10-Q
Table of Contents

 

 

HORIZON BANCORP

 

 

FORM 10-Q

 

 

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

Commission file number 0-10792

 

 

HORIZON BANCORP

(Exact name of registrant as specified in its charter)

 

 

 

Indiana   35-1562417

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

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

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

 

 

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

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 14,776,952 shares of Common Stock, no par value, at August 9, 2016.

 

 

 


Table of Contents

HORIZON BANCORP

FORM 10-Q

INDEX

 

PART I. FINANCIAL INFORMATION

  

Item 1.

  Financial Statements (Unaudited)   
  Condensed Consolidated Balance Sheets      3   
  Condensed Consolidated Statements of Income      4   
  Condensed Consolidated Statements of Comprehensive Income      5   
  Condensed Consolidated Statement of Stockholders’ Equity      6   
  Condensed Consolidated Statements of Cash Flows      7   
  Notes to Condensed Consolidated Financial Statements      8   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      41   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      57   

Item 4.

  Controls and Procedures      57   

PART II. OTHER INFORMATION

  

Item 1.

  Legal Proceedings      58   

Item 1A.

  Risk Factors      58   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      58   

Item 3.

  Defaults Upon Senior Securities      58   

Item 4.

  Mine Safety Disclosures      58   

Item 5.

  Other Information      58   

Item 6.

  Exhibits      59   

Signatures

     60   

Index To Exhibits

     61   

 

2


Table of Contents

PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)

 

     June 30      December 31  
     2016      2015  
     (Unaudited)         

Assets

     

Cash and due from banks

   $ 109,224       $ 48,650   

Investment securities, available for sale

     455,239         444,982   

Investment securities, held to maturity (fair value of $180,059 and $193,703)

     173,696         187,629   

Loans held for sale

     7,812         7,917   

Loans, net of allowance for loan losses of $14,226 and $14,534

     1,923,599         1,734,597   

Premises and equipment, net

     61,186         60,798   

Federal Reserve and Federal Home Loan Bank stock

     16,636         13,823   

Goodwill

     56,458         49,600   

Other intangible assets

     8,686         7,371   

Interest receivable

     11,526         10,535   

Cash value of life insurance

     57,944         54,504   

Other assets

     36,074         31,995   
  

 

 

    

 

 

 

Total assets

   $ 2,918,080       $ 2,652,401   
  

 

 

    

 

 

 

Liabilities

     

Deposits

     

Non-interest bearing

   $ 397,412       $ 335,955   

Interest bearing

     1,684,849         1,544,198   
  

 

 

    

 

 

 

Total deposits

     2,082,261         1,880,153   

Borrowings

     492,883         449,347   

Subordinated debentures

     32,874         32,797   

Interest payable

     961         507   

Other liabilities

     28,099         22,765   
  

 

 

    

 

 

 

Total liabilities

     2,637,078         2,385,569   
  

 

 

    

 

 

 

Commitments and contingent liabilities

     

Stockholders’ Equity

     

Preferred stock, Authorized, 1,000,000 shares Series B shares $.01 par value, $1,000 liquidation value Issued 0 and 12,500 shares

     —           12,500   

Common stock, no par value Authorized, 44,000,000 shares Issued, 12,590,784 and 11,995,324 shares Outstanding, 12,571,534 and 11,939,887 shares

     —           —     

Additional paid-in capital

     120,758         106,370   

Retained earnings

     156,651         148,685   

Accumulated other comprehensive income (loss)

     3,593         (723
  

 

 

    

 

 

 

Total stockholders’ equity

     281,002         266,832   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 2,918,080       $ 2,652,401   
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

3


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

 

     Three Months Ended     Six Months Ended  
     June 30     June 30  
     2016      2015     2016     2015  
     (Unaudited)      (Unaudited)     (Unaudited)     (Unaudited)  

Interest Income

         

Loans receivable

   $ 20,794       $ 17,981      $ 40,541      $ 34,843   

Investment securities

         

Taxable

     2,661         2,067        5,205        4,221   

Tax exempt

     1,195         1,079        2,432        2,156   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest income

     24,650         21,127        48,178        41,220   
  

 

 

    

 

 

   

 

 

   

 

 

 

Interest Expense

         

Deposits

     1,557         1,237        3,048        2,469   

Borrowed funds

     1,721         1,539        3,480        3,018   

Subordinated debentures

     503         501        1,007        997   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total interest expense

     3,781         3,277        7,535        6,484   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net Interest Income

     20,869         17,850        40,643        34,736   

Provision for loan losses

     232         1,906        764        2,520   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Loan Losses

     20,637         15,944        39,879        32,216   
  

 

 

    

 

 

   

 

 

   

 

 

 

Non-interest Income

         

Service charges on deposit accounts

     1,335         1,085        2,573        2,084   

Wire transfer fees

     175         182        296        333   

Interchange fees

     1,663         1,366        3,121        2,468   

Fiduciary activities

     1,465         1,216        3,100        2,513   

Gain on sale of investment securities (includes $767 for the three months ended and $875 for the six months ended June 30, 2016 and $0 for the three months ended and $124 for the six months ended June 30, 2015, related to accumulated other comprehensive earnings reclassifications)

     767         —          875        124   

Gain on sale of mortgage loans

     3,529         2,642        5,643        5,021   

Mortgage servicing income net of impairment

     500         300        947        479   

Increase in cash value of bank owned life insurance

     351         257        696        515   

Death benefit on bank owned life insurance

     —           —          —          145   

Other income

     84         138        482        570   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total non-interest income

     9,869         7,186        17,733        14,252   
  

 

 

    

 

 

   

 

 

   

 

 

 

Non-interest Expense

         

Salaries and employee benefits

     10,317         8,385        20,382        16,889   

Net occupancy expenses

     1,901         1,375        3,837        2,926   

Data processing

     1,134         966        2,239        1,889   

Professional fees

     747         660        1,578        1,187   

Outside services and consultants

     2,198         918        3,297        1,544   

Loan expense

     1,409         1,367        2,604        2,624   

FDIC insurance expense

     409         339        814        676   

Other losses

     136         150        403        105   

Other expense

     3,304         2,490        6,148        4,878   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total non-interest expense

     21,555         16,650        41,302        32,718   
  

 

 

    

 

 

   

 

 

   

 

 

 

Income Before Income Tax

     8,951         6,480        16,310        13,750   

Income tax expense (includes $268 for the three months ended and $306 for the six months ended June 30, 2016 and $0 for the three months ended and $43 for the six months ended June 30, 2015, related to income tax expense from reclassification items)

     2,625         1,752        4,603        3,664   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net Income

     6,326         4,728        11,707        10,086   

Preferred stock dividend

     —           (31     (42     (63
  

 

 

    

 

 

   

 

 

   

 

 

 

Net Income Available to Common Shareholders

   $ 6,326       $ 4,697      $ 11,665      $ 10,023   
  

 

 

    

 

 

   

 

 

   

 

 

 

Basic Earnings Per Share

   $ 0.52       $ 0.51      $ 0.97      $ 1.09   

Diluted Earnings Per Share

     0.52         0.49        0.96        1.04   

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Dollar Amounts in Thousands)

 

     Three Months Ended June 30     Six Months Ended June 30  
     2016     2015     2016     2015  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Net Income

   $ 6,326      $ 4,728      $ 11,707      $ 10,086   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss)

        

Change in fair value of derivative instruments:

        

