(78 |
) |
(Gain) loss on sales of securities available for sale |
|
|
15 |
|
|
|
(2 |
) |
|
|
764 |
|
Gain on sale of mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
(656 |
) |
Gain on sale of loans |
|
|
(2,747 |
) |
|
|
(2,566 |
) |
|
|
(1,681 |
) |
Proceeds from sales of loans |
|
|
145,473 |
|
|
|
135,436 |
|
|
|
95,471 |
|
Loans originated for sale |
|
|
(140,462 |
) |
|
|
(128,180 |
) |
|
|
(104,453 |
) |
(Gain) loss on sale of other real estate owned |
|
|
(22 |
) |
|
|
(10 |
) |
|
|
4 |
|
Tax benefit of options exercised |
|
|
(8 |
) |
|
|
(68 |
) |
|
|
(469 |
) |
Increase in cash surrender value of life insurance |
|
|
(574 |
) |
|
|
(920 |
) |
|
|
(470 |
) |
Net change in
Interest receivable |
|
|
189 |
|
|
|
197 |
|
|
|
(281 |
) |
Interest payable |
|
|
(790 |
) |
|
|
668 |
|
|
|
108 |
|
Other assets |
|
|
(781 |
) |
|
|
110 |
|
|
|
556 |
|
Other liabilities |
|
|
442 |
|
|
|
648 |
|
|
|
(879 |
) |
|
|
|
Net cash provided by (used in) operating activities |
|
|
18,884 |
|
|
|
18,748 |
|
|
|
(924 |
) |
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in interest-bearing deposits |
|
|
(2,430 |
) |
|
|
649 |
|
|
|
14,837 |
|
Purchases of securities available for sale |
|
|
(115,895 |
) |
|
|
(51,822 |
) |
|
|
(91,791 |
) |
Proceeds from maturities, calls and principal repayments of securities available for sale |
|
|
50,858 |
|
|
|
34,546 |
|
|
|
33,695 |
|
Proceeds from sales of available for sale securities |
|
|
45 |
|
|
|
27,973 |
|
|
|
91,265 |
|
Purchase of securities held to maturity |
|
|
(1,800 |
) |
|
|
|
|
|
|
|
|
Proceeds from maturities of securities held to maturity |
|
|
170 |
|
|
|
|
|
|
|
|
|
Purchase of FRB and FHLB stock, net of redemption |
|
|
|
|
|
|
(539 |
) |
|
|
(81 |
) |
Proceeds from sale of mortgage servicing rights |
|
|
|
|
|
|
|
|
|
|
1,273 |
|
Proceeds from sale of Federal Home loan Bank Stock |
|
|
|
|
|
|
50 |
|
|
|
928 |
|
Net change in loans |
|
|
(39,054 |
) |
|
|
(48,161 |
) |
|
|
(112,247 |
) |
Proceeds from sale of other real estate owned |
|
|
434 |
|
|
|
388 |
|
|
|
44 |
|
Recoveries on loans previously charged-off |
|
|
1,037 |
|
|
|
722 |
|
|
|
608 |
|
Purchases of premises and equipment |
|
|
(5,442 |
) |
|
|
(3,001 |
) |
|
|
(3,877 |
) |
Purchase of trust preferred securities |
|
|
|
|
|
|
|
|
|
|
(372 |
) |
Purchase of bank owned life insurance |
|
|
|
|
|
|
(8,000 |
) |
|
|
|
|
Proceeds from sale of loans transferred to held for sale |
|
|
37,695 |
|
|
|
|
|
|
|
|
|
Death benefit officer life insurance |
|
|
538 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(73,844 |
) |
|
|
(47,195 |
) |
|
|
(65,718 |
) |
|
|
|
59
Horizon Bancorp
Consolidated Statements of Cash Flows (continued)
(Dollar Amounts in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
(Continued) |
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net change in |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
$ |
(52,495 |
) |
|
$ |
(20,309 |
) |
|
$ |
58,407 |
|
Repurchase agreements and note payable |
|
|
65,531 |
|
|
|
59,059 |
|
|
|
16,160 |
|
Proceeds from issuance of trust preferred securities |
|
|
|
|
|
|
|
|
|
|
12,372 |
|
Redemption of trust preferred securities |
|
|
|
|
|
|
(12,372 |
) |
|
|
|
|
Dividends paid |
|
|
(2,147 |
) |
|
|
(1,917 |
) |
|
|
(1,811 |
) |
Proceeds from issuance of preferred stock |
|
|
25,000 |
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
35 |
|
|
|
135 |
|
|
|
735 |
|
Tax benefit of options exercised |
|
|
8 |
|
|
|
68 |
|
|
|
469 |
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
(128 |
) |
|
|
|
Net cash provided by financing activities |
|
|
35,932 |
|
|
|
24,664 |
|
|
|
86,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
(19,028 |
) |
|
|
(3,783 |
) |
|
|
19,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, Beginning of Year |
|
|
55,029 |
|
|
|
58,812 |
|
|
|
39,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Year |
|
$ |
36,001 |
|
|
$ |
55,029 |
|
|
$ |
58,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Cash Flows Information |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
33,675 |
|
|
$ |
41,592 |
|
|
$ |
36,960 |
|
Income tax paid |
|
|
2,935 |
|
|
|
2,630 |
|
|
|
1,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Cash Flows Information |
|
|
|
|
|
|
|
|
|
|
|
|
Transfer of loans to other real estate owned |
|
$ |
3,157 |
|
|
$ |
679 |
|
|
$ |
100 |
|
Mortgage servicing rights capitalized |
|
|
634 |
|
|
|
79 |
|
|
|
83 |
|
See notes to consolidated financial statements.
60
Horizon Bancorp
Notes to Consolidated
Financial Statements
(Table Dollar Amounts in Thousands)
Note 1: Nature of Operations and Summary of Significant Accounting Policies
Nature of Business The consolidated financial statements of Horizon Bancorp (Horizon) and its
wholly owned subsidiary, Horizon Bank, N.A. (Bank) conform to accounting principles generally
accepted in the United States of America and reporting practices followed by the banking industry.
The Bank is a full-service commercial bank offering a broad range of commercial and retail banking
and other services incident to banking. The Bank has three active wholly owned subsidiaries:
Horizon Trust & Investment Management, Inc. (HTIM), Horizon Investments, Inc. (Investment Company)
and Horizon Grantor Trust. HTIM offers corporate and individual trust and agency services and
investment management services. Horizon Investments, Inc. manages the investment portfolio of the
Bank. Horizon Grantor Trust holds title to certain company owned life insurance policies. The
Bank maintains 17 full service facilities. The Bank also wholly owns Horizon Insurance Services,
Inc. (Insurance Agency) which is inactive, but previously offered a full line of personal insurance
products. The net income generated from the insurance operations was not significant to the
overall operations of Horizon and the majority of the insurance agency assets were sold during
2005. Horizon conducts no business except that incident to its ownership of the subsidiaries.
Horizon formed Horizon Statutory Trust II in 2004 and Horizon Bancorp Capital Trust III in 2006 for
the purpose of participating in Pooled Trust Preferred Stock offerings. The Company assumed
additional debentures as the result of the acquisition of Alliance in 2005 which formed Alliance
Financial Statutory Trust I (Alliance Trust). See Note 9 for further discussion regarding these
previously consolidated entities that are now reported separately.
Basis of Reporting The consolidated financial statements include the accounts of Horizon and
subsidiaries. All material inter-company accounts and transactions have been eliminated in
consolidation.
Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those
estimates.
Fair Value Measurements Horizon uses fair value measurements to record fair value adjustments,
to certain assets, and liabilities and to determine fair value disclosures. Effective January 1,
2008, Horizon adopted SFAS 157 for all applicable financial and nonfinancial assets and
liabilities. This accounting guidance defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. SFAS 157 applies only when other
guidance requires or permits assets or liabilities to be measured at fair value; it does not expand
the use of fair value in any new circumstances.
61
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
As defined in SFAS 157, fair value is the price to sell an asset or transfer a liability in an
orderly transaction between market participants. It represents an exit price at the measurement
date. Market participants are buyers and sellers, who are independent, knowledgeable, and willing
and able to transact in the principal (or most advantageous) market for the asset or liability
being measured. Current market conditions, including imbalances between supply and demand, are
considered in determining fair value. Horizon values its assets and liabilities in the principal
market where it sells the particular asset or transfers the liability with the greatest volume and
level of activity. In the absence of a principal market, the valuation is based on the most
advantageous market for the asset or liability (i.e., the market where the asset could be sold or
the liability transferred at a price that maximizes the amount to be received for the asset or
minimizes the amount to be paid to transfer the liability).
In measuring the fair value of an asset, Horizon assumes the highest and best use of the asset
by a market participant to maximize the value of the asset, and does not consider the intended use
of the asset.
When measuring the fair value of a liability, Horizon assumes that the nonperformance risk
associated with the liability is the same before and after the transfer. Nonperformance risk is
the risk that an obligation will not be satisfied and encompasses not only Horizons own credit
risk (i.e., the risk that Horizon will fail to meet its obligation), but also other risks such as
settlement risk. Horizon considers the effect of its own credit risk on the fair value for any
period in which fair value is measured.
There are three acceptable valuation techniques that can be used to measure fair value: the
market approach, the income approach and the cost approach. Selection of the appropriate technique
for valuing a particular asset or liability takes into consideration the exit market, the nature of
the asset or liability being valued, and how a market participant would value the same asset or
liability. Ultimately, determination of the appropriate valuation method requires significant
judgment, and sufficient knowledge and expertise are required to apply the valuation techniques.
Valuation inputs refer to the assumptions market participants would use in pricing a given
asset or liability using one of the three valuation techniques. Inputs can be observable or
unobservable. Observable inputs are those assumptions which market participants would use in
pricing the particular asset or liability. These inputs are based on market data and are obtained
from a source independent of Horizon. Unobservable inputs are assumptions based on Horizons own
information or estimate of assumptions used by market participants in pricing the asset or
liability. Unobservable inputs are based on the best and most current information available on the
measurement date. All inputs, whether observable or unobservable, are ranked in accordance with a
prescribed fair value hierarchy which gives the highest ranking to quoted prices (unadjusted) in
active markets for identical assets or liabilities (Level 1) and the lowest ranking to unobservable
inputs (Level 3). Fair values for assets or liabilities classified as Level 2 are based on one or
a combination of the following factors: (i) quoted prices for similar assets; (ii) observable
inputs for the asset or liability, such as interest rates or yield curves; or (iii) inputs derived
principally from or corroborated by observable market data. The level in the fair value hierarchy
within which the fair value measurement in its entirety falls is determined based on the lowest
level input that is significant to the fair value measurement in its entirety. The Corporation
considers an input to be significant if it drives 10% or more of the total fair value of a
particular asset or liability.
62
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Assets and liabilities are considered to be fair valued on a recurring basis if fair value is
measured regularly (i.e., daily, weekly, monthly or quarterly). Recurring valuation occurs at a
minimum on the measurement date. Assets and liabilities are considered to be fair valued on a
nonrecurring basis if the fair value measurement of the instrument does not necessarily result in a
change in the amount recorded on the balance sheet. Generally, nonrecurring valuation is the
result of the application of other accounting pronouncements which require assets or liabilities to
be assessed for impairment or recorded at the lower of cost or fair value. The fair value of
assets or liabilities transferred in or out of Level 3 is measured on the transfer date, with any
additional changes in fair value subsequent to the transfer considered to be realized or unrealized
gains or losses.
Investment Securities Available for Sale Horizon designates the majority of its investment
portfolio as available for sale based on managements plans to use such securities for asset and
liability management, liquidity and not to hold such securities as long-term investments.
Management repositions the portfolio to take advantage of future expected interest rate trends when
Horizons long-term profitability can be enhanced. Investment securities available for sale and
marketable equity securities are carried at estimated fair value and any net unrealized
gains/losses (after tax) on these securities are included in accumulated other comprehensive
income. Gains/losses on the disposition of securities available for sale are recognized at the
time of the transaction and are determined by the specific identification method.
Investment Securities Held to Maturity Includes any security for which Horizon has the positive
intent and ability to hold until maturity. These securities are carried at cost.
Loans Held for Sale Loans held for sale are reported at the lower of cost or market value in the
aggregate.
Interest and Fees on Loans Interest on commercial, mortgage and installment loans is recognized
over the term of the loans based on the principal amount outstanding. When principal or interest is
past due 90 days or more, and the loan is not well secured or in the process of collection, or when
serious doubt exists as to the collectibility of a loan, the accrual of interest is discontinued.
Loan origination fees, net of direct loan origination costs, are deferred and recognized over the
life of the loan as a yield adjustment.
Concentrations of Credit Risk The Bank grants commercial, real estate and consumer loans to
customers located primarily in Northwest Indiana and southwest Michigan and provides mortgage
warehouse lines to mortgage companies in the United States. Commercial loans make up approximately
35% of the loan portfolio and are secured by both real estate and business assets. These loans are
expected to be repaid from cash flows from operations of the businesses. The Bank does not have a
concentration in speculative commercial real estate loans. Residential real estate loans make up
approximately 19% of the loan portfolio and are secured by residential real estate. Installment
loans make up approximately 32% of the loan portfolio and are primarily secured by consumer assets.
