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HORIZON BANCORP INC /IN/ - Quarter Report: 2014 March (Form 10-Q)

Form 10-Q
Table of Contents

 

 

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

HORIZON BANCORP

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, 2014

Commission file number 0-10792

 

 

HORIZON BANCORP

(Exact name of registrant as specified in its charter)

 

 

 

Indiana   35-1562417

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

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

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

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

 

 

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

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

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 9,201,786 shares of Common Stock, no par value, at May 9, 2014.

 

 

 


Table of Contents

HORIZON BANCORP

FORM 10-Q

INDEX

 

PART I. FINANCIAL INFORMATION

  

Item 1.

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

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      35   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      46   

Item 4.

  Controls and Procedures      46   

PART II. OTHER INFORMATION

  

Item 1.

  Legal Proceedings      47   

Item 1A.

  Risk Factors      47   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      47   

Item 3.

  Defaults Upon Senior Securities      47   

Item 4.

  Mine Safety Disclosures      47   

Item 5.

  Other Information      47   

Item 6.

  Exhibits      48   

Signatures

  

Index To Exhibits

  

 

2


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  
     2014      2013  
     (Unaudited)     

 

 

Assets

     

Cash and due from banks

   $ 35,820       $ 31,721   

Investment securities, available for sale

     519,430         508,591   

Investment securities, held to maturity (fair value of $9,910 and $9,910)

     9,910         9,910   

Loans held for sale

     5,335         3,281   

Loans, net of allowance for loan losses of $16,102 and $15,992

     1,084,692         1,052,836   

Premises and equipment, net

     47,013         46,194   

Federal Reserve and Federal Home Loan Bank stock

     14,184         14,184   

Goodwill

     20,483         19,748   

Other intangible assets

     3,100         3,288   

Interest receivable

     7,536         7,501   

Cash value life insurance

     36,423         36,190   

Other assets

     22,657         24,832   
  

 

 

    

 

 

 

Total assets

   $ 1,806,583       $ 1,758,276   
  

 

 

    

 

 

 

Liabilities

     

Deposits

     

Non-interest bearing

   $ 238,499       $ 231,096   

Interest bearing

     1,117,072         1,060,424   
  

 

 

    

 

 

 

Total deposits

     1,355,571         1,291,520   

Borrowings

     236,043         256,296   

Subordinated debentures

     32,525         32,486   

Interest payable

     498         506   

Other liabilities

     12,163         12,948   
  

 

 

    

 

 

 

Total liabilities

     1,636,800         1,593,756   
  

 

 

    

 

 

 

Commitments and contingent liabilities

     

Stockholders’ Equity

     

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

     12,500         12,500   

Common stock, no par value
Authorized, 22,500,000 shares
Issued, 8,703,596 and 8,706,971 shares
Outstanding, 8,630,966 and 8,630,966 shares

     —           —     

Additional paid-in capital

     32,604         32,496   

Retained earnings

     123,678         121,253   

Accumulated other comprehensive income (loss)

     1,001         (1,729
  

 

 

    

 

 

 

Total stockholders’ equity

     169,783         164,520   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 1,806,583       $ 1,758,276   
  

 

 

    

 

 

 

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  
     2014     2013  
     (Unaudited)     (Unaudited)  

Interest Income

    

Loans receivable

   $ 12,954      $ 16,440   

Investment securities

    

Taxable

     2,390        2,022   

Tax exempt

     1,123        967   
  

 

 

   

 

 

 

Total interest income

     16,467        19,429   
  

 

 

   

 

 

 

Interest Expense

    

Deposits

     1,277        1,480   

Borrowed funds

     1,422        1,448   

Subordinated debentures

     496        491   
  

 

 

   

 

 

 

Total interest expense

     3,195        3,419   
  

 

 

   

 

 

 

Net Interest Income

     13,272        16,010   

Provision for loan losses

     —          2,084   
  

 

 

   

 

 

 

Net Interest Income after Provision for Loan Losses

     13,272        13,926   
  

 

 

   

 

 

 

Non-interest Income

    

Service charges on deposit accounts

     923        913   

Wire transfer fees

     112        190   

Interchange fees

     959        866   

Fiduciary activities

     1,048        1,140   

Gain on sale of investment securities (includes $0 and $368 for the three months ended March 31, 2014 and 2013, respectively, related to accumulated other other comprehensive earnings reclassifications)

     —          368   

Gain on sale of mortgage loans

     1,411        3,106   

Mortgage servicing income net of impairment

     207        163   

Increase in cash value of bank owned life insurance

     233        252   

Other income

     629        462   
  

 

 

   

 

 

 

Total non-interest income

     5,522        7,460   
  

 

 

   

 

 

 

Non-interest Expense

    

Salaries and employee benefits

     7,483        7,504   

Net occupancy expenses

     1,424        1,311   

Data processing

     870        600   

Professional fees

     608        499   

Outside services and consultants

     661        712   

Loan expense

     1,015        1,114   

FDIC insurance expense

     256        283   

Other losses

     38        (72

Other expense

     2,159        2,028   
  

 

 

   

 

 

 

Total non-interest expense

     14,514        13,979   
  

 

 

   

 

 

 

Income Before Income Tax

     4,280        7,407   

Income tax expense (includes $0 and $129 for the three months ended March 31, 2014 and 2013, respectively, related to income tax expense from reclassification items)

     863        2,096   
  

 

 

   

 

 

 

Net Income

     3,417        5,311   

Preferred stock dividend and discount accretion

     (31     (146
  

 

 

   

 

 

 

Net Income Available to Common Shareholders

   $ 3,386      $ 5,165   
  

 

 

   

 

 

 

Basic Earnings Per Share

   $ 0.39      $ 0.60   

Diluted Earnings Per Share

     0.38        0.58   

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  
     2014     2013  
     (Unaudited)     (Unaudited)  

Net Income

   $ 3,417      $ 5,311   
  

 

 

   

 

 

 

Other Comprehensive Income (Loss)

    

Change in fair value of derivative instruments:

    

Change in fair value of derivative instruments for the period

     (225     439   

Income tax effect

     79        (154
  

 

 

   

 

 

 

Changes from derivative instruments

     (146     285   
  

 

 

   

 

 

 

Change in securities available-for-sale:

    

Unrealized appreciation (depreciation) for the period

     4,426        (1,704

Reclassification adjustment for securities gains realized in income

     —          (368

Income tax effect

     (1,550     726   
  

 

 

   

 

 

 

Unrealized gains (losses) on available-for-sale securities

     2,876        (1,346
  

 

 

   

 

 

 

Other Comprehensive Income (Loss), Net of Tax

     2,730        (1,061
  

 

 

   

 

 

 

Comprehensive Income

   $ 6,147      $ 4,250   
  

 

 

   

 

 

 

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)

 

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

Balances, January 1, 2014

   $  12,500       $ 32,496       $ 121,253      $ (1,729   $ 164,520   

Net income

           3,417          3,417   

Other comprehensive loss, net of tax

             2,730        2,730   

Amortization of unearned compensation

        81             81   

Stock option expense

        27             27   

Cash dividends on preferred stock (1.00%)

           (31       (31

Cash dividends on common stock ($.11 per share)

           (961       (961
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balances, March 31, 2014

   $ 12,500       $ 32,604       $ 123,678      $ 1,001      $ 169,783   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Dollar Amounts in Thousands)

 

     Three Months Ended March 31  
     2014     2013  
     (Unaudited)     (Unaudited)  

Operating Activities

    

Net income

   $ 3,417      $ 5,311   

Items not requiring (providing) cash

    

Provision for loan losses

     —          2,084   

Depreciation and amortization

     844        849   

Share based compensation

     27        8   

Mortgage servicing rights recovery

     (5     (33

Premium amortization on securities available for sale, net

     549        808   

Gain on sale of investment securities

     —          (368

Gain on sale of mortgage loans

     (1,411     (3,106

Proceeds from sales of loans

     35,348        102,762   

Loans originated for sale

     (35,991     (95,017

Change in cash value of life insurance

     (233     (252

Gain on sale of other real estate owned

     (218     (238

Net change in

    

Interest receivable

     (35     167   

Interest payable

     (8     (8

Other assets

     675        3,346   

Other liabilities

     (1,138     (676
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,821        15,637   
  

 

 

   

 

 

 

Investing Activities

    

Purchases of securities available for sale

     (27,290     (51,581

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

     20,327        51,894   

Purchase of securities held to maturity

     —          (2,110

Net change in loans

     (32,259     99,089   

Proceeds on the sale of OREO and repossessed assets

     784        1,159   

Purchases of premises and equipment

     (1,394     (841

Purchase of Mortgage Company

     (735     —     
  

 

 

   

 

 

 

Net cash provided by (used in) by investing activities

     (40,567     97,610   
  

 

 

   

 

 

 

Financing Activities

    

Net change in

    

Deposits

     64,051        20,910   

Borrowings

     (20,214     (136,826

Dividends paid on common shares

     (961     (867

Dividends paid on preferred shares

     (31     (146
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     42,845        (116,929
  

 

 

   

 

 

 

Net Change in Cash and Cash Equivalents

     4,099        (3,682

Cash and Cash Equivalents, Beginning of Period

     31,721        30,735   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 35,820      $ 27,053   
  

 

 

   

 

 

 

Additional Cash Flows Information

    

Interest paid

   $ 3,203      $ 3,427   

Income taxes paid

     —          400   

Transfer of loans to other real estate owned

     610        670   

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, 2014 and March 31, 2013 are not necessarily indicative of the operating results for the full year of 2014 or 2013. 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 2013 filed with the Securities and Exchange Commission on February 28, 2014. The consolidated condensed balance sheet of Horizon as of December 31, 2013 has been derived from the audited balance sheet as of that date.