Change in fair value of derivative instruments for the period

     (83     511        (645     182   

Income tax effect

     29        (179     226        (64
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from derivative instruments

     (54     332        (419     118   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in securities:

        

Unrealized appreciation (depreciation) for the period on AFS securities

     2,691        (2,364     8,637        (402

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

     (248     (158     (477     (272

Reclassification adjustment for securities gains realized in income

     (767     —          (875     (124

Income tax effect

     (511     882        (2,550     279   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on securities

     949        (1,640     4,735        (519
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss), Net of Tax

     895        (1,308     4,316        (401
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 7,221      $ 3,420      $ 16,023      $ 9,685   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)

 

                        Accumulated        
           Additional            Other        
     Preferred     Paid-in      Retained     Comprehensive        
     Stock     Capital      Earnings     Income (Loss)     Total  

Balances, January 1, 2016

   $ 12,500      $ 106,370       $ 148,685      $ (723   $ 266,832   

Net income

          11,707          11,707   

Other comprehensive loss, net of tax

            4,316        4,316   

Redemption of preferred stock

     (12,500            (12,500

Amortization of unearned compensation

       150             150   

Stock option expense

       170             170   

Stock issued in acquisition

       14,068             14,068   

Cash dividends on preferred stock (1.00%)

          (42       (42

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

          (3,699       (3,699
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Balances, June 30, 2016

   $ —        $ 120,758       $ 156,651      $ 3,593      $ 281,002   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

 

     Six Months Ended June 30  
     2016     2015  
     (Unaudited)     (Unaudited)  

Operating Activities

    

Net income

   $ 11,707      $ 10,086   

Items not requiring (providing) cash

    

Provision for loan losses

     764        2,520   

Depreciation and amortization

     2,463        1,883   

Share based compensation

     170        138   

Mortgage servicing rights net impairment

     840        356   

Premium amortization on securities available for sale, net

     2,673        1,289   

Gain on sale of investment securities

     (875     (124

Gain on sale of mortgage loans

     (5,643     (5,021

Proceeds from sales of loans

     144,197        155,746   

Loans originated for sale

     (138,452     (152,259

Change in cash value of life insurance

     (695     (515

Gain (Loss) on sale of other real estate owned

     118        (206

Net change in

    

Interest receivable

     (355     (577

Interest payable

     399        (36

Other assets

     (5,624     4,099   

Other liabilities

     316        (1,511
  

 

 

   

 

 

 

Net cash provided by operating activities

     12,003        15,868   
  

 

 

   

 

 

 

Investing Activities

    

Purchases of securities available for sale

     (50,143     (47,958

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

     65,523        40,359   

Purchases of securities held to maturity

     (17,960     —     

Proceeds from maturities of securities held to maturity

     12,934        1,535   

Proceeds from the sale of FHLB stock

     (2,231     268   

Net change in loans

     (88,250     (142,131

Proceeds on the sale of OREO and repossessed assets

     1,253        1,793   

Change in premises and equipment, net

     (683     (3,587

Acquisition of Kosciusko, net of cash received

     30,437        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (49,120     (149,721
  

 

 

   

 

 

 

Financing Activities

    

Net change in

    

Deposits

     78,622        102,404   

Borrowings

     35,310        34,115   

Redemption of preferred stock

     (12,500     —     

Proceeds from issuance of stock

       389   

Dividends paid on common shares

     (3,699     (2,611

Dividends paid on preferred shares

     (42     (63
  

 

 

   

 

 

 

Net cash provided by financing activities

     97,691        134,234   
  

 

 

   

 

 

 

Net Change in Cash and Cash Equivalents

     60,574        381   

Cash and Cash Equivalents, Beginning of Period

     48,650        43,476   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 109,224      $ 43,857   
  

 

 

   

 

 

 

Additional Supplemental Information

    

Interest paid

   $ 7,081      $ 6,519   

Income taxes paid

     4,750        3,700   

Transfer of loans to other real estate owned

     1,971        (1,384

The Company purchased all of the capital stock of Kosciusko for $22,581 on June 1, 2016. In conjunction with the acquisition, liabilities were assumed as follows:

    

Fair value of assets acquired

     155,413        —     

Less: common stock issued

     14,068        —     

Cash paid for the capital stock

     8,513        —     

Liabilities assumed

     132,832        —     

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 1 - Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of Horizon Bancorp (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank, N.A. (“Bank”). All inter-company balances and transactions have been eliminated. The results of operations for the periods ended June 30, 2016 and June 30, 2015 are not necessarily indicative of the operating results for the full year of 2016 or 2015. The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of Horizon’s management, necessary to fairly present the financial position, results of operations and cash flows of Horizon for the periods presented. Those adjustments consist only of normal recurring adjustments.

Certain information and note disclosures normally included in Horizon’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Horizon’s Annual Report on Form 10-K for 2015 filed with the Securities and Exchange Commission on February 29, 2016. The condensed consolidated balance sheet of Horizon as of December 31, 2015 has been derived from the audited balance sheet as of that date.

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

 

     Three Months Ended      Six Months Ended  
     June 30      June 30  
     2016      2015      2016      2015  
     (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Basic earnings per share

           

Net income

   $ 6,326       $ 4,728       $ 11,707       $ 10,086   

Less: Preferred stock dividends

     —           31         42         63   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 6,326       $ 4,697       $ 11,665       $ 10,023   

Weighted average common shares outstanding

     12,179,253         9,240,005         12,064,335         9,228,075   

Basic earnings per share

   $ 0.52       $ 0.51       $ 0.97       $ 1.09   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

           

Net income available to common shareholders

   $ 6,326       $ 4,697       $ 11,665       $ 10,023   

Weighted average common shares outstanding

     12,179,253         9,240,005         12,064,335         9,228,075   

Effect of dilutive securities:

           

Warrants

     —           324,698         —           323,198   

Restricted stock

     20,721         34,892         21,050         30,816   

Stock options

     42,804         37,991         41,643         33,462   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     12,242,778         9,637,586         12,127,028         9,615,551   

Diluted earnings per share

   $ 0.52       $ 0.49       $ 0.96       $ 1.04   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were zero shares for both the three and six months ended June 30, 2016, respectively, and 2,500 and 41,444 for the three and six months ended June 30, 2015 which were not included in the computation of diluted earnings per share because they were non-dilutive.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2015 Annual Report on Form 10-K.

Note 2 – Acquisitions

On July 1, 2015, Horizon completed the acquisition of Peoples Bancorp, an Indiana corporation (“Peoples”) and Horizon Bank N.A.’s acquisition of Peoples Federal Savings Bank of DeKalb County (“Peoples FSB”), through mergers effective July 1, 2015. Under the terms of the acquisition, the exchange ratio was 0.95 shares of Horizon common stock (the “Exchange Ratio”) and $9.75 in cash for each outstanding share of Peoples common stock. Peoples shareholders owning fewer than 100 shares of common stock received $33.14 in cash for each common share. Peoples shares outstanding at the closing were 2,311,858, and the shares of Horizon common stock issued to Peoples shareholders totaled 2,192,202. Horizon’s stock price was $25.32 per share at the close of business on July 1, 2015. Based upon these numbers, the total value of the consideration for the acquisition was $78.1 million. The Company had approximately $4.9 million in costs related to the acquisition as of December 31, 2015. These expenses were classified in the other expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company increased its deposit base and reduced transaction costs. The Company also expects to reduce cost through economies of scale.