Mortgage warehouse loans make up approximately 14% of the loan portfolio and are secured by
residential real estate.
Mortgage Warehouse Loans Horizons mortgage warehousing business line has specific mortgage
companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage
companies are funded as a secured borrowing with pledge of collateral under Horizons agreement
with the mortgage company. Each individual mortgage is assigned to Horizon until the loan is sold
to the secondary market by the mortgage company. In addition, Horizon takes possession of each
original note and forwards such note to the end investor once the mortgage company has sold the
loan. At the time a loan is transferred to the secondary market, the mortgage company repurchases
the loan under its option within the agreement.
63
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Due to the repurchase feature contained in the agreement, the transaction does not qualify as a
sale under SFAS 140 paragraph 9 (c) and therefore is accounted for as a secured borrowing with
pledge of collateral under paragraph 12 of SFAS 140 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 payoff 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 is typically less than 30 days.
Based on the agreements with each mortgage company, at any time a mortgage company can repurchase
from Horizon their outstanding loan balance on an individual mortgage and regain possession of the
original note. Horizon also has the option to request that the mortgage company repurchase an
individual mortgage. Should this occur, Horizon would return the original note and reassign the
assignment of the mortgage to the mortgage company. Also, in the event that the end investor would
not be able to honor the sales commitment and the mortgage company would not be able to repurchase
its loan on an individual mortgage, Horizon would be able to exercise its rights under the
agreement.
Allowance for Loan Losses An allowance for loan losses is maintained to absorb probable incurred
losses inherent in the loan portfolio. The allowance is based on ongoing quarterly assessments of
the probable incurred losses inherent in the loan portfolio. The allowance is increased by the
provision for credit losses, which is charged against current period operating results and
decreased by the amount of charge offs, net of recoveries. Horizons methodology for assessing the
appropriateness of the allowance consists of several key elements, which include the general
allowance, specific allowances for identified problem loans and the qualitative allowance.
The general allowance is calculated by applying loss factors to pools of outstanding loans. Loss
factors are based on a historical loss experience and may be adjusted for significant factors that,
in managements judgment, affect the collectibility of the portfolio as of the evaluation date.
Specific allowances are established in cases where management has identified conditions or
circumstances related to a credit that management believes indicate the probability that a loss
will be incurred in excess of the amount determined by the application of the formula allowance.
The qualitative allowance is based upon managements evaluation of various conditions, the effects
of which are not directly measured in the determination of the general and specific allowances.
The evaluation of the inherent loss with respect to these conditions is subject to a higher degree
of uncertainty because they are not identified with specific credits. The conditions evaluated in
connection with the qualitative allowance may include factors such as local, regional and national
economic conditions and forecasts, concentrations of credit and changes in the composition of the
portfolio.
64
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Loan Impairment When analysis determines a borrowers operating results and financial condition
are not adequate to meet 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
placed on non-accrual status when 90 days or more past due. These loans are also often considered
impaired. Impaired loans, or portions thereof, are charged-off when deemed uncollectible. This
typically occurs when the loan is 120 or more days past due.
Loans are considered impaired if full principal or interest payments are not made in accordance
with the original terms of the loan. Impaired loans are measured and carried at the lower of cost
or the present value of expected future cash flows discounted at the loans effective interest
rate, at the loans observable market price or at the fair value of the collateral if the loan is
collateral dependent.
Smaller balance homogenous loans are evaluated for impairment in the aggregate. Such loans include
residential first mortgage loans secured by one to four family residences, residential construction
loans and automobile, home equity and second mortgages. Commercial loans and mortgage loans
secured by other properties are evaluated individually for impairment.
Premises and Equipment Buildings and major improvements are capitalized and depreciated using
primarily the straight-line method with useful lives ranging from 3 to 40 years. Furniture and
equipment are capitalized and depreciated using primarily the straight-line method with useful
lives ranging from 2 to 20 years. Maintenance and repairs are expensed as incurred while major
additions and improvements are capitalized. Gains and losses on disposition are included in current
operations.
Federal Reserve and Federal Home Loan Bank of Indianapolis (FHLBI) Stock The stock is a required
investment for institutions that are members of the Federal Reserve Bank (FRB) and Federal Home
Loan Bank (FHLBI) systems. The required investment in the common stock is based on a predetermined
formula.
Mortgage Servicing Rights Mortgage servicing rights on originated loans that have been sold are
capitalized by allocating the total cost of the mortgage loans between the mortgage servicing
rights and the loans based on their relative fair values. Capitalized servicing rights are
amortized in proportion to and over the period of estimated servicing revenue. Impairment of
mortgage-servicing rights is assessed based on the fair value of those rights. Fair values are
estimated using discounted cash flows based on a current market interest rate. For purposes of
measuring impairment, the rights are stratified based on the predominant risk characteristics of
the underlying loans. The predominant characteristic currently used for stratification is type of
loan. The amount of impairment recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value. Amortization expense and charges related
to an impairment write-down are included in other income.
Goodwill Goodwill is tested annually for impairment. Statement of Financial Accounting Standard
(SFAS) No. 142, Accounting for Goodwill and Other Intangible Assets, establishes standards for the
amortization of acquired intangible assets and impairment assessment of goodwill. At December 31,
2008, Horizon had core deposit intangibles of $1.751 million subject to amortization and $5.787
million of goodwill, which is not subject to amortization. Goodwill arising from business
combinations represents the value attributable to unidentifiable intangible assets in the business
acquired. Horizons goodwill relates to the value inherent in the banking industry and that value
is dependent upon the ability of Horizon to provide quality, cost effective banking services in a
competitive marketplace. The goodwill value is supported by revenue that is in part driven by the
volume of business transacted. If the implied fair value of goodwill is lower than its carrying
amount, goodwill impairment is indicated and goodwill is written down to its implied fair value.
Goodwill totaled $5.787 million at December 31, 2008 and 2007. A large majority of the goodwill
relates to the acquisition of Alliance Financial Corporation.
65
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Income Taxes Horizon files annual consolidated income tax returns with its subsidiaries. Income
tax in the consolidated statements of income includes deferred income tax provisions or benefits
for all significant temporary differences in recognizing income and expenses for financial
reporting and income tax purposes.
The Company adopted the provisions of the Financial Accounting Standards Board (FASB)
Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes - an interpretation of
FASB Statement No. 109, on January 1, 2007. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition.
As a result of the implementation of FIN 48, no material liabilities for uncertain tax positions
have been recorded. However, during 2007, the Company reduced its liabilities for certain tax
position by $563,000. This reduction was recorded as a cumulative effect adjustment to equity.
Trust Assets and Income Property, other than cash deposits, held in a fiduciary or agency
capacity is not included in the consolidated balance sheets since such property is not owned by
Horizon.
Earnings per Common Share Basic EPS is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were exercised or converted
into common stock. In August 2002, substantially all of the participants in Horizons Stock Option
and Stock Appreciation Rights Plans voluntarily entered into an agreement with Horizon to cap the
value of their stock appreciation rights (SARS) at $14.67 per share and cease any future vesting of
the SARS. These agreements with option holders make it more advantageous to exercise an option
rather than a SAR whenever Horizons stock price exceeds $14.67 per share, therefore, the option
becomes potentially dilutive at $14.67 per share or higher. The number of shares used in the
computation of basic earnings per share is 3,208,658 for 2008, 3,200,440 for 2007 and 3,177,272 for
2006. The number of shares used in the computation of diluted earnings per share is 3,246,351 for
2008, 3,243,565 for 2007 and 3,217,050 for 2006. There were 29,800, 18,000 and 5,000 shares for
2008, 2007 and 2006, respectively, that were excluded from diluted earnings per share, as they were
anti-dilutive.
Dividend Restrictions Regulations of the Comptroller of the Currency limit the amount of
dividends that may be paid by a national bank to its parent holding company without prior approval
of the Comptroller of the Currency. At December 31, 2008, $13.4 million was available for payment
of dividends from the Bank to Horizon. Additionally, the Federal Reserve Board limits the amount
of dividends that may be paid by Horizon to its stockholders under its capital adequacy guidelines.
Under the Capital Purchase Program pursuant to which Horizon issued the Preferred Stock, Horizon
cannot increase the amount of the idvidend it pays on its common shares while the Preferred Stock
is outstanding without the prior consent of the Treasury. The preferred Stock qualifies as Tier I
capital and will pay cumulative dividends at a rate of 5% per annum for the first five years and 9%
per annum thereafter. This further limits the amount of net income available to the common
shareholders.
Consolidated Statements of Cash Flows For purposes of reporting cash flows, cash and cash
equivalents are defined to include cash and due from banks, money market investments and federal
funds sold with maturities of one day or less. Horizon reports net cash flows for customer loan
transactions, deposit transactions, short-term investments and short-term borrowings.
66
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Share-Based Compensation At December 31, 2008, Horizon has stock option plans, which are
described more fully in Note 17. Effective January 1, 2006, Horizon adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment (SFAS 123(R)). SFAS 123(R) addresses all
forms of share-based payment awards, including shares under employee stock purchase plans, stock
options, restricted stock and stock appreciation rights. SFAS 123(R) requires all share-based
payments to be recognized as expense, based upon their fair values, in the financial statements
over the vesting period of the awards. Horizon has recorded approximately $39 thousand and $53
thousand for 2008 and 2007, respectively, in compensation expense relating to vesting of stock
options less estimated forfeitures for the 12 month period ended December 31, 2008 and 2007. Prior
to adoption of SFAS 123(R), unearned compensation related to restricted stock awards was classified
as a separate component of stockholders equity. Upon the adoption of SFAS 123(R) on January 1,
2006, the balance in unearned compensation was reclassified to additional paid-in capital.
Current Economic Conditions The current economic environment presents financial institutions
with unprecedented circumstances and challenges which in some cases have resulted in large declines
in the fair values of investments and other assets, constraints on liquidity and significant credit
quality problems, including severe volatility in the valuation of real estate and other collateral
supporting loans. The financial statements have been prepared using values and information
currently available to Horizon.
Given the volatility of current economic conditions, the values of assets and liabilities recorded
in the financial statements could change rapidly, resulting in material future adjustments in asset
values, the allowance for loan losses, capital that could negatively impact Horizons ability to
meet regulatory capital requirements and maintain sufficient liquidity.
Reclassifications Certain reclassifications have been made to the 2007 and 2006 consolidated
financial statements to be comparable to 2008. These reclassifications had no effect on net
income.
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157).
Effective January 1, 2008, Horizon adopted SFAS 157 for existing fair value measurement
requirements related to financial and non-financial assets and liabilities. SFAS 157 establishes a
hierarchy to be used in performing measurements of fair value. Additionally, SFAS 157 emphasizes
that fair value should be determined from the perspective of a market participant while also
indicating that valuation methodologies should first reference available market data before using
internally developed assumptions. SFAS 157 also provides expanded disclosure requirements
regarding the effects of fair value measurements on the financial statements. The adoption of SFAS
157 did not have a material impact on the consolidated financial condition, results of operations,
or liquidity.
On October 10, 2008, the Financial Accounting Standards Board (FASB) issued FSP FAS 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP
FAS 157-3). FSP FAS 157-3 clarifies the application of SFAS 157 in a market that is not active
and provides an example to illustrate key consideration in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP FAS 157-3 is effective
upon issuance, including prior periods for which financial statements have not been issued. The
Corporation adopted FSP FAS 157-3 for the period ended September 30, 2008 and the adoption did not
have any significant impact on consolidated statements of financial position, consolidated
statement of operations, or disclosures.
67
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (SFAS 159). In February 2007, the FASB issued SFAS 159 which permits
companies to elect to measure certain eligible items at fair value. Subsequent unrealized gains
and losses on those items will be reported in earnings. Upfront costs and fees related to those
items will be reported in earnings as incurred and not deferred. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. The Corporation does not anticipate that this statement
will have a meterial impact on the consolidated financial condition or results of operations.
Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations (SFAS
141(R)). During December 2007, the FASB issued SFAS 141(R). This Statement replaces SFAS 141,
Business Combinations (Statement 141). SFAS 141(R) retains the fundamental requirements in
Statement 141 that the acquisition method of accounting (called the purchase method) be used for
all business combinations and for an acquirer to be identified for each business combination. This
Statement defines the acquirer as the entity that obtains control of one or more businesses,
including those sometimes referred to as true mergers or mergers of equals and combinations
achieved without the transfer of consideration, for example, by contract alone or through the lapse
of minority veto rights. This is broader than in Statement 141 which applied only to business
combinations in which control was obtained by transferring consideration. This Statement requires
an acquirer to recognize the assets acquired, liabilities assumed and any non-controlling interest
in the acquiree at the acquisition date, measured at their fair values as of that date. SFAS 141(R)
recognizes and measures the goodwill acquired in the business combination and defines a bargain
purchase as a business combination in which the total acquisition-date fair value of the
identifiable net assets acquired exceeds the fair value of the consideration transferred plus any
non-controlling interest in the acquiree, and it requires the acquirer to recognize that excess as
a gain attributable to the acquirer. In contrast, Statement 141 required the negative goodwill
amount to be allocated as a pro rata reduction of the amounts assigned to assets acquired. SFAS
141(R) applies prospectively to business combinations for which the acquisition date is on or after
December 15, 2008. An entity may not apply it before that date. The Corporation does not
anticipate that this statement will have a meterial impact on the consolidated financial condition
or results of operations.
Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans (SFAS 158). In September 2006, the FASB issued SFAS 158.
Except for the measurement requirement, Horizon adopted this accounting guidance as of December
31, 2006. The requirement to measure plan assets and benefit obligations as of the end of an
employers fiscal year is effective for years ending after December 15, 2008 (December 31, 2008 for
Horizon). Adoption of this guidance did not have a material effect on the Corporations financial
condition or results of operations.
68
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Statement of Financial Accounting Standards No. 160, Non-Controlling Interests in Consolidated
Financial Statements an amendment of ARB No. 51 (SFAS 160). During December 2007, the FASB
issued SFAS 160 to establish accounting and reporting standards for the non-controlling interest in
a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a non-controlling
interest in a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statement, but separate from the parents equity.
Before the Statement was issued these so-called minority interests were reported in the
consolidated statement of financial position as liabilities or in the mezzanine section between
liabilities and equity. The amount of consolidated net income attributable to the parent and to
the non-controlling interest must be clearly identified and presented in the consolidated statement
of income. This Statement requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. SFAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited.
Management does not anticipate that this Statement will have a material impact on the Corporations
consolidated financial condition or results of operations.
Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB Statement No. 133 (SFAS 161). During March 2008, the
FASB issued SFAS 161. SFAS 161 amends and expands the disclosure requirement of SFAS 133 No. 133,
Accounting for Derivative Instruments and Hedging Activities (SFAS 133), with the intent to
provide users of financial statements with an enhanced understanding of: (a) how and why an entity
uses derivative instruments; (b) how derivative instrument and related hedged items are accounted
for under SFAS 133 and its related interpretations; and (c) how derivative instruments and related
hedged items affect an entitys financial position, financial performance, and cash flows. To meet
those objectives, SFAS 161 requires qualitative disclosures about objectives and strategies for
using derivative, quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent features in derivative
agreements. SFAS 161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The Corporation does not anticipate that this statement
will have a meterial impact on the consolidated financial condition or results of operations.
Statement of Financial Accounting Standards, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162). During May 2008, the FASB issued SFAS 162. This Statement identifies the
sources of account principles and the framework for selecting the principles to be used in the
preparation of financial statements of non-governmental entities that are presented in conformity
with generally accepted accounting principles (GAAP) in the United States. This Statement is
effective 60 days following the SEC approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted
Accounting Principles. Adoption of SFAS 162 will not be a change in Horizons current accounting
practices; therefore, it will not have a material impact on Horizons consolidated financial
condition or results of operations.
69
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions are Participating Securities (FSP EITF 03-6-1). During June 2008, the FASB issued
FSP EITF 03-6-1. FSP EITF 03-6-1 clarifies whether instruments, such as restricted stock, granted
in share-based payments are participating securities prior to vesting. Such participating
securities must be included in the computation of earnings per share under the two-class method as
described in SFAS No. 128, Earnings per Share. FSP EITF 03-6-1 requires companies to treat
unvested share-based payment awards that have non-forfeitable rights to dividend or dividend
equivalents as a separate class of securities in calculating earnings per share. FSP EITF 03-6-1 is
effective for financial statements issued for fiscal years and interim periods beginning after
December 15, 2008, and requires a company to retrospectively adjust its earning per share data.
Early adoption is not permitted. It is not expected that the adoption of FSP EITF 03-6-1 will have
a material effect on consolidated results of operations or earnings per share.
Note 2: Investment Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
December 31 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies |
|
$ |
23,661 |
|
|
$ |
1,253 |
|
|
$ |
|
|
|
$ |
24,914 |
|
State and municipal |
|
|
88,282 |
|
|
|
804 |
|
|
|
2,101 |
|
|
|
86,985 |
|
Federal agency collateralized
mortgage obligations |
|
|
13,063 |
|
|
|
223 |
|
|
|
335 |
|
|
|
12,951 |
|
Federal agency mortgage-backed pools |
|
|
174,227 |
|
|
|
2,374 |
|
|
|
212 |
|
|
|
176,389 |
|
Corporate notes |
|
|
587 |
|
|
|
|
|
|
|
188 |
|
|
|
399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total available for sale
investment securities |
|
$ |
299,820 |
|
|
$ |
4,654 |
|
|
$ |
2,836 |
|
|
$ |
301,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity, State and Municipal |
|
$ |
1,630 |
|
|
$ |
4 |
|
|
$ |
|
|
|
$ |
1,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
December 31 |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
Available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and federal agencies |
|
$ |
25,660 |
|
|
$ |
560 |
|
|
$ |
|
|
|
$ |
26,220 |
|
State and municipal |
|
|
86,389 |
|
|
|
906 |
|
|
|
364 |
|
|
|
86,931 |
|
Federal agency collateralized
mortgage obligations |
|
|
13,650 |
|
|
|
53 |
|
|
|
151 |
|
|
|
13,552 |
|
Federal agency mortgage-backed pools |
|
|
108,247 |
|
|
|
253 |
|
|
|
1,129 |
|
|
|
107,371 |
|
Corporate notes |
|
|
632 |
|
|
|
|
|
|
|
31 |
|
|
|
601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities |
|
$ |
234,578 |
|
|
$ |
1,772 |
|
|
$ |
1,675 |
|
|
$ |
234,675 |
|
|
|
|
70
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities available for sale and held to maturity at December
31, 2008, 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.
|
|
|
|
|
|
|
|
|
|
|
Amortized |
|
Fair |
Available for sale |
|
Cost |
|
Value |
|
Within one year |
|
$ |
1,182 |
|
|
$ |
1,190 |
|
One to five years |
|
|
10,569 |
|
|
|
10,926 |
|
Five to ten years |
|
|
28,701 |
|
|
|
28,664 |
|
After ten years |
|
|
72,078 |
|
|
|
71,518 |
|
|
|
|
|
|
|
112,530 |
|
|
|
112,298 |
|
Federal agency collateralized mortgage obligations |
|
|
13,063 |
|
|
|
12,951 |
|
Federal agency mortgage-backed pools |
|
|
174,227 |
|
|
|
176,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
299,820 |
|
|
$ |
301,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity |
|
|
|
|
|
|
|
|
|
Within one year |
|
$ |
90 |
|
|
$ |
91 |
|
One to five years |
|
|
1,540 |
|
|
|
1,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,630 |
|
|
$ |
1,634 |
|
|
|
|
Securities with a carrying value of $158,375,000 and $116,931,000 were pledged at December 31, 2008
and 2007, respectively, to secure certain public and trust deposits and securities sold under
agreements to repurchase.
Proceeds from sales of securities available for sale during 2008 were $30,000. Losses of $15,000
were recognized on these sales and the tax benefit related to the loss was $5,000. Proceeds from
sales of securities available for sale during 2007 were $27,973,000. Gross gains of $164,000 and
gross losses of $162,000 were recognized on these sales and the tax expense related to the net
realized gains for 2007 was $700. Proceeds from the sales of securities available for sale during
2006 were $91,265,000. Gross gains of $1,247,000 and gross losses of $2,011,000 were recognized on
these sales and the tax benefit related to the net losses for 2006 was $267,000. Certain
investments in debt securities are reported in the financial statements at an amount less than
their historical cost. Total fair value of these investments at December 31, 2008 and 2007, was
$84,880,000 and $101,674,000, respectively, which is approximately 28% and 43% of Horizons
available-for-sale investment portfolio. The decline primarily resulted from changes in market
interest rates.
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, Horizon intends and has the ability to hold them until the earlier of
a recovery in fair value or maturity.
71
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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.
The following table shows our investments gross unrealized losses and fair value, aggregated by
investment category and length of time that individual securities have been in a continuous
unrealized loss position at December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
Description of |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
Securities |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State and municipal |
|
$ |
47,215 |
|
|
$ |
1,973 |
|
|
$ |
2,342 |
|
|
$ |
128 |
|
|
$ |
49,557 |
|
|
$ |
2,101 |
|
Federal agency
collateralized mortgage
obligations |
|
|
4,026 |
|
|
|
335 |
|
|
|
|
|
|
|
|
|
|
|
4,026 |
|
|
|
335 |
|
Federal agency
mortgage-backed pools |
|
|
24,753 |
|
|
|
161 |
|
|
|
6,145 |
|
|
|
51 |
|
|
|
30,898 |
|
|
|
212 |
|
Corporate notes |
|
|
399 |
|
|
|
188 |
|
|
|
|
|
|
|
|
|
|
|
399 |
|
|
|
188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily
impaired
securities |
|
$ |
76,393 |
|
|
$ |
2,657 |
|
|
$ |
8,487 |
|
|
$ |
179 |
|
|
$ |
84,880 |
|
|
$ |
2,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 Months |
|
12 Months or More |
|
Total |
|
|
|
Description of |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
|
Fair |
|
Unrealized |
Securities |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
Value |
|
Losses |
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury and
federal agencies |
|
$ |
21,498 |
|
|
$ |
161 |
|
|
$ |
11,177 |
|
|
$ |
203 |
|
|
$ |
32,675 |
|
|
$ |
364 |
|
State and municipal |
|
|
2,665 |
|
|
|
22 |
|
|
|
4,995 |
|
|
|
129 |
|
|
|
7,660 |
|
|
|
151 |
|
Federal agency
collateralized
mortgage
obligations |
|
|
692 |
|
|
|
15 |
|
|
|
60,046 |
|
|
|
1,114 |
|
|
|
60,738 |
|
|
|
1,129 |
|
Federal agency
mortgage-backed
pools |
|
|
601 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
601 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
temporarily
impaired
securities |
|
$ |
25,456 |
|
|
$ |
229 |
|
|
$ |
76,218 |
|
|
$ |
1,446 |
|
|
$ |
101,674 |
|
|
$ |
1,675 |
|
|
|
|
72
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 3: Loans and Allowance
|
|
|
|
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
|
Commercial loans |
|
$ |
310,842 |
|
|
$ |
307,535 |
|
Mortgage warehouse loans |
|
|
123,287 |
|
|
|
78,225 |
|
Real estate loans |
|
|
167,766 |
|
|
|
216,019 |
|
Installment loans |
|
|
280,072 |
|
|
|
287,073 |
|
|
|
|
|
|
|
881,967 |
|
|
|
888,852 |
|
Allowance for loan losses |
|
|
(11,410 |
) |
|
|
(9,791 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
870,557 |
|
|
$ |
879,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
Allowance for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1 |
|
$ |
9,791 |
|
|
$ |
8,738 |
|
|
$ |
8,368 |
|
Provision for losses |
|
|
7,568 |
|
|
|
3,068 |
|
|
|
905 |
|
Recoveries on loans |
|
|
1,037 |
|
|
|
722 |
|
|
|
608 |
|
Loans charged off |
|
|
(6,986 |
) |
|
|
(2,737 |
) |
|
|
(1,143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31 |
|
$ |
11,410 |
|
|
$ |
9,791 |
|
|
$ |
8,738 |
|
|
|
|
Impaired loans for which the carrying value of the loans exceeded the discounted cash flows or
collateral value totaled approximately $6,012,000 and $1,870,000 at December 31, 2008 and 2007,
respectively. The allowance for impaired loans, included in the Banks allowance for loan losses,
totaled $1,327,000 and $345,000 at December 31, 2008 and 2007, respectively. There were no
impaired loans without a specific reserve in 2008 or 2007. The average balance of impaired loans
during 2008 was $3,157,000 and $1,673,000 during 2007. There was $354,000 and $165,000 of interest
income recorded during 2008 and 2007, respectively, on impaired loans.
At December 31, 2008, loans past due more than 90 days and still accruing interest totaled
approximately $832,000. At December 31, 2007, loans past due more than 90 days and still accruing
interest totaled approximately $87,000. Non-accruing loans at December 31, 2008, 2007 and 2006,
totaled approximately $7,031,000, $2,862,000 and $2,481,000, respectively. Interest income not
recognized on these loans totaled approximately $283,000, $122,000 and $77,000 in 2008, 2007 and
2006, respectively.
Loans to directors and executive officers of Horizon and the Bank, including associates of such
persons, amounted to $15,940,000 and $15,217,000, as of December 31, 2008 and 2007, respectively.
During 2008, new loans or advances were $13,958,000 and loan payments were $13,235,000.
73
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 4: Premises and Equipment
|
|
|
|
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
Land |
|
$ |
8,742 |
|
|
$ |
7,006 |
|
Buildings and improvements |
|
|
27,562 |
|
|
|
25,453 |
|
Furniture and equipment |
|
|
11,920 |
|
|
|
10,366 |
|
|
|
|
Total cost |
|
|
48,224 |
|
|
|
42,825 |
|
Accumulated depreciation |
|
|
(19,944 |
) |
|
|
(18,218 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
28,280 |
|
|
$ |
24,607 |
|
|
|
|
Note 5: Loan Servicing
Loans serviced for others are not included in the accompanying consolidated balance sheets. The
unpaid principal balances of loans serviced for others totaled approximately $79,544,000 and
$26,191,000 at December 31, 2008 and 2007, respectively.