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

 

     Three months ended
March 31
 
     2014      2013  
     (Unaudited)      (Unaudited)  

Basic earnings per share

     

Net income

   $ 3,417       $ 5,311   

Less: Preferred stock dividends and accretion of discount

     31         146   
  

 

 

    

 

 

 

Net income available to common shareholders

   $ 3,386       $ 5,165   

Weighted average common shares outstanding

     8,630,966         8,617,466   

Basic earnings per share

   $ 0.39       $ 0.60   
  

 

 

    

 

 

 

Diluted earnings per share

     

Net income available to common shareholders

   $ 3,386       $ 5,165   

Weighted average common shares outstanding

     8,630,966         8,617,466   

Effect of dilutive securities:

     

Warrants

     311,278         293,237   

Restricted stock

     39,519         35,557   

Stock options

     40,023         34,395   
  

 

 

    

 

 

 

Weighted average shares outstanding

     9,021,786         8,980,655   

Diluted earnings per share

   $ 0.38       $ 0.58   
  

 

 

    

 

 

 

At March 31, 2014 and 2013, there were no shares which were not included in the computation of diluted earnings per share because they were non-dilutive.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2013 Annual Report on Form 10-K.

Reclassifications

Certain reclassifications have been made to the 2013 condensed consolidated financial statements to be comparable to 2014. These reclassifications had no effect on net income.

Note 2—Securities

The fair value of securities is as follows:

 

March 31, 2014    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Available for sale

          

U.S. Treasury and federal agencies

   $ 43,098       $ 121       $ (578   $ 42,641   

State and municipal

     174,538         5,623         (1,828     178,333   

Federal agency collateralized mortgage obligations

     115,584         1,126         (1,874     114,836   

Federal agency mortgage-backed pools

     179,625         3,553         (1,605     181,573   

Private labeled mortgage-backed pools

     1,024         32         —          1,056   

Corporate notes

     970         21         —          991   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale investment securities

   $ 514,839       $ 10,476       $ (5,885   $ 519,430   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held to maturity, State and Municipal

   $ 9,910       $ —         $ —        $ 9,910   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

December 31, 2013    Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

Available for sale

          

U.S. Treasury and federal agencies

   $ 43,808       $ 133       $ (807   $ 43,134   

State and municipal

     176,670         4,405         (3,177     177,898   

Federal agency collateralized mortgage obligations

     116,047         1,242         (2,583     114,706   

Federal agency mortgage-backed pools

     170,006         3,172         (2,284     170,894   

Private labeled mortgage-backed pools

     1,188         38         —          1,226   

Corporate notes

     708         25         —          733   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total available for sale investment securities

   $ 508,427       $ 9,015       $ (8,851   $ 508,591   
  

 

 

    

 

 

    

 

 

   

 

 

 

Held to maturity, State and Municipal

   $ 9,910       $ —         $ —        $ 9,910   
  

 

 

    

 

 

    

 

 

   

 

 

 

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, 2014, no individual investment security had an unrealized loss that was determined to be other-than-temporary.

The unrealized losses on the Company’s investments in securities of state and municipal governmental agencies, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at March 31, 2014.

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The amortized cost and fair value of securities available for sale and held to maturity at March 31, 2014 and December 31, 2013, 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, 2014      December 31, 2013  
     Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value  

Available for sale

           

Within one year

   $ 4,449       $ 4,486       $ 3,643       $ 3,663   

One to five years

     43,451         43,959         49,198         49,627   

Five to ten years

     111,942         114,654         106,225         107,424   

After ten years

     58,764         58,866         62,120         61,051   
  

 

 

    

 

 

    

 

 

    

 

 

 
     218,606         221,965         221,186         221,765   

Federal agency collateralized mortgage obligations

     115,584         114,836         116,047         114,706   

Federal agency mortgage-backed pools

     179,625         181,573         170,006         170,894   

Private labeled mortgage-backed pools

     1,024         1,056         1,188         1,226   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 514,839       $ 519,430       $ 508,427       $ 508,591   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

Within one year

   $ 9,910       $ 9,910       $ 9,910       $ 9,910   

One to five years

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 9,910       $ 9,910       $ 9,910       $ 9,910   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Less than 12 Months     12 Months or More     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
March 31, 2014    Value      Losses     Value      Losses     Value      Losses  

U.S. Treasury and federal agencies

   $ 31,303       $ (578   $ —         $ —        $ 31,303       $ (578

State and municipal

     47,875         (1,578     5,040         (250     52,915         (1,828

Federal agency collateralized mortgage obligations

     42,858         (675     26,382         (1,199     69,240         (1,874

Federal agency mortgage-backed pools

     69,597         (1,605     —           —          69,597         (1,605
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 191,633       $ (4,436   $ 31,422       $ (1,449   $ 223,055       $ (5,885
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 Months     12 Months or More     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
December 31, 2013    Value      Losses     Value      Losses     Value      Losses  

U.S. Treasury and federal agencies

   $ 32,099       $ (807   $ —         $ —        $ 32,099       $ (807

State and municipal

     57,078         (2,993     3,206         (184     60,284         (3,177

Federal agency collateralized mortgage obligations

     64,445         (2,121     8,601         (462     73,046         (2,583

Federal agency mortgage-backed pools

     87,919         (2,284     —           —          87,919         (2,284
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 241,541       $ (8,205   $ 11,807       $ (646   $ 253,348       $ (8,851
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Three months ended March 31  
     2014      2013  

Sales of securities available for sale (Unaudited)

     

Proceeds

   $ —         $ 23,485   

Gross gains

     —           376   

Gross losses

     —           (8

 

10


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 3—Loans

 

     March 31     December 31  
     2014     2013  

Commercial

    

Working capital and equipment

   $ 253,939      $ 241,569   

Real estate, including agriculture

     254,734        245,313   

Tax exempt

     2,483        2,898   

Other

     17,479        15,409   
  

 

 

   

 

 

 

Total

     528,635        505,189   

Real estate

    

1–4 family

     185,428        181,393   

Other

     4,465        4,565   
  

 

 

   

 

 

 

Total

     189,893        185,958   

Consumer

    

Auto

     140,147        139,915   

Recreation

     5,107        4,839   

Real estate/home improvement

     31,139        30,729   

Home equity

     96,682        96,924   

Unsecured

     3,780        3,825   

Other

     3,265        3,293   
  

 

 

   

 

 

 

Total

     280,120        279,525   

Mortgage warehouse

     102,146        98,156   
  

 

 

   

 

 

 

Total loans

     1,100,794        1,068,828   

Allowance for loan losses

     (16,102     (15,992
  

 

 

   

 

 

 

Loans, net

   $ 1,084,692      $ 1,052,836   
  

 

 

   

 

 

 

Commercial

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

Commercial real estate loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves larger loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of property type, and are monitored for concentrations of credit. The Company 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.

 

11


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Real Estate and Consumer

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

Mortgage Warehousing

Horizon’s mortgage warehouse lending has specific mortgage companies as customers of Horizon Bank. Individual mortgage loans originated by these mortgage companies are funded as a secured borrowing with a pledge of collateral under Horizon’s agreement with the mortgage company. Each individual mortgage 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 a pledge of collateral pursuant to the agreement with the mortgage company. When the individual loan is sold to the end investor by the mortgage company, the proceeds from the sale of the loan are received by Horizon and used to pay off the loan balance with Horizon along with any accrued interest and any related fees. The remaining balance from the sale is forwarded to the mortgage company. These individual loans typically are sold by the mortgage company within 30 days and are seldom held more than 90 days. Interest income is accrued during this period and collected at the time each loan is sold. Fee income for each loan sold is collected when the loan is sold, and no costs are deferred due to the term between each loan funding and related payoff, which is typically less than 30 days.