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

 

ASSETS

  

Cash and due from banks

   $ 205,054   

Investment securities, held to maturity

     2,038   

Commercial

     67,435   

Residential mortgage

     137,331   

Consumer

     19,593   
  

 

 

 

Total loans

     224,359   

Premises and equipment, net

     5,524   

FRB and FHLB stock

     2,743   

Goodwill

     21,424   

Core deposit intangible

     4,394   

Interest receivable

     1,279   

Cash value of life insurance

     13,898   

Other assets

     4,364   
  

 

 

 

Total assets purchased

   $ 485,077   
  

 

 

 

Common shares issued

   $ 55,506   

Cash paid

     22,641   
  

 

 

 

Total estimated purchase price

   $ 78,147   
  

 

 

 

LIABILITIES

  

Deposits

  

Non-interest bearing

   $ 28,251   

NOW accounts

     65,771   

Savings and money market

     125,176   

Certificates of deposits

     131,889   
  

 

 

 

Total deposits

     351,087   

Borrowings

     48,884   

Interest payable

     21   

Other liabilities

     6,938   
  

 

 

 

Total liabilities assumed

   $ 406,930   
  

 

 

 
 

 

Of the total purchase price of $78.1 million, $4.4 million has been allocated to core deposit intangible. Additionally, $21.0 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over seven years on a straight line basis.

The Company acquired the $228.6 million loan portfolio at a fair value discount of $4.8 million. The performing portion of the portfolio, $223.4 million, had an estimated fair value of $220.0 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-20.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

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

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

The following table details the acquired loans that are accounted for in accordance with ASC 310-30 as of July 1, 2015.

 

Contractually required principal and interest at acquisition

   $ 5,730   

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

     715   
  

 

 

 

Expected cash flows at acquisition

     5,015   

Interest component of expected cash flows (accretable discount)

     647   
  

 

 

 

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

   $ 4,368   
  

 

 

 

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

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

     Three Months Ended      Six Months Ended  
     June 30      June 30      June 30      June 30  
     2016      2015      2016      2015  

Summary of Operations:

           

Net Interest Income

   $ 20,869       $ 20,829       $ 40,643       $ 40,690   

Provision for Loan Losses

     232         1,936         764         2,580   

Net Interest Income after Provision for Loan Losses

     20,637         18,893         39,879         38,110   

Non-interest Income

     9,869         8,086         17,733         16,145   

Non-Interest Expense

     21,555         19,852         41,302         39,014   

Income before Income Taxes

     8,951         7,127         16,310         15,241   

Income Tax Expense

     2,625         1,779         4,603         3,791   

Net Income

     6,326         5,348         11,707         11,450   

Net Income Available to Common Shareholders

   $ 6,326       $ 5,317       $ 11,665       $ 11,387   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic Earnings Per Share

   $ 0.52       $ 0.46       $ 0.97       $ 0.99   

Diluted Earnings Per Share

   $ 0.52       $ 0.45       $ 0.96       $ 0.96   

The pro forma information includes adjustments for interest income on loans, amortization of intangibles arising from the transaction, interest expense on deposits acquired, premises expense for the banking centers acquired and the related income tax effects. The pro forma information for the three and six months ended June 30, 2015 includes $657,000, net of tax, of operating revenue from Peoples and approximately $95,000, net of tax, of non-recurring expenses directly attributable to the Peoples acquisition.

The pro forma financial information is presented for information purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results.

On June 1, 2016, Horizon completed the acquisition of Kosciusko Financial, Inc., an Indiana corporation (“Kosciusko”) and Horizon Bank’s acquisition of Farmers State Bank, a state-chartered bank and wholly owned subsidiary of Kosciusko, through mergers effective June 1, 2016. Under the terms of the Merger Agreement, shareholders of Kosciusko had the option to receive $81.75 per share in cash or 3.0122 shares of Horizon common stock for each share of Kosciusko’s common stock, subject to allocation provisions to assure that in aggregate, Kosciusko shareholders received total consideration that consists of 65% stock and 35% cash. Kosciusko shareholders owning fewer than 100 shares of common stock received $81.75 in cash for each common share. As a result of Kosciusko stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 582,287 shares of its common stock in the merger. Based upon the June 1, 2016 closing price of $24.85 per share of Horizon common stock, the transaction has an implied valuation of approximately $23.0 million. The Company has had approximately $1.6 million in costs related to the acquisition. These expenses are classified in the other expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce cost through economies of scale.

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the Kosciusko acquisition is detailed in the following table. Prior to the end of the one year measurement period for finalizing the purchase price allocation, if information becomes available which would indicate adjustments are required to the purchase price allocation, such adjustments will be included in the purchase price allocation prospectively. If any adjustments are made to the preliminary assumptions (provisional amounts), disclosures will be made in the notes to the financial statements of the amounts recorded in the current period earnings by line item that have been recorded in previous reporting periods if the adjustments to the provisional amounts had been recognized as of the acquisition date.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

ASSETS

  

Cash and due from banks

   $ 38,950   

Investment securities, held to maturity

     1,191   

Commercial

     67,310   

Residential mortgage

     26,244   

Consumer

     6,319   
  

 

 

 

Total loans

     99,873   

Premises and equipment, net

     1,466   

FRB and FHLB stock

     582   

Goodwill

     6,858   

Core deposit intangible

     1,867   

Interest receivable

     636   

Cash value of life insurance

     2,745   

Other assets

     1,245   
  

 

 

 

Total assets purchased

   $ 155,413   
  

 

 

 

Common shares issued

   $ 14,068   

Cash paid

     8,513   
  

 

 

 

Total estimated purchase price

   $ 22,581   
  

 

 

 

LIABILITIES

  

Deposits

  

Non-interest bearing

   $ 28,549   

NOW accounts

     35,213   

Savings and money market

     26,953   

Certificates of deposits

     32,771   
  

 

 

 

Total deposits

     123,486   

Borrowings

     8,303   

Interest payable

     55   

Other liabilities

     988   
  

 

 

 

Total liabilities assumed

   $ 132,832   
  

 

 

 
 

 

Of the total estimated purchase price of $22.6 million, $1.9 million has been allocated to core deposit intangible. Additionally, $6.9 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over seven years on a straight line basis.

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

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

The Company acquired the $130.5 million loan portfolio at a fair value discount of $6.4 million. The performing portion of the portfolio, $106.2 million, had an estimated fair value of $104.6 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-20.

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

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

On July 18, 2016, Horizon completed the acquisition of LaPorte Bancorp, Inc., a Maryland corporation (“LaPorte Bancorp”) and Horizon Bank’s acquisition of The LaPorte Savings Bank, a state-chartered savings bank and wholly owned subsidiary of LaPorte Bancorp, through mergers effective July 18, 2016. Under the terms of the Merger Agreement, shareholders of LaPorte Bancorp had the option to receive $17.50 per share in cash or 0.629 shares of Horizon common stock for each share of LaPorte Bancorp’s common stock, subject to allocation provisions to assure that in aggregate, LaPorte Bancorp shareholders received total consideration that consists of 65% stock and 35% cash. LaPorte Bancorp shareholders owning fewer than 100 shares of common stock received $17.50 in cash for each common share. As a result of LaPorte stockholder stock and cash elections and the related proration provisions of the Merger Agreement, Horizon issued 2,280,992 shares of its common stock in the merger. Based upon the July 18, 2016 closing price of $27.54 per share of Horizon common stock, the transaction has an implied valuation of approximately $101.7 million.