The aggregate fair value of capitalized mortgage servicing rights was approximately $1,208,000,
$309,000 and $258,000 at December 31, 2008, 2007 and 2006, respectively. Comparable market values
and a valuation model that calculates the present value of future cash flows were used to estimate
fair value. For purposes of measuring impairment, risk characteristics including product type,
investor type and interest rates, were used to stratify the originated mortgage servicing rights.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
Mortgage Servicing Rights |
|
|
|
|
|
|
|
|
|
|
|
|
Balances, January 1 |
|
$ |
276 |
|
|
$ |
248 |
|
|
$ |
1,278 |
|
Servicing rights capitalized |
|
|
634 |
|
|
|
79 |
|
|
|
83 |
|
Servicing rights sold |
|
|
|
|
|
|
|
|
|
|
(862 |
) |
Amortization of servicing rights |
|
|
(178 |
) |
|
|
(51 |
) |
|
|
(251 |
) |
|
|
|
|
|
|
732 |
|
|
|
276 |
|
|
|
248 |
|
Impairment allowance |
|
|
(4 |
) |
|
|
(7 |
) |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31 |
|
$ |
728 |
|
|
$ |
269 |
|
|
$ |
245 |
|
|
|
|
During 2006, the Bank sold mortgage servicing rights with a book value of $862,000. The principal
balance of the loans on which the servicing was sold amounted to $134,465,000. During 2008 and
2006, the Bank recorded a recovery of the impairment allowance totaling approximately $3,000 and
$41,000 respectively. During 2007, the Bank recorded additional impairment of approximately $4,000.
74
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 6: Intangible Assets
As a result of the acquisition of Alliance Bank Corporation in 2005, the Company has recorded
certain amortizable intangible assets related to core deposit intangibles. The Core deposit
intangible is being amortized over ten years using an accelerated method. Additionally, the
Company has a non-compete agreement being amortized over four years from the acquisition of a
mortgage company in 2003. Amortizable intangible assets are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
2007 |
|
|
Gross |
|
|
|
|
|
Gross |
|
|
|
|
Carrying |
|
Accumulated |
|
Carrying |
|
Accumulated |
December 31 |
|
Amount |
|
Amortization |
|
Amount |
|
Amortization |
Amortizable intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core deposit intangible |
|
$ |
2,952 |
|
|
$ |
(1,201 |
) |
|
$ |
2,952 |
|
|
$ |
(884 |
) |
Non-compete agreement |
|
|
|
|
|
|
|
|
|
|
90 |
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,952 |
|
|
$ |
(1,201 |
) |
|
$ |
3,042 |
|
|
$ |
(974 |
) |
|
|
|
Amortization expense for intangible assets totaled $317,000, $344,000 and $368,000 for the years
ended December 31, 2008, 2007 and 2006, respectively. Estimated amortization for the years ending
December 31 are as follows:
|
|
|
|
|
2009 |
|
$ |
305 |
|
2010 |
|
|
292 |
|
2011 |
|
|
280 |
|
2012 |
|
|
269 |
|
2013 |
|
|
258 |
|
Thereafter |
|
|
347 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,751 |
|
|
|
|
|
Note 7: Deposits
|
|
|
|
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
Noninterest-bearing demand deposits |
|
$ |
83,642 |
|
|
$ |
84,097 |
|
Interest-bearing demand deposits |
|
|
315,005 |
|
|
|
230,574 |
|
Money market (variable rate) |
|
|
81,477 |
|
|
|
100,792 |
|
Savings deposits |
|
|
32,449 |
|
|
|
29,110 |
|
Certificates of deposit of $100,000 or more |
|
|
144,966 |
|
|
|
227,781 |
|
Other certificates and time deposits |
|
|
183,630 |
|
|
|
221,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
841,169 |
|
|
$ |
893,664 |
|
|
|
|
75
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Certificates and other time deposits maturing in years ending December 31 are as follows:
|
|
|
|
|
2009 |
|
$ |
161,669 |
|
2010 |
|
|
78,933 |
|
2011 |
|
|
67,313 |
|
2012 |
|
|
9,317 |
|
2013 |
|
|
8,820 |
|
Thereafter |
|
|
2,544 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
328,596 |
|
|
|
|
|
Note 8: Borrowings
|
|
|
|
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
Federal Home Loan Bank advances, variable and fixed
rates ranging from 3.62% to 7.53%, due at various
dates through November 15, 2024 |
|
$ |
177,488 |
|
|
$ |
157,783 |
|
Securities sold under agreements to repurchase |
|
|
89,995 |
|
|
|
96,369 |
|
Federal reserve Bank discount window |
|
|
45,000 |
|
|
|
|
|
Federal funds purchased |
|
|
7,200 |
|
|
|
|
|
Notes payable |
|
|
4,700 |
|
|
|
4,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
$ |
324,383 |
|
|
$ |
258,852 |
|
|
|
|
The Federal Home Loan Bank advances are secured by first and second mortgage loans and mortgage
warehouse loans totaling approximately $434,730,000. Advances are subject to restrictions or
penalties in the event of prepayment. In addition, $75,200,000 of the advances outstanding at
December 31, 2008 contained options with dates ranging from January 12, 2008 to April 29, 2013,
whereby the interest rate may be adjusted by the Federal Home Loan Bank, at which time the advances
may be repaid at the option of the Company without penalty.
Securities sold under agreements to repurchase consist of obligations of the Bank to other parties.
The obligations are secured by U.S. agency and mortgage-backed securities and such collateral is
held in safekeeping by third parties. The maximum amount of outstanding agreements at any month
end during 2008 and 2007 totaled $103,618,000 and $97,677,000 and the daily average of such
agreements totaled $95,621,000 and $75,588,000, respectively. The agreements at December 31, 2008,
mature at various dates through September 11, 2017. Securities sold under repurchase agreements
totaling $20,000,000 may be cancelled at the discretion of the lender on various dates beginning on
September 11, 2010.
Horizon has an unsecured $12,000,000 line of credit, of which, $4.7 million was outstanding at
December 31, 2008. The line of credit is from an unrelated financial institution with interest
payable quarterly at a rate indexed to LIBOR. The note matures within one year.
At December 31, 2008, the Bank has available approximately $142,398,000 in credit lines with
various money center banks, including the FHLB.
76
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Contractual maturities in years ending December 31
|
|
|
|
|
2009 |
|
$ |
137,020 |
|
2010 |
|
|
55,133 |
|
2011 |
|
|
40,142 |
|
2012 |
|
|
41,568 |
|
2013 |
|
|
15,072 |
|
Thereafter |
|
|
35,448 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
324,383 |
|
|
|
|
|
Note 9: Subordinated Debentures
In March of 2002, Horizon formed Horizon Statutory Trust I (Trust I), a wholly owned statutory
business trust. Trust I sold $12.372 million of Trust Preferred Capital Securities as a participant
in a pooled trust preferred securities offering. The proceeds from the sale of the trust preferred
securities were used by the trust to purchase an equivalent amount of subordinated debentures from
Horizon. The junior subordinated debentures are the sole assets of Trust I and are fully and
unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust preferred
securities pay interest and dividends, respectively, on a quarterly basis. The junior subordinated
debentures and the securities bear interest at a rate of 90-day LIBOR plus 3.60% and mature on
March 26, 2032, and are non-callable for five years. After that period, the securities may be
called at any quarterly interest payment date at par. These securities have been called and were
redeemed on March 26, 2007. Costs associated with the issuance of the securities totaling $362,000
were capitalized and were amortized to the March 26,2007 first call date of the securities.
In October of 2004, Horizon formed Horizon Statutory Trust II (Trust II), a wholly owned statutory
business trust. Trust II sold $10.310 million of Trust Preferred Capital Securities as a
participant in a pooled trust preferred securities offering. The proceeds from the sale of the
trust preferred securities were used by the trust to purchase an equivalent amount of subordinated
debentures from Horizon. The junior subordinated debentures are the sole assets of Trust II and are
fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the trust
preferred securities pay interest and dividends, respectively, on a quarterly basis. The junior
subordinated debentures and the securities bear interest at a rate of 90 day LIBOR plus 1.95% and
mature on October 21, 2034, and are non-callable for five years. After that period, the securities
may be called at any quarterly interest payment date at par. Costs associated with the issuance of
the securities totaling $17,500 were capitalized and are being amortized to the first call date of
the securities.
77
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
In December of 2006, Horizon formed Horizon Bancorp Capital Trust III (Trust III), a wholly owned
statutory business trust. Trust III sold $12.372 million of Trust Preferred Capital Securities as
a participant in a pooled trust preferred securities offering. The proceeds from the sale of the
trust preferred securities were used by the trust to purchase an equivalent amount of subordinated
debentures from Horizon. The junior subordinated debentures are the sole assets of Trust III and
are fully and unconditionally guaranteed by Horizon. The junior subordinated debentures and the
trust preferred securities pay interest and dividends, respectively, on a quarterly basis. The
junior subordinated debentures and the securities bear interest at a rate of 90 day LIBOR plus
1.65% and mature on January 30, 2037, and are non-callable for five years. After that period, the
securities may be called at any quarterly interest payment date at par. Costs associated with the
issuance of the securities totaling $12,647 were capitalized and are being amortized to the first
call date of the securities. The proceeds of this issue were used to redeem the securities issued
by Trust I on March 26, 2007.
The Company assumed additional debentures as the result of the acquisition of Alliance Bank
Corporation in 2005. In June 2004, Alliance formed Alliance Financial Statutory Trust I a wholly
owned business trust (Alliance Trust) to sell $5.155 million in trust preferred securities. The
proceeds from the sale of the trust preferred securities were used by the trust to purchase an
equivalent amount of subordinated debentures from Alliance. The junior subordinated debentures are
the sole assets of Alliance Trust and are fully and unconditionally guaranteed by Horizon. The
junior subordinated debentures and the trust preferred securities pay interest and dividends,
respectively, on a quarterly basis. The junior subordinated debentures and the securities bear
interest at a rate of 90-day LIBOR plus 2.65%, mature in June 2034, and are non-callable for five
years. After that period, the securities may be called at any quarterly interest payment date at
par.
The Trust Preferred Capital Securities, subject to certain limitations, are included in Tier 1
Capital for regulatory purposes. Dividends on the Trust Preferred Capital Securities are recorded
as interest expense.
Note 10: Employee Stock Ownership Plan
Effective January 1, 2007, Horizon converted its stock bonus plan to an employee stock ownership
plan (ESOP). Prior to that date, Horizon maintained an employee stock bonus plan that covered
substantially all employees. The stock bonus plan was noncontributory, and Horizon made matching
contributions of amounts contributed by the employees to the Employee Thrift Plan and discretionary
contributions. Prior to the establishment of the employee stock bonus plan, Horizon maintained an
ESOP that was terminated in 1999. The prior ESOP accounts of active employees and the
discretionary accounts of active employees will remain in the new ESOP. The Matching contribution
accounts under the Stock Bonus Plan will be transferred to the Horizon Bancorp Employees Thrift
Plan.
The ESOP exists for the benefit of substantially all employees. Contributions to the ESOP are by
Horizon and are determined by the Board of Directors at their discretion. The contributions may be
made in the form of cash or common stock. Shares are allocated among participants each December 31
on the basis of each participants eligible compensation to total eligible compensation. Eligible
compensation is limited to $230,000 for each participant. Dividends on shares held by the plan, at
the discretion of each participant, may be distributed to an individual participant or left in the
plan to purchase additional shares.
78
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Total cash contributions and expense recorded for the ESOP was $300,000 in 2008 and 2007. The
expense recorded for the Stock Bonus Plan was $200,000 in 2006.
The ESOP, which is not leveraged, owns a total of 391,310 shares of Horizons stock or 12.2% of the
outstanding shares.
Note 11: Employee Thrift Plan
The Employee Thrift Plan (Plan) provides that all employees of Horizon with the requisite hours
of service are eligible for the Plan. The Plan permits voluntary employee contributions and
Horizon may make discretionary matching and profit sharing contributions. Each eligible employee
is vested according to a schedule based upon years of service. Employee voluntary contributions are
vested at all times and Horizons discretionary contributions vest over a six-year period. The
Banks expense related to the thrift plan totaled approximately $348,000 in 2008 and 2007 and
$332,000 in 2006.
