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HORIZON BANCORP INC /IN/ - Quarter Report: 2012 March (Form 10-Q)

10-Q
Table of Contents

 

 

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

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)

(219) 879-0211

Registrant’s telephone number, including area code:

N/A

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

 

 

 

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: 4,997,017 shares of Common Stock, no par value, at May 10, 2012.

 

 

 


Table of Contents

HORIZON BANCORP

FORM 10-Q

INDEX

 

PART I. FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
   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      36   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      47   

Item 4.

   Controls and Procedures      47   

PART II. OTHER INFORMATION

  

Item 1.

   Legal Proceedings      48   

Item 1A.

   Risk Factors      48   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      48   

Item 3.

   Defaults Upon Senior Securities      48   

Item 4.

   Mine Safety Disclosures      48   

Item 5.

   Other Information      48   

Item 6.

   Exhibits      49   

Signatures

  

Index To Exhibits

  

 

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Table of Contents

PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)

 

     March 31      December 31  
     2012
(Unaudited)
     2011  
Assets      

Cash and due from banks

   $ 19,049       $ 20,447   

Investment securities, available for sale

     433,501         431,045   

Investment securities, held to maturity

     7,100         7,100   

Loans held for sale

     10,202         14,090   

Loans, net of allowance for loan losses of $19,412 and $18,882

     969,141         964,311   

Premises and equipment

     35,775         34,665   

Federal Reserve and Federal Home Loan Bank stock

     12,390         12,390   

Goodwill

     5,910         5,910   

Other intangible assets

     2,182         2,292   

Interest receivable

     6,798         6,671   

Cash value life insurance

     30,415         30,190   

Other assets

     14,368         18,051   
  

 

 

    

 

 

 

Total assets

   $ 1,546,831       $ 1,547,162   
  

 

 

    

 

 

 

Liabilities

     

Deposits

     

Non-interest bearing

   $ 138,618       $ 130,673   

Interest bearing

     926,003         879,192   
  

 

 

    

 

 

 

Total deposits

     1,064,621         1,009,865   

Borrowings

     310,889         370,111   

Subordinated debentures

     30,699         30,676   

Interest payable

     555         596   

Other liabilities

     13,829         14,449   
  

 

 

    

 

 

 

Total liabilities

     1,420,593         1,425,697   
  

 

 

    

 

 

 

Commitments and contingent liabilities

     

Stockholders’ Equity

     

Preferred stock, $.01 par value, $1,000 liquidation value

     

Authorized, 1,000,000 Series B shares

     

Issued 12,500 and 12,500 shares

     12,500         12,500   

Common stock, $.3333 stated value

     

Authorized, 22,500,000 shares

     

Issued, 4,994,017 and 4,967,196 shares

     

Outstanding, 4,954,347 and 4,947,696 shares

     1,126         1,126   

Additional paid-in capital

     10,641         10,610   

Retained earnings

     93,198         89,387   

Accumulated other comprehensive income

     8,773         7,842   
  

 

 

    

 

 

 

Total stockholders’ equity

     126,238         121,465   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 1,546,831       $ 1,547,162   
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

 

     Three Months Ended March 31  
     2012     2011  
     (Unaudited)     (Unaudited)  

Interest Income

    

Loans receivable

   $ 13,532      $ 11,888   

Investment securities

    

Taxable

     2,314        2,500   

Tax exempt

     980        1,043   
  

 

 

   

 

 

 

Total interest income

     16,826        15,431   
  

 

 

   

 

 

 

Interest Expense

    

Deposits

     1,639        2,337   

Borrowed funds

     1,519        1,577   

Subordinated debentures

     470        450   
  

 

 

   

 

 

 

Total interest expense

     3,628        4,364   
  

 

 

   

 

 

 

Net Interest Income

     13,198        11,067   

Provision for loan losses

     559        1,548   
  

 

 

   

 

 

 

Net Interest Income after Provision for Loan Losses

     12,639        9,519   
  

 

 

   

 

 

 

Other Income

    

Service charges on deposit accounts

     712        795   

Wire transfer fees

     182        108   

Interchange fees

     628        545   

Fiduciary activities

     975        963   

Gain on sale of securities

     —          274   

Gain on sale of mortgage loans

     2,274        533   

Mortgage servicing income net of impairment

     90        764   

Increase in cash surrender value of bank owned life insurance

     225        205   

Other income

     56        127   
  

 

 

   

 

 

 

Total other income

     5,142        4,314   
  

 

 

   

 

 

 

Other Expenses

    

Salaries and employee benefits

     5,963        5,361   

Net occupancy expenses

     1,054        1,081   

Data processing

     526        407   

Professional fees

     534        349   

Outside services and consultants

     471        381   

Loan expense

     702        762   

FDIC insurance expense

     257        387   

Other losses

     30        31   

Other expenses

     1,623        1,499   
  

 

 

   

 

 

 

Total other expenses

     11,160        10,258   
  

 

 

   

 

 

 

Income Before Income Tax

     6,621        3,575   

Income tax expense

     2,008        810   
  

 

 

   

 

 

 

Net Income

     4,613        2,765   

Preferred stock dividend and discount accretion

     (156     (276
  

 

 

   

 

 

 

Net Income Available to Common Shareholders

   $ 4,457      $ 2,489   
  

 

 

   

 

 

 

Basic Earnings Per Share

   $ 0.90      $ 0.51   

Diluted Earnings Per Share

     0.88        0.49   

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 March 31  
     2012      2011  
     (Unaudited)      (Unaudited)  

Net Income

   $ 4,613       $ 2,765   
  

 

 

    

 

 

 

Other Comprehensive Income

     

Change in fair value of derivative instruments, net of taxes

of $198 and $670, for 2012 and 2011, respectively

     367         1,245   

Unrealized appreciation on available-for-sale securities, net of taxes of $303 and $158, for 2012 and 2011, respectively

     564         293   

Less: reclassification adjustment for realized gains included in net income, net of taxes of $0 and $96, for 2012 and 2011, respectively

     —           178   
  

 

 

    

 

 

 
     931         1,716   
  

 

 

    

 

 

 

Comprehensive Income

   $ 5,544       $ 4,481   
  

 

 

    

 

 

 

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)

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

 

     Preferred
Stock
     Common
Stock
     Additional
Paid-in
Capital
     Retained
Earnings
    Accumulated
Other
Comprehensive
Income
     Total  

Balances, January 1, 2012

   $ 12,500       $ 1,126       $ 10,610       $ 89,387      $ 7,842       $ 121,465   

Net income

              4,613           4,613   

Other comprehensive income, net of tax

                931         —     

Amortization of unearned compensation

           23              23   

Stock option expense

           8              8   

Cash dividends on preferred stock (5.00%)

              (156        (156

Cash dividends on common stock ($.13 per share)

              (646        (646
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balances, March 31, 2012

   $ 12,500       $ 1,126       $ 10,641       $ 93,198      $ 8,773       $ 126,238   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

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HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

 

     Three Months Ended March 31  
     2012     2011  
     (Unaudited)     (Unaudited)  

Operating Activities

    

Net income

   $ 4,613      $ 2,765   

Items not requiring (providing) cash

    

Provision for loan losses

     559        1,548   

Depreciation and amortization

     646        604   

Share based compensation

     8        10   

Mortgage servicing rights impairment (recovery)

     7        (701

Premium amortization on securities available for sale, net

     700        522   

Gain on sale of investment securities

     —          (274

Gain on sale of mortgage loans

     (2,274     (533

Proceeds from sales of loans

     82,619        64,764   

Loans originated for sale

     (80,345     (64,231

Change in cash surrender value of life insurance

     (225     (205

(Gain) loss on sale of other real estate owned

     21        (30

Net change in

    

Interest receivable

     (127     (114

Interest payable

     (41     5   

Other assets

     1,415        1,401   

Other liabilities

     (179     (1,159
  

 

 

   

 

 

 

Net cash provided by operating activities

     7,397        4,372   
  

 

 

   

 

 

 

Investing Activities

    

Purchases of securities available for sale

     (22,581     (76,429

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

     20,294        25,358   

Purchase of securities held to maturity

     —          (2,437

Proceeds from maturities of securities held to maturity

     —          1,400   

Net change in loans

     (2,102     84,163   

Proceeds on the sale of OREO and repossessed assets

     2,461        1,469   

Purchases of premises and equipment

     (1,622     (990
  

 

 

   

 

 

 

Net cash provided (used in) by investing activities

     (3,550     32,534   
  

 

 

   

 

 

 

Financing Activities

    

Net change in

    

Deposits

     54,756        15,911   

Borrowings

     (59,199     (36,360

Proceeds from issuance of stock

     —          56   

Tax benefit from issuance of stock

     —          8   

Dividends paid on common shares

     (646     (560

Dividends paid on preferred shares

     (156     (235
  

 

 

   

 

 

 

Net cash used in financing activities

     (5,245     (21,180
  

 

 

   

 

 

 

Net Change in Cash and Cash Equivalent

     (1,398     15,726   

Cash and Cash Equivalents, Beginning of Period

     20,447        15,683   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 19,049      $ 31,409   
  

 

 

   

 

 

 

Additional Cash Flows Information

    

Interest paid

   $ 3,669      $ 4,358   

Income taxes paid

     900        —     

Transfer of loans to other real estate owned

     527        1,095   

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 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 March 31, 2012 and March 31, 2011 are not necessarily indicative of the operating results for the full year of 2012 or 2011. 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 2011 filed with the Securities and Exchange Commission on March 12, 2012. The consolidated condensed balance sheet of Horizon as of December 31, 2011 has been derived from the audited balance sheet of Horizon 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

March 31

 
      2012
(Unaudited)
     2011
(Unaudited)
 

Basic earnings per share

     

Net income

   $ 4,613       $ 2,765   

Less: Preferred stock dividends and accretion of discount

     156         276   
  

 

 

    

 

 

 

Net income available to common shareholders

   $ 4,457       $ 2,489   

Weighted average common shares outstanding(1)

     4,948,573         4,924,715   

Basic earnings per share

   $ 0.90       $ 0.51   
  

 

 

    

 

 

 

Diluted earnings per share

     

Net income available to common shareholders

   $ 4,457       $ 2,489   

Weighted average common shares outstanding(1)

     4,948,573         4,924,715   

Effect of dilutive securities:

     

Warrants

     106,438         115,887   

Restricted stock

     971         22,217   

Stock options

     9,678         11,945   
  

 

 

    

 

 

 

Weighted average shares outstanding

     5,065,660         5,074,763   

Diluted earnings per share

   $ 0.88       $ 0.49   
  

 

 

    

 

 

 

 

(1)

Adjusted for 3:2 stock split on December 9, 2011

 

 

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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)

 

At March 31, 2012 and 2011, there were 31,500 shares and 39,176 shares that were not included in the computation of diluted earnings per share because they were non-dilutive.

Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2011 Annual Report on Form 10-K.

Reclassifications

Certain reclassifications have been made to the 2011 consolidated financial statements to be comparable to 2012. These reclassifications had no effect on net income.

Note 2 – Securities

The fair value of securities is as follows:

 

            Gross      Gross        
March 31, 2012    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

Available for sale

          

U.S. Treasury and federal agencies

   $ 18,365       $ 293       $ (1   $ 18,657   

State and municipal

     134,661         9,195         (82     143,774   

Federal agency collateralized mortgage obligations

     84,458         2,233         (1     86,690   

Federal agency mortgage-backed pools

     174,909         6,095         (21     180,983   

Private labeled mortgage-backed pools

     3,247         113         —          3,360   

Corporate notes

     32         5         —          37   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale investment securities

   $ 415,672       $ 17,934       $ (105   $ 433,501   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held to maturity, State and Municipal

   $ 7,100       $ —         $ —        $ 7,100   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

            Gross      Gross        
December 31, 2011    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
    Fair
Value
 

Available for sale

          

U.S. Treasury and federal agencies

   $ 12,693       $ 329       $ —        $ 13,022   

State and municipal

     135,011         8,950         (71     143,890   

Federal agency collateralized mortgage obligations

     89,016         2,106         —          91,122   

Federal agency mortgage-backed pools

     173,797         5,669         (115     179,351   

Private labeled mortgage-backed pools

     3,518         118         —          3,636   

Corporate notes

     32         —           (8     24   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale investment securities

   $ 414,067       $ 17,172       $ (194   $ 431,045   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held to maturity, State and Municipal

   $ 7,100       $ 34       $ —        $ 7,134   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

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 March 31, 2012, 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 United States Department of the Treasury (“U.S. Treasury”) and federal agencies, securities of state and municipal governmental agencies, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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 March 31, 2012.

The amortized cost and fair value of securities available for sale and held to maturity at March 31, 2012 and December 31, 2011, 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.

 

     March 31, 2012      December 31, 2011  
      Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Available for sale

           

Within one year

   $ 936       $ 941       $ 931       $ 940   

One to five years

     32,713         33,847         30,796         31,910   

Five to ten years

     59,524         63,509         51,476         55,053   

After ten years

     59,885         64,171         64,533         69,033   
  

 

 

    

 

 

    

 

 

    

 

 

 
     153,058         162,468         147,736         156,936   

Federal agency collateralized mortgage obligations

     84,458         86,690         89,016         91,122   

Federal agency mortgage-backed pools

     174,909         180,983         173,797         179,351   

Private labeled mortgage-backed pools

     3,247         3,360         3,518         3,636   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 415,672       $ 433,501       $ 414,067       $ 431,045   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

Within one year

   $ 7,100       $ 7,100       $ 7,100       $ 7,134   

One to five years

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 7,100       $ 7,100       $ 7,100       $ 7,134   
  

 

 

    

 

 

    

 

 

    

 

 

 

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  

March 31, 2012

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

U.S. Treasury and federal agencies

   $ 2,984       $ (1   $ —         $ —        $ 2,984       $ (1

State and municipal

     2,323         (82     —           —          2,323         (82

Federal agency collateralized mortgage obligations

     2,595         (1     —           —          2,595         (1

Federal agency mortgage-backed pools

     7,248         (21     20         —          7,268         (21
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 15,150       $ (105   $ 20       $ —        $ 15,170       $ (105
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
      Less than 12 Months     12 Months or More     Total  

December 31, 2011

   Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

State and municipal

   $ 1,550       $ (44   $ 1,948       $ (27   $ 3,498       $ (71

Federal agency mortgage-backed pools

     23,442         (115     23         —          23,465         (115

Corporate notes

     24         (8     —           —          24         (8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 25,016       $ (167   $ 1,971       $ (27   $ 26,987       $ (194
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

10


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 March 31  
     2012      2011  

Sales of securities available for sale (Unaudited)

     

Proceeds

   $ —         $ 9,274   

Gross gains

     —           274   

Gross losses

     —           —     

Note 3 — Loans

 

     March 31     December 31  
     2012     2011  

Commercial

    

Working capital and equipment

   $ 164,199      $ 170,325   

Real estate, including agriculture

     176,889        172,910   

Tax exempt

     3,539        3,818   

Other

     5,836        5,323   
  

 

 

   

 

 

 

Total

     350,463        352,376   

Real estate

    

1–4 family

     151,497        153,039   

Other

     4,053        4,102   
  

 

 

   

 

 

 

Total

     155,550        157,141   

Consumer

    

Auto

     138,682        134,686   

Recreation

     4,808        4,737   

Real estate/home improvement

     27,865        27,729   

Home equity

     92,495        92,249   

Unsecured

     3,039        3,183   

Other

     2,499        2,793   
  

 

 

   

 

 

 

Total

     269,388        265,377   

Mortgage warehouse

     213,152        208,299   
  

 

 

   

 

 

 

Total

     213,152        208,299   
  

 

 

   

 

 

 

Total loans

     988,553        983,193   

Allowance for loan losses

     (19,412     (18,882
  

 

 

   

 

 

 

Loans, net

   $ 969,141      $ 964,311   
  

 

 

   

 

 

 

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 higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the

 

11


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of property type, which 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.

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 pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage is assigned to Horizon until the loan is sold to the secondary market by the mortgage company. In addition, Horizon takes possession of each original note and forwards such note to the end investor once the mortgage company has sold the loan. At the time a loan is transferred to the secondary market, the mortgage company repurchases the loan under its option within the agreement. Due to the repurchase feature contained in the agreement, the transaction does not qualify as a sale and therefore is accounted for as a secured borrowing with 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 is typically less than 30 days.

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

 

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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.

 

March 31, 2012    Loan
Balance
    Interest Due      Deferred
Fees/(Costs)
    Recorded
Investment
 

Owner occupied real estate

   $ 129,530      $ 409       $ 26      $ 129,965   

Non owner occupied real estate

     150,861        395         99        151,355   

Residential spec homes

     2,834        7         —          2,841   

Development & spec land loans

     7,366        15         —          7,381   

Commercial and industrial

     59,744        198         3        59,945   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial

     350,335        1,024         128        351,487   

Residential mortgage

     148,073        569         68        148,710   

Residential construction

     7,409        11         —          7,420   

Mortgage warehouse

     213,152        427         —          213,579   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total real estate

     368,634        1,007         68        369,709   

Direct installment

     24,735        86         (346     24,475   

Direct installment purchased

     863        —           —          863   

Indirect installment

     131,461        403         —          131,864   

Home equity

     113,420        524         (745     113,199   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer

     270,479        1,013         (1,091     270,401   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total loans

     989,448        3,044         (895     991,597   

Allowance for loan losses

     (19,412     —           —          (19,412
  

 

 

   

 

 

    

 

 

   

 

 

 

Net loans

   $ 970,036      $ 3,044       $ (895   $ 972,185   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

December 31, 2011    Loan
Balance
    Interest Due      Deferred
Fees/(Costs)
    Recorded
Investment
 

Owner occupied real estate

   $ 131,893      $ 383       $ 30      $ 132,306   

Non owner occupied real estate

     142,269        360         94        142,723   

Residential spec homes

     3,574        6         —          3,580   

Development & spec land loans

     8,739        16         —          8,755   

Commercial and industrial

     65,774        169         3        65,946   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial

     352,249        934         127        353,310   

Residential mortgage

     150,893        513         68        151,474   

Residential construction

     6,181        8         —          6,189   

Mortgage warehouse

     208,299        427         —          208,726   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total real estate

     365,373        948         68        366,389   

Direct installment

     24,252        94         (360     23,986   

Direct installment purchased

     981        —           —          981   

Indirect installment

     127,751        420         (56     128,115   

Home equity

     113,561        559         (752     113,368   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer

     266,545        1,073         (1,168     266,450   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total loans

     984,167        2,955         (973     986,149   

Allowance for loan losses

     (18,882     —           —          (18,882
  

 

 

   

 

 

    

 

 

   

 

 

 

Net loans

   $ 965,285      $ 2,955       $ (973   $ 967,267   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 4 – 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 two-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.

 

     Three Months Ended  
     March 31     March 31  
     2012     2011  
     (Unaudited)     (Unaudited)  

Balance at beginning of the period

   $ 18,882      $ 19,064   

Loans charged-off:

    

Commercial

    

Owner occupied real estate

     —          11   

Non owner occupied real estate

     —          —     

Residential development

     —          —     

Development & Spec Land Loans

     —          —     

Commercial and industrial

     —          50   
  

 

 

   

 

 

 

Total commercial

     —          61   

Real estate

    

Residential mortgage

     89        82   

Residential construction

     —          —     

Mortgage warehouse

     —          —     
  

 

 

   

 

 

 

Total real estate

     89        82   

Consumer

    

Direct Installment

     113        185   

Direct Installment Purchased

     —          —     

Indirect Installment

     338        455   

Home Equity

     133        977   
  

 

 

   

 

 

 

Total consumer

     584        1,617   
  

 

 

   

 

 

 

Total loans charged-off

     673        1,760   

Recoveries of loans previously charged-off:

    

Commercial

    

Owner occupied real estate

     300        —     

Non owner occupied real estate

     7        —     

Residential development

     —          —     

Development & Spec Land Loans

     —          —     

Commercial and industrial

     25        2   
  

 

 

   

 

 

 

Total commercial

     332        2   

Real estate

    

Residential mortgage

     30        —     

Residential construction

     —          —     

Mortgage warehouse

     —          —     
  

 

 

   

 

 

 

Total real estate

     30        —     

Consumer

    

Direct Installment

     15        48   

Direct Installment Purchased

     —          —     

Indirect Installment

     201        169   

Home Equity

     66        19   
  

 

 

   

 

 

 

Total consumer

     282        236   
  

 

 

   

 

 

 

Total loan recoveries

     644        238   
  

 

 

   

 

 

 

Net loans charged-off

     29        1,522   
  

 

 

   

 

 

 

Provision charged to operating expense

    

Commercial

     86        1,114   

Real estate

     611        47   

Consumer

     (138     387   
  

 

 

   

 

 

 