As of July 18, 2016, LaPorte Bancorp had total assets of approximately $536.0 million, total deposits of approximately $370.9 million and total net loans of approximately $316.8 million.

Utilizing July 15, 2016 financials for both Horizon and LaPorte Bancorp and an estimate of the fair market value adjustments associated with the merger, Horizon would have total assets of approximately $3.5 billion, total deposits of approximately $2.5 billion and total net loans of approximately $2.2 billion on a pro forma basis. The accounting for the business combination is not yet complete and therefore all required disclosures for a business combination have not been provided.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 3 – Securities

The fair value of securities is as follows:

 

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

Available for sale

           

U.S. Treasury and federal agencies

   $ 18,384       $ 86       $ —         $ 18,470   

State and municipal

     60,961         1,654         (4      62,611   

Federal agency collateralized mortgage obligations

     151,736         2,596         (69      154,263   

Federal agency mortgage-backed pools

     215,445         4,654         (276      219,823   

Corporate notes

     32         40         —           72   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 446,558       $ 9,030       $ (349    $ 455,239   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

State and municipal

   $ 143,093       $ 7,586       $ (2,606    $ 148,073   

Federal agency collateralized mortgage obligations

     8,424         199         —           8,623   

Federal agency mortgage-backed pools

     22,179         1,184         —           23,363   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 173,696       $ 8,969       $ (2,606    $ 180,059   
  

 

 

    

 

 

    

 

 

    

 

 

 
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
December 31, 2015    Cost      Gains      Losses      Value  

Available for sale

           

U.S. Treasury and federal agencies

   $ 5,940       $ 3       $ (17    $ 5,926   

State and municipal

     73,829         1,299         (33      75,095   

Federal agency collateralized mortgage obligations

     157,291         567         (1,655      156,203   

Federal agency mortgage-backed pools

     206,970         2,080         (1,346      207,704   

Corporate notes

     32         22         —           54   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 444,062       $ 3,971       $ (3,051    $ 444,982   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

U.S. Treasury and federal agencies

   $ 5,859       $ 93       $ —         $ 5,952   

State and municipal

     146,331         5,375         (253      151,453   

Federal agency collateralized mortgage obligations

     9,051         27         (124      8,954   

Federal agency mortgage-backed pools

     26,388         1,141         (185      27,344   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 187,629       $ 6,636       $ (562    $ 193,703   
  

 

 

    

 

 

    

 

 

    

 

 

 

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information, and information obtained from regulatory filings, management believes the declines in fair value for these securities are temporary. While these securities are held in the available for sale portfolio and held-to-maturity, Horizon intends, and has the ability, to hold them until the earlier of a recovery in fair value or maturity.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. At June 30, 2016, no individual investment security had an unrealized loss that was determined to be other-than-temporary.

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

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The amortized cost and fair value of securities available for sale and held to maturity at June 30, 2016 and December 31, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

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

Available for sale

           

Within one year

   $ 7,123       $ 7,153       $ 7,192       $ 7,232   

One to five years

     46,104         46,664         38,197         38,894   

Five to ten years

     11,351         11,804         16,807         17,152   

After ten years

     14,799         15,532         17,605         17,797   
  

 

 

    

 

 

    

 

 

    

 

 

 
     79,377         81,153         79,801         81,075   

Federal agency collateralized mortgage obligations

     151,736         154,263         157,291         156,203   

Federal agency mortgage-backed pools

     215,445         219,823         206,970         207,704   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 446,558       $ 455,239       $ 444,062       $ 444,982   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

Within one year

   $ —         $ —         $ —         $ —     

One to five years

     20,415         20,436         17,815         18,403   

Five to ten years

     88,183         92,551         106,167         110,026   

After ten years

     34,495         35,086         28,208         28,976   
  

 

 

    

 

 

    

 

 

    

 

 

 
     143,093         148,073         152,190         157,405   

Federal agency collateralized mortgage obligations

     8,424         8,623         9,051         8,954   

Federal agency mortgage-backed pools

     22,179         23,363         26,388         27,344   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 173,696       $ 180,059       $ 187,629       $ 193,703   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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

State and municipal

   $ 1,763       $ (2,609   $ 132       $ (1   $ 1,895       $ (2,610

Federal agency collateralized mortgage obligations

     4,059         (23     9,079         (46     13,138         (69

Federal agency mortgage-backed pools

     23,361         (276     —           —          23,361         (276
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 29,183       $ (2,908   $ 9,211       $ (47   $ 38,394       $ (2,955
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 Months     12 Months or More     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
December 31, 2015    Value      Losses     Value      Losses     Value      Losses  

U.S. Treasury and federal agencies

   $ 5,468       $ (17   $ —         $ —        $ 5,468       $ (17

State and municipal

     17,353         (280     446         (6     17,799         (286

Federal agency collateralized mortgage obligations

     89,459         (1,124     25,428         (655     114,887         (1,779

Federal agency mortgage-backed pools

     113,244         (1,212     16,506         (319     129,750         (1,531
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 225,524       $ (2,633   $ 42,380       $ (980   $ 267,904       $ (3,613
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Three Months Ended June 30      Six Months Ended June 30  
     2016      2015      2016      2015  

Sales of securities available for sale (Unaudited)

           

Proceeds

   $ 17,536       $ —         $ 25,077       $ 13,332   

Gross gains

     952         —           1,060         147   

Gross losses

     (185      —           (185      (23

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 4  Loans

 

     June 30      December 31  
     2016      2015  

Commercial

     

Working capital and equipment

   $ 416,205       $ 381,245   

Real estate, including agriculture

     424,300         391,668   

Tax exempt

     11,458         8,674   

Other

     22,617         23,408   
  

 

 

    

 

 

 

Total

     874,580         804,995   

Real estate

     

1–4 family

     489,133         433,015   

Other

     4,493         4,129   
  

 

 

    

 

 

 

Total

     493,626         437,144   

Consumer

     

Auto

     162,172         168,397   

Recreation

     5,005         5,365   

Real estate/home improvement

     50,121         47,015   

Home equity

     130,017         127,113   

Unsecured

     4,175         4,120   

Other

     12,430         10,290   
  

 

 

    

 

 

 

Total

     363,920         362,300   

Mortgage warehouse

     205,699         144,692   
  

 

 

    

 

 

 

Total loans

     1,937,825         1,749,131   

Allowance for loan losses

     (14,226      (14,534
  

 

 

    

 

 

 

Loans, net

   $ 1,923,599       $ 1,734,597   
  

 

 

    

 

 

 

Commercial

Commercial loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets, the general economy or fluctuations in interest rates. The properties securing the Company’s commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. Management monitors and evaluates commercial real estate loans based on collateral, cash flow and risk grade criteria. As a general rule, the Company avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Real Estate and Consumer

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

Mortgage Warehousing

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

Based on the agreements with each mortgage company, at any time a mortgage company can reacquire from Horizon its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company reacquire an individual mortgage. Should this occur, Horizon would return the original note and reassign the assignment of the mortgage to the mortgage company. Also, in the event that the end investor would not be able to honor the purchase commitment and the mortgage company would not be able to reacquire its loan on an individual mortgage, Horizon would be able to exercise its rights under the agreement.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

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

Owner occupied real estate

   $ 298,481       $ 1,068       $ 1,134       $ 300,683   

Non owner occupied real estate

     343,360         346         566         344,272   

Residential spec homes

     7,660         13         13         7,686   

Development & spec land loans

     23,171         58         16         23,245   

Commercial and industrial

     199,933         1,419         246         201,598   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     872,605         2,904         1,975         877,484   