Note 12: Other Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
Supplies and printing |
|
$ |
508 |
|
|
$ |
452 |
|
|
$ |
466 |
|
Advertising |
|
|
787 |
|
|
|
630 |
|
|
|
613 |
|
Communication |
|
|
557 |
|
|
|
561 |
|
|
|
479 |
|
Directors fees |
|
|
357 |
|
|
|
280 |
|
|
|
279 |
|
Insurance expense |
|
|
313 |
|
|
|
331 |
|
|
|
364 |
|
Postage |
|
|
387 |
|
|
|
354 |
|
|
|
340 |
|
Amortization of intangibles |
|
|
317 |
|
|
|
344 |
|
|
|
367 |
|
Travel and entertainment |
|
|
548 |
|
|
|
548 |
|
|
|
530 |
|
Credit card merchant processing |
|
|
672 |
|
|
|
704 |
|
|
|
714 |
|
FDIC insurance expense |
|
|
546 |
|
|
|
99 |
|
|
|
102 |
|
Other |
|
|
1,324 |
|
|
|
1,160 |
|
|
|
1,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses |
|
$ |
6,316 |
|
|
$ |
5,463 |
|
|
$ |
5,400 |
|
|
|
|
79
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 13: Income Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
Currently payable |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
2,404 |
|
|
$ |
2,671 |
|
|
$ |
2,381 |
|
State |
|
|
(57 |
) |
|
|
281 |
|
|
|
535 |
|
Deferred |
|
|
(485 |
) |
|
|
(225 |
) |
|
|
(78 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense |
|
$ |
1,862 |
|
|
$ |
2,727 |
|
|
$ |
2,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of federal statutory to actual tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory income tax at 34% |
|
$ |
3,683 |
|
|
$ |
3,695 |
|
|
$ |
3,510 |
|
Tax exempt interest |
|
|
(1,182 |
) |
|
|
(1,097 |
) |
|
|
(1,009 |
) |
Tax exempt income |
|
|
(496 |
) |
|
|
(318 |
) |
|
|
(170 |
) |
Nondeductible and other |
|
|
(105 |
) |
|
|
261 |
|
|
|
154 |
|
Effect of state income taxes |
|
|
(38 |
) |
|
|
186 |
|
|
|
353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual tax expense |
|
$ |
1,862 |
|
|
$ |
2,727 |
|
|
$ |
2,838 |
|
|
|
|
A cumulative net deferred tax asset is included in other assets. The components of the asset are
as follows:
|
|
|
|
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
Assets |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
4,516 |
|
|
$ |
3,944 |
|
Director and employee benefits |
|
|
1,133 |
|
|
|
829 |
|
|
|
|
Total assets |
|
|
5,649 |
|
|
|
4,773 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Depreciation |
|
|
(1,146 |
) |
|
|
(899 |
) |
Difference in expense recognition |
|
|
(130 |
) |
|
|
(111 |
) |
Federal Home Loan Bank stock dividends |
|
|
(319 |
) |
|
|
(326 |
) |
Difference in basis of intangible assets |
|
|
(685 |
) |
|
|
(826 |
) |
Difference in basis of assets |
|
|
(91 |
) |
|
|
|
|
Unrealized gain on securities available for sale |
|
|
(338 |
) |
|
|
(34 |
) |
Other |
|
|
(360 |
) |
|
|
(178 |
) |
|
|
|
Total liabilities |
|
|
(3,069 |
) |
|
|
(2,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
2,580 |
|
|
$ |
2,399 |
|
|
|
|
80
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 14: Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
|
Unrealized losses on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during the year |
|
$ |
1,706 |
|
|
$ |
2,413 |
|
|
$ |
1,307 |
|
Less: reclassification adjustment for gains
(losses) realized in net income |
|
|
(15 |
) |
|
|
2 |
|
|
|
(764 |
) |
|
|
|
|
|
|
1,721 |
|
|
|
2,415 |
|
|
|
2,071 |
|
Unrealized loss on derivative instruments |
|
|
(851 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains |
|
|
870 |
|
|
|
2,415 |
|
|
|
2,071 |
|
Tax expense |
|
|
(305 |
) |
|
|
(845 |
) |
|
|
(725 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
$ |
565 |
|
|
$ |
1,570 |
|
|
$ |
1,346 |
|
|
|
|
The components of accumulated other comprehensive income included in capital are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
|
2006 |
|
Unrealized holding gain (loss) on securities available for sale |
|
$ |
1,181 |
|
|
$ |
63 |
|
|
$ |
(1,507 |
) |
Unrealized loss on derivative instruments |
|
|
(553 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
$ |
628 |
|
|
$ |
63 |
|
|
$ |
(1,507 |
) |
|
|
|
Note 15: Commitments, Off-Balance Sheet Risk and Contingencies
Because of the nature of its activities, Horizon is subject to pending and threatened legal actions
that arise in the normal course of business. In managements opinion, after consultation with
counsel, none of the litigation to which Horizon or any of its subsidiaries is a party will have a
material effect on the consolidated financial position or results of operations of Horizon.
The Bank was required to have approximately $1,890,000 of cash on hand or on deposit with the
Federal Reserve Bank to meet regulatory reserve and clearing balance requirements at December 31,
2008. These balances are included in cash and cash equivalents and do not earn interest.
The Bank is a party to financial instruments with off-balance sheet risk in the ordinary course of
business to meet financing needs of its customers. These financial instruments include commitments
to make loans and standby letters of credit. The Banks exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to make loans and
standby letters of credit is represented by the contractual amount of those instruments. The Bank
follows the same credit policy to make such commitments as is followed for those loans recorded in
the financial statements.
At December 31, 2008 and 2007, commitments to make loans amounted to approximately $180,808,000 and
$141,729,000 and commitments under outstanding standby letters of credit amounted to approximately
$1,677,000 and $1,929,000. Since many commitments to make loans and standby letters of credit
expire without being used, the amount does not necessarily represent future cash advances. No
losses are anticipated as a result of these transactions. Collateral obtained upon exercise of the
commitment is determined using managements credit evaluation.
81
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 16: Regulatory Capital
Horizon and the Bank are subject to various regulatory capital requirements administered by the
federal banking agencies and are assigned to a capital category. The assigned capital category is
largely determined by three ratios that are calculated according to the regulations: total risk
adjusted capital, Tier I capital and Tier I leverage ratios. The ratios are intended to measure
capital relative to assets and credit risk associated with those assets and off-balance sheet
exposures of the entity. The capital category assigned to an entity can also be affected by
qualitative judgments made by regulatory agencies about the risk inherent in the entitys
activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well capitalized to
critically undercapitalized. Classification of a bank in any of the undercapitalized categories
can result in actions by regulators that could have a material effect on a banks operations. At
December 31, 2008 and 2007, Horizon and the Bank are categorized as well capitalized and met all
subject capital adequacy requirements.
Horizons and the Banks actual and required capital amounts and ratios are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Required To |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Be Well |
|
|
|
|
|
|
|
|
|
|
Minimum Required |
|
Capitalized
1 Under |
|
|
|
|
|
|
|
|
|
|
for Capital 1 |
|
Prompt Corrective |
|
|
Actual |
|
Adequacy Purposes |
|
Action Requirements |
|
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
As of December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital 1 (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
134,546 |
|
|
|
14.38 |
% |
|
$ |
74,877 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Bank |
|
|
122,538 |
|
|
|
13.11 |
|
|
|
74,790 |
|
|
|
8.00 |
|
|
$ |
93,488 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital 1 (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
123,136 |
|
|
|
13.16 |
|
|
|
37,438 |
|
|
|
4.00 |
|
|
|
N/A |
|
|
|
N/A |
|
Bank |
|
|
111,128 |
|
|
|
11.89 |
|
|
|
37,395 |
|
|
|
4.00 |
|
|
|
56,093 |
|
|
|
6.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital 1 (to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
123,136 |
|
|
|
10.45 |
|
|
|
47,124 |
|
|
|
4.00 |
|
|
|
N/A |
|
|
|
N/A |
|
Bank |
|
|
111,128 |
|
|
|
9.44 |
|
|
|
47,094 |
|
|
|
4.00 |
|
|
|
58,868 |
|
|
|
5.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital 1 (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
99,491 |
|
|
|
10.90 |
% |
|
$ |
72,998 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Bank |
|
|
96,448 |
|
|
|
10.58 |
|
|
|
72,923 |
|
|
|
8.00 |
|
|
$ |
91,154 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital 1 (to risk-weighted assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
83,651 |
|
|
|
9.17 |
|
|
|
36,499 |
|
|
|
4.00 |
|
|
|
N/A |
|
|
|
N/A |
|
Bank |
|
|
86,657 |
|
|
|
9.51 |
|
|
|
36,462 |
|
|
|
4.00 |
|
|
|
54,692 |
|
|
|
6.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I capital 1 (to average assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
83,651 |
|
|
|
6.99 |
|
|
|
47,853 |
|
|
|
4.00 |
|
|
|
N/A |
|
|
|
N/A |
|
Bank |
|
|
86,657 |
|
|
|
7.29 |
|
|
|
47,573 |
|
|
|
4.00 |
|
|
|
59,466 |
|
|
|
5.00 |
|
|
|
|
1 |
|
As defined by regulatory agencies |
82
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 17: Share-Based Compensation
Under Horizons 1997 Stock Option and Stock Appreciation Right Plan (1997 Plan), which is accounted
for in accordance with Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 123R, Share-Based Payment, Horizon may grant certain officers and employees stock
option awards or stock appreciation rights which vest and become fully exercisable at the end of
five years of continued employment. SARs entitle eligible employees to receive cash, stock or a
combination of cash and stock totaling the excess, on the date of exercise, of the fair market
value of the shares of common stock covered by the option over the option exercise price. The
underlying stock options are deemed to have been cancelled upon exercise of the SARs. In the third
quarter of 2002, Horizon entered into agreements with participants that capped the value of their
SARs at $14.67 per share and discontinued any future vesting. No additional compensation expense
is recognized when the fair value of Horizon stock exceeds $14.67 per share as there is a
presumption that participants will exercise their options rather than the SARs. No compensation
expense relating to the SARs was recorded in 2008, 2007 or 2006.
A summary of option activity under the 1997 Plan as of December 31, 2008 and changes during the
year then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term |
|
|
Value |
|
|
|
|
Outstanding, beginning of year |
|
|
27,770 |
|
|
$ |
8.07 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(2,250 |
) |
|
|
13.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of year |
|
|
25,520 |
|
|
$ |
7.61 |
|
|
|
2.82 |
|
|
$ |
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year |
|
|
25,520 |
|
|
$ |
7.61 |
|
|
|
2.82 |
|
|
$ |
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no options granted during the years 2008, 2007 and 2006. The total intrinsic value of
options exercised during the years ended December 31, 2008, 2007 and 2006, was $22,545, $166,613
and $1,860,528, respectively.
83
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
On January 21, 2003, the Board of Directors adopted the Horizon Bancorp 2003 Omnibus Equity
Incentive Plan (2003 Plan), which was approved by stockholders on May 8, 2003. Under the 2003
Plan, Horizon may issue up to 150,000 common shares, plus the number of shares that are tendered to
or withheld by Horizon in connection with the exercise of options plus that number of shares that
are purchased by Horizon with the cash proceeds received upon option exercises. The 2003 Plan
limits the number of shares available to 150,000 for incentive stock options and to 75,000 for the
grant of non-option awards. The shares available for issuance under the 2003 Plan may be divided
among the various types of awards and among the participants as the Compensation Committee
(Committee) determines. The Committee is authorized to grant any type of award to a participant
that is consistent with the provisions of the 2003 Plan. Awards may consist of incentive stock
options, nonqualified stock options, stock appreciation rights, restricted stock, performance
units, performance shares or any combination of these awards. The Committee determines the
provisions, terms and conditions of each award. The restricted shares vest over a period of time
established by the committee at the time of each grant. Holders of restricted shares receive
dividends and may vote the shares. The restricted shares are recorded at fair market value (on the
date granted) as a separate component of stockholders equity. The cost of these shares is being
amortized against earnings using the straight-line method over the vesting period. The options
shares granted under the 2003 plan vest at a rate of 20% per year. The restricted shares granted
under the 2003 Plan vest at the end of each grants vesting period.
The fair value of options granted is estimated on the date of the grant using an option-pricing
model with the following weighted-average assumptions (there were no options granted during 2008
under the 2003 plan):
|
|
|
|
|
|
|
|
|
December 31 |
|
2007 |
|
2006 |
|
Dividend yields |
|
|
2.18 |
% |
|
|
2.14 |
% |
Volatility factors of expected market price of common stock |
|
|
20.47 |
% |
|
|
18.10 |
% |
Risk-free interest rates |
|
|
5.05 |
% |
|
|
5.20 |
% |
Expected life of options |
|
6 years |
|
9 years |
A summary of option activity under the 2003 Plan as of December 31, 2008, and changes during the
year then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
Term |
|
|
Value |
|
|
|
|
Outstanding, beginning and end of year |
|
|
29,000 |
|
|
$ |
25.28 |
|
|
|
6.66 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year |
|
|
15,800 |
|
|
$ |
26.23 |
|
|
|
6.59 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The weighted average grant-date fair value of options granted during the years 2007 and 2006 was
$6.59 and $7.12, respectively. The total intrinsic value of options exercised during the year
ended December 31, 2007 was $4,258. No options were granted under the 2003 Plan during 2008. No
options granted under the 2003 Plan were exercised in 2008 or 2007.