Total provision charged to operating expense

     559        1,548   
  

 

 

   

 

 

 

Balance at the end of the period

   $ 19,412      $ 19,090   
  

 

 

   

 

 

 

 

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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)

 

Management’s general practice is to proactively charge down loans individually evaluated for impairment to the fair value 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, charge-off of unsecured open-end loans when the loan is 90 days past due, and charge down to the net realizable value when other secured loans 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 will occur regardless of delinquency status, need not be 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:

 

March 31, 2012    Commercial      Real Estate      Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

              

Individually evaluated for impairment

   $ 2,833       $ —         $ —         $ —         $ 2,833   

Collectively evaluated for impairment

     5,602         3,025         1,694         6,258         16,579   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 8,435       $ 3,025       $ 1,694       $ 6,258       $ 19,412   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated for impairment

   $ 9,035       $ —         $ —         $ —         $ 9,035   

Collectively evaluated for impairment

     342,452         156,130         213,579         270,401         982,562   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 351,487       $ 156,130       $ 213,579       $ 270,401       $ 991,597   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2011    Commercial      Real Estate      Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

              

Individually evaluated for impairment

   $ 2,136       $ —         $ —         $ —         $ 2,136   

Collectively evaluated for impairment

     5,881         2,472         1,695         6,698         16,746   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 8,017       $ 2,472       $ 1,695       $ 6,698       $ 18,882   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated for impairment

   $ 7,960       $ —         $ —         $ —         $ 7,960   

Collectively evaluated for impairment

     345,350         157,663         208,726         266,450         978,189   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 353,310       $ 157,663       $ 208,726       $ 266,450       $ 986,149   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 5 – Non-performing Loans and Impaired Loans

The following table presents the nonaccrual, loans past due over 90 days still on accrual, and troubled debt restructured (“TDR’s”) by class of loans:

 

            Loans Past                      
            Due Over 90      Non            Total Non-  
            Days Still      Performing      Performing     Performing  
March 31, 2012    Nonaccrual      Accruing      TDR’s      TDR’s     Loans  

Commercial

             

Owner occupied real estate

   $ 2,359       $ —           —         $ —        $ 2,359   

Non owner occupied real estate

     4,033         —           152         (0     4,185   

Residential development

     —           —           —           —          —     

Development & Spec Land Loans

     805         —           —           —          805   

Commercial and industrial

     808         —           878         0        1,686   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial

     8,005         —           1,030         0        9,035   

Real estate

             

Residential mortgage

     4,853         —           1,331         2,047        8,231   

Residential construction

     144         —           —           292        436   

Mortgage warehouse

     —           —           —           —          —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total real estate

     4,997         —           1,331         2,339        8,667   

Consumer

             

Direct Installment

     157         —           24         0        181   

Direct Installment Purchased

     —           9         —           —          9   

Indirect Installment

     755         19         —           —          774   

Home Equity

     1,536         —           53         849        2,438   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Consumer

     2,448         28         78         849        3,402   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 15,450       $ 28       $ 2,439       $ 3,188      $ 21,104   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

            Loans Past                       
            Due Over 90      Non             Total Non-  
            Days Still      Performing      Performing      Performing  
December 31, 2011    Nonaccrual      Accruing      TDR’s      TDR’s      Loans  

Commercial

              

Owner occupied real estate

   $ 2,515       $ —         $ —         $ —         $ 2,515   

Non owner occupied real estate

     3,970         —           152         —           4,122   

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     90         —           —           —           90   

Commercial and industrial

     330         —           901         —           1,231   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     6,905         —           1,053         —           7,958   

Real estate

              

Residential mortgage

     4,550         —           1,120         2,389         8,059   

Residential construction

     144         —           —           293         437   

Mortgage warehouse

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     4,694         —           1,120         2,682         8,496   

Consumer

              

Direct Installment

     256         1         —           —           257   

Direct Installment Purchased

     —           4         —           —           4   

Indirect Installment

     926         29         —           —           955   

Home Equity

     1,587         3         25         858         2,473   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     2,769         37         25         858         3,689   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,368       $ 37       $ 2,198       $ 3,540       $ 20,143   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

16


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

the loan from an “earning asset” to a non-accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is management’s policy to place a loan on a non-accrual status when delinquent in excess of 90 days or have had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief Operating 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. Nonaccrual 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. The Company requires a period of satisfactory performance of not less than six months before returning a nonaccrual 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 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 TDR’s, 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 TDR’s are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At March 31, 2012, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments. 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 March 31, 2012, the Company had $5.6 million in TDR’s and $3.4 million were performing according to the restructured terms. The financial statement impact of non-perfoming TDR’s was not material for the three months ending March 31, 2012. There was $840,000 of specific reserves allocated to TDR’s at March 31, 2012 based on the collateral deficiencies.

 

17


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Loans classified as troubled debt restructuring during the three months ended March 31, 2012 and 2011, segregated by class, are shown in the table below.

 

     March 31, 2012      March 31, 2011  
     Number
of
Defaults
     Unpaid
Principal
Balance
     Number
of
Defaults
     Unpaid
Principal
Balance
 

Commercial

     

Owner occupied real estate

     —         $ —           —         $ —     

Non owner occupied real estate

     —           —           —           —     

Residential development

     —           —           —           —     

Development & Spec Land Loans

     —           —           —           —     

Commercial and industrial

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     —           —           —           —     

Real estate

           

Residential mortgage

     1         121         2         342   

Residential construction

     —           —           —           —     

Mortgage warehouse

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     1         121         2         342   

Consumer

           

Direct Installment

     —           —           —           —     

Direct Installment Purchased

     —           —           —           —     

Indirect Installment

     —           —           —           —     

Home Equity

     1         53         1         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     1         53         1         9   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 174         3       $ 351   
  

 

 

    

 

 

    

 

 

    

 

 

 

Troubled debt restructured loans which had payment defaults during the three months ended March 31, 2012 and 2011, segregated by class, are shown in the table below. Default occurs when a loan is 90 days or more past due or transferred to nonaccrual.

 

      March 31, 2012      March 31, 2011  
     Number      Unpaid      Number      Unpaid  
     of      Principal      of      Principal  
     Defaults      Balance      Defaults      Balance  

Commercial

           

Owner occupied real estate

     —         $ —           —         $ —     

Non owner occupied real estate

     —           —           —           —     

Residential development

     —           —           —           —     

Development & Spec Land Loans

     —           —           —           —     

Commercial and industrial

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     —           —           —           —     

Real estate

           

Residential mortgage

     2         232         1         459   

Residential construction

     —           —           1         293   

Mortgage warehouse

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     2         232         2         752   

Consumer

           

Direct Installment

     —           —           —           —     

Direct Installment Purchased

     —           —           —           —     

Indirect Installment

     —           —           —           —     

Home Equity

     1         53         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     1         53         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 285         2       $ 752   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


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 loans:

 

                          Three Months Ending  
                          Average      Cash/Accrual  
     Unpaid             Allowance For      Balance in      Interest  
     Principal      Recorded      Loan Loss      Impaired      Income  
March 31, 2012    Balance      Investment      Allocated      Loans      Recognized  

With no recorded allowance

              

Commercial

              

Owner occupied real estate

   $ 723       $ 723       $ —         $ 503       $ 3   

Non owner occupied real estate

     972         974         —           973         —     

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     90         90         —           90         —     

Commercial and industrial

     338         338         —           240         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     2,123         2,125         —           1,806         4   

With an allowance recorded

              

Commercial

              

Owner occupied real estate

     1,636         1,636         595         1,783         1   

Non owner occupied real estate

     3,213         3,213         1,105         3,186         2   

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     715         715         470         237         6   

Commercial and industrial

     1,348         1,348         663         1,130         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     6,912         6,912         2,833         6,336         13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,035       $ 9,037       $ 2,833       $ 8,142       $ 17   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                          Three Months Ending  
                          Average      Cash/Accrual  
     Unpaid             Allowance For      Balance in      Interest  
     Principal      Recorded      Loan Loss      Impaired      Income  
March 31, 2011    Balance      Investment      Allocated      Loans      Recognized  

With no recorded allowance

              

Commercial

              

Owner occupied real estate

   $ 1,003       $ 1,006       $ —         $ 818       $ 1   

Non owner occupied real estate

     1,254         1,254         —           1,037         4   

Residential development

     16         16         —           16         —     

Development & Spec Land Loans

     124         124         —           83         —     

Commercial and industrial

     191         191         —           154         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     2,588         2,591         —           2,107         5   

With an allowance recorded

              

Commercial

              

Owner occupied real estate

     1,538         1,537         585         1,141         —     

Non owner occupied real estate

     4,849         4,888         665         4,884         —     

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     250         250         125         250         —     

Commercial and industrial

     251         251         115         251         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     6,888         6,926         1,490         6,526         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,476       $ 9,517       $ 1,490       $ 8,633       $ 6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

March 31, 2012    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

   $ 285       $ 30       $ —         $ 315       $ 129,215       $ 129,530   

Non owner occupied real estate

     —           97         —           97         150,764         150,861   

Residential development

     —           —           —           —           2,834         2,834   

Development & Spec Land Loans

     —           —           —           —           7,366         7,366   

Commercial and industrial

     1         —           —           1         59,743         59,744   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     286         127         —           413         349,922         350,335   

Real estate

                 

Residential mortgage

     213         254         —           467         147,606         148,073   

Residential construction

     292         —           —           292         7,117         7,409   

Mortgage warehouse

     —           —           —           —           213,152         213,152   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     505         254         —           759         367,875         368,634   

Consumer

                 

Direct Installment

     137         17         —           154         24,581         24,735   

Direct Installment Purchased

     4         8         9         21         842         863   

Indirect Installment

     816         87         19         922         130,539         131,461   

Home Equity

     655         36         —           691         112,729         113,420   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     1,612         148         28         1,788         268,691         270,479   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,403       $ 529       $ 28       $ 2,960       $ 986,488       $ 989,448   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011    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

   $ 89       $ 168       $ —         $ 257       $ 131,636       $ 131,893   

Non owner occupied real estate

     228         —           —           228         142,041         142,269   

Residential development

     —           —           —           —           3,574         3,574   

Development & Spec Land Loans

     —           —           —           —           8,739         8,739   

Commercial and industrial

     34         22         —           56         65,718         65,774   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     351         190         —           541         351,708         352,249   

Real estate

                 

Residential mortgage

     411         —           —           411         150,482         150,893   

Residential construction

     —           —           —           —           6,181         6,181   

Mortgage warehouse

     —           —           —           —           208,299         208,299   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     411         —           —           411         364,962         365,373   

Consumer

                 

Direct Installment

     164         22         1         187         24,065         24,252   

Direct Installment Purchased

     7         14         4         25         956         981   

Indirect Installment

     1,333         335         29         1,697         126,054         127,751   

Home Equity

     363         92         3         458         113,103         113,561   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     1,867         463         37         2,367         264,178         266,545   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,629       $ 653       $ 37       $ 3,319       $ 980,848       $ 984,167   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 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.

 

20


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 of $500,000 or greater are validated by the Loan Committee, which is chaired by the Chief Operating Officer (COO).

 

 

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

 

 

The COO 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 attends 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, and collateral 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 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 a troubled debt restructure are graded “Substandard.” After being 90 days delinquent a loan is charged off unless it is well secured and in the process of collection. If the latter case exists, the loan is placed on non-accrual. Occasionally a mortgage loan may be graded as “Special Mention.” When this situation arises, it is because the characteristics of the loan and the borrower fit the definition of a Risk Grade 5 described below, which is normally used for grading commercial loans. Loans not graded Substandard are considered Pass.

Horizon Bank employs an eight-grade rating system to determine the credit quality of commercial loans. The first four 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.

 

21


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 (Pass)

Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than Satisfactory loans due to weak balance sheets, marginal earnings or cash flow, lack of financial information, weakening markets, insufficient or questionable collateral coverage or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision. Loans that normally fall into this grade include construction of commercial real estate buildings, land development and subdivisions, and rental properties that have not attained stabilization.

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.

 

 

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.

 

22


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

 

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.

 

23


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

March 31, 2012    Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial

              

Owner occupied real estate

   $ 111,070       $ 5,936       $ 12,524       $ —         $ 129,530   

Non owner occupied real estate

     125,077         12,740         13,044         —           150,861   

Residential development

     974         527         1,333         —           2,834   

Development & Spec Land Loans

     3,624         939         2,803         —           7,366   

Commercial and industrial

     52,043         2,831         4,870         —           59,744   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     292,788         22,973         34,574         —           350,335   

Real estate

              

Residential mortgage

     139,842         —           8,231         —           148,073   

Residential construction

     6,973         —           436         —           7,409   

Mortgage warehouse

     213,152         —           —           —           213,152   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     359,967         —           8,667         —           368,634   

Consumer

              

Direct Installment

     24,554         —           181         —           24,735   

Direct Installment Purchased

     854         —           9         —           863   

Indirect Installment

     130,687         —           774         —           131,461   

Home Equity

     110,982         —           2,438         —           113,420   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     267,077         —           3,402         —           270,479   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 919,832       $ 22,973       $ 46,643       $ —         $ 989,448   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2011    Pass      Special
Mention
     Substandard      Doubtful      Total  

Commercial

              

Owner occupied real estate

   $ 107,155       $ 4,101       $ 20,637       $ —         $ 131,893   

Non owner occupied real estate

     118,446         11,423         12,400         —           142,269   

Residential development

     1,677         529         1,368         —           3,574   

Development & Spec Land Loans

     3,778         860         4,101         —           8,739   

Commercial and industrial

     55,964         3,012         6,798         —           65,774   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     287,020         19,925         45,304         —           352,249   

Real estate

              

Residential mortgage

     142,834         —           8,059         —           150,893   

Residential construction

     5,744         —           437         —           6,181   

Mortgage warehouse

     208,299         —           —           —           208,299   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     356,877         —           8,496         —           365,373   

Consumer

              

Direct Installment

     23,995         —           257         —           24,252   

Direct Installment Purchased

     977         —           4         —           981   

Indirect Installment

     126,796         —           955         —           127,751   

Home Equity

     111,088         —           2,473         —           113,561   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     262,856         —           3,689         —           266,545   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 906,753       $ 19,925       $ 57,489       $ —         $ 984,167   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 6 – 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 5.63% on a notional amount of $30.5 million at March 31, 2012. Under these 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 the 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 March 31, 2012, the Company’s cash flow hedge was effective and is not expected to have a significant impact 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 activities. 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 March 31, 2012, 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.

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 $47.6 million at March 31, 2012.

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 March 31, 2012, the Company’s fair value of these derivatives was recorded and over the next 12 months is 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.

 

25


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

     Asset Derivative
March 31, 2012
     Liability Derivatives
March 31, 2012
 

Derivatives designated as hedging instruments (Unaudited)

   Balance Sheet
Location
   Fair Value      Balance Sheet
Location
     Fair Value  

Interest rate contracts

   Loans    $ 643         Other liabilities       $ 2,113   

Interest rate contracts

   Other Assets      1,470         Other liabilities         4,351   
     

 

 

       

 

 

 

Total derivatives designated as hedging instruments

        2,113            6,464   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments

           

Mortgage loan contracts

   Other assets      510         Other liabilities         71   
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

        510            71   
     

 

 

       

 

 

 

Total derivatives

      $ 2,623          $ 6,535   
     

 

 

       

 

 

 

 

     Asset Derivative
December 31, 2011
     Liability Derivatives
December 31, 2011
 
Derivatives designated as hedging instruments (Unaudited)    Balance Sheet
Location
   Fair Value      Balance Sheet
Location
     Fair Value  

Interest rate contracts

   Loans    $ 754         Other liabilities       $ 2,187   

Interest rate contracts

   Other Assets      1,433         Other liabilities         4,914   
     

 

 

       

 

 

 

Total derivatives designated as hedging instruments

        2,187            7,101   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments

           

Mortgage loan contracts

   Other assets      662         Other liabilities         —     
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

        662            —     
     

 

 

       

 

 

 

Total derivatives

      $ 2,849          $ 7,101   
     

 

 

       

 

 

 

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

 

     Comprehensive Income on Derivative
(Effective Portion)
 
     Three Months Ended March 31  

Derivative in cash flow

hedging relationship

   2012
(Unaudited)
     2011
(Unaudited)
 

Interest rate contracts

   $ 367       $ 293   

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.

 

26


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

`         Amount of Gain (Loss) Recognized on Derivative  

Derivative in fair value

hedging relationship

  

Location of gain (loss)

recognized on derivative

   Three Months Ended March 31  
      2012
(Unaudited)
    2011
(Unaudited)
 

Interest rate contracts

   Interest income - loans    $ (74   $ (410

Interest rate contracts

   Interest income - loans    $ 74        410   
     

 

 

   

 

 

 

Total

      $ —        $ —     
     

 

 

   

 

 

 
          Amount of Gain (Loss) Recognized on Derivative  

Derivative not designated as

hedging relationship

  

Location of gain (loss)

recognized on derivative

   Three Months Ended March 31  
      2012
(Unaudited)
    2011
(Unaudited)
 

Mortgage contracts

   Other income - gain on sale of loans    $ (223   $ 634   

Note 7 – 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 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 March 31, 2012. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available for sale securities

When quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics or discounted cash flows. Level 2 securities include U.S. Treasury and federal agency securities, state and municipal securities, federal agency mortgage 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.

 

27


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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, 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 financial statements measured at fair value on a recurring basis and the level within the FASB ASC fair value hierarchy in which the fair value measurements fall at the following:

 

     Fair Value     Quoted Prices in
Active Markets
for Identical
Assets

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

(Level 3)
 

March 31, 2012

         

Available-for-sale securities

         

U.S. Treasury and federal agencies

   $ 18,657      $ —         $ 18,657      $ —     

State and municipal

     143,774        —           143,774        —     

Federal agency collateralized mortgage obligations

     86,690        —           86,690        —     

Federal agency mortgage-backed pools

     180,983        —           180,983        —     

Private labeled mortgage-backed pools

     3,360        —           3,360        —     

Corporate notes

     37        —           37        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

     433,501        —           433,501        —     

Hedged loans

     59,911        —           59,911        —     

Forward sale commitments

     510        —           510        —     

Interest rate swap agreements

     (6,464     —           (6,464     —     

Commitments to originate loans

     (71     —           (71     —     

December 31, 2011

         

Available-for-sale securities

         

U.S. Treasury and federal agencies

   $ 13,022      $ —         $ 13,022      $ —     

State and municipal

     143,890        —           143,890        —     

Federal agency collateralized mortgage obligations

     91,122        —           91,122        —     

Federal agency mortgage-backed pools

     179,351        —           179,351        —     

Private labeled mortgage-backed pools

     3,636        —           3,636        —     

Corporate notes

     24        —           24        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

     431,045        —           431,045        —     

Hedged loans

     54,362        —           —          54,362   

Forward sale commitments

     662        —           —          662   

Interest rate swap agreements

     (7,102     —           —          (7,101

Commitments to originate loans

     —          —           —          —     

 

28


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Transfers between Levels

Transfers between Levels 1, 2 and 3 and the reasons for those transfers are as follows:

 

     Quoted Prices
in Active
Markets for
Identical
Assets

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

(Level 3)
     Reason
for
Transfer
 

Transfers to level:

          

Hedged loans

   $ —         $ 59,911      $ —           (a

Forward sale commitments

     —           510        —           (b

Interest rate swap agreements

     —           (6,464     —           (a

Commitments to originate loans

     —           (71     —           (b
  

 

 

    

 

 

   

 

 

    

Total transfers to level

   $ —         $ 53,886      $ —        
  

 

 

    

 

 

   

 

 

    

 

(a) — Valuation determined by widely accepted valuation techniques including discounted cash flow analysis on expected cash flows of each derivative an observable market rate inputs such as yield curves and contractual terms on each instrument.
(b) — Valuation determined by quoted prices for similar loans in the secondary market with an expected fallout rate (interest rate locked pipeline loans not expected to close). Fallout rate is not considered a significant input to the fair value in its entirety.

The following is a reconciliation of the beginning and ending balances of recurring fair value measurements recognized in the accompanying condensed consolidated balance sheet using significant unobservable (Level 3) inputs (Unaudited):

 

     Hedged Loans     Forward Sale
Commitments
    Interest Rate
Swaps
    Commitments to
Originate Loans
 

Beginning balance December 31, 2011

   $ 54,362      $ 662      $ (7,101   $ —     

Total realized and unrealized gains and losses

        

Included in net income

     (74     (152     74        (71

Included in other comprehensive income, gross

     —          —          563        —     

Purchases, issuances, and settlements

     6,114        —          —          —     

Principal payments

     (491     —          —          —     

Transfers out to Level 2

     (59,911     (510     6,464        71   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance March 31, 2012

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Hedged Loans     Forward Sale
Commitments
    Interest Rate
Swaps
    Commitments to
Originate Loans
 

Beginning balance December 31, 2010

   $ 50,088      $ 407      $ (3,415   $ —     

Total realized and unrealized gains and losses

        

Included in net income

     (410     (126     410        (56

Included in other comprehensive income, gross

     —          —          451        —     

Purchases, issuances, and settlements

     (915     —          —          —     

Principal payments

     (352     —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance March 31, 2011

     48,411        281        (2,554     (56
  

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

     Three Months Ended March 31  
     2012     2011  
Non Interest Income    (Unaudited)     (Unaudited)  

Total gains and losses from:

    

Hedged loans

   $ (74   $ (410

Fair value interest rate swap agreements

     74        410   

Derivative loan commitments

     (223     634   
  

 

 

   

 

 

 
   $ (223   $ 634   
  

 

 

   

 

 

 

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

 

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

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

March 31, 2012

           

Impaired loans

   $ 6,202       $ —         $ —         $ 6,202   

Mortgage servicing rights

     4,377         —           —           4,377   

December 31, 2011

           

Impaired loans

   $ 5,822       $ —         $ —         $ 5,822   

Mortgage servicing rights

     4,193         —           —           4,193   

Impaired (collateral dependent): Fair value adjustments for impaired and non-accrual loans typically occur when there is evidence of impairment. Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. The Company measures fair value based on the value of the collateral securing the loans. Collateral may be in the form of real estate or personal property, including equipment and inventory. The value of the collateral is determined based on internal estimates as well as third-party appraisals or non-binding broker quotes. These measurements were classified as Level 3. The fair value of the Company's other real estate owned is determined using Level 3 inputs, which include current and prior appraisals net of estimated costs to sell. Fair value adjustments on impaired loans were $2.8 million at March 31, 2012 and $2.1 million at December 31, 2012.

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.

 

30


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 8 – Fair Value of Financial Instruments

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

The estimated fair values of financial instruments, as shown below, are not intended to reflect the estimated liquidation or market value of Horizon taken as a whole. The disclosed fair value estimates are limited to Horizon’s significant financial instruments at March 31, 2012 and December 31, 2011. These include financial instruments recognized as assets and liabilities on the consolidated balance sheet as well as certain off-balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by 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 Letter of Credit — The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the

 

31


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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.

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).

 

     March 31, 2012  
     Carrying
Amount
     Quoted Prices
in Active
Markets for
Identical
Assets

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

(Level 3)
 

Assets

           

Cash and due from banks

   $ 19,049       $ 19,049       $ —         $ —     

Investment securities held to maturity

     7,100         —           7,100         —     

Loans held for sale

     10,202         —           —           10,202   

Loans, net

     969,141         —           —           983,862   

Stock in FHLB and FRB

     12,390         —           12,390         —     

Interest receivable

     6,798         —           6,798         —     

Liabilities

           

Non-interest bearing deposits

   $ 138,618       $ 138,618       $ —         $ —     

Interest-bearing deposits

     926,003         —           918,614         —     

Borrowings

     310,889         —           344,188         —     

Subordinated debentures

     30,699         —           30,344         —     

Interest payable

     555         —           555         —     

 

     December 31, 2011  
     Carrying
Amount
     Quoted Prices
in Active
Markets for
Identical
Assets

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

(Level 3)
 

Assets

           

Cash and due from banks

   $ 20,447       $ 20,447       $ —         $ —     

Investment securities held to maturity

     7,100         —           7,134         —     

Loans held for sale

     14,090         —           —           14,090   

Loans, net

     964,311         —           —           979,401   

Stock in FHLB and FRB

     12,390         —           12,390         —     

Interest receivable

     6,671         —           6,671         —     

Liabilities

           

Non-interest bearing deposits

   $ 130,673       $ 130,673       $ —         $ —     

Interest-bearing deposits

     879,192         —           874,160         —     

Borrowings

     370,111         —           398,789         —     

Subordinated debentures

     30,676         —           30,083         —     

Interest payable

     596         —           596         —     

 

32


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 9 – Other Comprehensive Income

 

     Three Months Ended  
     March 31
2012
    March 31
2011
 
     (Unaudited)     (Unaudited)  

Unrealized gains on securities:

    

Unrealized holding gains arising during the period

   $ 867      $ 725   

Less: reclassification adjustment for gains realized in net income

     —          274   
  

 

 

   

 

 

 
     867        451   

Unrealized gain on derivative instruments

     565        2,189   
  

 

 

   

 

 

 

Net unrealized gains

     1,432        2,640   

Tax expense (benefit)

     (501     (924
  

 

 

   

 

 

 

Other comprehensive income

   $ 931      $ 1,716   
  

 

 

   

 

 

 

 

     March 31
2012
    December 31
2011
 

Unrealized gain on securities available for sale

   $ 17,829      $ 16,978   

Unrealized gain (loss) on derivative instruments

     (4,351     (4,914

Tax effect

     (4,705     (4,222
  

 

 

   

 

 

 

Total accumulated other comprehensive income

   $ 8,773      $ 7,842   
  

 

 

   

 

 

 

Note 10 – Future accounting matters

Offsetting Assets and Liabilities: In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11 “Balance Sheet (Topic 210)—Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 requires an entity to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Retrospective disclosure is required for all comparative periods presented. The Company is assessing the impact of ASU 2011-11 on its disclosures.

Goodwill: In September 2011, the FASB issued ASU No. 2011-08 “Intangibles — Goodwill and Other (Topic 350)—Testing Goodwill for Impairment.” ASU 2011-08 allows an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of the reporting unit. ASU 2011-08 was effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption was permitted. The Company does not expect an impact on its financial condition or results of operations.

Comprehensive Income: In June 2011, the FASB issued ASU No. 2011-05 “Comprehensive Income (Topic 220)—Presentation of Comprehensive Income.” ASU 2011-05 requires that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. In December 2011, FASB issued ASU No. 2011-12 which defers the effective date of the requirement in ASU 2011-05 to present items that arereclassified from accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. ASU 2011-05 was effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The effect of applying this standard is reflected in the Condensed Consolidated Statement of Comprehensive Income.

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Fair Value Measurements: In May 2011, the FASB issued ASU No. 2011-04 “Fair Value Measurement (Topic 820)—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU 2011-04 changed the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Consequently, the amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs (International Financial Reporting Standards). ASU 2011-04 was effective prospectively during interim and annual periods beginning on or after December 15, 2011. Early application by public entities was not permitted. The effect of applying this standard is included in Note 7.

Transfers and Servicing: In April 2011, the FASB issued ASU No. 2011-03 “Transfers and Servicing (Topic 860)—Reconsideration of Effective Control for Repurchase Agreement.” ASU 2011-03 removed from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. ASU 2011-03 was effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occurred on or after the effective date. Early adoption was not permitted. ASU 2011-03 did not have an impact on the Company’s financial condition, results of operations, or disclosures.

Note 11 – Business Combination

On February 9, 2012, Horizon entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for Horizon’s acquisition of Heartland Bancshares, Inc., an Indiana corporation (“Heartland”). Pursuant to the Merger Agreement, Heartland will merge with and into Horizon, with Horizon surviving the merger (the “Merger”), and Heartland Community Bank, an Indiana-chartered commercial bank and wholly owned subsidiary of Heartland, will merge with and into a wholly owned subsidiary of Horizon, Horizon Bank, N.A. (“Horizon Bank”), with Horizon Bank as the surviving bank.

The boards of directors of each of Horizon and Heartland have approved the Merger and the Merger Agreement. Subject to the approval of the Merger by Heartland’s shareholders, regulatory approvals and other closing conditions, the parties anticipate completing the Merger at the end of the second quarter or beginning of the third quarter of 2012.

In connection with the Merger, each Heartland shareholder will receive 0.54 shares of Horizon common stock (the “Exchange Ratio”) for each share of Heartland common stock owned by them, subject to adjustment as described below. Based on Horizon’s February 8, 2012 closing price of $18.00 per share as reported on the NASDAQ Global Market, the transaction value is estimated at $14.0 million.

The Exchange Ratio may be adjusted in the manner prescribed in the Merger Agreement based upon (i) Heartland’s consolidated shareholder’s equity as of the end of the month prior to closing of the Merger, (ii) the closing of certain commercial loans prior to the closing of the Merger, (iii) a significant decrease in Horizon’s common stock price, and (iv) certain other circumstances specified by the Merger Agreement.

The Merger Agreement also provides that prior to the merger Horizon will fund the purchase by either Horizon or Heartland of the shares of preferred stock with an aggregate liquidation value of $7.248 million that Heartland issued to the U.S. Treasury pursuant to the TARP Capital Purchase Program. The Merger Agreement contains other customary representations, warranties, and covenants of Horizon and Heartland.

Subject to certain terms and conditions, the board of directors of Heartland has agreed to recommend the approval and adoption of the Merger Agreement to the Heartland shareholders and will solicit proxies voting in favor of the Merger from Heartland’s shareholders.

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The Merger Agreement also provides for certain termination rights for both Horizon and Heartland, and further provides that upon termination of the Merger Agreement under certain circumstances, Heartland will be obligated to pay Horizon a termination fee.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2012

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward–Looking Statements

This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, with respect to Horizon Bancorp (“Horizon” or the “Company”) and Horizon Bank, N.A. (the “Bank”). Horizon intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and is including this statement for the purposes of these safe harbor provisions. Statements in this report should be considered in conjunction with the other information available about Horizon, including the information in the other filings we make with the Securities and Exchange Commission. The forward-looking statements are based on management’s expectations and are subject to a number of risks and uncertainties. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “expect,” “estimate,” “project,” “intend,” “plan,” “believe,” “could,” “will” and similar expressions in connection with any discussion of future operating or financial performance. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements.

Actual results may differ materially, and adversely or positively, from the expectations of the Company that are expressed or implied by any forward-looking statement. Risks, uncertainties, and factors that could cause the Company’s actual results to vary materially from those expressed or implied by any forward-looking statement include but not limited to:

 

   

the use of proceeds of future offerings of securities;

 

   

the unknown future direction of interest rates and the timing and magnitude of any changes in interest rates;

 

   

changes in competitive conditions;

 

   

the introduction, withdrawal, success and timing of asset/liability management strategies or of mergers and acquisitions and other business initiatives and strategies;

 

   

changes in customer borrowing, repayment, investment and deposit practices;

 

   

changes in fiscal, monetary and tax policies;

 

   

changes in financial and capital markets;

 

   

deterioration in general economic conditions, either nationally or locally, resulting in, among other things, credit quality deterioration;

 

   

capital management activities, including possible future sales of new securities, or possible repurchases or redemptions by the Company of outstanding debt or equity securities;

 

   

risks of expansion through acquisitions and mergers, such as unexpected credit quality problems of the acquired loans or other assets, unexpected attrition of the customer base of the acquired institution or branches, and difficulties in integration of the acquired operations;

 

   

factors that may cause the Company to incur impairment charges on its investment securities;

 

   

the impact, extent and timing of technological changes

 

   

electronic, cyber and physical security breaches;

 

   

claims and litigation liabilities, including related costs, expenses, settlements and judgments, or the outcome of matters before regulatory agencies, whether pending or commencing in the future;

 

   

actions of the Federal Reserve Board;

 

   

changes in accounting principles and interpretations;

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2012

 

   

potential increases of federal deposit insurance premium expense, and possible future special assessments of FDIC premiums, either industry wide or specific to the Company’s banking subsidiary;

 

   

actions of the regulatory authorities under the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Federal Deposit Insurance Act and other possible legislative and regulatory actions and reforms;

 

   

the continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends; and

 

   

other factors and risks described under the caption “Risk Factors” in this report and in any of our subsequent reports that we have made or make with the Securities and Exchange Commission (“SEC”).

Because such forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such statements. The foregoing list of important factors is not exclusive and you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this document or, in the case of documents incorporated by reference, the dates of those documents. We do not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of us. For a detailed discussion of the risks and uncertainties that may cause our actual results or performance to differ materially from the results or performance expressed or implied by forward-looking statements, see “Risk Factors” in Item 1A of Part I of our 2011 Annual Report on Form 10-K and in the subsequent reports we file with the SEC.

Overview

Horizon is a registered bank holding company incorporated in Indiana and headquartered in Michigan City, Indiana. Horizon provides a broad range of banking services in Northwestern Indiana and Southwestern Michigan through its bank subsidiary. Horizon operates as a single segment, which is commercial banking. Horizon’s Common Stock is traded on the NASDAQ Global Market under the symbol HBNC. The Bank was chartered as a national banking association in 1873 and has operated continuously since that time. The Bank is a full-service commercial bank offering commercial and retail banking services, corporate and individual trust and agency services, and other services incident to banking.

Horizon continues to operate in a challenging economic and banking environment. Within the Company’s primary market areas of Northwest Indiana and Southwest Michigan, unemployment rates increased during 2009 and have remained at high levels during 2010, 2011 and through the first three months of 2012. This rise in unemployment has been driven by multiple factors including slowdowns in the steel and recreational vehicle industries as well as a continued lower activity in the housing industry. The Company’s higher than historical levels of non-performing loans at March 31, 2012 and over the past two years can be attributed to the continued slow economy and continued high local unemployment, which have resulted in lower business revenues and increased bankruptcies. Despite these economic factors, Horizon continued to post record positive results through the first three months of 2012.

Following are some highlights of Horizon’s financial performance through the first quarter of 2012:

 

   

First quarter 2012 net income was $4.6 million or $.88 diluted earnings per share, a 79% increase in diluted earnings per share compared to the same period in 2011 and a 29% increase compared to the most recent linked quarter. In addition, this represents the highest quarterly net income and diluted earnings per share in the Company’s history.

 

   

Total loans increased $5.4 million during the quarter and $179.0 million over the previous twelve months to $988.6 million at March 31, 2012.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2012

 

   

Net interest income, after provisions for loan losses, for the first three months of 2012 was $12.6 million compared with $9.5 million for the same period in the prior year.

 

   

The provision for loan losses decreased to $559,000 for the first three months of 2012 compared to $1.5 million for the same period in 2011 and $838,000 for the most recent linked quarter.

 

   

Net charge-offs for the first three months of 2012 were $29,000 compared to $1.5 million for the same period in 2011 and $1.1 million for the most recent linked quarter.

 

   

Return on average assets was 1.23% for the first quarter of 2012.

 

   

Return on average common equity was 15.90% for the first quarter of 2012.

 

   

Announced the definitive agreement to acquire Heartland Bancshares, Inc (“Heartland”) based in Franklin, Indiana.

 

   

The Company increased its quarterly cash dividend in the first quarter of 2012 to $.13 and paid its 105th consecutive quarterly dividend to shareholders.

 

   

Horizon’s tangible book value per share rose to $21.35 compared with $18.11 at March 31, 2011.

 

   

Horizon Bank’s capital ratios, including Tier 1 Capital to total risk weighted assets of 11.77% as of March 31, 2012, continue to be well above the regulatory standards for well-capitalized banks.

Critical Accounting Policies

The notes to the consolidated financial statements included in Item 8 of the Company’s Annual Report on Form 10-K for 2011 contain a summary of the Company's significant accounting policies. Certain of these policies are important to the portrayal of the Company's financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Management has identified the allowance for loan losses, intangible assets, mortgage servicing rights and hedge accounting as critical accounting policies.

Allowance for Loan Losses

An allowance for loan losses is maintained to absorb probable incurred loan losses inherent in the loan portfolio. The determination of the allowance for loan losses is a critical accounting policy that involves management’s ongoing quarterly assessments of the probable incurred losses inherent in the loan portfolio. The identification of loans that have probable incurred losses is subjective; therefore, a general reserve is maintained to cover all probable losses within the entire loan portfolio. Horizon utilizes a loan grading system that helps identify, monitor and address asset quality problems in an adequate and timely manner. Each quarter, various factors affecting the quality of the loan portfolio are reviewed. Large credits are reviewed on an individual basis for loss potential. Other loans are reviewed as a group based upon previous trends of loss experience. Horizon also reviews the current and anticipated economic conditions of its lending market as well as transaction risk to determine the effect they may have on the loss experience of the loan portfolio.

Goodwill and Intangible Assets

Management believes that the accounting for goodwill and other intangible assets also involves a higher degree of judgment than most other significant accounting policies. FASB ASC 350-10 establishes standards for the amortization of acquired intangible assets and impairment assessment of goodwill. At March 31, 2012, Horizon had core deposit intangibles of $2.2 million subject to amortization and $5.9 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC 350-10 requires

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2012

 

an annual evaluation of goodwill for impairment. The evaluation of goodwill for impairment requires the use of estimates and assumptions. Market price at the close of business on March 31, 2012 was $18.50 per share compared to a book value of $22.99 per common share. Horizon reported record earnings for the twelfth consecutive year in 2011 and the first three months of 2012 were the highest first three months of net income in the Company’s history, therefore, the Company believes the below book market price relates to an overall decline in the financial industry sector and is not specific to Horizon.

The financial markets are currently reflecting significantly lower valuations for the stocks of financial institutions, when compared to historic valuation metrics, largely driven by the constriction in available credit and losses suffered related to residential mortgage markets. The Company’s stock activity, as well as the price, has been affected by the economic conditions affecting the banking industry. Management believes this downturn has impacted the Company’s stock and has concluded that the recent stock price is not indicative or reflective of fair value (per ASC Topic 820 Fair Value).

Horizon has concluded that, based on its own internal evaluation the recorded, value of goodwill is not impaired.

Mortgage Servicing Rights

Servicing assets are recognized as separate assets when rights are acquired through purchase or through the sale of financial assets on a servicing-retained basis. Capitalized servicing rights are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated regularly for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying servicing rights by predominant characteristics, such as interest rates, original loan terms and whether the loans are fixed or adjustable rate mortgages. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. When the book value of an individual stratum exceeds its fair value, an impairment reserve is recognized so that each individual stratum is carried at the lower of its amortized book value or fair value. In periods of falling market interest rates, accelerated loan prepayment can adversely affect the fair value of these mortgage-servicing rights relative to their book value. In the event that the fair value of these assets was to increase in the future, Horizon can recognize the increased fair value to the extent of the impairment allowance but cannot recognize an asset in excess of its amortized book value. Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact Horizon’s financial condition and results of operations either positively or negatively.

Generally, when market interest rates decline and other factors favorable to prepayments occur, there is a corresponding increase in prepayments as customers refinance existing mortgages under more favorable interest rate terms. When a mortgage loan is prepaid, the anticipated cash flows associated with servicing that loan are terminated, resulting in a reduction of the fair value of the capitalized mortgage servicing rights. To the extent that actual borrower prepayments do not react as anticipated by the prepayment model (i.e., the historical data observed in the model does not correspond to actual market activity), it is possible that the prepayment model could fail to accurately predict mortgage prepayments and could result in significant earnings volatility. To estimate prepayment speeds, Horizon utilizes a third-party prepayment model, which is based upon statistically derived data linked to certain key principal indicators involving historical borrower prepayment activity associated with mortgage loans in the secondary market, current market interest rates and other factors, including Horizon’s own historical prepayment experience. For purposes of model valuation, estimates are made for each product type within the mortgage servicing rights portfolio on a monthly basis. In addition, on a quarterly basis Horizon engages a third party to independently test the value of its servicing asset.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2012

 

Derivative Instruments

As part of the Company’s asset/liability management program, Horizon utilizes, from time-to-time, interest rate floors, caps or swaps to reduce the Company’s sensitivity to interest rate fluctuations. These are derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated income statements or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.

Horizon’s accounting policies related to derivatives reflect the guidance in FASB ASC 815-10. Derivatives that qualify for the hedge accounting treatment are designated as either: a hedge of the fair value of the recognized asset or liability or of an unrecognized firm commitment (a fair value hedge) or a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge). For fair value hedges, the cumulative change in fair value of both the hedge instruments and the underlying loans is recorded in non-interest income. For cash flow hedges, changes in the fair values of the derivative instruments are reported in OCI to the extent the hedge is effective. The gains and losses on derivative instruments that are reported in OCI are reflected in the consolidated income statement in the periods in which the results of operations are impacted by the variability of the cash flows of the hedged item. Generally, net interest income is increased or decreased by amounts receivable or payable with respect to the derivatives, which qualify for hedge accounting. At inception of the hedge, Horizon establishes the method it uses for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. The ineffective portion of the hedge, if any, is recognized currently in the consolidated statements of income. Horizon excludes the time value expiration of the hedge when measuring ineffectiveness.

Valuation Measurements

Valuation methodologies often involve a significant degree of judgment, particularly when there are no observable active markets for the items being valued. Investment securities, residential mortgage loans held for sale and derivatives are carried at fair value, as defined in FASB ASC 820, which requires key judgments affecting how fair value for such assets and liabilities is determined. In addition, the outcomes of valuations have a direct bearing on the carrying amounts of goodwill, mortgage servicing rights, and pension and other post-retirement benefit obligations. To determine the values of these assets and liabilities, as well as the extent, to which related assets may be impaired, management makes assumptions and estimates related to discount rates, asset returns, prepayment speeds and other factors. The use of different discount rates or other valuation assumptions could produce significantly different results, which could affect Horizon’s results of operations.

Financial Condition

On March 31, 2012, Horizon’s total assets were $1.5 billion, primarily unchanged from December 31, 2011.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2012

 

Investment securities were comprised of the following as of:

 

     March 31, 2012      December 31, 2011  
     Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value  

Available for sale

           

U.S. Treasury and federal agencies

   $ 18,365       $ 18,657       $ 12,693       $ 13,022   

State and municipal

     134,661         143,774         135,011         143,890   

Federal agency collateralized mortgage obligations

     84,458         86,690         89,016         91,122   

Federal agency mortgage-backed pools

     174,909         180,983         173,797         179,351   

Private labeled mortgage-backed pools

     3,247         3,360         3,518         3,636   

Corporate notes

     32         37         32         24   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 415,672       $ 433,501       $ 414,067       $ 431,045   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity, State and Municipal

   $ 7,100       $ 7,100       $ 7,100       $ 7,134   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment securities increased by approximately $2.5 million compared to the end of 2011. This growth was the result of the Company deploying excess cash that was held during the first three months in cash and due from banks into investment securities.

Net loans increased $4.8 million since December 31, 2011. This increase was the result of an increase in consumer and mortgage warehouse loans of $4.0 million and $4.9 million, respectively. These increases were offset by a decrease in commercial and real estate loans of $1.9 million and $1.6 million, respectively. The increase in consumer loans is the direct result of increased calling efforts and market expansion allowing opportunities to increase Horizon’s market share within the Company’s footprint. Mortgage warehouse loans increased as a result of market expansion and refinancing activity. Horizon’s commercial loans decreased during the first three months of 2012 as new loan production has not completely replaced all of the loan run-off from scheduled amortization and pay-offs along with exiting several substandard relationships.

Other assets decreased $3.7 million during the first three months of 2012 primarily due to a $2.0 million decrease in OREO.

Total deposits increased $54.8 million during the first three months of 2012 primarily due to municipal deposit growth.

The Company’s borrowings decreased $59.2 million since December 31, 2011. At March 31, 2012 the Company had $106.0 million in short-term funds borrowed compared to $157.0 million at December 31, 2011. The Company uses short-term borrowings to fund the increase in mortgage warehouse lending when it is determined that the loan demand may fluctuate as a result of refinancing activity. In addition, the current Company’s balance sheet strategy is to utilize a reasonable level of short-term borrowing during extended low rate environments in addition to what is needed for the fluctuations in mortgage warehouse lending.

Stockholders’ equity totaled $126.2 million at March 31, 2012 compared to $121.5 million at December 31, 2011. The increase in stockholders’ equity during the period was the result of generating net income and an increase in accumulated other comprehensive income, net of dividends declared. At March 31, 2012, the ratio of average stockholders’ equity to average assets was 8.33% compared to 7.96% for December 31, 2011. Book value per common share at March 31, 2012 increased to $22.99 compared to $22.02 at December 31, 2011.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2012

 

Results of Operations

Overview

Consolidated net income for the three-month period ended March 31, 2012 was $4.6 million, an increase of 66.8% from the $2.8 million for the same period in 2011. Earnings per common share for the three months ended March 31, 2012 increased to $0.90 basic and $0.88 diluted, compared to $0.51 basic and $0.49 diluted for the same three-month period in 2011. Dividends paid on preferred shares reduced diluted earnings per share by $0.03 and $0.08 per share for the three-month periods ended March 31, 2012 and 2011, respectively.

Net Interest Income

The largest component of net income is net interest income. Net interest income is the difference between interest income, principally from loans and investment securities, and interest expense, principally on deposits and borrowings. Changes in the net interest income are the result of changes in volume and the net interest spread which affects the net interest margin. Volume refers to the average dollar levels of interest-earning assets and interest-bearing liabilities. Net interest spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities.

The reduction in interest rates has influenced the cost of the Company’s interest bearing liabilities more significantly than the reduction in the yields received on the Company’s interest earning assets, resulting in an increase of the net interest margin. Management believes that the current level of interest rates is driven by external factors and therefore impacts the results of the Company’s net interest margin. Management does not expect a significant rise in interest rates in the short term, but an increase in rates is expected at some time in the future due to the current historically low interest rate environment.

Net interest income during the three months ended March 31, 2012 was $13.2 million, an increase of $2.1 million over the $11.1 million earned during the same period in 2011. Yields on the Company’s interest-earning assets decreased by 2 basis points to 4.91% from 4.93% for the three months ended March 31, 2012 and 2011, respectively. Interest income increased $1.4 million from $15.4 million for the three months ended March 31, 2011 to $16.8 million for the same period in 2012. This increase was primarily due to an increase in interest earning assets offset slightly from the yield on new and repriced earning assets. However, the asset yields on loans receivable has not declined at the same pace as some market indices partially due to interest rate floors that are in place on approximately $387.1 million of the Company’s $520.5 million of adjustable rate loans.

Rates paid on interest-bearing liabilities decreased by 34 basis points for the three months ended March 31, 2012 compared to the same period in 2011 due to the lower interest rate environment. Interest expense decreased $736,000 from $4.4 million for the three-months ended March 31, 2011 to $3.6 million for the same period in 2012. This decrease was due to the lower rates being paid on the Company’s interest bearing liabilities. Due to a more significant decrease in the rates paid on the Company’s interest-bearing liabilities compared to the decrease in yields received on the Company’s interest-earning assets the net interest margin increased 30 basis points from 3.57% for the three months ended March 31, 2011 to 3.87% for the same period in 2012.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2012

 

The following are the average balance sheets for the three months ending:

 

     Three Months Ended     Three Months Ended  
     March 31, 2012     March 31, 2011  
     Average            Average     Average            Average  
     Balance     Interest      Rate     Balance     Interest      Rate  

ASSETS

              

Interest-earning assets

              

Federal funds sold

   $ 4,782      $ 3         0.25   $ 63,220      $ 39         0.25

Interest-earning deposits

     1,971        1         0.20     3,180        1         0.13

Investment securities - taxable

     344,144        2,310         2.70     301,613        2,460         3.31

Investment securities - non-taxable (1)

     107,892        980         5.07     114,294        1,043         5.07

Loans receivable (2)(3)(4)

     952,236        13,532         5.72     820,388        11,888         5.88
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets (1)

     1,411,025        16,826         4.91     1,302,695        15,431         4.93

Noninterest-earning assets

              

Cash and due from banks

     15,785             14,596        

Allowance for loan losses

     (19,427          (19,062     

Other assets

     96,543             100,475        
  

 

 

        

 

 

      
   $ 1,503,926           $ 1,398,704        
  

 

 

        

 

 

      

LIABILITIES AND SHAREHOLDERS’ EQUITY

              

Interest-bearing liabilities

              

Interest-bearing deposits

   $ 909,314      $ 1,639         0.72   $ 903,487      $ 2,337         1.05

Borrowings

     292,616        1,519         2.09     227,472        1,577         2.81

Subordinated debentures

     31,446        470         6.01     34,946        450         5.22
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     1,233,376        3,628         1.18     1,165,905        4,364         1.52

Noninterest-bearing liabilities

              

Demand deposits

     131,778             109,543        

Accrued interest payable and other liabilities

     13,510             9,382        

Shareholders’ equity

     125,262             113,874        
  

 

 

        

 

 

      
   $ 1,503,926           $ 1,398,704        
  

 

 

        

 

 

      

Net interest income/spread

     $ 13,198         3.73     $ 11,067         3.41
    

 

 

        

 

 

    

Net interest income as a percent of average interest earning assets (1)

          3.87          3.57

 

(1) Securities balances represent daily average balances for the fair value of securities. The average rate is calculated based on the daily average balance for the amortized cost of securities. Interest rate is presented on a tax equivalent basis.
(2) Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.
(3) Non-accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loans fees.
(4) Loan fees and late fees included in interest on loans.

Provision for Loan Losses

Horizon assesses the adequacy of its Allowance for Loan and Lease Losses (“ALLL”) by regularly reviewing the performance of its loan portfolios. During the first quarter of 2012, a provision for loan losses of $559,000 was required to adequately fund the ALLL compared to a provision of $1.5 million for the first quarter of 2011. The provision for the current quarter was the amount required to bring the ALLL to the amount determined to be adequate. Commercial loans had net recoveries during the first quarter of 2012 of $332,000, residential mortgage loans had net charge-offs of $59,000 and consumer loans had net charge-offs of $302,000. The ALLL balance at March 31, 2012 was $19.4 million or 1.94% of total loans. This compares to an ALLL balance of $18.9 million at December 31, 2011 or 1.89% of total loans and $19.1 million at March 31, 2011 or 2.34% of total loans.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2012

 

No assurance can be given that Horizon will not, in any particular period, sustain loan losses that are significant in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions and management’s ongoing quarterly assessments of the portfolio, will not require increases in the allowance for loan losses. Horizon considers the allowance for loan losses to be appropriate to cover probable incurred losses in the loan portfolio as of March 31, 2012.

Non-performing loans totaled $21.1 million on March 31, 2012, up from $20.1 million on December 31, 2011, and down from $22.1 million on March 31, 2011. As a percentage of total loans, non-performing loans were 2.11% on March 31, 2012, up from 2.02% on December 31, 2011, and down from 2.71% on March 31, 2011.

The increase of non-performing loans in the first quarter of 2012 from the prior quarter was primarily due to an increase of non-performing commercial loans from $8.0 million on December 31, 2011 to $9.0 million on March 31, 2012. Non-performing mortgage loans increased from $8.5 million on December 31, 2011 to $8.7 million on March 31, 2012. Non-performing consumer loans declined from $3.7 million on December 31, 2011 to $3.4 million on March 31, 2012.

Non-accrual loans, excluding non-accrual troubled debt resturcturings, were $15.5 million on March 31, 2012, up from $14.4 million on December 31, 2011, but down from $17.4 million on March 31, 2011. Loans 90 days delinquent but still on accrual totaled $29,000 on March 31, 2012, down from $37,000 on December 31, 2011, and $57,000 on March 31, 2011. Loans 30 to 89 days delinquent declined to $2.93 million in first quarter 2012 compared with $3.28 million at December 31, 2011 and $6.95 million at March 31, 2011. At .30% of total loans, this represents the lowest levels of loans 30-89 days delinquent since 2007.