Residential mortgage

     473,563         1,434         2,277         477,274   

Residential construction

     17,786         36         —           17,822   

Mortgage warehouse

     205,699         480         —           206,179   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     697,048         1,950         2,277         701,275   

Direct installment

     59,105         164         (383      58,886   

Direct installment purchased

     131         —           —           131   

Indirect installment

     144,935         300         —           145,235   

Home equity

     160,955         621         (823      160,753   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     365,126         1,085         (1,206      365,005   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     1,934,779         5,939         3,046         1,943,764   

Allowance for loan losses

     (14,226      —           —           (14,226
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans

   $ 1,920,553       $ 5,939       $ 3,046       $ 1,929,538   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Loan             Deferred      Recorded  
December 31, 2015    Balance      Interest Due      Fees / (Costs)      Investment  

Owner occupied real estate

   $ 268,281       $ 613       $ 1,328       $ 270,222   

Non owner occupied real estate

     326,399         306         497         327,202   

Residential spec homes

     5,018         9         17         5,044   

Development & spec land loans

     18,183         33         26         18,242   

Commercial and industrial

     184,911         1,246         335         186,492   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     802,792         2,207         2,203         807,202   

Residential mortgage

     414,924         1,275         2,470         418,669   

Residential construction

     19,751         34         —           19,785   

Mortgage warehouse

     144,692         480         —           145,172   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     579,367         1,789         2,470         583,626   

Direct installment

     54,341         168         (359      54,150   

Direct installment purchased

     153         —           —           153   

Indirect installment

     151,523         323         —           151,846   

Home equity

     157,164         628         (522      157,270   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     363,181         1,119         (881      363,419   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     1,745,340         5,115         3,792         1,754,247   

Allowance for loan losses

     (14,534      —           —           (14,534
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans

   $ 1,730,806       $ 5,115       $ 3,792       $ 1,739,713   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 5 – Accounting for Certain Loans Acquired in a Transfer

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

Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and non-accrual status, borrower credit scores and recent loan-to-value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds. Amounts for Kosciusko were estimated as of June 30, 2016 as the final analysis of loans with deterioration was not completed.

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

 

     June 30      June 30      June 30      June 30      June 30  
     2016      2016      2016      2016      2016  
     Heartland      Summit      Peoples      Kosciusko      Total  

Commercial

   $ 1,243       $ 5,409       $ 750       $ 7,576       $ 14,978   

Real estate

     641         1,181         281         316         2,419   

Consumer

     1         9         —           22         32   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding balance

   $ 1,885       $ 6,599       $ 1,031       $ 7,914       $ 17,429   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Carrying amount, net of allowance of $0

               $ 17,429   
              

 

 

 
     December 31      December 31      December 31      December 31      December 31  
     2015      2015      2015      2015      2015  
     Heartland      Summit      Peoples      Kosciusko      Total  

Commercial

   $ 1,633       $ 5,567       $ 1,061       $ —         $ 8,261   

Real estate

     693         1,216         179         —           2,088   

Consumer

     6         35         —           —           41   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding balance

   $ 2,332       $ 6,818       $ 1,240       $ —         $ 10,390   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Carrying amount, net of allowance of $63

               $ 10,327   
              

 

 

 

Accretable yield, or income expected to be collected for the six months ended June 30, is as follows:

 

     Six Months Ended June 30, 2016  
     Heartland     Summit     Peoples     Kosciusko      Total  

Balance at January 1

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

Additions

     —          —          —          950         950   

Accretion

     (89     (103     (69     —           (261

Reclassification from nonaccretable difference

     —          —          —          —           —     

Disposals

     (24     (4     (58     —           (86
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30

   $ 682      $ 601      $ 428      $ 950       $ 2,661   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 
     Six Months Ended June 30, 2015  
     Heartland     Summit     Peoples     Kosciusko      Total  

Balance at January 1

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

Additions

     —          —          —          —           —     

Accretion

     (205     (180     —          —           (385

Reclassification from nonaccretable difference

     —          —          —          —           —     

Disposals

     (117     (49     —          —           (166
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance at June 30

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

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

18


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

During the six months ended June 30, 2016 and 2015, the Company decreased the allowance for loan losses on purchased loans by a recovery to the income statement of $0 and $76,000, respectively.

Note 6 – Allowance for Loan Losses

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

 

     Three Months Ended      Six Months Ended  
     June 30      June 30  
     2016      2015      2016      2015  
     (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Balance at beginning of the period

   $ 14,236       $ 16,634       $ 14,534       $ 16,501   

Loans charged-off:

           

Commercial

           

Owner occupied real estate

     31         1,422         178         1,422   

Non owner occupied real estate

     173         —           472         16   

Residential development

     —           —           —           —     

Development & Spec Land Loans

     —           —           —           —     

Commercial and industrial

     —           253         39         253   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     204         1,675         689         1,691   

Real estate

           

Residential mortgage

     —           164         115         186   

Residential construction

     —           —           —           —     

Mortgage warehouse

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     —           164         115         186   

Consumer

           

Direct Installment

     46         96         104         155   

Direct Installment Purchased

     —           —           —           —     

Indirect Installment

     279         196         555         565   

Home Equity

     64         304         239         504   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     389         596         898         1,224   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans charged-off

     593         2,435         1,702         3,101   

Recoveries of loans previously charged-off:

           

Commercial

           

Owner occupied real estate

     4         78         29         86   

Non owner occupied real estate

     31         —           54         —     

Residential development

     2         —           4         —     

Development & Spec Land Loans

     —           —           —           —     

Commercial and industrial

     63         14         95         33   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     100         92         182         119   

Real estate

           

Residential mortgage

     31         3         63         5   

Residential construction

     —           —           —           —     

Mortgage warehouse

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     31         3         63         5   

Consumer

           

Direct Installment

     28         47         44         76   

Direct Installment Purchased

     —           —           —           —     

Indirect Installment

     146         134         240         235   

Home Equity

     46         40         101         66   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     220         221         385         377   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loan recoveries

     351         316         630         501   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans charged-off (recovered)

     242         2,119         1,072         2,600   
  

 

 

    

 

 

    

 

 

    

 

 

 

Provision charged to operating expense

           

Commercial

     (305      2,093         (639      2,048   

Real estate

     343         (29      (249      904   

Consumer

     194         (158      1,652         (432
  

 

 

    

 

 

    

 

 

    

 

 

 

Total provision charged to operating expense

     232         1,906         764         2,520   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at the end of the period

   $ 14,226       $ 16,421       $ 14,226       $ 16,421   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

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

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

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

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

 

June 30, 2016    Commercial      Real Estate      Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

  

        

Individually evaluated for impairment

   $ 500       $ —         $ —         $ —         $ 500   

Collectively evaluated for impairment

     5,551         2,102         1,080         4,993         13,726   

Loans acquired with deteriorated credit quality

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 6,051       $ 2,102       $ 1,080       $ 4,993       $ 14,226   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated for impairment

   $ 4,344       $ —         $ —         $ —         $ 4,344   

Collectively evaluated for impairment

     873,140         495,096         206,179         365,005         1,939,420   

Loans acquired with deteriorated credit quality

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 877,484       $ 495,096       $ 206,179       $ 365,005       $ 1,943,764   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2015    Commercial      Real Estate      Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

              