A summary of the status of Horizons non-vested, restricted shares as of December 31, 2008 and
2007, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
|
Grant Date |
|
|
Shares |
|
Fair Value |
|
Shares |
|
Fair Value |
|
|
|
Non-vested beginning of year |
|
|
45,000 |
|
|
$ |
24.37 |
|
|
|
45,000 |
|
|
$ |
23.56 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
27.22 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
2,400 |
|
|
|
23.56 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
7,600 |
|
|
|
23.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested, end of year |
|
|
45,000 |
|
|
$ |
24.37 |
|
|
|
45,000 |
|
|
$ |
24.37 |
|
|
|
|
Grants vest at the end of four or five years of continuous employment.
Total compensation cost recognized in the income statement for option-based payment arrangements
during 2008 was $39,000 and the related tax benefit recognized was $15,000. Total compensation
cost recognized in the income statement for option-based payment arrangements during 2007 was
$53,000 and the related tax benefit recognized was $21,000. Total compensation cost recognized in
the income statement for option-based payment arrangements during 2006 was $40,000 and the related
tax benefit recognized was $16,000.
Total compensation cost recognized in the income statement for restricted share based payment
arrangements during 2008, 2007 and 2006 was $233,000, $240,000 and $212,000, respectively. The
recognized tax benefit related thereto was $92,000, $96,000 and $84,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
Cash received from option exercise under all share-based payment arrangements for the years ended
December 31, 2008, 2007 and 2006 was $35,000, $135,000 and $735,000, respectively. The actual tax
benefit realized for the tax deductions from option exercise of the share-based payment
arrangements totaled $8,000, $68,000 and $723,000, respectively, for the years ended December 31,
2008, 2007 and 2006.
As of December 31, 2008, there was $317,000 of total unrecognized compensation cost related to all
non-vested share-based compensation arrangements granted under all of the plans. That cost is
expected to be recognized over a weighted-average period of 1.9 years.
85
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 18: FDIC Insurance
Effective November 17, 2006, the FDIC implemented a one-time credit of $4.7 billion to eligible
institutions. The purpose of the credit is to recognize contributions made by certain institutions
to capitalize the Bank Insurance Fund and Savings Association Insurance Fund, which have now been
merged into the Deposit Insurance Fund. The Bank is an eligible institution and has received
notice from the FDIC that its share of the credit is $458,000. Horizon utilized $314,000 of this
credit during 2007, which reduced the Companys FDIC insurance expense. The remaining credit of
$144,000 was used in the first quarter of 2008. FDIC insurance expense for the full year increased
from $99,000 in 2007 to $546,000 in 2008 because of the reduction in the available credit and a
premium increase from the FDIC.
During the fourth quarter of 2008, the FDIC announced a temporary increase in coverage limits from
$100,000 to $250,000. The increase is set to expire December 31, 2009.
Note 19: Derivative Financial Instruments
In the normal course of business, the Company uses various derivative financial instruments to
manage its interest rate risk and market risks in accommodating the needs of its customers. These
instruments carry varying degrees of credit, interest rate, and market or liquidity risks.
Derivative instruments are recognized as either assets or liabilities in the accompanying financial
statements and are measured at fair value. Subsequent changes in the derivatives fair values are
recognized in earnings unless specific hedge accounting criteria are met.
Horizon has established objectives and strategies that include interest-rate risk parameters for
maximum fluctuations in net interest income and market value of portfolio equity. Interest rate
risk is monitored via simulation modeling reports. The goal of Horizons asset/liability
management efforts is to maintain profitable financial leverage within established risk parameters.
Horizon has entered into several financial arrangements using derivatives during 2008 to add
stability to interest income and to manage its exposure to interest rate movements.
Fair Value Hedges
Horizon 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, Horizon has entered into
interest rate swap agreements on individual loans, converting the fixed rate loans to a variable
rate. These agreements were entered into at the time that the individual loans were closed during
2008. The cumulative change in fair value of both the hedge instruments and the underlying loans
is recorded in non-interest income. Since the critical terms of the hedged loans and the interest
rate swap are identical, the fair value hedges are considered to be highly effective. At December
31, 2008, management has determined that there is no hedge ineffectiveness.
The notional amounts of the debt obligations being hedged was $25,033,000 at December 31, 2008 and
the fair value of the interest rate swap liability at December 31, 2008 was $1,706,000.
86
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Cash Flow Hedges
Through certain special purpose entities (see note 10 of Item 8 in Horizons 2007 Form 10-K)
Horizon issued trust preferred debentures as part of its capital management strategy. These
debentures are variable rate, which exposes Horizon to variability in cash flows. Given the
characteristics of this debt, Horizon Bancorp is exposed to interest rate risk caused by the
variability of expected future interest expense attributable to changes in 3-month LIBOR. To
mitigate this exposure to fluctuations in cash flows resulting from changes in interest rates,
Horizon entered into three pay-fixed interest rate swap agreements in January 2008.
Based on the evaluation performed at inception and through the current date, these derivative
instruments qualify for cash flow hedge accounting. Therefore, the cumulative change in fair value
of the interest rate swap, to the extent that it is expected to be offset by the cumulative change
in anticipated interest cash flows from the hedged trust preferred debentures, will be deferred and
reported as a component of other comprehensive income (OCI). Any hedge ineffectiveness will be
charged to current earnings.
Since the floating index and reset dates are based on identical terms, management believes that the
hedge relationship of the cumulative changes in expected future cash flow from the interest rate
swap and the cumulative changes in expected interest cash flows from the trust preferred debentures
will be highly effective. At December 31, 2008, management has determined that there is no hedge
ineffectiveness.
The notional amounts of the debt obligations being hedged was $27,000,000 at December 31, 2008 and
the fair value of the interest rate swap liability at
December 31, 2008, was $851,000.
Note 20: Fair Values of Financial Instruments
The estimated fair value amounts were determined using available market information, current
pricing information applicable to Horizon and various valuation methodologies. Where market
quotations were not available, considerable management judgment was involved in the determination
of estimated fair values. Therefore, the estimated fair value of financial instruments shown below
may not be representative of the amounts at which they could be exchanged in a current or future
transaction. Due to the inherent uncertainties of expected cash flows of financial instruments,
the use of alternate valuation assumptions and methods could have a significant effect on the
derived estimated fair value amounts.
The estimated fair values of financial instruments, as shown below, are not intended to reflect the
estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value
estimates are limited to Horizons significant financial instruments at December 31, 2008 and 2007.
These include financial instruments recognized as assets and liabilities on the consolidated
balance sheet as well as certain off-balance sheet financial instruments. The estimated fair
values shown below do not include any valuation of assets and liabilities which are not financial
instruments as defined by SFAS No. 107, Disclosures About Fair Value of Financial Instruments.
The following methods and assumptions were used to estimate the fair value of each class of
financial instrument:
Cash and Cash Equivalents The carrying amounts approximate fair value.
Interest-Bearing Deposits The carrying amounts approximate fair value.
87
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Investment Securities For debt securities held to maturity, fair values are based on quoted
market prices or dealer quotes. For those securities where a quoted market price is not available,
carrying amount is a reasonable estimate of fair value based upon comparison with similar
securities.
Loans Held for Sale The carrying amounts approximate fair value.
Net Loans The fair value of portfolio loans is estimated by discounting the future cash flows
using the current rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities. The carrying amounts of loans held for sale
approximate fair value.
Interest Receivable/Payable The carrying amounts approximate fair value.
FHLB and FRB Stock Fair value of FHLB and FRB stock is based on the price at which it may be
resold to the FHLB and FRB.
Deposits The fair value of demand deposits, savings accounts, interest-bearing checking accounts
and money market deposits is the amount payable on demand at the reporting date. The fair value of
fixed maturity certificates of deposit is estimated by discounting the future cash flows using
rates currently offered for deposits of similar remaining maturity.
Borrowings Rates currently available to Horizon for debt with similar terms and remaining
maturities are used to estimate fair values of existing borrowings.
Subordinated Debentures Rates currently available for debentures with similar terms and
remaining maturities are used to estimate fair values of existing debentures.
Commitments to Extend Credit and Standby Letter of Credit The fair value of commitments is
estimated using the fees currently charged to enter into similar agreements, taking into account
the remaining terms of the agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the difference between current levels of
interest rates and the committed rates. The fair value of letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date. Due to the short-term nature
of these agreements, carrying amounts approximate fair value.
88
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The estimated fair values of Horizons financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
December 31 |
|
Amount |
|
Value |
|
Amount |
|
Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
36,001 |
|
|
$ |
36,001 |
|
|
$ |
55,029 |
|
|
$ |
55,029 |
|
Interest-bearing deposits |
|
|
2,679 |
|
|
|
2,679 |
|
|
|
249 |
|
|
|
249 |
|
Investment securities
available for sale |
|
|
301,638 |
|
|
|
301,638 |
|
|
|
234,675 |
|
|
|
234,675 |
|
Investment securities held
to maturity |
|
|
1,630 |
|
|
|
1,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale |
|
|
5,955 |
|
|
|
5,955 |
|
|
|
8,413 |
|
|
|
8,413 |
|
Loans, net |
|
|
870,557 |
|
|
|
870,329 |
|
|
|
879,061 |
|
|
|
894,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest receivable |
|
|
5,708 |
|
|
|
5,708 |
|
|
|
5,897 |
|
|
|
5,897 |
|
Stock in FHLB and FRB |
|
|
12,625 |
|
|
|
12,625 |
|
|
|
12,625 |
|
|
|
12,625 |
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
83,642 |
|
|
|
83,642 |
|
|
|
84,097 |
|
|
|
84,097 |
|
Interest-bearing deposits |
|
|
757,527 |
|
|
|
739,867 |
|
|
|
809,567 |
|
|
|
809,021 |
|
Borrowings |
|
|
324,383 |
|
|
|
334,616 |
|
|
|
258,852 |
|
|
|
265,797 |
|
Subordinated debentures |
|
|
27,837 |
|
|
|
28,867 |
|
|
|
27,837 |
|
|
|
27,860 |
|
Interest payable |
|
|
1,910 |
|
|
|
1,910 |
|
|
|
2,439 |
|
|
|
2,439 |
|
89
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Effective January 1, 2008, Horizon adopted Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (FAS 157). FAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. The standard describes
three levels of inputs that may be used to measure fair value:
|
|
|
|
|
|
|
Level 1
|
|
Quoted prices in active markets for identical assets or liabilities |
|
|
|
|
|
|
|
Level 2
|
|
Observable inputs other than Level 1 prices, such as quoted prices
for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the full
term of the assets or liabilities |
|
|
|
|
|
|
|
Level 3
|
|
Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets
or liabilities |
Following is a description of the valuation methodologies used for instruments measured at fair
value on a recurring basis and recognized in the accompanying financial statements, as well as the
general classification of such instruments pursuant to the valuation hierarchy.
Available for Sale Securities
When quoted market prices are available in an active market, securities are classified within Level
1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities and corporate
notes. If quoted market prices are not available, then fair values are estimated by using pricing
models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2
securities include Federal agency securities, State and municipal securities, Federal agency
collateralized mortgage obligations and Federal agency mortgage-backed pools.
Hedged Loans
Certain fixed rate loans have been converted to variable rate loans through entering into interest
rate swap agreements. Fair value of those fixed rate loans is based on discounting estimated cash
flows using interest rates determined by a respective interest rate swap agreement. Loans are
classified within Level 3 of the valuation hierarchy based on the unobservable inputs used.
Interest Rate Swap Agreements
The fair value is estimated by a third party using inputs that are primarily unobservable and
cannot be corroborated by observable market data and, therefore, are classified within Level 3 of
the valuation hierarchy.
Derivative Loan Commitments
The fair value of commitments to originate loans and the fair value of forward sale commitments are
estimated using significant unobservable inputs and are classified within level 3 of the hierarchy.