Other Real Estate Owned (OREO) totaled $803,000 on March 31, 2012, down from $2.8 million on December 31, 2011, and $2.3 million on March 31, 2011. During the quarter, 15 properties with a book value of $2.1 million as of December 31, 2011 were sold. Only one property with a book value of $137,000 was transferred into OREO. No write downs on OREO occurred during the quarter.

Other Income

The following is a summary of changes in other income:

 

     Three Months Ended               
     March 31      March 31      Amount     Percent  
Other income    2012      2011      Change     Change  

Service charges on deposit accounts

   $ 712       $ 795       $ (83     -10.4

Wire transfer fees

     182         108         74        68.5

Interchange fees

     628         545         83        15.2

Fiduciary activities

     975         963         12        1.2

Gain (loss) on sale of securities

     —           274         (274     -100.0

Gain on sale of mortgage loans

     2,274         533         1,741        326.6

Mortgage servicing net of impairment

     90         764         (674     -88.2

Increase in cash surrender value of bank owned life insurance

     225         205         20        9.8

Other income

     56         127         (71     -55.9
  

 

 

    

 

 

    

 

 

   

 

 

 

Total other income

   $ 5,142       $ 4,314       $ 828        19.2
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2012

 

Service charges on deposit accounts were $83,000 lower during the first quarter of 2012 compared to the same period in 2011 primarily due to the regulatory changes on overdraft fees. The residential mortgage loan activity during the first quarter of 2012 generated $2.3 million of income from the gain on sale of mortgage loans, up $1.7 million from the same period in 2011. This increase was primarily due to more favorable pricing on loans sold and additional volume. Loans originated for sale during the first quarter of 2012 were $80.3 million compared to $64.2 million for the same period in 2011. However, during the first quarter of 2011, the Company recovered $701,000 of impairment on the Company’s mortgage servicing asset.

Other Expense

The following is a summary of changes in other expense:

 

     Three Months Ended               
     March 31      March 31      Amount     Percent  
Other expense    2012      2011      Change     Change  

Salaries

   $ 3,934       $ 3,748       $ 186        5.0

Commission and bonuses

     846         497         349        70.2

Employee benefits

     1,183         1,116         67        6.0

Net occupancy expenses

     1,054         1,081         (27     -2.5

Data processing

     526         407         119        29.2

Professional fees

     534         349         185        53.0

Outside services and consultants

     471         381         90        23.6

Loan expense

     702         762         (60     -7.9

FDIC deposit insurance

     257         387         (130     -33.6

Other losses

     30         31         (1     -3.2

Other expenses

     1,623         1,499         124        8.3
  

 

 

    

 

 

    

 

 

   

 

 

 

Total other expense

   $ 11,160       $ 10,258       $ 902        8.8
  

 

 

    

 

 

    

 

 

   

 

 

 

Total other expenses were $902,000 higher in the first quarter of 2012 compared to the first quarter of 2011. Salaries, commissions and bonuses, and employee benefits increased $602,000 compared to the same quarter in 2011. This increase is the result of annual merit pay increases and higher commission and bonus expense based on the first quarter performance for 2012. FDIC deposit insurance expense decreased during the first quarter of 2012 compared to 2011 as the new assessment calculation resulted in lower expense for the Bank. Included in the first quarter of 2012’s professional fees, outside services and consultants and other expenses was $168,000 of transaction costs related to the Heartland merger.

Income Taxes

Income tax expense for the first quarter of 2012 was $2.0 million compared to $810,000 of tax expense for the first quarter of 2011. The effective tax rate for the first quarter of 2012 was 30.3% compared to 22.7% in 2011. The increase in the effective tax rate is primarily due to higher income before income tax for the first quarter of 2012 compared to the same period in 2011 with a similar level of tax exempt income.

Liquidity

The Bank maintains a stable base of core deposits provided by long-standing relationships with individuals and local businesses. These deposits are the principal source of liquidity for Horizon. Other sources of liquidity for Horizon include earnings, loan repayment, investment security sales and maturities, proceeds from the sale of residential mortgage loans, and borrowing relationships with correspondent banks, including

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three Months Ended March 31, 2012

 

the FHLB. During the three months ended March 31, 2012, cash and cash equivalents decreased by approximately $1.4 million. At March 31, 2012, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $333.4 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window at March 31, 2012 compared to $288.7 million at December 31, 2011 and $302.6 million at March 31, 2011.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at March 31, 2012. Stockholders’ equity totaled $126.2 million as of March 31, 2012, compared to $121.5 million as of December 31, 2011. At March 31, 2012, the quarter’s ratio of average stockholders’ equity to average assets was 8.33% compared to 7.96% at December 31, 2011. Horizon’s capital increased during the three months as a result of increased earnings and an increase in accumulated other comprehensive income, net of dividends declared and the amortization of unearned compensation.

The Company currently intends to continue its participation in the Small Business Lending Fund, pursuant to which it issued preferred stock to the US Treasury, since the growth in the Company’s small business lending has reduced the dividend cost. For the three months ending March 31, 2012, the dividend cost was approximately $156,000, or 5.0% annualized. For the second quarter of 2012 the dividend cost will be approximately $106,000, or 3.4% annualized and for the third quarter of 2012 the dividend cost will be approximately $62,500, or 2.0% annualized. The Company plans to reserve cash for the ability to redeem this preferred stock if and when the cost of this capital exceeds other forms of capital.

Horizon declared common dividends in the amount of $0.13 per share during the first three months of 2012 compared to $0.11 for the same period of 2011. The dividend payout ratio (dividends as a percent of basic earnings per share) was 14.4% and 22.42% for the first three months of 2012 and 2011, respectively. For additional information regarding dividend conditions, see Horizon’s Annual Report on Form 10-K for 2011.

 

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HORIZON BANCORP AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

For the Three Months Ended March 31, 2012

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Refer to Horizon’s 2011 Annual Report on Form 10-K for analysis of its interest rate sensitivity. Horizon believes there have been no significant changes in its interest rate sensitivity since it was reported in its 2011 Annual Report on Form 10-K.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation Of Disclosure Controls And Procedures

Based on an evaluation of disclosure controls and procedures as of March 31, 2012, Horizon’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of Horizon’s disclosure controls (as defined in Exchange Act Rule 13a-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on such evaluation, such officers have concluded that, as of the evaluation date, Horizon’s disclosure controls and procedures are effective to ensure that the information required to be disclosed by Horizon in the reports it files under the Exchange Act is recorded, processed, summarized and reported within the time specified in Securities and Exchange Commission rules and forms and are designed to ensure that information required to be disclosed in those reports is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure.

Changes In Internal Control Over Financial Reporting

Horizon’s management, including its Chief Executive Officer and Chief Financial Officer, also have concluded that during the fiscal quarter ended March 31, 2012, there have been no changes in Horizon’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Horizon’s internal control over financial reporting.

 

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HORIZON BANCORP AND SUBSIDIARIES

Part II – Other Information

For the Three Months Ended March 31, 2012

 

ITEM 1. LEGAL PROCEEDINGS

Horizon and its subsidiaries are involved in various legal proceedings incidental to the conduct of their business. Management does not expect that the outcome of any such proceedings will have a material adverse effect on our consolidated financial position or results of operations.

 

ITEM 1A. RISK FACTORS

An investment in Horizon’s securities is subject to risks inherent to our business. The material risks and uncertainties that management believes currently affect Horizon are described below. Before making an investment decision, you should carefully consider these risks as well as information we include or incorporate by reference in this report and other filings we make with the SEC. The risks and uncertainties we have described are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations.

If any of these risks or uncertainties materializes or any of these assumptions proves incorrect, our results could differ materially from the forward-looking statements. All forward-looking statements in this report are current only as of the date on which the statements were made. We do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any statement is made or to reflect the occurrence of unanticipated events.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not Applicable

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

 

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

 

ITEM 5. OTHER INFORMATION

Not Applicable

 

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HORIZON BANCORP AND SUBSIDIARIES

Part II – Other Information

For the Three Months Ended March 31, 2012

 

ITEM 6. EXHIBITS

 

  (a) Exhibits

 

    Exhibit No.    Description
  2.1    Agreement and Plan of Merger, dated February 9, 2012, between the Registrant and Heartland Bancshares, Inc. Incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K filed on February 10, 2012.
  3.1    Amended and Restated Bylaws of Horizon Bancorp (as amended through March 20, 2012). Incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on March 23, 2012.
  10.1    First Amendment to the Horizon Bancorp 2005 Supplemental Executive Retirement Plan
  10.2    Second Amendment to the Horizon Bancorp 2005 Supplemental Executive Retirement Plan.
  10.3    Fifth Amendment to Horizon Bancorp Supplemental Executive Retirement Plan
  Exhibit 31.1    Certification of Craig M. Dwight
  Exhibit 31.2    Certification of Mark E. Secor
  Exhibit 32    Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  Exhibit 101    Interactive Data Files*

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    HORIZON BANCORP
Dated: May 10, 2012     /s/ Craig M. Dwight
    Craig M. Dwight
    Chief Executive Officer
Dated: May 10, 2012     /s/ Mark E. Secor
    Mark E. Secor
    Chief Financial Officer

 

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Table of Contents

INDEX TO EXHIBITS

 

Exhibit No.

  

Description

  

Location

2.1

   Agreement and Plan of Merger, dated February 9, 2012, between the Registrant and Heartland Bancshares, Inc.    Incorporated by reference to Exhibit 2.1 to Registrant’s Form 8-K filed on February 10, 2012.

3.1

   Amended and Restated Bylaws of Horizon Bancorp (as amended through March 20, 2012).    Incorporated by reference to Exhibit 3.1 to the Registrant’s Form 8-K filed on March 23, 2012.

10.1

   First Amendment to the Horizon Bancorp 2005 Supplemental Executive Retirement Plan.    Attached.

10.2

   Second Amendment to the Horizon Bancorp 2005 Supplemental Executive Retirement Plan.    Attached

10.3

   Fifth Amendment to Horizon Bancorp Supplemental Executive Retirement Plan.    Attached

Exhibit 31.1

   Certification of Craig M. Dwight    Attached

Exhibit 31.2

   Certification of Mark E. Secor    Attached

Exhibit 32

   Certification of Chief Executive and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    Attached

Exhibit 101

   Interactive Data Files*    Attached

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files in Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

51