Based on the agreements with each mortgage company, at any time a mortgage company can 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 purchase 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.

 

12


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, 2014    Loan
Balance
    Interest Due      Deferred
Fees / (Costs)
    Recorded
Investment
 

Owner occupied real estate

   $ 173,514      $ 268       $ 245      $ 174,027   

Non owner occupied real estate

     230,225        201         266        230,692   

Residential spec homes

     833        1         —          834   

Development & spec land loans

     21,347        61         43        21,451   

Commercial and industrial

     102,112        715         50        102,877   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial

     528,031        1,246         604        529,881   

Residential mortgage

     180,849        579         352        181,780   

Residential construction

     8,692        14         —          8,706   

Mortgage warehouse

     102,146        480         —          102,626   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total real estate

     291,687        1,073         352        293,112   

Direct installment

     30,556        104         (278     30,382   

Direct installment purchased

     270        —           —          270   

Indirect installment

     131,394        301         —          131,695   

Home equity

     118,132        517         46        118,695   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer

     280,352        922         (232     281,042   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total loans

     1,100,070        3,241         724        1,104,035   

Allowance for loan losses

     (16,102     —           —          (16,102
  

 

 

   

 

 

    

 

 

   

 

 

 

Net loans

   $ 1,083,968      $ 3,241       $ 724      $ 1,087,933   
  

 

 

   

 

 

    

 

 

   

 

 

 
December 31, 2013    Loan
Balance
    Interest Due      Deferred
Fees / (Costs)
    Recorded
Investment
 

Owner occupied real estate

   $ 156,262      $ 257       $ 207      $ 156,726   

Non owner occupied real estate

     224,713        105         299        225,117   

Residential spec homes

     400        —           —          400   

Development & spec land loans

     21,289        62         42        21,393   

Commercial and industrial

     101,920        737         57        102,714   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total commercial

     504,584        1,161         605        506,350   

Residential mortgage

     176,068        578         382        177,028   

Residential construction

     9,508        14         —          9,522   

Mortgage warehouse

     98,156        480         —          98,636   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total real estate

     283,732        1,072         382        285,186   

Direct installment

     29,983        104         (281     29,806   

Direct installment purchased

     294        —           —          294   

Indirect installment

     131,384        320         —          131,704   

Home equity

     117,958        529         187        118,674   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total consumer

     279,619        953         (94     280,478   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total loans

     1,067,935        3,186         893        1,072,014   

Allowance for loan losses

     (15,992     —           —          (15,992
  

 

 

   

 

 

    

 

 

   

 

 

 

Net loans

   $ 1,051,943      $ 3,186       $ 893      $ 1,056,022   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

13


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 4—Accounting for Certain Loans Acquired in a Transfer

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

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

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

 

     March 31      December 31  
     2014      2013  

Commercial

   $ 22,223       $ 37,048   

Real estate

     11,033         11,761   

Consumer

     10,272         11,485   
  

 

 

    

 

 

 

Outstanding balance

   $ 43,528       $ 60,294   
  

 

 

    

 

 

 

Carrying amount, net of allowance of $367 and $389

   $ 43,161       $ 59,905   
  

 

 

    

 

 

 

Accretable yield, or income expected to be collected for the three months ended March 31, is as follows:

 

     2014     2013  

Balance at January 1

   $ 3,185      $ 6,111   

Additions

     —          —     

Accretion

     (138     (451

Reclassification from nonaccreatable difference

     —          —     

Disposals

     (18     (696
  

 

 

   

 

 

 

Balance at March 31

   $ 3,029      $ 4,964   
  

 

 

   

 

 

 

During the three months ended March 31, 2014 and 2013, the Company increased the allowance for loan losses by a charge to the income statement by $0 and $1.4 million, respectively. No allowances for loan losses were reversed for the three months ended March 31, 2014 or 2013.

Note 5—Allowance for Loan Losses

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

 

14


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  
     2014     2013  
     (Unaudited)     (Unaudited)  

Balance at beginning of the period

   $ 15,992      $ 18,270   

Loans charged-off:

    

Commercial

    

Owner occupied real estate

     —          132   

Non owner occupied real estate

     22        146   

Residential development

     —          —     

Development & Spec Land Loans

     7        —     

Commercial and industrial

     —          139   
  

 

 

   

 

 

 

Total commercial

     29        417   

Real estate

    

Residential mortgage

     22        143   

Residential construction

     —          —     

Mortgage warehouse

     —          —     
  

 

 

   

 

 

 

Total real estate

     22        143   

Consumer

    

Direct Installment

     33        107   

Direct Installment Purchased

     —          —     

Indirect Installment

     227        353   

Home Equity

     184        438   
  

 

 

   

 

 

 

Total consumer

     444        898   
  

 

 

   

 

 

 

Total loans charged-off

     495        1,458   

Recoveries of loans previously charged-off:

    

Commercial

    

Owner occupied real estate

     4        32   

Non owner occupied real estate

     1        2   

Residential development

     —          —     

Development & Spec Land Loans

     —          —     

Commercial and industrial

     385        36   
  

 

 

   

 

 

 

Total commercial

     390        70   

Real estate

    

Residential mortgage

     4        3   

Residential construction

     —          —     

Mortgage warehouse

     —          —     
  

 

 

   

 

 

 

Total real estate

     4        3   

Consumer

    

Direct Installment

     18        394   

Direct Installment Purchased

     —          —     

Indirect Installment

     119        170   

Home Equity

     74        32   
  

 

 

   

 

 

 

Total consumer

     211        596   
  

 

 

   

 

 

 

Total loan recoveries

     605        669   
  

 

 

   

 

 

 

Net loans charged-off (recovered)

     (110     789   
  

 

 

   

 

 

 

Provision charged to operating expense

    

Commercial

     212        1,738   

Real estate

     (604     312   

Consumer

     392        34   
  

 

 

   

 

 

 

Total provision charged to operating expense

     —          2,084   
  

 

 

   

 

 

 

Balance at the end of the period

   $ 16,102      $ 19,565   
  

 

 

   

 

 

 

Certain loans are individually evaluated for impairment, and the Company’s general practice is to proactively charge down impaired loans 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.

 

15


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

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

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

 

March 31, 2014    Commercial      Real Estate      Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

              

Individually evaluated for impairment

   $ 1,290       $ —         $ —         $ —         $ 1,290   

Collectively evaluated for impairment

     5,580         2,812         1,665         4,388         14,445   

Loans acquired with deteriorated credit quality

     367         —           —           —           367   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 7,237       $ 2,812       $ 1,665       $ 4,388       $ 16,102   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated for impairment

   $ 7,335       $ —         $ —         $ —         $ 7,335   

Collectively evaluated for impairment

     522,054         190,486         102,626         281,042         1,096,208   

Loans acquired with deteriorated credit quality

     492         —           —           —           492   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 529,881       $ 190,486       $ 102,626       $ 281,042       $ 1,104,035   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2013    Commercial      Real Estate      Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

              

Individually evaluated for impairment

   $ 1,312       $ —         $ —         $ —         $ 1,312   

Collectively evaluated for impairment

     4,963         3,462         1,638         4,228         14,291   

Loans acquired with deteriorated credit quality

     389         —           —           —           389   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 6,664       $ 3,462       $ 1,638       $ 4,228       $ 15,992   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated for impairment

   $ 7,448       $ —         $ —         $ —         $ 7,448   

Collectively evaluated for impairment

     489,547         186,526         98,636         279,448         1,054,157   

Loans acquired with deteriorated credit quality

     9,355         24         —           1,030         10,409   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 506,350       $ 186,550       $ 98,636       $ 280,478       $ 1,072,014   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 6—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 (“TDRs”) by class of loans:

 

March 31, 2014    Nonaccrual      Loans Past
Due Over 90
Days Still
Accruing
     Non Performing
TDR’s
     Performing
TDR’s
     Total Non-
Performing
Loans
 

Commercial

  

           

Owner occupied real estate

   $ 294       $ —         $ 81       $ 769       $ 1,144   

Non owner occupied real estate

     2,192         —           1,084         514         3,790   

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     162         —           —           —           162   

Commercial and industrial

     1,043         —           1,173         —           2,216   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     3,691         —           2,338         1,283         7,312   

Real estate

              

Residential mortgage

     2,709         3         858         2,510         6,080   

Residential construction

     —           —           278         —           278   

Mortgage warehouse

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     2,709         3         1,136         2,510         6,358   

Consumer

              

Direct Installment

     289         20         —           —           309   

Direct Installment Purchased

     —           —           —           —           —     

Indirect Installment

     536         103         —           —           639   

Home Equity

     1,548         77         187         1,206         3,018   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     2,373         200         187         1,206         3,966   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,773       $ 203       $ 3,661       $ 4,999       $ 17,636   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
December 31, 2013    Nonaccrual      Loans Past
Due Over 90
Days Still
Accruing
     Non Performing
TDR’s
     Performing
TDR’s
     Total Non-
Performing
Loans
 

Commercial

              

Owner occupied real estate

   $ 293       $ —         $ 222       $ 778       $ 1,293   

Non owner occupied real estate

     2,289         45         1,117         518         3,969   

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     182         —           —           —           182   

Commercial and industrial

     1,250         —           777         —           2,027   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     4,014         45         2,116         1,296         7,471   

Real estate

              

Residential mortgage

     2,459         2         719         2,686         5,866   

Residential construction

     —           —           280         —           280   

Mortgage warehouse

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     2,459         2         999         2,686         6,146   

Consumer

              

Direct Installment

     202         —           —           —           202   

Direct Installment Purchased

     —           —           —           —           —     

Indirect Installment

     531         2         —           —           533   

Home Equity

     2,542         —           311         1,072         3,925   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     3,275         2         311         1,072         4,660   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,748       $ 49       $ 3,426       $ 5,054       $ 18,277   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Included in the $8.8 million of non-accrual loans and the $3.7 million of non-performing TDR’s at March 31, 2014 were $2.6 million and $436,000, respectively, of loans acquired for which accretable yield was recognized.

From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is management’s policy to convert the loan from an “earning asset” to a non-accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is management’s policy to place a loan on a non-accrual status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief Credit 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 in accordance with the loan terms. 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 they are 90 days or more past due. These loans are often considered impaired. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

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

The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At March 31, 2014, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of March 31, 2014, the Company had $8.7 million in TDRs and $5.0 million were performing according to the restructured terms and no TDR’s were returned to accrual status during the first three months of 2014. There was $1.5 million of specific reserves allocated to TDRs at March 31, 2014 based on the discounted cash flows.

 

18


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Loans transferred and classified as troubled debt restructuring during the three months ended March 31, 2014 and 2013, segregated by class, are shown in the table below.

 

     March 31, 2014      March 31, 2013  
     Number
of
Defaults
     Unpaid
Principal
Balance
     Number
of
Defaults
     Unpaid
Principal
Balance
 

Commercial

           

Owner occupied real estate

     —         $ —           2       $ 76   

Non owner occupied real estate

     —           —           1         70   

Residential development

     —           —           —           —     

Development & Spec Land Loans

     —           —           —           —     

Commercial and industrial

     2         398         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     2         398         3         146   

Real estate

           

Residential mortgage

     —           —           3         390   

Residential construction

     —           —           —           —     

Mortgage warehouse

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     —           —           3         390   

Consumer

           

Direct Installment

     —           —           —           —     

Direct Installment Purchased

     —           —           —           —     

Indirect Installment

     —           —           —           —     

Home Equity

     1         146         2         791   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     1         146         2         791   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3       $ 544         8       $ 1,327   
  

 

 

    

 

 

    

 

 

    

 

 

 

Troubled debt restructured loans which had payment defaults during the three months ended March 31, 2014 and 2013, segregated by class, are shown in the table below. Default occurs when a loan is 90 days or more past due or has been transferred to nonaccrual.

 

     March 31, 2014      March 31, 2013  
     Number
of
Defaults
     Unpaid
Principal
Balance
     Number
of
Defaults
     Unpaid
Principal
Balance
 

Commercial

           

Owner occupied real estate

     —         $ —           2       $ 76   

Non owner occupied real estate

     —           —           1         70   

Residential development

     —           —           —           —     

Development & Spec Land Loans

     —           —           —           —     

Commercial and industrial

     2         398         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     2         398         3         146   

Real estate

           

Residential mortgage

     1         154         1         234   

Residential construction

     —           —           —           —     

Mortgage warehouse

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     1         154         1         234   

Consumer

           

Direct Installment

     —           —           —           —     

Direct Installment Purchased

     —           —           —           —     

Indirect Installment

     —           —           —           —     

Home Equity

     1         146         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     1         146         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     4       $ 698         4       $ 380   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 commercial loans individually evaluated for impairment by class of loan:

 

       Three Months Ending  
March 31, 2014    Unpaid
Principal
Balance
     Recorded
Investment
     Allowance For
Loan Loss
Allocated
     Average
Balance
in
Impaired
Loans
    Cash/
Accrual
Interest
Income
Recognized
 

With no recorded allowance

  

          

Commercial

  

          

Owner occupied real estate

   $ 1,145       $ 1,148       $ —         $ 1,759      $ 12   

Non owner occupied real estate

     3,443         3,446         —           3,514        5   

Residential development

     —           —           —           —          —     

Development & Spec Land Loans

     24         24         —           24        —     

Commercial and industrial

     333         349         —           608        —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial

     4,945         4,967         —           5,905        17   

With an allowance recorded

             

Commercial

             

Owner occupied real estate

     —           —           —           (1     —     

Non owner occupied real estate

     347         347         170         353        —     

Residential development

     —           —           —           —          —     

Development & Spec Land Loans

     138         138         40         142        —     

Commercial and industrial

     1,883         1,883         1,080         1,727        2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial

     2,368         2,368         1,290         2,221        2   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 7,313       $ 7,335       $ 1,290       $ 8,126      $ 19   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
       Three Months Ending  
March 31, 2013    Unpaid
Principal
Balance
     Recorded
Investment
     Allowance For
Loan Loss
Allocated
     Average
Balance
in
Impaired
Loans
    Cash/
Accrual
Interest
Income
Recognized
 

With no recorded allowance

             

Commercial

             

Owner occupied real estate

   $ 3,310       $ 3,317       $ —         $ 4,906      $ 14   

Non owner occupied real estate

     2,578         2,579         —           3,793        11   

Residential development

     —           —           —           —          —     

Development & Spec Land Loans

     135         135         —           166        —     

Commercial and industrial

     912         928         —           1,877        —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial

     6,935         6,959         —           10,742        25   

With an allowance recorded

             

Commercial

             

Owner occupied real estate

     —           —           —           —          —     

Non owner occupied real estate

     1,763         1,763         1,080         1,774        —     

Residential development

     —           —           —           —          —     

Development & Spec Land Loans

     564         564         600         569        —     

Commercial and industrial

     792         792         265         794        —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total commercial

     3,119         3,119         1,945         3,137        —     
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 10,054       $ 10,078       $ 1,945       $ 13,879      $ 25   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

20


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

March 31, 2014    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

   $ 218      $ 127      $ —        $ 345      $ 173,169      $ 173,514   

Non owner occupied real estate

     122        —          —          122        230,103        230,225   

Residential development

     —          —          —          —          833        833   

Development & Spec Land Loans

     —          —          —          —          21,347        21,347   

Commercial and industrial

     110        —          —          110        102,002        102,112   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     450        127        —          577        527,454        528,031   

Real estate

            

Residential mortgage

     313        —          3        316        180,533        180,849   

Residential construction

     —          —          —          —          8,692        8,692   

Mortgage warehouse

     —          —          —          —          102,146        102,146   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     313        —          3        316        291,371        291,687   

Consumer

            

Direct Installment

     67        10        20        97        30,459        30,556   

Direct Installment Purchased

     —          —          —          —          270        270   

Indirect Installment

     771        41        103        915        130,479        131,394   

Home Equity

     555        278        77        910        117,222        118,132   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     1,393        329        200        1,922        278,430        280,352   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,156      $ 456      $ 203      $ 2,815      $ 1,097,255      $ 1,100,070   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     0.20     0.04     0.02     0.26     99.74  
December 31, 2013    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

   $ 341      $ —        $ —        $ 341      $ 155,921      $ 156,262   

Non owner occupied real estate

     424        —          45        469        224,244        224,713   

Residential development

     —          —          —          —          400        400   

Development & Spec Land Loans

     —          —          —          —          21,289        21,289   

Commercial and industrial

     —          —          —          —          101,920        101,920   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     765        —          45        810        503,774        504,584   

Real estate

            

Residential mortgage

     445        87        2        534        175,534        176,068   

Residential construction

     —          —          —          —          9,508        9,508   

Mortgage warehouse

     —          —          —          —          98,156        98,156   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     445        87        2        534        283,198        283,732   

Consumer

            

Direct Installment

     120        24        —          144        29,839        29,983   

Direct Installment Purchased

     —          —          —          —          294        294   

Indirect Installment

     1,011        175        2        1,188        130,196        131,384   

Home Equity

     767        58        —          825        117,133        117,958   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     1,898        257        2        2,157        277,462        279,619   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 3,108      $ 344      $ 49      $ 3,501      $ 1,064,434      $ 1,067,935   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     0.29     0.03     0.00     0.33     99.67  

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

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

 

    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 Credit Officer (CCO).

 

21


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

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

 

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

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

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

Risk Grade 1: Excellent (Pass)

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

Risk Grade 2: Good (Pass)

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

Risk Grade 3: Satisfactory (Pass)

Loans supported by financial statements (audited or unaudited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

 

22


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

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

 

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

 

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

Risk Grade 4 Satisfactory/Monitored:

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

Risk Grade 4W Management Watch:

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

Risk Grade 5: Special Mention

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

Risk Grade 6: Substandard

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

 

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

 

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

 

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

 

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

 

23


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

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

 

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

 

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

 

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

 

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

Risk Grade 7: Doubtful

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

 

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

 

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

 

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

Risk Grade 8: Loss

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

 

24


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The following table presents loans by credit grades.

 

March 31, 2014    Pass     Special
Mention
    Substandard     Doubtful     Total  

Commercial

          

Owner occupied real estate

   $ 163,274      $ 2,667      $ 7,573      $ —        $ 173,514   

Non owner occupied real estate

     213,918        6,211        10,096        —          230,225   

Residential development

     738        95        —          —          833   

Development & Spec Land Loans

     19,984        88        1,275        —          21,347   

Commercial and industrial

     92,357        6,045        3,710        —          102,112   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     490,271        15,106        22,654        —          528,031   

Real estate

          

Residential mortgage

     174,769        —          6,080        —          180,849   

Residential construction

     8,414        —          278        —          8,692   

Mortgage warehouse

     102,146        —          —          —          102,146   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     285,329        —          6,358        —          291,687   

Consumer

          

Direct Installment

     30,247        —          309        —          30,556   

Direct Installment Purchased

     270        —          —          —          270   

Indirect Installment

     130,755        —          639        —          131,394   

Home Equity

     115,114        —          3,018        —          118,132   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

     276,386        —          3,966        —          280,352   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,051,985      $ 15,106      $ 32,978      $ —        $ 1,100,070   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     95.63     1.37     3.00     0.00  
December 31, 2013    Pass     Special
Mention
    Substandard     Doubtful     Total  

Commercial

          

Owner occupied real estate

   $ 146,085      $ 2,231      $ 7,946      $ —        $ 156,262   

Non owner occupied real estate

     208,625        5,047        11,041        —          224,713   

Residential development

     400        —          —          —          400   

Development & Spec Land Loans

     19,858        91        1,340        —          21,289   

Commercial and industrial

     91,852        6,492        3,576        —          101,920   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     466,820        13,861        23,903        —          504,584   

Real estate

          

Residential mortgage

     170,202        —          5,866        —          176,068   

Residential construction

     9,228        —          280        —          9,508   

Mortgage warehouse

     98,156        —          —          —          98,156   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     277,586        —          6,146        —          283,732   

Consumer

          

Direct Installment

     29,781        —          202        —          29,983   

Direct Installment Purchased

     294        —          —          —          294   

Indirect Installment

     130,851        —          533        —          131,384   

Home Equity

     114,033        —          3,925        —          117,958   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

     274,959        —          4,660        —          279,619   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,019,365      $ 13,861      $ 34,709      $ —        $ 1,067,935   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     95.45     1.30     3.25     0.00  

 

25


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 7—Derivative financial instruments

Cash Flow Hedges

As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 6.14% on a notional amount of $30.5 million at March 31, 2014 and December 31, 2013. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At March 31, 2014 the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.

Fair Value Hedges

Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At March 31, 2014 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 $100.1 million at March 31, 2014 and $95.3 million at December 31, 2013.

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, 2014, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income.

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

 

26


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

     Asset Derivative
March 31, 2014
     Liability Derivatives
March 31, 2014
 

Derivatives designated as hedging

instruments (Unaudited)

   Balance Sheet
Location
   Fair Value      Balance Sheet
Location
   Fair Value  

Interest rate contracts

   Loans    $ —         Other liabilities    $ 154   

Interest rate contracts

   Other Assets      154       Other liabilities      3,051   
     

 

 

       

 

 

 

Total derivatives designated as hedging instruments

        154            3,205   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments

           

Mortgage loan contracts

   Other assets      470       Other liabilities      39   
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

        470            39   
     

 

 

       

 

 

 

Total derivatives

      $ 624          $ 3,244   
     

 

 

       

 

 

 

 

     Asset Derivative
December 31, 2013
    Liability Derivatives
December 31, 2013
 

Derivatives designated as

hedging instruments (Unaudited)

   Balance Sheet
Location
   Fair Value     Balance Sheet
Location
   Fair Value  

Interest rate contracts

   Loans    $ 7      Other liabilities    $ (53

Interest rate contracts

   Other Assets      (60   Other liabilities      2,826   
     

 

 

      

 

 

 

Total derivatives designated as hedging instruments

        (53        2,773   
     

 

 

      

 

 

 

Derivatives not designated as hedging instruments

          

Mortgage loan contracts

   Other assets      212      Other liabilities      22   
     

 

 

      

 

 

 

Total derivatives not designated as hedging instruments

        212           22   
     

 

 

      

 

 

 

Total derivatives

      $ 159         $ 2,795   
     

 

 

      

 

 

 

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

 

     Amount of Loss Recognized in Other
Comprehensive Income on Derivative
(Effective Portion)
 
     Three Months Ended March 31  

Derivative in cash flow

hedging relationship

   2014
(Unaudited)
    2013
(Unaudited)
 

Interest rate contracts

   $ (146   $ 285   

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.

 

27


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
 
          Three Months Ended March 31  

Derivative in fair value hedging relationship

  

Location of gain (loss)
recognized on derivative

   2014
(Unaudited)
    2013
(Unaudited)
 

Interest rate contracts

   Interest income—loans    $ 207      $ (401

Interest rate contracts

   Interest income—loans      (207     401   
     

 

 

   

 

 

 

Total

      $ —        $ —     
     

 

 

   

 

 

 

 

          Amount of Gain (Loss)
Recognized on Derivative
 
          Three Months Ended March 31  

Derivative not designated as hedging relationship

  

Location of gain (loss)

recognized on derivative

   2014
(Unaudited)
     2013
(Unaudited)
 

Mortgage contracts

   Other income—gain on sale of loans    $ 240       $ (12

Note 8—Disclosures about fair value of assets and liabilities

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

 

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

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended March 31, 2014. 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, private-label 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.

 

28


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

 

     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, 2014

         

Available-for-sale securities

         

U.S. Treasury and federal agencies

   $ 42,641      $ —         $ 42,641      $ —     

State and municipal

     178,333        —           178,333        —     

Federal agency collateralized mortgage obligations

     114,836        —           114,836        —     

Federal agency mortgage-backed pools

     181,573        —           181,573        —     

Private labeled mortgage-backed pools

     1,056        —           1,056        —     

Corporate notes

     991        —           991        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

     519,430        —           519,430        —     

Hedged loans

     100,564        —           100,564        —     

Forward sale commitments

     470        —           470        —     

Interest rate swap agreements

     (3,205     —           (3,205     —     

Commitments to originate loans

     (39     —           (39     —     

December 31, 2013

         

Available-for-sale securities

         

U.S. Treasury and federal agencies

   $ 43,134      $ —         $ 43,134      $ —     

State and municipal

     177,898        —           177,898        —     

Federal agency collateralized mortgage obligations

     114,706        —           114,706        —     

Federal agency mortgage-backed pools

     170,894        —           170,894        —     

Private labeled mortgage-backed pools

     1,226        —           1,226        —     

Corporate notes

     733        —           733        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total available-for-sale securities

     508,591        —           508,591        —     

Hedged loans

     95,372        —           95,372        —     

Forward sale commitments

     212        —           212        —     

Interest rate swap agreements

     (2,773     —           (2,773     —     

Commitments to originate loans

     (22     —           (22     —     

 

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
 
Non Interest Income    2014     2013  
Total gains and losses from:    (Unaudited)     (Unaudited)  

Hedged loans

   $ 207      $ (401

Fair value interest rate swap agreements

     (207     401   

Derivative loan commitments

     240        (12
  

 

 

   

 

 

 
   $ 240      $ (12
  

 

 

   

 

 

 

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

 

           

Quoted Prices in
Active Markets

for Identical

Assets

     Significant Other
Observable
Inputs
     Significant
Unobservable
Inputs
 
     Fair Value      (Level 1)      (Level 2)      (Level 3)  

March 31, 2014

           

Impaired loans

   $ 6,023       $ —         $ —         $ 6,023   

Mortgage servicing rights

     7,030         —           —           7,030   

December 31, 2013

           

Impaired loans

   $ 6,114       $ —         $ —         $ 6,114   

Mortgage servicing rights

     7,039         —           —           7,039   

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

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

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

Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSR’s fair value increased by $5,000 during the first three months of 2014 and increased by $33,000 during the first three months of 2013.

 

30


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

     Fair Value at
March 31, 2014
     Valuation
Technique
   Unobservable Inputs    Range (Weighted
Average)

Impaired loans

   $ 6,023       Collateral based measurement    Discount to reflect current
market conditions and
ultimate collectability
   10% - 15% (12%)

Mortgage servicing rights

   $ 7,030       Discounted cashflows    Discount rate, Constant
prepayment rate,
Probably of default
   10% - 15% (12%),
4% - 7% (4.6%),
1% - 10% (4.5%)
     Fair Value at
December 31,
2013
     Valuation Technique    Unobservable Inputs    Range (Weighted
Average)

Impaired loans

   $ 6,114       Collateral based measurement    Discount to reflect current
market conditions and
ultimate collectability
   10% - 15% (12%)

Mortgage servicing rights

   $ 7,039       Discounted cashflows    Discount rate, Constant
prepayment rate,
Probably of default
   10% - 15% (12%),
4% - 7% (4.6%),
1% - 10% (4.5%)

Note 9—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, 2014 and December 31, 2013. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheet as well as certain off-balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy.

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

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

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

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

 

31


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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 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).

 

32


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

     March 31, 2014  
     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

   $ 35,820       $ 35,820       $ —         $ —     

Investment securities, held to maturity

     9,910         —           —           9,910   

Loans held for sale

     5,335         —           —           5,335   

Loans excluding loan level hedges, net

     984,128         —           —           1,009,380   

Stock in FHLB and FRB

     14,184         —           14,184         —     

Interest receivable

     7,536         —           7,536         —     

Liabilities

           

Non-interest bearing deposits

   $ 238,499       $ 238,499       $ —         $ —     

Interest-bearing deposits

     1,117,072         —           1,051,391         —     

Borrowings

     236,043         —           237,997         —     

Subordinated debentures

     32,525         —           32,587         —     

Interest payable

     498         —           498         —     

 

     December 31, 2013  
     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

   $ 31,721       $ 31,721       $ —         $ —     

Investment securities, held to maturity

     9,910         —           —           9,910   

Loans held for sale

     3,281         —           —           3,281   

Loans excluding loan level hedges, net

     957,464         —           —           975,910   

Stock in FHLB and FRB

     14,184         —           14,184         —     

Interest receivable

     7,501         —           7,501         —     

Liabilities

           

Non-interest bearing deposits

   $ 231,096       $ 231,096       $ —         $ —     

Interest-bearing deposits

     1,060,424         —           1,002,980         —     

Borrowings

     256,296         —           257,093         —     

Subordinated debentures

     32,486         —           32,528         —     

Interest payable

     506         —           506         —     

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 10—Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) included in capital are as follows:

 

     March 31     December 31  
     2014     2013  

Unrealized gain on securities available for sale

   $ 4,590      $ 164   

Unrealized loss on derivative instruments

     (3,051     (2,826

Tax effect

     (538     933   
  

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

   $ 1,001      $ (1,729
  

 

 

   

 

 

 

Note 11—Business Combination

On November 12, 2013, Horizon entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for Horizon’s acquisition of SCB Bancorp, Inc., a Michigan corporation (“SCB”). Pursuant to the Merger Agreement, SCB would merge with and into Horizon, with Horizon surviving the merger (the “Merger”), and Summit Community Bank, a Michigan-chartered commercial bank and wholly owned subsidiary of SCB, would merge with and into a wholly owned subsidiary of Horizon, Horizon Bank, N.A. (“Horizon Bank”), with Horizon Bank as the surviving bank.

On April 3, 2014 Horizon completed the acquisition of SCB and Horizon Bank N.A.’s acquisition of Summit Community Bank, through mergers effective April 3, 2014. Under the terms of the acquisition, the exchange ratio was 0.4904 shares of Horizon common stock (the “Exchange Ratio”) and $5.15 in cash for each outstanding share of SCB common stock. SCB shares outstanding at the closing were 1,164,442, and the shares of Horizon common stock issued to SCB shareholders totaled 570,820. Horizon’s stock price was $22.23 per share at the close of business on April 3, 2014. Based upon these numbers, the total value of the consideration for the acquisition was $18.9 million.

As of March 31, 2013, Summit Community Bank reported total assets of approximately $154.1 million, total deposits of approximately $119.3 million and total net loans of approximately $130.9 million.

Note 12—Future accounting matters

Accounting Standards Update No. 2014-01- Accounting for Investments in Qualified Affordable Housing Projects – In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, to permit entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The ASU modifies the conditions that an entity must meet to be eligible to use a method other than the equity or cost methods to account for qualified affordable housing project investments. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

Accounting Standards Update No. 2014-04- Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure – In January 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, to reduce diversity by clarifying when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

 

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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, 2014

 

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, 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 are not limited to:

 

    Changes in general economic conditions and their impact on Horizon and its customers, including the slowing or failure of economic recovery

 

    changes in the level and volatility of interest rates, spreads on earning assets and interest-bearing liabilities, and interest rate sensitivity;

 

    estimates of fair value of certain of Horizon’s assets and liabilities;

 

    volatility and disruption in financial markets;

 

    prepayment speeds, loan originations, credit losses and market values, collateral securing loans and other assets;

 

    unavailability of sources of liquidity;

 

    potential risk of environmental liability related to lending activities;

 

    changes in the competitive environment in Horizon’s market areas and among other financial service providers;

 

    legislation and/or regulation affecting the financial services industry as a whole, and Horizon and its subsidiaries in particular, including the effects resulting from the reforms enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the adoption of regulations by regulatory bodies under the Dodd-Frank Act;

 

    the impact of the Basel III capital rules as adopted by the federal banking agencies;

 

    changes in regulatory supervision and oversight, including monetary policy and capital requirements;

 

    changes in accounting policies or procedures as may be adopted and required by regulatory agencies;

 

    rapid technological developments and changes;

 

    Inability to contain costs and expenses;

 

    the ability of the U.S. federal government to manage federal debt limits; and

 

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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, 2014

 

    the risks of expansion through mergers and acquisitions, including unexpected credit quality problems with acquired loans, difficulty integrating acquired operations and material differences in the actual financial results of such transactions compared with Horizon’s initial expectations, including the full realization of anticipated cost savings.

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 2013 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 and Central Indiana and Southwestern and South Central 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.

On November 12, 2013, Horizon entered into an Agreement and Plan of Merger (the “Merger Agreement”) providing for Horizon’s acquisition of SCB Bancorp, Inc., a Michigan corporation (“SCB”). Pursuant to the Merger Agreement, SCB would merge with and into Horizon, with Horizon surviving the merger (the “Merger”), and Summit Community Bank, an Michigan-chartered commercial bank and wholly owned subsidiary of SCB, would merge with and into a wholly owned subsidiary of Horizon, Horizon Bank, N.A. (“Horizon Bank”), with Horizon Bank as the surviving bank.

On April 3, 2014 Horizon completed the acquisition of SCB and Horizon Bank N.A.’s acquisition of Summit Community Bank, through mergers effective April 3, 2014. Under the terms of the acquisition, the exchange ratio was 0.4904 shares of Horizon common stock and $5.15 in cash for each outstanding share of SCB common stock. SCB shares outstanding at the closing were 1,164,442, and the shares of Horizon’s common stock issued to SCB shareholders totaled 570,820. Horizon’s stock price was $22.23 per share at the close of business on April 3, 2014. Based upon these numbers, the total value of the consideration for the acquisition was $18.9 million.

Following are some highlights of Horizon’s financial performance through the first three months of 2014:

 

    First quarter 2014 net income was $3.4 million or $.38 diluted earnings per share.

 

    Excluding fees related to the acquisition of SCB Bancorp, Inc., net income for the first quarter of 2014 was $3.6 million or $.40 diluted earnings per share.

 

    Net interest income, after provisions for loan losses, for the first three months of 2014 was $13.3 million compared with $13.9 million for the same period in the prior year.

 

    Horizon’s previously announced acquisition of SCB Bancorp, Inc. and its wholly-owned subsidiary, Summit Community Bank, headquartered in East Lansing, Michigan closed as scheduled on April 3, 2014.

 

    Horizon did not record a provision for the three months ended March 31, 2014 compared with a provision of $2.1 million for same period of 2013.

 

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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, 2014

 

    Non-interest income was $5.5 million in first quarter 2014 compared with $7.5 million in the same period of 2013, reflecting a decrease of $1.7 million in gain on sale of loans and a decrease of $368,000 in gain on sale of investment securities.

 

    Total loans increased $34.0 million during the quarter to $1.1 billion at March 31, 2014.

 

    Commercial loans increased $23.4 million during the quarter or 4.6% to $528.6 million at March 31, 2014.

 

    Core deposits increased $67.7 million during the quarter or 6.7% to $1.1 billion at March 31, 2014.

 

    Horizon’s tangible book value per share rose to $15.52 at March 31, 2014, compared to $14.97 at December 31, 2013 and $14.64 at March 31, 2013.

 

    Horizon Bank’s capital ratios, including Tier 1 Capital to Average Assets of 9.51% and Total Capital to Risk Weighted Assets of 14.12% as of March 31, 2014, 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 2013 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 as critical accounting policies the allowance for loan losses, intangible assets, mortgage servicing rights, hedge accounting and valuation measurements.

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, 2014, Horizon had core deposit intangibles of $3.1 million subject to amortization and $20.5 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 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, 2014 was $22.28 per share compared to a book value of $18.22 per common share. Horizon reported record earnings for the fourteenth consecutive year in 2013.

 

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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, 2014

 

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.

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.

 

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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, 2014

 

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.

 

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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, 2014

 

Financial Condition

On March 31, 2014, Horizon’s total assets were $1.8 billion, an increase of approximately $48.3 million compared to December 31, 2013. The increase was primarily due to the growth in net loans and investment securities of $33.9 million and $10.8 million, respectively.

Investment securities were comprised of the following as of:

 

     March 31, 2014      December 31, 2013  
     Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value  

Available for sale

           

U.S. Treasury and federal agencies

   $ 43,098       $ 42,641       $ 43,808       $ 43,134   

State and municipal

     174,538         178,333         176,670         177,898   

Federal agency collateralized mortgage obligations

     115,584         114,836         116,047         114,706   

Federal agency mortgage-backed pools

     179,625         181,573         170,006         170,894   

Private labeled mortgage-backed pools

     1,024         1,056         1,188         1,226   

Corporate notes

     970         991         708         733   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 514,839       $ 519,430       $ 508,427       $ 508,591   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity, State and Municipal

   $ 9,910       $ 9,910       $ 9,910       $ 9,910   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities increased by approximately $10.8 million at March 31, 2014 compared to December 31, 2013 due to excess liquidity from the growth in deposits.

Net loans increased $33.9 million since December 31, 2013 to $1.1 billion as of March 31, 2014. This increase was the result of an increase in commercial loans of $23.4 million, mortgage warehouse loans of $4.0 million, residential mortgage loans of $3.9 million and consumer loans of $595,000. The growth in commercial loans is the direct result of increased calling efforts to increase Horizon’s market share within the Company’s footprint and market expansion.

Total deposits increased $64.1 million during the first three months of 2014. This increase was the result of non-interest bearing deposit accounts increasing by $7.4 million due to increased calling and marketing efforts and interest bearing transaction accounts increasing by $60.3 million, primarily due to increased municipal deposits, partially offset by a decrease in time deposits of $3.6 million during the first three months of 2014.

The Company’s borrowings decreased $20.3 million from December 31, 2013 as deposit growth of $64.1 million outpaced loan growth of $34.0 million during first three months of 2014, thereby reducing the Company’s reliance on borrowings to fund loan growth during the quarter. At March 31, 2014, the Company had $20.0 million in short-term funds borrowed compared to $41.0 million at December 31, 2013. The Company’s current balance sheet strategy is to utilize a reasonable level of short-term borrowings during extended low rate environments in addition to what is needed for the fluctuations in mortgage warehouse lending.

Stockholders’ equity totaled $169.8 million at March 31, 2014 compared to $164.5 million at December 31, 2013. The increase in stockholders’ equity during the period was the result of the generation of net income and an increase in accumulated other comprehensive income, partially offset by dividends declared. At March 31, 2014, the ratio of average stockholders’ equity to average assets was 9.65% compared to 9.46% for December 31, 2013. Book value per common share at March 31, 2014 increased to $18.22 compared to $17.64 at December 31, 2013.

 

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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, 2014

 

Results of Operations

Overview

Consolidated net income for the three-month period ended March 31, 2014 was $3.4 million, a decrease of 35.7% from the $5.3 million for the same period in 2013. Earnings per common share for the three months ended March 31, 2014 were $0.39 basic and $0.38 diluted, compared to $0.60 basic and $0.58 diluted for the same three-month period in 2013. Diluted earnings per share decreased by $.20 compared with the same three-month period in 2013 due primarily to the decline in mortgage warehouse activity, lower gain on sale of loans from mortgage origination volume, lower yields on loans and a reduction in interest income from Heartland loan valuation discounts recognized at the time of acquisition being accreted and discounts recognized from loans paying off. Excluding transaction expenses related to the acquisition of SCB Bancorp, Inc. of $311,000, net income would have been $3.6 million or $.40 diluted earnings per share for the first quarter of 2014.

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.

Net interest income during the three months ended March 31, 2014 was $13.3 million, a decrease of $2.7 million from the $16.0 million earned during the same period in 2013. Yields on the Company’s interest-earning assets decreased by 66 basis points to 4.29% for the three months ending March 31, 2014 from 4.95% for the three months ended March 31, 2013. Interest income decreased $3.0 million from $19.4 million for the three months ended March 31, 2013 to $16.5 million for the same period in 2014. This decrease was primarily due to a decrease in mortgage warehouse balances, lower yields on loans and a reduction in interest income from Heartland loan valuation discounts recognized at the time of acquisition being accreted and discounts recognized from loans paying off of $389,000 for the first quarter of 2014 compared to $2.0 million for the same period in 2013.

Rates paid on interest-bearing liabilities decreased by 4 basis points for the three months ended March 31, 2014 compared to the same period in 2013 due to the continued low interest rate environment. Interest expense decreased $224,000 from $3.4 million for the three months ended March 31, 2013 to $3.2 million for the same period in 2014. This decrease was due to a lower amount of average interest-bearing liabilities and lower rates being paid on the Company’s interest bearing liabilities. The net interest margin decreased 62 basis points from 4.10% for the three months ended March 31, 2013 to 3.48% for the same period in 2014. The decrease in the margin for the three-months ended March 31, 2014 compared to the same period in 2013 was due to the decrease of approximately $1.6 million of interest income from Heartland loan discounts being accreted and loans paying off before their scheduled maturity as well as a reduction in the yield on interest-earning assets. Excluding the interest income recognized from the loan discounts, the margin would have been 3.38% for the three-month period ending March 31, 2014 compared to 3.62% for the same period in 2013.

 

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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, 2014

 

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

 

     Three Months Ended     Three Months Ended  
     March 31, 2014     March 31, 2013  
     Average            Average     Average            Average  
     Balance     Interest      Rate     Balance     Interest      Rate  

ASSETS

              

Interest-earning assets

              

Federal funds sold

   $ 7,439      $ 4         0.22   $ 12,639      $ 8         0.26

Interest-earning deposits

     5,722        3         0.21     7,423        2         0.11

Investment securities—taxable

     386,793        2,383         2.50     371,311        2,012         2.20

Investment securities—non-taxable (1)

     147,840        1,123         4.28     120,652        967         4.33

Loans receivable (2)(3)

     1,050,491        12,954         5.00     1,105,843        16,440         6.03
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets (1)

     1,598,285        16,467         4.29     1,617,868        19,429         4.95

Noninterest-earning assets

              

Cash and due from banks

     24,890             23,745        

Allowance for loan losses

     (16,166          (18,425     

Other assets

     138,322             134,623        
  

 

 

        

 

 

      
   $ 1,745,331           $ 1,757,811        
  

 

 

        

 

 

      

LIABILITIES AND SHAREHOLDERS’ EQUITY

              

Interest-bearing liabilities

              

Interest-bearing deposits

   $ 1,079,514      $ 1,277         0.48   $ 1,102,599      $ 1,480         0.54

Borrowings

     228,138        1,422         2.53     241,383        1,448         2.43

Subordinated debentures

     32,502        496         6.19     32,370        491         6.15
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     1,340,154        3,195         0.97     1,376,352        3,419         1.01

Noninterest-bearing liabilities

              

Demand deposits

     223,974             202,403        

Accrued interest payable and other liabilities

     12,807             18,082        

Shareholders’ equity

     168,396             160,974        
  

 

 

        

 

 

      
   $ 1,745,331           $ 1,757,811        
  

 

 

        

 

 

      

Net interest income/spread

     $ 13,272         3.32     $ 16,010         3.95
    

 

 

        

 

 

    

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

          3.48          4.10

 

(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 loan fees and late fees. The inclusion of these 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.

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 three-months ended March 31, 2014, no provision was required to adequately fund the ALLL compared to a provision of $2.1 million for the same period of 2013. Commercial loan net recoveries during the first quarter of 2014 were $361,000, residential mortgage loan net charge-offs were $18,000, and consumer loan net charge-offs were $233,000. The lower provision for loan losses in the first quarter of 2014 compared to the same period of 2013 was due to the continued improvement of nonperforming and substandard loans. The ALLL balance at March 31, 2014 was $16.1 million or 1.46% of total loans. This compares to an ALLL balance of $16.0 million at December 31, 2013 or

 

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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, 2014

 

1.49% of total loans and $19.6 million at March 31, 2013 or 1.78% of total loans. The decrease in the ratio at March 31, 2014 compared to December 31, 2013 was due an increase in total loans of $34.0 million. The decrease in the ratio at March 31, 2014 compared to March 31, 2013 was due to a decrease in the allowance for loan and lease losses of $3.5 million due to the continued improvement of nonperforming and substandard loans, partially offset by an increase in total loans of $7.3 million.

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, 2014.

Non-performing loans totaled $17.6 million on March 31, 2014, down from $18.3 million and $23.7 million on December 31, 2013 and March 31, 2013, respectively. Compared to December 31, 2013, non-performing commercial loans and consumer loans decreased by $158,000 and $695,000, respectively, partially offset by an increase of $212,000 in non-performing real estate loans.

At March 31, 2014, loans acquired in the Heartland acquisition represented $4.2 million in non-performing, $9.0 million in substandard and $150,000 in delinquent loans, which compares to $4.5 million in non-performing, $10.3 million in substandard and $323,000 in delinquent loans at December 31, 2013 and $6.4 million in non-performing, $17.7 million in substandard and $3.4 million in delinquent loans at March 31, 2013.

Other Real Estate Owned (OREO) totaled $1.7 million on March 31, 2014, down from $2.1 million and $1.8 million on December 31, 2013 and March 31, 2013, respectively.

Non-interest Income

The following is a summary of changes in non-interest income:

 

     Three Months Ended               
     March 31      March 31      Amount     Percent  
     2014      2013      Change     Change  

Non-interest Income

          

Service charges on deposit accounts

   $ 923       $ 913       $ 10        1.1

Wire transfer fees

     112         190         (78     -41.1

Interchange fees

     959         866         93        10.7

Fiduciary activities

     1,048         1,140         (92     -8.1

Gain on sale of securities

     —           368         (368     -100.0

Gain on sale of mortgage loans

     1,411         3,106         (1,695     -54.6

Mortgage servicing net of impairment

     207         163         44        27.0

Increase in cash surrender value of bank owned life insurance

     233         252         (19     -7.5

Other income

     629         462         167        36.1
  

 

 

    

 

 

    

 

 

   

Total non-interest income

   $ 5,522       $ 7,460       $ (1,938     -26.0
  

 

 

    

 

 

    

 

 

   

Total non-interest income was $1.9 million lower in the first quarter of 2014 compared to the first quarter of 2013. Gain on sale of securities decreased $368,000 for the three months ended March 31, 2014 compared to the same period in 2013. Residential mortgage loan activity during the first quarter of 2014 generated $1.4 million of income from the gain on sale of mortgage loans, down $1.7 million from the same period in 2013. The reduction in the gain on sale of mortgages loans was due to the decrease in total origination volume of $36.9 million for the first quarter of 2014 compared to the same period in 2013, partially offset by an increase in the percentage earned on the sale of these loans. Loans originated for sale during the first quarter of 2014 totaled $52.6 million compared to $89.5 million for the same period in 2013.

 

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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, 2014

 

Non-interest Expense

The following is a summary of changes in non-interest expense:

 

     Three Months Ended              
     March 31      March 31     Amount     Percent  
     2014      2013     Change     Change  

Non-interest expense

         

Salaries

   $ 5,356       $ 5,179      $ 177        3.4

Commission and bonuses

     480         1,039        (559     -53.8

Employee benefits

     1,647         1,286        361        28.1

Net occupancy expenses

     1,424         1,311        113        8.6

Data processing

     870         600        270        45.0

Professional fees

     608         499        109        21.8

Outside services and consultants

     661         712        (51     -7.2

Loan expense

     1,015         1,114        (99     -8.9

FDIC deposit insurance

     256         283        (27     -9.5

Other losses

     38         (72     110        -152.8

Other expense

     2,159         2,028        131        6.5
  

 

 

    

 

 

   

 

 

   

Total non-interest expense

   $ 14,514       $ 13,979      $ 535        3.8
  

 

 

    

 

 

   

 

 

   

Total non-interest expenses were $535,000 higher in the first quarter of 2014 compared to the first quarter of 2013. Salaries and employee benefits increased $538,000 compared to the same quarter in 2013 primarily due to changes in annual merit pay, a larger employee base and increased employee benefits costs. Commission and bonuses decreased $559,000 compared to the same quarter in 2013 primarily due to lower mortgage loan origination volume and the resulting commissions paid on these loans and lower bonus accruals. Net occupancy expenses increased by $113,000 compared to the same quarter in 2013 as primarily as a result of higher maintenance costs from snow removal. Data processing expense increased during the quarter by $270,000 compared to the same period in 2013 due to growth and additional services and $96,000 in fees one-time fees associated with the SCB acquisition. Professional fees increased by $109,000 compared to the same period of 2013 due to $169,000 in fees associated with the SCB acquisition which occurred during the quarter. Other losses improved $110,000 year over year due to the reversal of a previously required reserve for potential repurchases of sold loans that were resolved without a loss during the first quarter of 2013. Other expenses increased $131,000 in the first quarter of 2014 compared to the same period in 2013 primarily due to the Company’s growth and expansion efforts.

Income Taxes

Income tax expense for the first quarter of 2014 was $863,000 compared to $2.1 million for same period of 2013. The effective tax rate for the first quarter of 2014 was 20.2% compared to 28.3% in the same period of 2013. The decrease in the effective tax rate is primarily due to lower net income during the first quarter of 2014.

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, 2014

 

the FHLB. During the three months ended March 31, 2014, cash and cash equivalents increased by approximately $4.1 million. At March 31, 2014, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $317.1 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $311.8 million at December 31, 2013 and $435.5 million at March 31, 2013.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at March 31, 2014. Stockholders’ equity totaled $169.8 million as of March 31, 2014, compared to $164.5 million as of December 31, 2013. For the three months ended March 31, 2014, the ratio of average stockholders’ equity to average assets was 9.65% compared to 9.46% for the three months ended December 31, 2013. The increase in stockholders’ equity during the period was the result of the generation of net income and an increase in accumulated other comprehensive income, net of dividends declared.

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, 2014, the dividend cost was approximately $31,000, or 1.0% annualized. For the remaining three quarters during of 2014, the dividend cost will be approximately $31,000 or 1.0% 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, subject to regulatory approval.

Horizon declared common stock dividends in the amount of $0.11 per share during the first three months of 2014 compared to $0.10 for the same period of 2013. The dividend payout ratio (dividends as a percent of basic earnings per share) was 28.0% and 16.7% for the first three months of 2014 and 2013, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 2013.

Basel III

On July 2, 2013, the Board of Governors of the Federal Reserve System announced its approval of the final rule to implement the Basel III regulatory capital reforms, among other changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Office of the Comptroller of the Currency, as well as the Federal Deposit Insurance Corporation, adopted the new rule on July 9, 2013. The final approved rule includes a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% as well as a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets. The rule also raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking institutions

The phase-in for banking organizations such as Horizon and the Bank will not begin until January 2015, while the phase-in period for larger banks starts in January 2014. Horizon and the Bank are currently evaluating the impact of the implementation of the new capital and liquidity standards.

 

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HORIZON BANCORP AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

For the Three Months Ended March 31, 2014

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We refer you to Horizon’s 2013 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 2013 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, 2014, 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, 2014, 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, 2014

 

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

There have been no material changes from the factors previously disclosed under Item 1A of Horizon’s Annual Report on Form 10-K for 2012.

 

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, 2014

 

ITEM 6. EXHIBITS

(a) Exhibits

 

Exhibit No.    Description
31.1    Certification of Craig M. Dwight
31.2    Certification of Mark E. Secor
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
101    Interactive Data Files

 

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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 9, 2014      

/s/ Craig M. Dwight

      Craig M. Dwight
      Chief Executive Officer
Dated: May 9, 2014      

/s/ Mark E. Secor

      Mark E. Secor
      Chief Financial Officer

 

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INDEX TO EXHIBITS

 

Exhibit No.

  

Description

  

Location

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

 

50