90
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The following table presents the fair value measurements of assets and liabilities recognized in
the accompanying financial statements measured at fair value on a recurring basis and the level
within the FAS 157 fair value hierarchy in which the fair value measurements fall at December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
Significant |
|
|
|
|
|
|
|
|
Active Markets |
|
Other |
|
Significant |
|
|
|
|
|
|
for Identical |
|
Observable |
|
Unobservable |
|
|
Fair |
|
Assets |
|
Inputs |
|
Inputs |
|
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Available-for-sale securities |
|
$ |
301,638 |
|
|
$ |
|
|
|
$ |
301,638 |
|
|
$ |
|
|
Hedged loans |
|
|
25,033 |
|
|
|
|
|
|
|
|
|
|
|
25,033 |
|
Forward sale commitments |
|
|
670 |
|
|
|
|
|
|
|
|
|
|
|
670 |
|
Interest rate swap agreements |
|
|
(2,557 |
) |
|
|
|
|
|
|
|
|
|
|
(2,557 |
) |
Commitments to originate loans |
|
|
(438 |
) |
|
|
|
|
|
|
|
|
|
|
(438 |
) |
The following tables show a reconciliation of the beginning and ending balances of recurring fair
value measurements recognized in the accompanying condensed consolidated balance sheet using
significant unobservable (Level 3) inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative |
|
|
Hedged |
|
Interest Rate |
|
Loan |
|
|
Loans |
|
Swaps |
|
Commitments |
|
Beginning balance January 1, 2008 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized and unrealized gains and losses |
|
|
|
|
|
|
|
|
|
|
|
|
Included in net income |
|
|
1,706 |
|
|
|
(1,706 |
) |
|
|
232 |
|
Included in other comprehensive income |
|
|
|
|
|
|
(851 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases, issuances and settlements |
|
|
23,737 |
|
|
|
|
|
|
|
|
|
Principal payments |
|
|
(410 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance December 31, 2008 |
|
$ |
25,033 |
|
|
$ |
(2,557 |
) |
|
$ |
232 |
|
|
|
|
91
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Realized gains and losses included in net income for the period from January 1, 2008 to December
31, 2008, are reported in the condensed consolidated statements of income as follows:
|
|
|
|
|
|
|
Non-Interest |
|
|
|
Income |
|
Total gains and losses from: |
|
|
|
|
Hedged loans |
|
$ |
1,706 |
|
Fair value interest rate swap agreements |
|
|
(1,706 |
) |
Derivative loan commitments |
|
|
232 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
232 |
|
|
|
|
|
Certain other assets and liabilities are measured at fair value on a nonrecurring basis in the
course of business and are subject to fair value adjustments in certain circumstances (for example,
when there is evidence of impairment)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices |
|
Significant |
|
|
|
|
|
|
|
|
in Active |
|
Other |
|
Significant |
|
|
|
|
|
|
Markets for |
|
Observable |
|
Unobservable |
|
|
Fair |
|
Identical Assets |
|
Inputs |
|
Inputs |
|
|
Value |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Impaired and non-accrual loans |
|
$ |
4,685 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,685 |
|
Impaired and non-accrual loans: Fair value adjustments for these items typically occur when there
is evidence of impairment. Loans are designated as impaired when, in the judgment of management
based on current information and events, it is probable that all amounts due according to the
contractual terms of the loan agreement will not be collected. The measurement of loss associated
with impaired loans can be based on either the observable market price of the loan or the fair
value of the collateral. The Corporation measures fair value based on the value of the collateral
securing the loans. Collateral may be in the form of real estate or personal property including
equipment and inventory. The value of the collateral is determined based on internal estimates as
well as third party appraisals or non-binding broker quotes. These measurements were classified as
Level 3.
Note 21: Capital Purchase Program
On December 19, 2008, Horizon entered into a Letter Agreement (Purchase Agreement) with the U.S.
Treasury (Treasury), pursuant to which the Horizon agreed to issue and sell (a) 25,000 of Horizons
fixed Rate Cumulative Perpetual Preferred Stock and (b) a warrant to purchase 212,104 shares of
Horizons common stock for an aggregate purchase price of $3,750,000 in cash.
92
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The preferred Stock qualifies as Tier I capital and will pay cumulative dividends at a rate of 5%
per annum for the first five years and 9% per annum thereafter. The preferred Stock is non-voting
except with respect to certain matters affecting the rights of the holders thereof, and may be
redeemed by Horizon after three years. The Warrant has a ten year term and is immediately
exercisable with an exercise price of $17.68 per share of Common Stock. Pursuant to the Purchase
Agreement, Treasury has agreed not to exercise voting power with respect to any shares of Common
Stock issued upon exercise of the Warrant.
In the Purchase Agreement, Horizon agreed that, until such time as Treasury ceases to own any debt
or equity securities of the Company, acquired pursuant to the Purchase Agreement, Horizon will take
all necessary action to ensure that its benefit plans with respect to its senior executive officers
comply with Section 111(b) of the Emergency Economic Stabilization Act of 2008 (EESA) as
implemented by any guidance or regulation under EESA that has been issued and is in effect as of
the date of issuance of the Preferred Stock and the Warrant, and has agreed to not adopt any
benefit plans with respect to, or which cover, its senior executive officers that do not comply
with the EESA, and the applicable executives have consented to the foregoing.
Upon issuance of the Preferred Stock on December 19, 2008, the ability of Horizon to declare or pay
dividends on, or purchase, redeem or otherwise acquire for consideration, shares of its Common
Stock will be subject to restrictions, including Horizons restriction against increasing dividends
from the last quarterly cash dividend per share of $.17 declared on the Common Stock prior to
December 19, 2008. The redemption, purchase or other acquisition of trust preferred securities of
Horizon or its affiliates also is restricted. These restrictions will terminate the earlier of (a)
the third anniversary of the date of issuance of the Preferred Stock or (b) the date on which the
Preferred Stock has been redeemed in whole or Treasury has transferred all of the Preferred Stock
to third parties. In addition, the ability of Horizon to declare or pay dividends, or repurchase,
redeem or otherwise acquire for consideration, shares of its Common Stock will be subject to
restrictions in the event that Horizon fails to declare and pay full dividends on its Preferred
Stock.
93
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 22: Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position, results of operations
and cash flows of Horizon Bancorp:
Condensed Balance Sheets
|
|
|
|
|
|
|
|
|
December 31 |
|
2008 |
|
2007 |
|
Assets |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
$ |
7,306 |
|
|
$ |
71 |
|
Investment securities, available for sale |
|
|
|
|
|
|
|
|
Investment in Bank |
|
|
119,921 |
|
|
|
94,602 |
|
Other assets |
|
|
10,230 |
|
|
|
9,326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
137,457 |
|
|
$ |
103,999 |
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Short-term borrowings |
|
$ |
4,700 |
|
|
$ |
4,700 |
|
Subordinated debentures |
|
|
27,837 |
|
|
|
27,837 |
|
Other liabilities |
|
|
1,570 |
|
|
|
817 |
|
Stockholders Equity |
|
|
103,350 |
|
|
|
70,645 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
137,457 |
|
|
$ |
103,999 |
|
|
|
|
Condensed Statements of Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
|
Operating Income (Expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Dividend income from Bank |
|
$ |
6,200 |
|
|
$ |
4,250 |
|
|
$ |
5,900 |
|
Investment income |
|
|
10 |
|
|
|
139 |
|
|
|
91 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
4 |
|
Interest expense |
|
|
(1,705 |
) |
|
|
(2,571 |
) |
|
|
(2,675 |
) |
Employee benefit expense |
|
|
(572 |
) |
|
|
(509 |
) |
|
|
(433 |
) |
Other expense |
|
|
(104 |
) |
|
|
(97 |
) |
|
|
(155 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Undistributed Income of Subsidiaries |
|
|
3,829 |
|
|
|
1,212 |
|
|
|
2,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Undistributed Income of Subsidiaries |
|
|
4,201 |
|
|
|
5,725 |
|
|
|
3,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Tax |
|
|
8,030 |
|
|
|
6,937 |
|
|
|
6,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Benefit |
|
|
942 |
|
|
|
1,203 |
|
|
|
1,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
8,972 |
|
|
$ |
8,140 |
|
|
$ |
7,484 |
|
|
|
|
94
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31 |
|
2008 |
|
2007 |
|
2006 |
|
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,972 |
|
|
$ |
8,140 |
|
|
$ |
7,484 |
|
Items not requiring (providing) cash |
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed net income of Bank |
|
|
(4,201 |
) |
|
|
(5,725 |
) |
|
|
(3,497 |
) |
Change in |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes receivable |
|
|
(954 |
) |
|
|
(1,836 |
) |
|
|
(1,745 |
) |
Dividends receivable from Bank |
|
|
300 |
|
|
|
400 |
|
|
|
(100 |
) |
Share based compensation |
|
|
39 |
|
|
|
53 |
|
|
|
40 |
|
Reversal of compensation expense |
|
|
|
|
|
|
(84 |
) |
|
|
|
|
Amortization of unearned compensation |
|
|
233 |
|
|
|
240 |
|
|
|
212 |
|
Other assets |
|
|
48 |
|
|
|
596 |
|
|
|
86 |
|
Other liabilities |
|
|
(98 |
) |
|
|
(4 |
) |
|
|
149 |
|
|
|
|
Net cash provided by operating activities |
|
|
4,339 |
|
|
|
1,780 |
|
|
|
2,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of securities available for sale |
|
|
|
|
|
|
|
|
|
|
(12,024 |
) |
Proceeds from maturities, calls and principal repayments
of securities available for sale |
|
|
|
|
|
|
12,024 |
|
|
|
|
|
Investment in Bank |
|
|
(20,000 |
) |
|
|
|
|
|
|
|
|
Investment in Statutory Trusts |
|
|
|
|
|
|
|
|
|
|
(372 |
) |
Redemption of Statutory Trust |
|
|
|
|
|
|
372 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(20,000 |
) |
|
|
12,396 |
|
|
|
(12,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of preferred stock |
|
|
25,000 |
|
|
|
|
|
|
|
|
|
Dividends paid |
|
|
(2,147 |
) |
|
|
(1,917 |
) |
|
|
(1,811 |
) |
Change in short-term borrowings |
|
|
|
|
|
|
(500 |
) |
|
|
(2,000 |
) |
Exercise of stock options |
|
|
35 |
|
|
|
135 |
|
|
|
735 |
|
Tax benefit of stock options |
|
|
8 |
|
|
|
68 |
|
|
|
469 |
|
Proceeds from issuance of trust preferred securities |
|
|
|
|
|
|
|
|
|
|
12,372 |
|
Redemption of trust preferred securities |
|
|
|
|
|
|
(12,372 |
) |
|
|
|
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
(128 |
) |
|
|
|
Net cash provided by (used in) financing activities |
|
|
22,896 |
|
|
|
(14,586 |
) |
|
|
9,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Change in Cash and Cash Equivalents |
|
|
7,235 |
|
|
|
(410 |
) |
|
|
(130 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at Beginning of Year |
|
|
71 |
|
|
|
481 |
|
|
|
611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year |
|
$ |
7,306 |
|
|
$ |
71 |
|
|
$ |
481 |
|
|
|
|
95
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 23: Quarterly Results of Operations (Unaudited)
The following is a summary of the quarterly consolidated results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended 2008 |
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
Interest income |
|
$ |
18,752 |
|
|
$ |
17,270 |
|
|
$ |
17,165 |
|
|
$ |
17,048 |
|
Interest expense |
|
|
9,829 |
|
|
|
7,935 |
|
|
|
7,762 |
|
|
|
7,359 |
|
|
|
|
Net interest income |
|
|
8,923 |
|
|
|
9,335 |
|
|
|
9,403 |
|
|
|
9,689 |
|
Provision for loan losses |
|
|
778 |
|
|
|
1,490 |
|
|
|
3,137 |
|
|
|
2,163 |
|
Net income |
|
|
2,528 |
|
|
|
2,990 |
|
|
|
1,332 |
|
|
|
2,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.79 |
|
|
$ |
.93 |
|
|
$ |
.42 |
|
|
$ |
.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
.78 |
|
|
$ |
.92 |
|
|
$ |
.41 |
|
|
$ |
.64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
3,207,232 |
|
|
|
3,208,419 |
|
|
|
3,209,482 |
|
|
|
3,209,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
3,242,471 |
|
|
|
3,238,331 |
|
|
|
3,255,409 |
|
|
|
3,246,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended 2007 |
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
Interest income |
|
$ |
17,948 |
|
|
$ |
18,566 |
|
|
$ |
19,173 |
|
|
$ |
19,381 |
|
Interest expense |
|
|
10,312 |
|
|
|
10,524 |
|
|
|
10,914 |
|
|
|
10,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
7,636 |
|
|
|
8,042 |
|
|
|
8,259 |
|
|
|
8,871 |
|
Provision for loan losses |
|
|
225 |
|
|
|
365 |
|
|
|
550 |
|
|
|
1,928 |
|
Net income |
|
|
1,844 |
|
|
|
2,016 |
|
|
|
2,270 |
|
|
|
2,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.58 |
|
|
$ |
.63 |
|
|
$ |
.71 |
|
|
$ |
.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
.57 |
|
|
$ |
.62 |
|
|
$ |
.70 |
|
|
$ |
.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
3,194,309 |
|
|
|
3,200,259 |
|
|
|
3,202,341 |
|
|
|
3,204,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
3,239,479 |
|
|
|
3,243,537 |
|
|
|
3,242,919 |
|
|
|
3,247,843 |
|
|
|
|
96
HORIZON BANCORP
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 24: Subsequent Event
On February 27, 2009, the FDIC announced the imposition of a special assessment and changes to
assessment rates, to the risk-based assessment system that will take effect beginning April 1,
2009, and to the restoration plan. The FDIC adopted an interim rule that imposes a special
assessment of 10 basis points as of June 30, 2009, which is to be collected on September 30, 2009.
Assuming that deposit levels remain constant, the Bank anticipates that the special assessment for
the Bank would total approximately $779,000. The FDICs interim rule also provides for the
imposition of additional special assessments of up to 10 basis points if necessary. Comments on
the interim rule are due within 30 days of publication in the Federal Register. Under the new
assessment system, banks in the best risk category will pay from 12 cents to 16 cents per $100 of
insured deposits. The FDIC also announced an amendment to the restoration plan to extend the
period of the plan from five to seven years.