Individually evaluated for impairment

   $ 202       $ —         $ —         $ —         $ 202   

Collectively evaluated for impairment

     6,739         2,476         1,007         3,856         14,078   

Loans acquired with deteriorated credit quality

     254         —           —           —           254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 7,195       $ 2,476       $ 1,007       $ 3,856       $ 14,534   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated for impairment

   $ 7,019       $ —         $ —         $ —         $ 7,019   

Collectively evaluated for impairment

     798,454         438,454         145,172         363,419         1,745,499   

Loans acquired with deteriorated credit quality

     1,729         —           —           —           1,729   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 807,202       $ 438,454       $ 145,172       $ 363,419       $ 1,754,247   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 7 – Non-performing Loans and Impaired Loans

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

 

June 30, 2016    Non-accrual      Loans Past
Due Over 90
Days Still
Accruing
     Non-
Performing
TDRs
     Performing
TDRs
     Total Non-
Performing
Loans
 

Commercial

  

           

Owner occupied real estate

   $ 1,054       $ —         $ —         $ —         $ 1,054   

Non owner occupied real estate

     2,901         —           243         60         3,204   

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —     

Commercial and industrial

     71         —           —           —           71   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     4,026         —           243         60         4,329   

Real estate

              

Residential mortgage

     3,664         1         803         950         5,418   

Residential construction

     —           —           242         —           242   

Mortgage warehouse

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     3,664         1         1,045         950         5,660   

Consumer

              

Direct Installment

     345         —           —           —           345   

Direct Installment Purchased

     —           —           —           —           —     

Indirect Installment

     837         23         —           —           860   

Home Equity

     1,554         —           178         246         1,978   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     2,736         23         178         246         3,183   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,426       $ 24       $ 1,466       $ 1,256       $ 13,172   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2015    Non-accrual      Loans Past
Due Over 90
Days Still
Accruing
     Non-
Performing
TDRs
     Performing
TDRs
     Total Non-
Performing
Loans
 

Commercial

  

           

Owner occupied real estate

   $ 1,749       $ —         $ —         $ —         $ 1,749   

Non owner occupied real estate

     3,034         —           1,915         60         5,009   

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     71         —           —           —           71   

Commercial and industrial

     176         —           —           —           176   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     5,030         —           1,915         60         7,005   

Real estate

              

Residential mortgage

     4,354         1         824         808         5,987   

Residential construction

     —           —           250         —           250   

Mortgage warehouse

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     4,354         1         1,074         808         6,237   

Consumer

              

Direct Installment

     541         —           —           —           541   

Direct Installment Purchased

     —           —           —           —           —     

Indirect Installment

     601         27         —           —           628   

Home Equity

     1,736         —           183         350         2,269   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     2,878         27         183         350         3,438   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,262       $ 28       $ 3,172       $ 1,218       $ 16,680   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Included in the $10.4 million of non-accrual loans and the $1.5 million of non-performing TDRs at June 30, 2016 were $2.1 million and $94,000, respectively, of loans acquired for which accretable yield was recognized.

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

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

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

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

The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At June 30, 2016, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of June 30, 2016, the Company had $2.7 million in TDRs and $1.3 million were performing according to the restructured terms and zero TDRs were returned to accrual status during the first six months of 2016. There was $107,000 of specific reserves allocated to TDRs at June 30, 2016 based on the discounted cash flows or when appropriate the fair value of the collateral.

 

22


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

                          Three Months Ending      Six Months Ending  
June 30, 2016    Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
For Loan
Loss
Allocated
     Average
Balance in
Impaired
Loans
     Cash/Accrual
Interest
Income
Recognized
     Average
Balance in
Impaired
Loans
     Cash/Accrual
Interest
Income
Recognized
 

With no recorded allowance

  

           

Commercial

  

                 

Owner occupied real estate

   $ 1,054       $ 1,054       $ —         $ 1,062       $ —         $ 1,079       $ —     

Non owner occupied real estate

     476         480         —           600         1         1,331         2   

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —           —           —     

Commercial and industrial

     71         71         —           320         —           325         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     1,601         1,605         —           1,982         1         2,735         2   

With an allowance recorded

  

           

Commercial

  

                 

Owner occupied real estate

     —           —           —           —           —           —           —     

Non owner occupied real estate

     2,729         2,739         500         2,747         —           2,757         —     

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —           —           —     

Commercial and industrial

     —           —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     2,729         2,739         500         2,747         —           2,757         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,330       $ 4,344       $ 500       $ 4,729       $ 1       $ 5,492       $ 2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

With no recorded allowance

  

           

Commercial

  

                 

Owner occupied real estate

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

Non owner occupied real estate

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

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —           —           —     

Commercial and industrial

     379         379         —           639         —           599         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

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

With an allowance recorded

  

           

Commercial

  

                 

Owner occupied real estate

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

Non owner occupied real estate

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

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —           —           —     

Commercial and industrial

     884         884         498         1,008         —           974         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

June 30, 2016    30 - 59 Days
Past Due
    60 - 89 Days
Past Due
    Greater than 90
Days Past Due
    Total Past Due     Loans Not Past
Due
    Total  

Commercial

  

         

Owner occupied real estate

   $ 98      $ 437      $ —        $ 535      $ 297,946      $ 298,481   

Non owner occupied real estate

     20        —          —          20        343,340        343,360   

Residential development

     —          —          —          —          7,660        7,660   

Development & Spec Land Loans

     2        —          —          2        23,169        23,171   

Commercial and industrial

     —          91        —          91        199,842        199,933   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     120        528        —          648        871,957        872,605   

Real estate

            

Residential mortgage

     1,023        300        1        1,324        472,239        473,563   

Residential construction

     —          271        —          271        17,515        17,786   

Mortgage warehouse

     —          —          —          —          205,699        205,699   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     1,023        571        1        1,595        695,453        697,048   

Consumer

            

Direct Installment

     155        16        —          171        58,934        59,105   

Direct Installment Purchased

     —          —          —          —          131        131   

Indirect Installment

     493        75        23        591        144,344        144,935   

Home Equity

     310        134        —          444        160,511        160,955   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     958        225        23        1,206        363,920        365,126   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,101      $ 1,324      $ 24      $ 3,449      $ 1,931,330      $ 1,934,779   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     0.11     0.07     0.00     0.18     99.82  
December 31, 2015    30 - 59 Days
Past Due
    60 - 89 Days
Past Due
    Greater than 90
Days Past Due
    Total Past Due     Loans Not Past
Due
    Total  

Commercial

  

         

Owner occupied real estate

   $ 481      $ 18      $ —        $ 499      $ 267,782      $ 268,281   

Non owner occupied real estate

     49        —          —          49        326,350        326,399   

Residential development

     —          —          —          —          5,018        5,018   

Development & Spec Land Loans

     —          —          —          —          18,183        18,183   

Commercial and industrial

     32        —          —          32        184,879        184,911   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     562        18        —          580        802,212        802,792   

Real estate

            

Residential mortgage

     1,121        344        1        1,466        413,458        414,924   

Residential construction

     —          —          —          —          19,751        19,751   

Mortgage warehouse

     —          —          —          —          144,692        144,692   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     1,121        344        1        1,466        577,901        579,367   

Consumer

            

Direct Installment

     106        10        —          116        54,225        54,341   

Direct Installment Purchased

     —          —          —          —          153        153   

Indirect Installment

     1,186        268        27        1,481        150,042        151,523   

Home Equity

     1,193        203        —          1,396        155,768        157,164   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     2,485        481        27        2,993        360,188        363,181   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 4,168      $ 843      $ 28      $ 5,039      $ 1,740,301      $ 1,745,340   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     0.24     0.05     0.00     0.29     99.71  

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

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

 

24


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

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

 

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

 

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

For residential real estate and consumer loans, Horizon uses a grading system based on delinquency. Loans that are 90 days or more past due, on non-accrual, or are classified as a TDR are graded “Substandard.” After being 90 to 120 days delinquent a loan is charged off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on non-accrual. Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass.

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

Risk Grade 1: Excellent (Pass)

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

Risk Grade 2: Good (Pass)

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

Risk Grade 3: Satisfactory (Pass)

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

 

25


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

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

 

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

 

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

 

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

Risk Grade 4 Satisfactory/Monitored:

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

Risk Grade 4W Management Watch:

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

Risk Grade 5: Special Mention

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

Risk Grade 6: Substandard

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

 

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

 

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

 

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

 

26


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

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

 

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

 

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

 

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

 

    The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

 

    There is a significant deterioration in market conditions to which the borrower is highly vulnerable.

Risk Grade 7: Doubtful

One or more of the following characteristics may be present in loans classified Doubtful:

 

    Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.

 

    The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

 

    The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.

Risk Grade 8: Loss

Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

 

27


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The following table presents loans by credit grades.

 

June 30, 2016    Pass     Special
Mention
    Substandard     Doubtful     Total  

Commercial

  

       

Owner occupied real estate

   $ 282,204      $ 8,716      $ 7,561      $ —        $ 298,481   

Non owner occupied real estate

     336,897        3,033        3,430        —          343,360   

Residential development

     7,660        —          —          —          7,660   

Development & Spec Land Loans

     23,171        —          —          —          23,171   

Commercial and industrial

     188,713        2,342        8,878        —          199,933   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     838,645        14,091        19,869        —          872,605   

Real estate

          

Residential mortgage

     468,145        —          5,418        —          473,563   

Residential construction

     17,544        —          242        —          17,786   

Mortgage warehouse

     205,699        —          —          —          205,699   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     691,388        —          5,660        —          697,048   

Consumer

          

Direct Installment

     58,760        —          345        —          59,105   

Direct Installment Purchased

     131        —          —          —          131   

Indirect Installment

     144,075        —          860        —          144,935   

Home Equity

     158,977        —          1,978        —          160,955   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

     361,943        —          3,183        —          365,126   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,891,976      $ 14,091      $ 28,712      $ —        $ 1,934,779   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     97.79     0.73     1.48     0.00  
December 31, 2015    Pass     Special
Mention
    Substandard     Doubtful     Total  

Commercial

  

       

Owner occupied real estate

   $ 257,181      $ 4,954      $ 6,146      $ —        $ 268,281   

Non owner occupied real estate

     320,216        585        5,598        —          326,399   

Residential development

     5,018        —          —          —          5,018   

Development & Spec Land Loans

     18,112        —          71        —          18,183   

Commercial and industrial

     180,581        693        3,637        —          184,911   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     781,108        6,232        15,452        —          802,792   

Real estate

          

Residential mortgage

     408,937        —          5,987        —          414,924   

Residential construction

     19,501        —          250        —          19,751   

Mortgage warehouse

     144,692        —          —          —          144,692   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     573,130        —          6,237        —          579,367   

Consumer

          

Direct Installment

     53,800        —          541        —          54,341   

Direct Installment Purchased

     153        —          —          —          153   

Indirect Installment

     150,895        —          628        —          151,523   

Home Equity

     154,895        —          2,269        —          157,164   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

     359,743        —          3,438        —          363,181   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,713,981      $ 6,232      $ 25,127      $ —        $ 1,745,340   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     98.20     0.36     1.44     0.00  

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 8 – Repurchase Agreements

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

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

 

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

Repurchase Agreements and repurchase-to-
maturity transactions

   

         

Repurchase Agreements

   $ 50,348      $ 25,000       $ 60,000       $ 10,000       $ —        $ —        $ 145,348   

Securities lending transactions

                 

U.S. Treasury and federal agencies

   $ 4,038      $ —         $ —         $ —         $ —        $ —        $ 4,038   

Federal agency collateralized mortgage obligations

     44,521        —           388         173         21,541        30,301        96,924   

Federal agency mortgage-backed pools

     15,003        —           110         2,404         21,304        28,396        67,217   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     63,562        —           498         2,577         42,845        58,697        168,179   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total borrowings

   $ (13,214   $ 25,000       $ 59,502       $ 7,423       $ (42,845   $ (58,697   $ (22,831
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Note 9 – Derivative Financial Instruments

Cash Flow Hedges

As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 6.14% on a notional amount of $30.5 million at June 30, 2016 and December 31, 2015. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At June 30, 2016, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.

Fair Value Hedges

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

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The change in fair value of both the hedge instruments and the underlying loan agreements are recorded as gains or losses in interest income. The fair value hedges are considered to be highly effective and any hedge ineffectiveness was deemed not material. The notional amounts of the loan agreements being hedged were $121.7 million at June 30, 2016 and $117.3 million at December 31, 2015.

Other Derivative Instruments

The Company enters into non-hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At June 30, 2016, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income.

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

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

 

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

Interest rate contracts

     Loans       $         Other liabilities       $ 5,393   

Interest rate contracts

     Other Assets         5,393         Other liabilities         3,786   
     

 

 

       

 

 

 

Total derivatives designated as hedging instruments

        5,393            9,179   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments

           

Mortgage loan contracts

     Other assets         1,111         Other liabilities         —     
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

        1,111            —     
     

 

 

       

 

 

 

Total derivatives

      $ 6,504          $ 9,179   
     

 

 

       

 

 

 
     Asset Derivatives      Liability Derivatives  
     December 31, 2015      December 31, 2015  
Derivatives designated as hedging instruments (Unaudited)    Balance Sheet
Location
     Fair
Value
     Balance Sheet
Location
     Fair Value  

Interest rate contracts

     Loans       $         Other liabilities       $ 1,782   

Interest rate contracts

     Other Assets         1,782         Other liabilities         3,141   
     

 

 

       

 

 

 

Total derivatives designated as hedging instruments

        1,782            4,923   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments

           

Mortgage loan contracts

     Other assets         642         Other liabilities         —     
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

        642            —     
     

 

 

       

 

 

 

Total derivatives

      $ 2,424          $ 4,923   
     

 

 

       

 

 

 

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

    

Amount of Loss Recognized in Other
Comprehensive Income on Derivative

(Effective Portion)

     Amount of Loss Recognized in Other
Comprehensive Income on Derivative
(Effective Portion)
 
     Three Months Ended June 30      Six Months Ended June 30  
Derivative in cash flow    2016      2015      2016      2015  

hedging relationship

   (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Interest rate contracts

   $ (54    $ 332       $ (419    $ 118   

FASB Accounting Standards Codification (“ASC”) Topic 820-10-20 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820-10-55 establishes a fair value hierarchy that emphasizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value.

 

        Amount of Gain (Loss) Recognized on Derivative     Amount of Gain (Loss) Recognized on Derivative  
        Three Months Ended June 30     Six Months Ended June 30  
Derivative in fair value   Location of gain (loss)   2016     2015     2016     2015  

hedging relationship

 

recognized on derivative

  (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Interest rate contracts

 

Interest income - loans

  $ 1,110      $ (1,186   $ 3,611      $ (186

Interest rate contracts

 

Interest income - loans

    (1,110     1,186        (3,611     186   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ —        $ —        $ —        $ —     
   

 

 

   

 

 

   

 

 

   

 

 

 
       

Amount of Gain (Loss) Recognized on Derivative

Three Months Ended June 30

   

Amount of Gain (Loss) Recognized on Derivative

Six Months Ended June 30

 
Derivative not designated   Location of gain (loss)   2016     2015     2016     2015  

as hedging relationship

 

recognized on derivative

  (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Mortgage contracts

 

Other income - gain on sale of loans

  $ 468      $ 83      $ 471      $ 272   

Note 10 – Disclosures about Fair Value of Assets and Liabilities

The Fair Value Measurements topic of the FASB ASC defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. There are three levels of inputs that may be used to measure fair value:

 

Level 1    Quoted prices in active markets for identical assets or liabilities
Level 2    Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3    Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended June 30, 2016. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Available for sale securities

When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency collateralized mortgage obligations and mortgage-backed pools and corporate notes. Level 2 securities are valued by a third party pricing service commonly used in the banking industry utilizing observable inputs. Observable inputs include dealer quotes, market spreads, cash flow analysis, the U.S. Treasury yield curve, trade execution data, market consensus prepayment spreads and available credit information and the bond’s terms and conditions. The pricing provider utilizes evaluated pricing models that vary based on asset class. These models incorporate available market information including quoted prices of securities with similar characteristics and, because many fixed-income securities do not trade on a daily basis, apply available information through processes such as benchmark curves, benchmarking of like securities, sector grouping, and matrix pricing. In addition, model processes, such as an option adjusted spread model, is used to develop prepayment and interest rate scenarios for securities with prepayment features.

Hedged loans

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

Interest rate swap agreements

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

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

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

            Quoted Prices in
Active Markets
for Identical
Assets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
     Fair Value      (Level 1)      (Level 2)      (Level 3)  

June 30, 2016

           

Available-for-sale securities

           

U.S. Treasury and federal agencies

   $ 18,470       $ —         $ 18,470       $ —     

State and municipal

     62,611         —           62,611         —     

Federal agency collateralized mortgage obligations

     154,263         —           154,263         —     

Federal agency mortgage-backed pools

     219,823         —           219,823         —     

Corporate notes

     72         —           72         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     455,239         —           455,239         —     

Hedged loans

     116,338         —           116,338         —     

Forward sale commitments

     1,111         —           1,111         —     

Interest rate swap agreements

     (9,179      —           (9,179      —     

Commitments to originate loans

     —           —           —           —     

December 31, 2015

           

Available-for-sale securities

           

U.S. Treasury and federal agencies

   $ 5,926       $ —         $ 5,926       $ —     

State and municipal

     75,095         —           75,095         —     

Federal agency collateralized mortgage obligations

     156,203         —           156,203         —     

Federal agency mortgage-backed pools

     207,704         —           207,704         —     

Corporate notes

     54         —           54         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     444,982         —           444,982         —     

Hedged loans

     115,472         —           115,472         —     

Forward sale commitments

     642         —           642         —     

Interest rate swap agreements

     (4,923      —           (4,923      —     

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

 

     Three Months Ended June 30      Six Months Ended June 30  
Non Interest Income    2016      2015      2016      2015  
Total gains and losses from:    (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Hedged loans

   $ 1,110       $ (1,186    $ 3,611       $ (186

Fair value interest rate swap agreements

     (1,110      1,186         (3,611      186   

Derivative loan commitments

     468         83         471         272   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 468       $ 83       $ 471       $ 272   
  

 

 

    

 

 

    

 

 

    

 

 

 

Certain other assets are measured at fair value on a nonrecurring basis in the ordinary course of business and are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment):

 

            Quoted Prices in
Active Markets
for Identical
Assets
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
     Fair Value      (Level 1)      (Level 2)      (Level 3)  

June 30, 2016

           

Impaired loans

   $ 3,830       $ —         $ —         $ 3,830   

Mortgage servicing rights

     9,714         —           —           9,714   

December 31, 2015

           

Impaired loans

   $ 6,803       $ —         $ —         $ 6,803   

Mortgage servicing rights

     8,874         —           —           8,874   

 

33


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

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

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

Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs’ fair value due to impairment decreased by $46,000 during the first six months of 2016 and decreased by $18,000 during the first six months of 2015.

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

 

    Fair Value at     Valuation       Range (Weighted
    June 30, 2016     Technique   Unobservable Inputs   Average)

Impaired loans

  $ 3,830      Collateral based measurement   Discount to reflect current market
conditions and ultimate
collectability
  10% - 15% (12%)

Mortgage servicing rights

  $ 9,714      Discounted cashflows   Discount rate, Constant
prepayment rate, Probability of
default
  10% - 15% (12%),
4% - 7% (4.6%),
1% - 10% (4.5%)
    Fair Value at     Valuation       Range (Weighted
    December 31, 2015     Technique   Unobservable Inputs   Average)

Impaired loans

  $ 6,803      Collateral based measurement   Discount to reflect current market
conditions and ultimate
collectability
  10% - 15% (12%)

Mortgage servicing rights

  $ 8,874      Discounted cashflows   Discount rate, Constant
prepayment rate, Probability of
default
  10% - 15% (12%),
4% - 7% (4.6%),
1% - 10% (4.5%)

Note 11 – Fair Value of Financial Instruments

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

 

34


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon’s significant financial instruments at June 30, 2016 and December 31, 2015. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheet as well as certain off-balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy.

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and Due from Banks — The carrying amounts approximate fair value.

Held-to-Maturity Securities — For debt securities held to maturity, fair values are based on quoted market prices or dealer quotes. For those securities where a quoted market price is not available, carrying amount is a reasonable estimate of fair value based upon comparison with similar securities.

Loans Held for Sale — The carrying amounts approximate fair value.

Net Loans — The fair value of portfolio loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The carrying amounts of loans held for sale approximate fair value.

FHLB and FRB Stock — Fair value of FHLB and FRB stock is based on the price at which it may be resold to the FHLB and FRB.

Interest Receivable/Payable — The carrying amounts approximate fair value.

Deposits — The fair value of demand deposits, savings accounts, interest-bearing checking accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit is estimated by discounting the future cash flows using rates currently offered for deposits of similar remaining maturity.

Borrowings — Rates currently available to Horizon for debt with similar terms and remaining maturities are used to estimate fair values of existing borrowings.

Subordinated Debentures — Rates currently available for debentures with similar terms and remaining maturities are used to estimate fair values of existing debentures.

Commitments to Extend Credit and Standby Letters of Credit — The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. Due to the short-term nature of these agreements, carrying amounts approximate fair value.

 

35


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

     June 30, 2016  
            Quoted Prices                
            in Active      Significant         
            Markets for      Other      Significant  
            Identical      Observable      Unobservable  
     Carrying      Assets      Inputs      Inputs  
     Amount      (Level 1)      (Level 2)      (Level 3)  

Assets

           

Cash and due from banks

   $ 109,224       $ 109,224       $ —         $ —     

Investment securities, held to maturity

     173,696         —           180,059         —     

Loans held for sale

     7,812         —           —           7,812   

Loans excluding loan level hedges, net

     1,807,261         —           —           1,798,943   

Stock in FHLB and FRB

     16,636         —           16,636         —     

Interest receivable

     11,526    &n