97
|
|
|
|
|
|
|
|
201 N. Illinois Street, Suite 700 |
|
P.O. Box 44998 |
|
Indianapolis, IN 46244-0998 |
|
317.383.4000 Fax 317.383.4200 www.bkd.com |
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors and Stockholders
Horizon Bancorp
Michigan City, Indiana
We have audited the accompanying consolidated balance sheets of Horizon Bancorp as of December 31,
2008 and 2007, and the related consolidated statements of income, stockholders equity and cash
flows for each of the years in the three-year period ended December 31, 2008. The Companys
management is responsible for these financial statements. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. Our audits included examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Horizon Bancorp as of December 31, 2008 and 2007, and
the results of its operations and its cash flows for each of the years in the three-year period
ended December 31, 2008, in conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 15, the Company changed its method of accounting for fair value measurements
in accordance with Statement of Financial Accounting Standards No. 157 in 2008.
Indianapolis, Indiana
March 17, 2009
98
Horizon Bancorp
MANAGEMENTS REPORT ON FINANCIAL STATEMENTS
Management is responsible for the preparation and presentation of the consolidated financial
statements and related notes on the preceding pages. The statements have been prepared in
conformity with accounting principles generally accepted in the United States of America
appropriate in the circumstances and include amounts that are based on managements best estimates
and judgments. Financial information elsewhere in the Annual Report is consistent with that in the
consolidated financial statements.
In meeting its responsibility for the accuracy of the consolidated financial statements, management
relies on Horizons system of internal accounting controls. This system is designed to provide
reasonable assurance that assets are safeguarded and transactions are properly recorded to permit
the preparation of appropriate financial information. The system of internal controls is
supplemented by a program of internal audits to independently evaluate the adequacy and application
of financial and operating controls and compliance with Company policies and procedures.
The Audit Committee of the Board of Directors meets periodically with management, the independent
accountants and the internal auditors to ensure that each is properly discharging its
responsibilities with regard to the consolidated financial statements and internal accounting
controls. The independent accountants have full and free access to the Audit Committee and meet
with it to discuss auditing and financial reporting matters.
The consolidated financial statements in the Annual Report have been audited by BKD, LLP,
independent registered public accounting firm, for 2008, 2007 and 2006. Their audits were
conducted in accordance with the standards of the Public Company Accounting Oversight Board (United
States) and included consideration of internal accounting controls, tests of accounting records and
other audit procedures to the extent necessary to allow them to express their opinion on the
fairness of the consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America.
99
Horizon Bancorp
Summary of Selected Financial Data
(Dollar Amounts In Thousands Except Per Share Data and Ratios)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
Earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$ |
37,350 |
|
|
$ |
32,808 |
|
|
$ |
31,545 |
|
|
$ |
30,873 |
|
|
$ |
25,422 |
|
Provision for loan losses |
|
|
7,568 |
|
|
|
3,068 |
|
|
|
905 |
|
|
|
1,521 |
|
|
|
990 |
|
Total non-interest income |
|
|
13,831 |
|
|
|
12,271 |
|
|
|
10,137 |
|
|
|
9,813 |
|
|
|
10,669 |
|
Total non-interest expense |
|
|
32,779 |
|
|
|
31,144 |
|
|
|
30,455 |
|
|
|
29,129 |
|
|
|
25,672 |
|
Provision for income taxes |
|
|
1,862 |
|
|
|
2,727 |
|
|
|
2,838 |
|
|
|
2,945 |
|
|
|
2,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,972 |
|
|
$ |
8,140 |
|
|
$ |
7,484 |
|
|
$ |
7,091 |
|
|
$ |
6,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividend declared |
|
$ |
2,147 |
|
|
$ |
1,917 |
|
|
$ |
1,811 |
|
|
$ |
1,660 |
|
|
$ |
1,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income basic |
|
$ |
2.78 |
|
|
$ |
2.54 |
|
|
$ |
2.36 |
|
|
$ |
2.31 |
|
|
$ |
2.32 |
|
Net income diluted |
|
|
2.75 |
|
|
|
2.51 |
|
|
|
2.33 |
|
|
|
2.24 |
|
|
|
2.22 |
|
Cash dividends declared |
|
|
.66 |
|
|
|
.59 |
|
|
|
.56 |
|
|
|
.53 |
|
|
|
.49 |
|
Book value at period end |
|
|
24.41 |
|
|
|
22.03 |
|
|
|
19.37 |
|
|
|
17.01 |
|
|
|
16.56 |
|
Weighted-average shares
outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
3,208,658 |
|
|
|
3,200,440 |
|
|
|
3,177,272 |
|
|
|
3,067,632 |
|
|
|
2,993,696 |
|
Diluted |
|
|
3,246,351 |
|
|
|
3,243,565 |
|
|
|
3,217,050 |
|
|
|
3,162,950 |
|
|
|
3,123,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period End Totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of deferred
loan fees and unearned
income |
|
$ |
881,967 |
|
|
$ |
888,852 |
|
|
$ |
843,834 |
|
|
$ |
732,734 |
|
|
$ |
564,042 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
|
11,410 |
|
|
|
9,791 |
|
|
|
8,738 |
|
|
|
8,368 |
|
|
|
7,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
1,306,857 |
|
|
|
1,258,874 |
|
|
|
1,222,430 |
|
|
|
1,127,875 |
|
|
|
913,831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
|
841,169 |
|
|
|
893,664 |
|
|
|
913,973 |
|
|
|
855,566 |
|
|
|
612,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings |
|
|
352,220 |
|
|
|
286,689 |
|
|
|
240,002 |
|
|
|
211,470 |
|
|
|
244,668 |
|
100
Horizon
Bancorp
Summary of Selected Financial Data
(Dollar Amounts In Thousands Except Per Share Data and Ratios)
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan to deposit |
|
|
104.85 |
% |
|
|
99.46 |
% |
|
|
93.76 |
% |
|
|
85.64 |
% |
|
|
92.76 |
% |
Loan to total funding |
|
|
73.90 |
|
|
|
75.30 |
|
|
|
76.73 |
|
|
|
68.67 |
|
|
|
65.67 |
|
Return on average assets |
|
|
.75 |
|
|
|
.69 |
|
|
|
.67 |
|
|
|
.71 |
|
|
|
.85 |
|
Average stockholders
equity to average total
assets |
|
|
6.36 |
|
|
|
5.61 |
|
|
|
5.14 |
|
|
|
5.19 |
|
|
|
5.90 |
|
Return on average
stockholders equity |
|
|
11.73 |
|
|
|
12.29 |
|
|
|
13.03 |
|
|
|
13.67 |
|
|
|
14.38 |
|
Dividend payout ratio
(dividends divided by
net income) |
|
|
23.93 |
|
|
|
23.51 |
|
|
|
24.20 |
|
|
|
21.21 |
|
|
|
21.36 |
|
Price to book value ratio |
|
|
51.10 |
|
|
|
118.09 |
|
|
|
143.53 |
|
|
|
166.42 |
|
|
|
162.74 |
|
Price to earnings ratio |
|
|
4.55 |
|
|
|
10.21 |
|
|
|
11.77 |
|
|
|
12.24 |
|
|
|
12.14 |
|
101
Horizon Bancorp
Horizons Common Stock and Related Stockholders Matters
Horizon common stock is traded on the NASDAQ Global Market under the symbol HBNC. The following
table sets forth, for the periods indicated, the high and low prices per share. Also summarized
below are the cash dividends declared by quarter for 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
Common Stock Prices |
|
Declared |
|
|
High |
|
Low |
|
Per Share |
|
|
|
First Quarter |
|
$ |
24.50 |
|
|
$ |
20.86 |
|
|
$ |
.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
23.99 |
|
|
|
17.53 |
|
|
|
.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
25.87 |
|
|
|
16.36 |
|
|
|
.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter |
|
|
24.52 |
|
|
|
12.00 |
|
|
|
.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
Dividends |
|
|
Common Stock Prices |
|
Declared |
|
|
High |
|
Low |
|
Per Share |
|
|
|
First Quarter |
|
$ |
28.10 |
|
|
$ |
26.60 |
|
|
$ |
.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Second Quarter |
|
|
27.97 |
|
|
|
26.80 |
|
|
|
.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter |
|
|
27.52 |
|
|
|
25.75 |
|
|
|
.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter |
|
|
26.40 |
|
|
|
24.40 |
|
|
|
.15 |
|
There can be no assurance as to the amount of future dividends on Horizon common stock since future
dividends are subject to the discretion of the Board of Directors, cash needs, general business
conditions and dividends from the bank subsidiary. In addition, as a result of Horizons
participation in the TARP Capital Purchase Program, Horizon may not increase the quarterly
dividends it pays on its common stock above $0.17 per share during the three-year period ending
December 19, 2011, without the consent of the U.S. Treasury Department, unless the Treasury
Department no longer holds shares of the Series A Preferred Stock Horizon issued in the TARP
Capital Purchase Program.
The approximate number of holders of record of Horizons outstanding common stock as of December
31, 2008, is 561.
102
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEM 9A(T). CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision of and with the participation of its management, including the Chief
Executive Officer and Chief Financial Office, Horizon has evaluated the effectiveness of the design
and operation of its disclosure controls (as defined in Rule 13a-15(e) of the Securities Exchange
Act of 1934 (the Exchange Act)) as of the end of the period covered by this report. Based on such
evaluation, such officers have concluded that, as of the evaluation date, Horizons disclosure
controls and procedures are effective to ensure that the information required to be disclosed by
Horizon in the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission
rules and forms and are designed to ensure that information required to be disclosed in those
reports is accumulated and communicated to management as appropriate to allow timely decisions
regarding disclosure.
Managements Report on Internal Control Over Financial Reporting
Management of Horizon Bancorp is responsible for establishing and maintaining effective internal
control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934. Horizons internal control over financial reporting is designed to provide reasonable
assurance to the Companys management and Board of Directors regarding the preparation and fair
presentation of published financial statements.
Management assessed the effectiveness of Horizons internal control over financial reporting as of
December 31, 2008. In making this assessment, management used the criteria set forth in Internal
Control Integrated Framework issued by the Committee of sponsoring Organizations (COSO) of the
Treadway Commission. Based on this assessment, management has determined that Horizons internal
control over financial reporting as of December 31, 2008 is effective based on the specified
criteria.
Internal Control Over Financial Reporting
Horizons management, including its Chief Executive Officer and Chief Financial Officer, also have
concluded that during the fiscal quarter ended December 31, 2008, there were no changes in
Horizons internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect Horizons internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
103
PART III
This information is omitted from this report pursuant to General Instruction G. (3) of Form 10-K as
Horizon intends to file with the Commission its definitive Proxy Statement for its 2009 Annual
Meeting of Shareholders (the Proxy Statement) pursuant to Regulation 14A of the Securities
Exchange Act of 1934, as amended, not later than 120 days after December 31, 2008.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information relating to Horizons directors required by this item is found in the Proxy
Statement under Proposal I Election of Directors and is incorporated into this report by
reference. The information relating to the Audit Committee of the Board of Directors required by
this item is found in the Proxy Statement under Corporate Governance The Audit Committee and is
incorporated into this report by reference.
The information relating to Horizons executive officers required by this item is included in Part
I of this Form 10-K under Special Item: Executive Officers and is incorporated into this item by
reference.
The information relating to certain filing obligations of directors and executive officers required
by this item is found in the Proxy Statement under Section 16(a) Beneficial Ownership Reporting
Compliance and is incorporated into this report by reference.
Horizon has a code of ethics that applies to its directors, chief executive officer and chief
financial officer. The code is available on Horizons website at http://www.accesshorizon.com/.
ITEM 11. EXECUTIVE COMPENSATION
The information on executive and director compensation and compensation committee matters required
by this item can be found in the Proxy Statement under Corporate Governance, Compensation
Committee Report, Compensation Discussion and Analysis, Executive Compensation and
Compensation of Directors and is incorporated into this report by reference.
104
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Equity Compensation Plan Information
The following table presents information regarding grants under all equity compensation plans of
Horizon through December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
|
|
|
|
|
|
|
|
Remaining Available for |
|
|
|
|
|
|
Weighted-Average |
|
Future Issuance Under |
|
|
Number of Securities to |
|
Exercise Price of |
|
Equity Compensation |
|
|
be Issued Upon Exercise |
|
Outstanding |
|
Plans (Excluding |
|
|
of Outstanding Options, |
|
Options, Warrants |
|
Securities Reflected in |
Plan Category |
|
Warrants and Rights |
|
and Rights |
|
the First Column) |
|
Equity compensation
plans approved by
security holders
(1) |
|
$ |
54,520 |
|
|
$ |
17.01 |
|
|
$ |
142,802 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
54,520 |
|
|
$ |
17.01 |
|
|
$ |
142,802 |
|
|
|
|
|
|
|
(1) |
|
Represents options granted or available under the 1997 Key Employees Stock Option and
Stock Appreciation Rights Plan of Horizon Bancorp and the Horizon Bancorp 2003 Omnibus Equity
Incentive Plan. |
The remaining information required by this item can be found in the Proxy Statement under Common
Stock Ownership by Directors and Executive Officers and Stock Ownership of Certain Beneficial
Owners and is incorporated by reference into this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSA