Form 10-Q
Table of Contents

 

 

HORIZON BANCORP

FORM 10-Q

 

 

United States

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

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: 11,932,887 shares of Common Stock, no par value, at November 9, 2015.

 

 

 


Table of Contents

HORIZON BANCORP

FORM 10-Q

INDEX

 

PART I. FINANCIAL INFORMATION   

Item 1.

 

Financial Statements (Unaudited)

  
 

Condensed Consolidated Balance Sheets

     3   
 

Condensed Consolidated Statements of Income

     4   
 

Condensed Consolidated Statements of Comprehensive Income

     5   
 

Condensed Consolidated Statement of Stockholders’ Equity

     6   
 

Condensed Consolidated Statements of Cash Flows

     7   
 

Notes to Condensed Consolidated Financial Statements

     8   

Item 2.

 

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

     41   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     57   

Item 4.

 

Controls and Procedures

     57   
PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

     58   

Item 1A.

 

Risk Factors

     58   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     58   

Item 3.

 

Defaults Upon Senior Securities

     58   

Item 4.

 

Mine Safety Disclosures

     58   

Item 5.

 

Other Information

     58   

Item 6.

 

Exhibits

     59   

Signatures

       60   

Index To Exhibits

     61   

 

2


Table of Contents

PART 1 — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)

 

     September 30
2015
     December 31
2014
 
     (Unaudited)         

Assets

     

Cash and due from banks

   $ 48,155       $ 43,476   

Investment securities, available for sale

     435,673         323,764   

Investment securities, held to maturity (fair value of $188,574 and $169,904)

     182,187         165,767   

Loans held for sale

     5,583         6,143   

Loans, net of allowance for loan losses of $16,168 and $16,501

     1,710,322         1,362,053   

Premises and equipment, net

     60,700         52,461   

Federal Reserve and Federal Home Loan Bank stock

     13,823         11,348   

Goodwill

     49,600         28,176   

Other intangible assets

     7,648         3,965   

Interest receivable

     10,862         8,246   

Cash value of life insurance

     54,148         39,382   

Other assets

     29,213         32,141   
  

 

 

    

 

 

 

Total assets

   $ 2,607,914       $ 2,076,922   
  

 

 

    

 

 

 

Liabilities

     

Deposits

     

Non-interest bearing

   $ 338,436       $ 267,667   

Interest bearing

     1,574,639         1,214,652   
  

 

 

    

 

 

 

Total deposits

     1,913,075         1,482,319   

Borrowings

     373,901         351,198   

Subordinated debentures

     32,758         32,642   

Interest payable

     490         497   

Other liabilities

     22,952         15,852   
  

 

 

    

 

 

 

Total liabilities

     2,343,176         1,882,508   
  

 

 

    

 

 

 

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, 11,987,424 and 9,278,916 shares Outstanding, 11,931,987 and 9,213,036 shares

     —           —     

Additional paid-in capital

     106,083         45,916   

Retained earnings

     144,344         134,477   

Accumulated other comprehensive income

     1,811         1,521   
  

 

 

    

 

 

 

Total stockholders’ equity

     264,738         194,414   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 2,607,914       $ 2,076,922   
  

 

 

    

 

 

 

See notes to condensed consolidated financial statements

 

3


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Dollar Amounts in Thousands, Except Per Share Data)

 

     Three Months Ended
September 30
    Nine Months Ended
September 30
 
     2015     2014     2015     2014  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Interest Income

        

Loans receivable

   $ 20,297      $ 16,403      $ 55,140      $ 45,988   

Investment securities

        

Taxable

     2,156        2,339        6,377        7,124   

Tax exempt

     1,125        1,109        3,281        3,328   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest income

     23,578        19,851        64,798        56,440   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest Expense

        

Deposits

     1,566        1,352        4,035        3,984   

Borrowed funds

     1,729        1,593        4,747        4,493   

Subordinated debentures

     507        506        1,504        1,503   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     3,802        3,451        10,286        9,980   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     19,776        16,400        54,512        46,460   

Provision for loan losses

     300        1,741        2,820        2,080   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income after Provision for Loan Losses

     19,476        14,659        51,692        44,380   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Income

        

Service charges on deposit accounts

     1,359        1,076        3,443        3,037   

Wire transfer fees

     160        151        493        408   

Interchange fees

     1,625        1,223        4,093        3,436   

Fiduciary activities

     1,520        1,131        4,033        3,378   

Gain on sale of investment securities (includes $0 for the three months ended and $124 for the nine months ended September 30, 2015 and $988 for the three and nine months ended September 30, 2014, related to accumulated other comprehensive earnings reclassifications)

     —          988        124        988   

Gain on sale of mortgage loans

     2,794        2,153        7,815        6,101   

Mortgage servicing income net of impairment

     246        116        725        556   

Increase in cash value of bank owned life insurance

     374        296        889        781   

Death benefit on bank owned life insurance

     —          —          145        —     

Other income

     322        256        892        854   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest income

     8,400        7,390        22,652        19,539   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Expense

        

Salaries and employee benefits

     10,652        8,215        27,541        23,991   

Net occupancy expenses

     1,723        1,404        4,649        4,188   

Data processing

     1,281        907        3,170        2,714   

Professional fees

     409        358        1,596        1,385   

Outside services and consultants

     3,209        595        4,753        2,554   

Loan expense

     1,351        1,202        3,975        3,489   

FDIC insurance expense

     423        313        1,099        854   

Other losses

     246        (35     351        98   

Other expense

     2,941        2,394        7,819        7,002   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-interest expense

     22,235        15,353        54,953        46,275   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income Before Income Tax

     5,641        6,696        19,391        17,644   

Income tax expense (includes $0 for the three months ended and $43 for the nine months ended September 30, 2015 and $346 for the three and nine months ended September 30, 2014, related to income tax expense from reclassification items)

     1,353        1,738        5,017        4,491   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

     4,288        4,958        14,374        13,153   

Preferred stock dividend

     (31     (40     (94     (102
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income Available to Common Shareholders

   $ 4,257      $ 4,918      $ 14,280      $ 13,051   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic Earnings Per Share

   $ 0.37      $ 0.53      $ 1.42      $ 1.45   

Diluted Earnings Per Share

     0.36        0.51        1.37        1.39   

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
September 30
    Nine Months Ended
September 30
 
     2015     2014     2015     2014  
     (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Net Income

   $ 4,288      $ 4,958      $ 14,374      $ 13,153   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss)

        

Change in fair value of derivative instruments:

        

Change in fair value of derivative instruments for the period

     (516     373        (334     (169

Income tax effect

     181        (131     117        59   
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from derivative instruments

     (335     242        (217     (110
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in securities:

        

Unrealized appreciation (depreciation) for the period on AFS securities

     1,781        (6,039     1,131        723   

Unrealized depreciation for the period on held-to-maturity

     (203     2,283        (475     2,175   

Reclassification adjustment for securities gains realized in income

     —          988        124        988   

Income tax effect

     (552     969        (273     (1,360
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on securities

     1,026        (1,799     507        2,526   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss), Net of Tax

     691        (1,557     290        2,416   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 4,979      $ 3,401      $ 14,664      $ 15,569   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)

 

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

Balances, January 1, 2015

   $ 12,500       $ 45,916       $ 134,477      $ 1,521       $ 194,414   

Net income

           14,374           14,374   

Other comprehensive income, net of tax

             290         290   

Amortization of unearned compensation

        267              267   

Exercise of stock options

        319              319   

Exercise of stock warrants

        3,751              3,751   

Tax benefit related to stock options

        108              108   

Stock option expense

        216              216   

Stock issued from acquisition

        55,506              55,506   

Cash dividends on preferred stock (1.00%)

           (94        (94

Cash dividends on common stock ($.43 per share)

           (4,413        (4,413
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Balances, September 30, 2015

   $ 12,500       $ 106,083       $ 144,344      $ 1,811       $ 264,738   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

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)

 

     Nine Months Ended
September 30
 
     2015     2014  
     (Unaudited)     (Unaudited)  

Operating Activities

    

Net income

   $ 14,374      $ 13,153   

Items not requiring (providing) cash

    

Provision for loan losses

     2,820        2,080   

Depreciation and amortization

     3,020        2,806   

Share based compensation

     216        145   

Mortgage servicing rights net (recovery) impairment

     389        (28

Premium amortization on securities available for sale, net

     2,192        1,733   

Gain on sale of investment securities

     (124     (988

Gain on sale of mortgage loans

     (7,815     (6,101

Proceeds from sales of loans

     247,512        169,858   

Loans originated for sale

     (239,137     (164,643

Change in cash value of life insurance

     (868     (745

Gain on sale of other real estate owned

     (214     (176

Net change in

    

Interest receivable

     (1,337     (563

Interest payable

     (28     (50

Other assets

     (61     2,251   

Other liabilities

     1,020        327   
  

 

 

   

 

 

 

Net cash provided by operating activities

     21,959        19,059   
  

 

 

   

 

 

 

Investing Activities

    

Purchases of securities available for sale

     (170,391     (77,164

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

     61,785        99,805   

Purchases of securities held to maturity

     (26,128     (4,839

Proceeds from maturities of securities held to maturity

     7,155        7,900   

Purchase of Federal Reserve Bank stock

     —          (592

Proceeds from the sale of FHLB stock

     268        —     

Net change in loans

     (123,326     (154,677

Proceeds on the sale of OREO and repossessed assets

     2,425        2,378   

Purchases of premises and equipment

     (4,757     (4,086

Acquisition of SCB

     —          7,894   

Acquisition of Peoples

     182,413        —     

Purchase of Mortgage Company

     —          (735
  

 

 

   

 

 

 

Net cash used in investing activities

     (70,556     (124,116
  

 

 

   

 

 

 

Financing Activities

    

Net change in

    

Deposits

     79,669        37,124   

Borrowings

     (26,064     76,944   

Proceeds from issuance of stock

     4,178        128   

Dividends paid on common shares

     (4,413     (3,440

Dividends paid on preferred shares

     (94     (102
  

 

 

   

 

 

 

Net cash provided by financing activities

     53,276        110,654   
  

 

 

   

 

 

 

Net Change in Cash and Cash Equivalents

     4,679        5,597   

Cash and Cash Equivalents, Beginning of Period

     43,476        31,721   
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 48,155      $ 37,318   
  

 

 

   

 

 

 

Additional Supplemental Information

    

Interest paid

   $ 10,292      $ 10,009   

Income taxes paid

     4,900        1,600   

Transfer of loans to other real estate owned

     2,825        3,078   

Transfer of available-for -sale securities to held-to-maturity

     —          167,047   

The Company purchased all of the capital stock of Peoples for $78,147 on July 1, 2015 and of Summit for $18,896 on April 3, 2014. In conjunction with the acquisition, liabilities were assumed as follows:

    

Fair value of assets acquired

     485,077        158,585   

Cash paid to retire debt

     —          1,029   

Cash paid for the capital stock

     22,641        6,207   

Less: common stock issued

     55,506        12,689   

Liabilities assumed

     406,930        138,660   

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

Note 1 – Accounting Policies

The accompanying unaudited condensed consolidated financial statements include the accounts of Horizon Bancorp (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank, N.A. (“Bank”). All inter-company balances and transactions have been eliminated. The results of operations for the periods ended September 30, 2015 and September 30, 2014 are not necessarily indicative of the operating results for the full year of 2015 or 2014. 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 2014 filed with the Securities and Exchange Commission on March 13, 2015. The condensed consolidated balance sheet of Horizon as of December 31, 2014 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      Nine Months Ended  
     September 30      September 30  
     2015      2014      2015      2014  
     (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Basic earnings per share

           

Net income

   $ 4,288       $ 4,958       $ 14,374       $ 13,153   

Less: Preferred stock dividends

     31         40         94         102   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to common shareholders

   $ 4,257       $ 4,918       $ 14,280       $ 13,051   

Weighted average common shares outstanding

     11,605,976         9,208,707         10,029,419         9,009,663   

Basic earnings per share

   $ 0.37       $ 0.53       $ 1.42       $ 1.45   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

           

Net income available to common shareholders

   $ 4,257       $ 4,918       $ 14,280       $ 13,051   

Weighted average common shares outstanding

     11,605,976         9,208,707         10,029,419         9,009,663   

Effect of dilutive securities:

           

Warrants

     214,592         309,790         290,669         308,647   

Restricted stock

     33,471         36,387         30,728         37,127   

Stock options

     39,215         33,448         36,297         33,922   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding

     11,893,254         9,588,332         10,387,113         9,389,359   

Diluted earnings per share

   $ 0.36       $ 0.51       $ 1.37       $ 1.39   
  

 

 

    

 

 

    

 

 

    

 

 

 

There were 2,500 shares for both the three and nine months ended September 30, 2015, respectively, and 46,766 shares for both the three and nine months ended September 30, 2014 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, 2014 Annual Report on Form 10-K.

Reclassifications

Certain reclassifications have been made to the 2014 condensed consolidated financial statements to be comparable to 2015. These reclassifications had no effect on net income.

Note 2 – Acquisitions

On July 1, 2015, Horizon completed the acquisition of Peoples Bancorp, an Indiana corporation (“Peoples”) and Horizon Bank N.A.’s acquisition of Peoples Federal Savings Bank of DeKalb County (“Peoples FSB”), through mergers effective July 1, 2015. Under the terms of the acquisition, the exchange ratio was 0.95 shares of Horizon common stock (the “Exchange Ratio”) and $9.75 in cash for each outstanding share of Peoples common stock. Peoples shareholders owning fewer than 100 shares of common stock received $33.14 in cash for each common share. Peoples shares outstanding at the closing were 2,311,858, and the shares of Horizon common stock issued to Peoples shareholders totaled 2,192,202. Horizon’s stock price was $25.32 per share at the close of business on July 1, 2015. Based upon these numbers, the total value of the consideration for the acquisition was $78.1 million. The Company had approximately $4.4 million in costs related to the acquisition as of September 30, 2015. These expenses are classified in the other expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce cost through economies of scale.

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

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

ASSETS

      LIABILITIES   

Cash and due from banks

   $ 205,054       Deposits   

Investment securities, held to maturity

     2,038       Non-interest bearing    $ 28,251   
      NOW accounts      65,771   

Commercial

     67,435       Savings and money market      125,176   

Residential mortgage

     137,331       Certificates of deposits      131,889   
        

 

 

 

Consumer

     19,593               Total deposits      351,087   
  

 

 

       

Total loans

     224,359         
      Borrowings      48,884   

Premises and equipment, net

     5,524       Interest payable      21   

FRB and FHLB stock

     2,743       Other liabilities      6,938   

Goodwill

     21,424         

Core deposit intangible

     4,394         

Interest receivable

     1,279         

Cash value of life insurance

     13,898         

Other assets

     4,364         
  

 

 

       

 

 

 

Total assets purchased

   $ 485,077       Total liabilities assumed    $ 406,930   
  

 

 

       

 

 

 

Common shares issued

   $ 55,506         

Cash paid

     22,641         
  

 

 

       

Total estimated purchase price

   $ 78,147         
  

 

 

       

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

The Company acquired the $229.1 million loan portfolio at a fair value discount of $4.8 million. The performing portion of the portfolio, $223.4 million, had an estimated fair value of $220.0 million. The excess of expected cash flows above the fair value of the performing portion of loans will be accreted to interest income over the remaining lives of the loans in accordance with ASC 310-20.

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

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

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

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

 

Contractually required principal and interest at acquisition

   $  5,730   

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

     715   
  

 

 

 

Expected cash flows at acquisition

     5,015   

Interest component of expected cash flows (accretable discount)

     647   
  

 

 

 

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

   $ 4,368   
  

 

 

 

The results of operations of Peoples and Peoples FSB have been included in the Company’s consolidated financial statements since the acquisition dates. The following schedule includes pro forma results for the periods ended September 30, 2015 and December 31, 2014 as if the Peoples and Peoples FSB acquisitions had occurred as of the beginning of the comparable prior reporting period.

 

(in thousands except per share data)    December 31,      Nine Months
Ended
September 30,
 
     2014      2015      2014  

Summary of Operations:

        

Net Interest Income

   $ 75,442       $ 60,466       $ 55,850   

Provision for Loan Losses

     3,443         2,880         2,420   

Net Interest Income after Provision for Loan Losses

     71,999         57,586         53,430   

Non-interest Income

     29,928         24,545         22,458   

Non-Interest Expense

     74,010         61,192         55,489   

Income before Income Taxes

     27,917         20,939         20,399   

Income Tax Expense

     6,561         5,164         4,846   

Net Income

     21,356         15,776         15,553   

Net Income Available to Common Shareholders

   $ 21,223       $ 15,682       $ 15,562   
  

 

 

    

 

 

    

 

 

 

Per Share Data

        

Net Income

   $ 1.82       $ 1.33       $ 1.32   

The pro forma information includes adjustments for interest income on loans, amortization of intangibles arising from the transaction, interest expense on deposits acquired, premises expense for the banking centers acquired and the related income tax effects. The pro forma information for the nine months ended 2015 includes $1.3 million, net of tax, of operating revenue from Peoples since the acquisition and approximately $3.0 million, net of tax, of non-recurring expenses directly attributable to the Peoples acquisition.

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

On April 3, 2014, Horizon closed its acquisition of SCB Bancorp, Inc. (“Summit”) and Horizon Bank N.A.’s acquisition of Summit Community Bank, through mergers effective as of that date. Under the final terms of the acquisition, the exchange ratio was 0.4904 shares of Horizon’s common stock and $5.15 in cash for each share of Summit common stock outstanding. Summit shares outstanding at the closing were 1,164,442, and the shares of Horizon common stock issued to Summit shareholders totaled 570,820. Horizon’s stock price

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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 (not including the retirement of Summit debt). The Company had approximately $1.3 million in costs related to the acquisition. These expenses are classified in the other expense section of the income statement and primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs. The Company also expects to reduce cost through economies of scale.

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

 

ASSETS

      LIABILITIES   

Cash and due from banks

   $ 15,161       Deposits   
      Non-interest bearing    $ 27,274   

Commercial

     70,441       NOW accounts      16,332   

Residential mortgage

     43,448       Savings and money market      35,045   

Consumer

     10,192       Certificates of deposits      42,368   
  

 

 

       

 

 

 

Total loans

     124,081      

Total deposits

     121,019   

Premises and equipment, net

     2,548       Borrowings      16,990   

FRB and FHLB stock

     2,136       Interest payable      52   

Goodwill

     8,428       Other liabilities      599   

Core deposit intangible

     822         

Interest receivable

     347         

Cash value of life insurance

     2,185         

Other assets

     2,877         
  

 

 

       

 

 

 

Total assets purchased

   $ 158,585       Total liabilities assumed    $ 138,660   
  

 

 

       

 

 

 

Common shares issued

   $ 12,689         

Cash paid

     6,207         

Retirement of Holding Company Debt

     1,029         
  

 

 

       

Total estimated purchase price

   $ 19,925         
  

 

 

       

Of the total purchase price of $19.9 million, $822,000 has been allocated to core deposit intangible. Additionally, $8.4 million has been allocated to goodwill and $4.4 million of the purchase price is deductible and was assigned to the business assets. The core deposit intangible will be amortized over seven years on a straight line basis.

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

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

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

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

The following table details the acquired loans that are accounted for in accordance with ASC 310-30 as of April 3, 2014.

 

Contractually required principal and interest at acquisition

   $  14,460   

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

     3,146   
  

 

 

 

Expected cash flows at acquisition

     11,314   

Interest component of expected cash flows (accretable discount)

     1,688   
  

 

 

 

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

   $ 9,626   
  

 

 

 

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

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 3 – Securities

The fair value of securities is as follows:

 

            Gross      Gross         
September 30, 2015    Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

Available for sale

           

U.S. Treasury and federal agencies

   $ 24,724       $ 45       $ (14    $ 24,755   

State and municipal

     58,467         1,349         (35      59,781   

Federal agency collateralized mortgage obligations

     134,494         1,426         (353      135,567   

Federal agency mortgage-backed pools

     212,718         3,179         (381      215,516   

Corporate notes

     32         22         —           54   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 430,435       $ 6,021       $ (783    $ 435,673   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

U.S. Treasury and federal agencies

   $ 5,852       $ 136       $ —         $ 5,988   

State and municipal

     142,763         5,262         (177      147,848   

Federal agency collateralized mortgage obligations

     9,356         59         (12      9,403   

Federal agency mortgage-backed pools

     24,216         1,208         (89      25,335   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 182,187       $ 6,665       $ (278    $ 188,574   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Available for sale

           

U.S. Treasury and federal agencies

   $ 26,996       $ 56       $ (229    $ 26,823   

State and municipal

     46,535         1,462         (45      47,952   

Federal agency collateralized mortgage obligations

     122,930         975         (1,045      122,860   

Federal agency mortgage-backed pools

     122,583         3,172         (360      125,395   

Private labeled mortgage-backed pools

     670         19         —           689   

Corporate notes

     32         13         —           45   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 319,746       $ 5,697       $ (1,679    $ 323,764   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

U.S. Treasury and federal agencies

   $ 9,804       $ 82       $ —         $ 9,886   

State and municipal

     129,595         3,398         (106      132,887   

Federal agency collateralized mortgage obligations

     4,039         35         (1      4,073   

Federal agency mortgage-backed pools

     22,329         729         —           23,058   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 165,767       $ 4,244       $ (107    $ 169,904   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. At September 30, 2015, no individual investment security had an unrealized loss that was determined to be other-than-temporary.

The unrealized losses on the Company’s investments in securities of state and municipal governmental agencies, U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at September 30, 2015.

The Company elected to transfer 319 available-for-sale (“AFS”) securities with an aggregate fair value of $167.1 million to a classification of held-to-maturity (“HTM”) on April 1, 2014. In accordance with FASB ASC 320-10-55-24, the transfer from AFS to HTM must be recorded at the fair value of the AFS securities at the time of transfer. The net unrealized holding gain of $1.3 million, net of tax, at the date of transfer was retained in accumulated other comprehensive income, with the associated pre-tax amount retained in the carrying value of the HTM securities. Such amounts will be amortized to comprehensive income over the remaining life of the securities. The fair value of the transferred AFS securities became the book value of the HTM securities at April 1, 2014, with no unrealized gain or loss at this date. Future reporting periods, with potential changes in market value for these securities, would likely record an unrealized gain or loss for disclosure purposes.

The amortized cost and fair value of securities available for sale and held to maturity at September 30, 2015 and December 31, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     September 30, 2015      December 31, 2014  
     Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value  

Available for sale

           

Within one year

   $ 7,335       $ 7,365       $ 6,098       $ 6,169   

One to five years

     51,574         52,460         44,720         45,093   

Five to ten years

     16,991         17,343         16,147         16,768   

After ten years

     7,323         7,422         6,598         6,790   
  

 

 

    

 

 

    

 

 

    

 

 

 
     83,223         84,590         73,563         74,820   

Federal agency collateralized mortgage obligations

     134,494         135,567         122,930         122,860   

Federal agency mortgage-backed pools

     212,718         215,516         122,583         125,395   

Private labeled mortgage-backed pools

     —           —           670         689   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 430,435       $ 435,673       $ 319,746       $ 323,764   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

Within one year

   $ —         $ —         $ —         $ —     

One to five years

     14,682         15,285         592         593   

Five to ten years

     101,152         105,151         99,225         101,323   

After ten years

     32,781         33,400         39,582         40,857   
  

 

 

    

 

 

    

 

 

    

 

 

 
     148,615         153,836         139,399         142,773   

Federal agency collateralized mortgage obligations

     9,356         9,403         4,039         4,073   

Federal agency mortgage-backed pools

     24,216         25,335         22,329         23,058   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 182,187       $ 188,574       $ 165,767       $ 169,904   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

     Less than 12 Months     12 Months or More     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
September 30, 2015    Value      Losses     Value      Losses     Value      Losses  

U.S. Treasury and federal agencies

   $ 5,995       $ (2   $ 7,979       $ (12   $ 13,973       $ (14

State and municipal

     19,967         (207     736         (4     20,704         (212

Federal agency collateralized mortgage obligations

     10,178         (54     27,071         (311     37,250         (365

Federal agency mortgage-backed pools

     31,473         (328     24,005         (142     55,478         (470
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 67,613       $ (591   $ 59,791       $ (469   $ 127,405       $ (1,061
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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

U.S. Treasury and federal agencies

   $ 2,993       $ (7   $ 20,762       $ (222   $ 23,755       $ (229

State and municipal

     10,287         (121     2,050         (30     12,337         (151

Federal agency collateralized mortgage obligations

     15,013         (88     39,801         (957     54,814         (1,045

Federal agency mortgage-backed pools

     5,993         (9     28,044         (351     34,037         (360
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 34,286       $ (225   $ 90,657       $ (1,560   $ 124,943       $ (1,785
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Three Months Ended September 30      Nine Months Ended September 30  
     2015      2014      2015      2014  

Sales of securities available for sale (Unaudited)

           

Proceeds

   $ —         $ 45,228       $ 13,332       $ 45,228   

Gross gains

     —           1,001         147         1,001   

Gross losses

     —           (13      (23      (13

Note 4 Loans

 

     September 30      December 31  
     2015      2014  

Commercial

     

Working capital and equipment

   $ 369,575       $ 300,940   

Real estate, including agriculture

     393,837         343,455   

Tax exempt

     8,829         8,595   

Other

     23,030         21,324   
  

 

 

    

 

 

 

Total

     795,271         674,314   

Real estate

     

1–4 family

     426,952         250,799   

Other

     3,975         3,826   
  

 

 

    

 

 

 

Total

     430,927         254,625   

Consumer

     

Auto

     170,032         154,538   

Recreation

     5,660         5,673   

Real estate/home improvement

     44,608         38,288   

Home equity

     128,498         112,426   

Unsecured

     4,051         3,613   

Other

     8,449         5,921   
  

 

 

    

 

 

 

Total

     361,298         320,459   

Mortgage warehouse

     138,974         129,156   
  

 

 

    

 

 

 

Total loans

     1,726,470         1,378,554   

Allowance for loan losses

     (16,168      (16,501
  

 

 

    

 

 

 

Loans, net

   $ 1,710,302       $ 1,362,053   
  

 

 

    

 

 

 

 

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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)

 

Commercial

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

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

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 its outstanding loan balance on an individual mortgage and regain possession of the original note. Horizon also has the option to request that the mortgage company 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.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

September 30, 2015    Loan
Balance
     Interest
Due
     Deferred
Fees / (Costs)
     Recorded
Investment
 

Owner occupied real estate

   $ 273,820       $ 944       $ 1,385       $ 276,149   

Non owner occupied real estate

     314,680         278         474         315,432   

Residential spec homes

     3,049         7         18         3,074   

Development & spec land loans

     18,394         34         28         18,456   

Commercial and industrial

     183,060         3,288         363         186,711   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     793,003         4,551         2,268         799,822   

Residential mortgage

     408,360         1,318         2,499         412,177   

Residential construction

     20,069         37         —           20,106   

Mortgage warehouse

     138,974         480         —           139,454   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     567,403         1,835         2,499         571,737   

Direct installment

     50,410         158         (370      50,198   

Direct installment purchased

     171         —           —           171   

Indirect installment

     153,786         307         —           154,093   

Home equity

     157,705         625         (404      157,926   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     362,072         1,090         (774      362,388   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     1,722,478         7,476         3,993         1,733,947   

Allowance for loan losses

     (16,168      —           —           (16,168
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans

   $ 1,706,310       $ 7,476       $ 3,993       $ 1,717,779   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014    Loan
Balance
     Interest
Due
     Deferred
Fees / (Costs)
     Recorded
Investment
 

Owner occupied real estate

   $ 228,380       $ 385       $ 680       $ 229,445   

Non owner occupied real estate

     297,299         309         506         298,114   

Residential spec homes

     2,027         2         —           2,029   

Development & spec land loans

     12,097         28         30         12,155   

Commercial and industrial

     133,256         859         39         134,154   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     673,059         1,583         1,255         675,897   

Residential mortgage

     242,521         737         599         243,857   

Residential construction

     11,505         21         —           11,526   

Mortgage warehouse

     129,156         480         —           129,636   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     383,182         1,238         599         385,019   

Direct installment

     40,137         129         (375      39,891   

Direct installment purchased

     219         —           —           219   

Indirect installment

     141,868         314         (163      142,019   

Home equity

     139,007         568         (234      139,341   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     321,231         1,011         (772      321,470   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     1,377,472         3,832         1,082         1,382,386   

Allowance for loan losses

     (16,501      —           —           (16,501
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans

   $ 1,360,971       $ 3,832       $ 1,082       $ 1,365,885   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 5 – Accounting for Certain Loans Acquired in a Transfer

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

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

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

 

     September 30      September 30      September 30      September 30  
     2015      2015      2015      2015  
     Heartland      Summit      Peoples      Total  

Commercial

   $ 2,283       $ 5,742       $ 1,841       $ 9,866   

Real estate

     759         1,427         584         2,770   

Consumer

     8         37         —           45   
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding balance

   $ 3,050       $ 7,206       $ 2,425       $ 12,681   
  

 

 

    

 

 

    

 

 

    

 

 

 

Carrying amount, net of allowance of $272

            $ 12,409   
           

 

 

 

 

     December 31      December 31      December 31      December 31  
     2014      2014      2014      2014  
     Heartland      Summit      Peoples      Total  

Commercial

   $ 5,492       $ 7,725       $ —         $ 13,217   

Real estate

     900         1,458         —           2,358   

Consumer

     8         43         —           51   
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding balance

   $ 6,400       $ 9,226       $ —         $ 15,626   
  

 

 

    

 

 

    

 

 

    

 

 

 

Carrying amount, net of allowance of $359

            $ 15,267   
           

 

 

 

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

 

     Nine Months Ended September 30, 2015  
     Heartland      Summit      Peoples      Total  

Balance at January 1

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

Additions

     —           —           647         647   

Accretion

     (272      (254      —           (526

Reclassification from nonaccretable difference

     —           —           —           —     

Disposals

     (1,210      (237      —           (1,447
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30

   $ 918       $ 777       $ 647       $ 2,342   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended September 30, 2014  
     Heartland      Summit      Peoples      Total  

Balance at January 1

   $ 3,185       $ —         $ —         $ 3,185   

Additions

     —           1,758         —           1,758   

Accretion

     (288      —           —           (288

Reclassification from nonaccretable difference

     —           —           —           —     

Disposals

     (95      —           —           (95
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at September 30

   $ 2,802       $ 1,758       $ —         $ 4,560   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

During the nine months ended September 30, 2015 and 2014, the Company decreased the allowance for loan losses on purchased loans by a recovery to the income statement of $87,000 and $0, respectively.

Note 6 – Allowance for Loan Losses

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

 

     Three Months Ended      Nine Months Ended  
     September 30      September 30  
     2015      2014      2015      2014  
     (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Balance at beginning of the period

   $ 16,421       $ 15,660       $ 16,501       $ 15,992   

Loans charged-off:

           

Commercial

           

Owner occupied real estate

     56         —           1,478         —     

Non owner occupied real estate

     —           —           16         22   

Residential development

     —           —           —           —     

Development & Spec Land Loans

     —           —           —           173   

Commercial and industrial

     38         1,093         291         1,220   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     94         1,093         1,785         1,415   

Real estate

           

Residential mortgage

     101         31         287         225   

Residential construction

     —           —           —           —     

Mortgage warehouse

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     101         31         287         225   

Consumer

           

Direct Installment

     51         74         206         151   

Direct Installment Purchased

     —           —           —           —     

Indirect Installment

     218         306         783         874   

Home Equity

     262         37         766         468   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     531         417         1,755         1,493   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans charged-off

     726         1,541         3,827         3,133   

Recoveries of loans previously charged-off:

           

Commercial

           

Owner occupied real estate

     8         4         94         10   

Non owner occupied real estate

     1         10         1         85   

Residential development

     —           —           —           —     

Development & Spec Land Loans

     —           55         —           55   

Commercial and industrial

     8         18         41         435   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     17         87         136         585   

Real estate

           

Residential mortgage

     5         12         10         19   

Residential construction

     —           —           —           —     

Mortgage warehouse

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     5         12         10         19   

Consumer

           

Direct Installment

     15         10         91         49   

Direct Installment Purchased

     —           —           —           —     

Indirect Installment

     112         165         347         431   

Home Equity

     24         26         90         137   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     151         201         528         617   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loan recoveries

     173         300         674         1,221   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans charged-off (recovered)

     553         1,241         3,153         1,912   
  

 

 

    

 

 

    

 

 

    

 

 

 

Provision charged to operating expense

           

Commercial

     532         1,563         2,580         1,682   

Real estate

     (955      697         (51      (290

Consumer

     723         (519      291         688   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total provision charged to operating expense

     300         1,741         2,820         2,080   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at the end of the period

   $ 16,168       $ 16,160       $ 16,168       $ 16,160   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

20


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

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

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

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

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

 

September 30, 2015    Commercial      Real Estate      Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

              

Individually evaluated for impairment

   $ 1,599       $ —         $ —         $ —         $ 1,599   

Collectively evaluated for impairment

     6,989         2,297         1,015         4,014         14,315   

Loans acquired with deteriorated credit quality

     254         —           —           —           254   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 8,842       $ 2,297       $ 1,015       $ 4,014       $ 16,168   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated for impairment

   $ 10,848       $ —         $ —         $ —         $ 10,848   

Collectively evaluated for impairment

     787,245         432,283         139,454         362,388         1,721,370   

Loans acquired with deteriorated credit quality

     1,729         —           —           —           1,729   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 799,822       $ 432,283       $ 139,454       $ 362,388       $ 1,733,947   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014    Commercial      Real Estate      Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

              

Individually evaluated for impairment

   $ 1,589       $ —         $ —         $ —         $ 1,589   

Collectively evaluated for impairment

     5,827         2,508         1,132         4,951         14,418   

Loans acquired with deteriorated credit quality

     494         —           —           —           494   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 7,910       $ 2,508       $ 1,132       $ 4,951       $ 16,501   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated for impairment

   $ 11,055       $ —         $ —         $ —         $ 11,055   

Collectively evaluated for impairment

     664,251         255,383         129,636         321,470         1,370,740   

Loans acquired with deteriorated credit quality

     591         —           —           —           591   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 675,897       $ 255,383       $ 129,636       $ 321,470       $ 1,382,386   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 7 – Non-performing Loans and Impaired Loans

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

 

September 30, 2015    Non-accrual      Loans Past
Due Over 90
Days Still
Accruing
     Non-
Performing
TDRs
     Performing
TDRs
     Total Non-
Performing
Loans
 

Commercial

              

Owner occupied real estate

   $ 4,165       $ —         $ —         $ 38       $ 4,203   

Non owner occupied real estate

     3,211         —           2,334         69         5,614   

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —     

Commercial and industrial

     456         —           559         —           1,015   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     7,832         —           2,893         107         10,832   

Real estate

              

Residential mortgage

     3,123         36         627         2,275         6,061   

Residential construction

     —           —           254         —           254   

Mortgage warehouse

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     3,123         36         881         2,275         6,315   

Consumer

              

Direct Installment

     571         37         —           —           608   

Direct Installment Purchased

     —           —           —           —           —     

Indirect Installment

     631         27         —           —           658   

Home Equity

     1,799         —           220         566         2,585   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     3,001         64         220         566         3,851   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,956       $ 100       $ 3,994       $ 2,948       $ 20,998   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2014    Non-accrual      Loans Past
Due Over 90
Days Still
Accruing
     Non-
Performing
TDRs
     Performing
TDRs
     Total Non-
Performing
Loans
 

Commercial

              

Owner occupied real estate

   $ 1,773       $ —         $ —         $ 44       $ 1,817   

Non owner occupied real estate

     7,439         —           217         566         8,222   

Residential development

     —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —     

Commercial and industrial

     812         —           1,004         —           1,816   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     10,024         —           1,221         610         11,855   

Real estate

              

Residential mortgage

     2,297         40         765         2,526         5,628   

Residential construction

     —           —           266         —           266   

Mortgage warehouse

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     2,297         40         1,031         2,526         5,894   

Consumer

              

Direct Installment

     227         10         —           —           237   

Direct Installment Purchased

     —           —           —           —           —     

Indirect Installment

     557         47         —           —           604   

Home Equity

     2,207         18         391         1,236         3,852   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Consumer

     2,991         75         391         1,236         4,693   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,312       $ 115       $ 2,643       $ 4,372       $ 22,442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


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 $14.0 million of non-accrual loans and the $4.0 million of non-performing TDRs at September 30, 2015 were $1.9 million and $98,000, 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. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal in accordance with the loan terms. The Company requires a period of satisfactory performance of not less than six months before returning a non-accrual loan to accrual status.

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

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

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

The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At September 30, 2015, 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 nine consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of September 30, 2015, the Company had $6.9 million in TDRs and $2.9 million were performing according to the restructured terms and four TDR,s were returned to accrual status during the first nine months of 2015. There was $631,000 of specific reserves allocated to TDRs at September 30, 2015 based on the discounted cash flows or when appropriate the fair value of the collateral.

 

23


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

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

With no recorded allowance

                    

Commercial

                    

Owner occupied real estate

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

Non owner occupied real estate

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

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —           —           —     

Commercial and industrial

     239         239         —           583         4         415         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

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

With an allowance recorded

                    

Commercial

                    

Owner occupied real estate

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

Non owner occupied real estate

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

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —           —           —     

Commercial and industrial

     776         776         451         776         —           836         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

                          Three Months Ending      Nine Months Ending  
September 30, 2014    Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
For Loan
Loss
Allocated
     Average
Balance in
Impaired
Loans
     Cash/
Accrual
Interest
Income
Recognized
     Average
Balance in
Impaired
Loans
     Cash/
Accrual
Interest
Income
Recognized
 

With no recorded allowance

                    

Commercial

                    

Owner occupied real estate

   $ 2,851       $ 2,854       $ —         $ 2,126       $ 85       $ 1,525       $ 129   

Non owner occupied real estate

     3,232         3,235         —           3,257         43         3,274         141   

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —           —           —     

Commercial and industrial

     281         281         —           367         —           433         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     6,364         6,370         —           5,750         128         5,232         270   

With an allowance recorded

                    

Commercial

                    

Owner occupied real estate

     403         403         13         406         —           274         6   

Non owner occupied real estate

     333         333         150         335         —           343         —     

Residential development

     —           —           —           —           —           —           —     

Development & Spec Land Loans

     —           —           —           —           —           —           —     

Commercial and industrial

     1,391         1,391         1,012         1,560         —           1,567         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     2,127         2,127         1,175         2,301         —           2,184         8   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,491       $ 8,497       $ 1,175       $ 8,051       $ 128       $ 7,416       $ 278   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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 the payment status by class of loan:

 

September 30, 2015    30 - 59 Days
Past Due
    60 - 89 Days
Past Due
    Greater than 90
Days Past Due
    Total Past Due     Loans Not
Past Due
    Total  

Commercial

  

         

Owner occupied real estate

   $ 329      $ 15      $ —        $ 344      $ 273,476      $ 273,820   

Non owner occupied real estate

     —          —          —          —          314,680        314,680   

Residential development

     —          —          —          —          3,049        3,049   

Development & Spec Land Loans

     —          —          —          —          18,394        18,394   

Commercial and industrial

     40        18        —          58        183,002        183,060   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     369        33        —          402        792,601        793,003   

Real estate

            

Residential mortgage

     1,879        205        36        2,120        406,240        408,360   

Residential construction

     —          —          —          —          20,069        20,069   

Mortgage warehouse

     —          —          —          —          138,974        138,974   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     1,879        205        36        2,120        565,283        567,403   

Consumer

            

Direct Installment

     133        31        37        201        50,209        50,410   

Direct Installment Purchased

     —          —          —          —          171        171   

Indirect Installment

     908        129        27        1,064        152,722        153,786   

Home Equity

     888        293        —          1,181        156,524        157,705   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     1,929        453        64        2,446        359,626        362,072   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 4,177      $ 691      $ 100      $ 4,968      $ 1,717,510      $ 1,722,478   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     0.24     0.04     0.01     0.29     99.71  

 

December 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

   $ 103      $ 645      $ —        $ 748      $ 227,632      $ 228,380   

Non owner occupied real estate

     413        —          —          413        296,886        297,299   

Residential development

     —          —          —          —          2,027        2,027   

Development & Spec Land Loans

     —          —          —          —          12,097        12,097   

Commercial and industrial

     19        1        —          20        133,236        133,256   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     535        646        —          1,181        671,878        673,059   

Real estate

            

Residential mortgage

     1,033        193        40        1,266        241,255        242,521   

Residential construction

     —          —          —          —          11,505        11,505   

Mortgage warehouse

     —          —          —          —          129,156        129,156   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     1,033        193        40        1,266        381,916        383,182   

Consumer

            

Direct Installment

     113        4        10        127        40,010        40,137   

Direct Installment Purchased

     —          —          —          —          219        219   

Indirect Installment

     1,042        243        47        1,332        140,536        141,868   

Home Equity

     1,084        189        18        1,291        137,716        139,007   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     2,239        436        75        2,750        318,481        321,231   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 3,807      $ 1,275      $ 115      $ 5,197      $ 1,372,275      $ 1,377,472   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     0.28     0.09     0.01     0.38     99.62  

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.

 

25


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

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

 

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

 

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

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

 

26


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

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

 

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

 

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

 

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

Risk Grade 4 Satisfactory/Monitored:

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

Risk Grade 4W Management Watch:

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

Risk Grade 5: Special Mention

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

Risk Grade 6: Substandard

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

 

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

 

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

 

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

 

27


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Risk Grade 7: Doubtful

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

 

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

 

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

 

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

Risk Grade 8: Loss

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

 

28


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The following table presents loans by credit grades.

 

September 30, 2015    Pass     Special
Mention
    Substandard     Doubtful     Total  

Commercial

          

Owner occupied real estate

   $ 262,753      $ 4,080      $ 6,987      $ —        $ 273,820   

Non owner occupied real estate

     306,709        1,657        6,314        —          314,680   

Residential development

     3,049        —          —          —          3,049   

Development & Spec Land Loans

     18,323        71        —          —          18,394   

Commercial and industrial

     178,926        1,528        2,606        —          183,060   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     769,760        7,336        15,907        —          793,003   

Real estate

          

Residential mortgage

     402,299        —          6,061        —          408,360   

Residential construction

     19,815        —          254        —          20,069   

Mortgage warehouse

     138,974        —          —          —          138,974   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     561,088        —          6,315        —          567,403   

Consumer

          

Direct Installment

     49,802        —          608        —          50,410   

Direct Installment Purchased

     171        —          —          —          171   

Indirect Installment

     153,128        —          658        —          153,786   

Home Equity

     155,120        —          2,585        —          157,705   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

     358,221        —          3,851        —          362,072   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,689,069      $ 7,336      $ 26,073      $ —        $ 1,722,478   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     98.06     0.43     1.51     0.00  
December 31, 2014    Pass     Special
Mention
    Substandard     Doubtful     Total  

Commercial

          

Owner occupied real estate

   $ 215,874      $ 7,623      $ 4,883      $ —        $ 228,380   

Non owner occupied real estate

     283,518        4,458        9,323        —          297,299   

Residential development

     2,027        —          —          —          2,027   

Development & Spec Land Loans

     12,018        79        —          —          12,097   

Commercial and industrial

     128,589        1,799        2,868        —          133,256   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     642,026        13,959        17,074        —          673,059   

Real estate

          

Residential mortgage

     236,893        —          5,628        —          242,521   

Residential construction

     11,239        —          266        —          11,505   

Mortgage warehouse

     129,156        —          —          —          129,156   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     377,288        —          5,894        —          383,182   

Consumer

          

Direct Installment

     39,900        —          237        —          40,137   

Direct Installment Purchased

     219        —          —          —          219   

Indirect Installment

     141,264        —          604        —          141,868   

Home Equity

     135,155        —          3,852        —          139,007   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Consumer

     316,538        —          4,693        —          321,231   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,335,853      $ 13,959      $ 27,661      $ —        $ 1,377,472   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     96.98     1.01     2.01     0.00  

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Note 8 – Repurchase Agreements

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

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

 

     Remaining Contractual Maturity of the Agreements  
September 30, 2015    Overnight
and
Continuous
    Up to one
year
     One to
three years
     Three to
five years
     Five to
ten years
    Beyond
ten years
    Total  

Repurchase Agreements and repurchase-to-maturity transactions

                 

Repurchase Agreements

   $ 56,418      $ —         $ 35,000       $ 60,000       $ —        $ —        $ 151,418   

Securities lending transactions

                 

U.S. Treasury and federal agencies

   $ 6,950      $ —         $ —         $ —         $ —        $ —        $ 6,950   

Federal agency collateralized mortgage obligations

   $ 45,279        —           76         886         6,904        44,401        97,545   

Federal agency mortgage-backed pools

   $ 14,523        —           79         401         11,396        40,744        67,144   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

     66,752        —           155         1,287         18,300        85,145        171,639   
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total borrowings

   $ (10,334   $ —         $ 34,845       $ 58,713       $ (18,300   $ (85,145   $ (20,221
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Gross amount of recognized liabilities for repurchase agreements and securities lending

                  $ 151,418   
                 

 

 

 

Note 9 – Derivative Financial Instruments

Cash Flow Hedges

As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flow due to interest rate fluctuations, the Company entered into interest rate swap agreements for a portion of its floating rate debt. The agreements provide for the Company to receive interest from the counterparty at three month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 6.14% on a notional amount of $30.5 million at September 30, 2015 and December 31, 2014. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At September 30, 2015, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.

Fair Value Hedges

Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At September 30, 2015, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The change in fair value of both the hedge instruments and the underlying loan agreements are recorded as gains or losses in interest income. The fair value hedges are considered to be highly effective and any hedge ineffectiveness was deemed not material. The notional amounts of the loan agreements being hedged were $113.9 million at September 30, 2015 and $102.7 million at December 31, 2014.

Other Derivative Instruments

The Company enters into non-hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At September 30, 2015, the Company’s fair value of these derivatives were recorded and over the next 12 months are not expected to have a significant impact on the Company’s net income.

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

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

 

     Asset Derivative      Liability Derivatives  
     September 30, 2015      September 30, 2015  
Derivatives designated as hedging instruments (Unaudited)    Balance Sheet
Location
   Fair Value      Balance Sheet
Location
   Fair Value  

Interest rate contracts

   Loans    $ —         Other liabilities    $ 1,787   

Interest rate contracts

   Other Assets      1,787       Other liabilities      3,671   
     

 

 

       

 

 

 

Total derivatives designated as hedging instruments

        1,787            5,458   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments

           

Mortgage loan contracts

   Other assets      643       Other liabilities      —     
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

        643            —     
     

 

 

       

 

 

 

Total derivatives

      $ 2,430          $ 5,458   
     

 

 

       

 

 

 
     Asset Derivative      Liability Derivatives  
     December 31, 2014      December 31, 2014  
Derivatives designated as hedging instruments (Unaudited)    Balance Sheet
Location
   Fair Value      Balance Sheet
Location
   Fair Value  

Interest rate contracts

   Loans    $ —          Other liabilities    $ 1,208   

Interest rate contracts

   Other Assets      1,208       Other liabilities      3,339   
     

 

 

       

 

 

 

Total derivatives designated as hedging instruments

        1,208            4,547   
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments

           

Mortgage loan contracts

   Other assets      447       Other liabilities      —     
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

        447            —     
     

 

 

       

 

 

 

Total derivatives

      $ 1,655          $ 4,547   
     

 

 

       

 

 

 

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The effect of the derivative instruments on the condensed consolidated statement of income for the three and nine-month periods ending September 30 is as follows:

 

     Comprehensive Income on Derivative
(Effective Portion)
     Comprehensive Income on Derivative
(Effective Portion)
 
     Three Months Ended September 30      Nine Months Ended September 30  
Derivative in cash flow    2015      2014      2015      2014  

hedging relationship

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

Interest rate contracts

   $ (335    $ 242       $ (217    $ (110

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

 

         

Amount of Gain (Loss)

Recognized on Derivative

   

Amount of Gain (Loss)

Recognized on Derivative

 
          Three Months Ended September 30     Nine Months Ended September 30  
Derivative in fair value    Location of gain (loss)    2015     2014     2015     2014  

hedging relationship

  

recognized on derivative

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

Interest rate contracts

   Interest income - loans    $ 765      $ (326   $ 579      $ 425   

Interest rate contracts

   Interest income - loans      (765     326        (579     (425
     

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ —        $ —        $ —        $ —     
     

 

 

   

 

 

   

 

 

   

 

 

 
         

Amount of Gain (Loss)

Recognized on Derivative

    Amount of Gain (Loss)
Recognized on Derivative
 
          Three Months Ended September 30     Nine Months Ended September 30  
Derivative not designated    Location of gain (loss)    2015     2014     2015     2014  

as hedging relationship

  

recognized on derivative

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

Mortgage contracts

   Other income -gain on sale of loans    $ (77   $ (22   $ 196      $ (1

Note 10 – Disclosures about Fair Value of Assets and Liabilities

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

 

Level 1 Quoted prices in active markets for identical assets or liabilities

 

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

 

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended September 30, 2015. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

Available for sale securities

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

Hedged loans

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

Interest rate swap agreements

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

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

 

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

September 30, 2015

           

Available-for-sale securities

           

U.S. Treasury and federal agencies

   $ 24,755       $ —         $ 24,755       $ —     

State and municipal

     59,781         —           59,781         —     

Federal agency collateralized mortgage obligations

     135,567         —           135,567         —     

Federal agency mortgage-backed pools

     215,516         —           215,516         —     

Corporate notes

     54         —           54         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     435,673         —           435,673         —     

Hedged loans

     112,089         —           112,089         —     

Forward sale commitments

     643         —           643         —     

Interest rate swap agreements

     (5,458      —           (5,458      —     

Commitments to originate loans

     —           —           —           —     

December 31, 2014

           

Available-for-sale securities

           

U.S. Treasury and federal agencies

   $ 26,823       $ —         $ 26,823       $ —     

State and municipal

     47,952         —           47,952         —     

Federal agency collateralized mortgage obligations

     122,860         —           122,860         —     

Federal agency mortgage-backed pools

     125,395         —           125,395         —     

Private labeled mortgage-backed pools

     689         —           689         —     

Corporate notes

     45         —           45         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale securities

     323,764         —           323,764         —     

Hedged loans

     101,445         —           101,445         —     

Forward sale commitments

     447         —           447         —     

Interest rate swap agreements

     (4,547      —           (4,547      —     

 

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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)

 

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 September 30      Nine Months Ended September 30  
Non Interest Income    2015      2014      2015      2014  
Total gains and losses from:    (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Hedged loans

   $ 765       $ (326    $ 579       $ 425   

Fair value interest rate swap agreements

     (765      326         (579      (425

Derivative loan commitments

     (77      (22      196         (1
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ (77    $ (22    $ 196       $ (1
  

 

 

    

 

 

    

 

 

    

 

 

 

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)  

September 30, 2015

           

Impaired loans

   $ 9,233       $ —         $ —         $ 9,233   

Mortgage servicing rights

     9,100         —           —           9,100   

December 31, 2014

           

Impaired loans

   $ 9,464       $ —         $ —         $ 9,464   

Mortgage servicing rights

     7,642         —           —           7,642   

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

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

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

Mortgage Servicing Rights (MSRs): MSRs do not trade in an active market with readily observable prices. Accordingly, the fair value of these assets is classified as Level 3. The Company determines the fair value of MSRs using an income approach model based upon the Company’s month-end interest rate curve and prepayment assumptions. The model utilizes assumptions to estimate future net servicing income cash flows, including estimates of time decay, payoffs and changes in valuation inputs and assumptions. The Company reviews the valuation assumptions against this market data for reasonableness and adjusts the assumptions if deemed appropriate. The carrying amount of the MSRs’ fair value due to impairment decreased by $51,000 during the first nine months of 2015 and increased by $28,000 during the first nine months of 2014.

 

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Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

     Fair Value at
September 30, 2015
    

Valuation Technique

  

Unobservable Inputs

   Range (Weighted
Average)

Impaired loans

   $ 9,233       Collateral based measurement    Discount to reflect current market conditions and ultimate collectability    10% - 15% (12%)

Mortgage servicing rights

   $ 9,100       Discounted cashflows    Discount rate, Constant prepayment rate, Probability of default    10% - 15% (12%),
4% - 7% (4.6%), 1% -
10%  (4.5%)
     Fair Value at
December 31, 2014
    

Valuation Technique

  

Unobservable Inputs

   Range (Weighted
Average)

Impaired loans

   $ 9,464       Collateral based measurement    Discount to reflect current market conditions and ultimate collectability    10% - 15% (12%)

Mortgage servicing rights

   $ 7,642       Discounted cashflows    Discount rate, Constant prepayment rate, Probability of default    10% - 15% (12%),
4% - 7% (4.6%), 1% -
10% (4.5%)

Note 11 – Fair Value of Financial Instruments

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

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 September 30, 2015 and December 31, 2014. 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.

 

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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)

 

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

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

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

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

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

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

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

 

36


Table of Contents

HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

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

 

     September 30, 2015  
     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

   $ 48,155       $ 48,155       $ —         $ —     

Investment securities, held to maturity

     182,187         —           188,574         —     

Loans held for sale

     5,583         —           —           5,583   

Loans excluding loan level hedges, net

     1,598,233         —           —           1,641,840   

Stock in FHLB and FRB

     13,823         —           13,823         —     

Interest receivable

     10,862         —           10,862         —     

Liabilities

           

Non-interest bearing deposits

   $ 338,436       $ 338,436       $ —         $ —     

Interest-bearing deposits

     1,574,639         —           1,494,112         —     

Borrowings

     373,901         —           372,971         —     

Subordinated debentures

     32,758         —           33,334         —     

Interest payable

     490         —           490         —     

 

     December 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

   $ 43,476       $ 43,476       $ —         $ —     

Investment securities, held to maturity

     165,767         —           169,904         —     

Loans held for sale

     6,143         —           —           6,143   

Loans excluding loan level hedges, net

     1,260,608         —           —           1,295,133   

Stock in FHLB and FRB

     11,348         —           11,348         —     

Interest receivable

     8,246         —           8,246         —     

Liabilities

           

Non-interest bearing deposits

   $ 267,667       $ 267,667       $ —         $ —     

Interest-bearing deposits

     1,214,652         —           1,158,912         —     

Borrowings

     351,198         —           348,597         —     

Subordinated debentures

     32,642         —           32,669         —     

Interest payable

     497         —           497         —     

 

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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 12 – Accumulated Other Comprehensive Income

 

     September 30      December 31  
     2015      2014  

Unrealized gain on securities available for sale

   $ 5,238       $ 4,018   

Unamortized gain on securities held to maturity, previously transferred from AFS

     1,219         1,658   

Unrealized loss on derivative instruments

     (3,671      (3,337

Tax effect

     (975      (818
  

 

 

    

 

 

 

Total accumulated other comprehensive income

   $ 1,811       $ 1,521   
  

 

 

    

 

 

 

Note 13 – Regulatory Capital

Horizon and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, which if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective actions, the Bank must meet specific capital guidelines involving quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined), or leverage ratio. For September 30, 2015, Interim Final Basel III rules require the Bank to maintain minimum amounts and ratios of common equity Tier I capital (as defined in the regulation) to risk-weighted assets (as defined). Additionally, under Basel III rules, the decision was made to opt-out of including accumulated other comprehensive income in regulatory capital. For December 31, 2014, regulatory capital ratios were calculated under Basel I rules.

To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, common equity Tier I risk-based (September 30, 2015) and Tier I leverage ratios as set forth in the table below. As of September 30, 2015 and December 31, 2014, the Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the end of the third quarter of 2015 that management believes have changed the Bank’s classification as well capitalized. There is no threshold for well-capitalized status for bank holding companies.

 

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Notes to Condensed Consolidated Financial Statements

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

 

Horizon and the Bank’s actual and required capital ratios as of September 30, 2015 and December 31, 2014 were as follows:

 

                  Required For Capital1     Well Capitalized Under Prompt1  
     Actual     Adequacy Purposes     Corrective Action Provisions  
     Amount      Ratio     Amount      Ratio     Amount      Ratio  

As of September 30, 2015

               

Total capital1 (to risk-weighted assets)

               

Consolidated

   $ 261,858         13.83   $ 151,472         8.00     N/A         N/A   

Bank

     246,162         13.17     149,529         8.00   $ 186,911         10.00

Tier 1 capital1 (to risk-weighted assets)

               

Consolidated

     245,690         12.98     113,570         6.00     N/A         N/A   

Bank

     229,994         12.30     112,192         6.00     149,590         8.00

Common equity tier 1 capital1 (to risk-weighted assets)

               

Consolidated

     200,122         10.57     85,199         4.50     N/A         N/A   

Bank

     229,994         12.30     84,144         4.50     121,542         6.50

Tier 1 capital1 (to average assets)

               

Consolidated

     245,690         9.98     98,473         4.00     N/A         N/A   

Bank

     229,994         9.31     98,816         4.00     123,520         5.00

As of December 31, 2014

               

Total capital1 (to risk-weighted assets)

               

Consolidated

   $ 212,276         14.48   $ 117,280         8.00     N/A         N/A   

Bank

     192,604         13.08     117,801         8.00   $ 147,251         10.00

Tier 1 capital1 (to risk-weighted assets)

               

Consolidated

     195,775         13.35     58,659         4.00     N/A         N/A   

Bank

     176,103         11.96     58,897         4.00     88,346         6.00

Tier 1 capital1 (to average assets)

               

Consolidated

     195,775         9.76     80,236         4.00     N/A         N/A   

Bank

     176,103         8.80     80,047         4.00     100,059         5.00

 

1  As defined by regulatory agencies

Note 14 – Future Accounting Matters

The FASB has issued ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.

Existing GAAP does not include explicit guidance about a customer’s accounting for fees paid in a cloud computing arrangement. Examples of cloud computing arrangements include: (a) software as a service; (b) platform as a service; (c) infrastructure as a service; and (d) other similar hosting arrangements.

The amendments add guidance to Subtopic 350-40, Intangibles - Goodwill and Other - Internal-Use Software, which will help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement. The guidance already exists in the FASB Accounting Standards Codification™ in paragraphs 985-605-55-121 through 55-123, but it is included in a Subtopic applied by cloud service providers to determine whether an arrangement includes the sale or license of software.

For public business entities, the amendments will be effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

The FASB has issued ASU No. 2015-02, Consolidation (Topic 810):

The amendments to the Consolidation Analysis, are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions).

 

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HORIZON BANCORP AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

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

 

The ASU focuses on the consolidation evaluation for reporting organizations (public and private companies and not-for-profit organizations) that are required to evaluate whether they should consolidate certain legal entities.

In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification™ (Codification) and improves current GAAP by:

 

    Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met.

 

    Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE).

 

    Changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs.

The ASU will be effective for periods beginning after December 15, 2015, for public companies. Early adoption is permitted, including adoption in an interim period. Adoption of the ASU is not expected to have a significant effect on the Company’s consolidated financial statements.

Note 15 – General Litigation

The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on the consolidated financial position, results or operation and cash flows of the Company.

 

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

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:

 

    economic conditions and their impact on Horizon and its customers;

 

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

 

    rising interest rates and their impact on mortgage loan volumes;

 

    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;

 

    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;

 

    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;

 

    the risks presented by cyber terrorism and data security breaches;

 

    containing costs and expenses;

 

    the slowing or failure of economic recovery;

 

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

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

 

    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 2014 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 Northern and Central Indiana and Southwestern and 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 Select 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 July 1, 2015, Horizon completed the acquisition of Peoples Bancorp, an Indiana corporation (“Peoples”) and Horizon Bank’s acquisition of Peoples Federal Savings Bank of DeKalb County, a federally-chartered stock savings bank and wholly owned subsidiary of Peoples, through mergers effective July 1, 2015. Under the terms of the acquisition, the exchange ratio was 0.95 shares of Horizon common stock (the “Exchange Ratio”) and $9.75 in cash for each outstanding share of Peoples common stock. Peoples shareholders owning fewer than 100 shares of common stock received $33.14 in cash for each common share. Peoples shares outstanding at the closing were 2,311,858, and the shares of Horizon common stock issued to Peoples shareholders totaled 2,192,202. Horizon’s stock price was $25.32 per share at the close of business on July 1, 2015. Based upon these numbers, the total value of the consideration for the acquisition was $78.1 million.

On April 3, 2014, Horizon completed the acquisition of SCB Bancorp, Inc., a Michigan corporation (“Summit”) and Horizon Bank’s acquisition of Summit Community Bank, a Michigan-chartered commercial bank and wholly owned subsidiary of Summit, 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 Summit common stock. Summit shares outstanding at the closing were 1,164,442, and the shares of Horizon’s common stock issued to Summit 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 (not including the retirement of Summit debt).

Following are some highlights of Horizon’s financial performance through the third quarter of 2015:

 

    On July 1, 2015, Horizon closed the acquisition of Peoples and its wholly-owned subsidiary, Peoples Federal Savings Bank of DeKalb County, headquartered in Auburn, Indiana.

 

    The quarterly dividend was increased from $.14 to $.15 per share on September 15, 2015.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

    Third quarter 2015 net income was $4.3 million or $.36 diluted earnings per share.

 

    Excluding merger expenses and gain on sale of investment securities, net income for the third quarter of 2015 increased 52.8% compared to the same period of 2014 to $6.7 million or $.56 diluted earnings per share.

 

    Net income for the first nine months of 2015 was $14.4 million or $1.37 diluted earnings per share.

 

    Excluding merger expenses, gain on sale of investment securities and the death benefit on bank owned life insurance, net income for the first nine months of 2015 increased 28.3% compared to the same period of 2014 to $17.2 million or $1.64 diluted earnings per share.

 

    Net interest income for the first nine months of 2015 increased 17.3% or $8.1 million compared to the same period in 2014.

 

    The net interest margin, excluding the impact of acquisitions (“core net interest margin”), decreased 7 basis points from the linked quarter and 3 basis points in the first nine months of 2015 compared to the same periods in 2014.

 

    Non-interest income for the first nine months of 2015 increased 15.9% or $3.1 million compared to the same period in 2014.

 

    Loans increased 11.9% on an annualized basis during the third quarter of 2015 excluding the Peoples acquisition, mortgage warehouse loans and loans held for sale.

 

    Horizon’s tangible book value per share increased to $16.34 at September 30, 2015, compared to $16.26 at December 31, 2014 and $15.75 at September 30, 2014.

 

    Horizon Bank’s capital ratios, including Tier 1 Capital to Average Assets of 9.31% and Total Capital to Risk Weighted Assets of 13.17% as of September 30, 2015, 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 2014 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 September 30, 2015, Horizon had core deposit intangibles of $7.6 million subject to amortization and $49.6 million of

 

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

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 September 30, 2015 was $23.75 per share compared to a book value of $21.14 per common share.

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

 

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

derivative instruments, which are recorded as assets or liabilities in the consolidated balance sheets at fair value. Changes in the fair values of derivatives are reported in the consolidated income statements or other comprehensive income (“OCI”) depending on the use of the derivative and whether the instrument qualifies for hedge accounting. The key criterion for the hedge accounting is that the hedged relationship must be highly effective in achieving offsetting changes in those cash flows that are attributable to the hedged risk, both at inception of the hedge and on an ongoing basis.

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

Valuation Measurements

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

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

Financial Condition

On September 30, 2015, Horizon’s total assets were $2.6 billion, an increase of approximately $531.0 million compared to December 31, 2014 and includes $485.1 million of purchased assets from the closing of the Peoples merger in the third quarter. The increase was primarily in net loans of $348.3 million and investment securities of $128.3 million.

Investment securities were comprised of the following as of (dollars in thousands):

 

     September 30, 2015      December 31, 2014  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Available for sale

           

U.S. Treasury and federal agencies

   $ 24,725       $ 24,755       $ 26,996       $ 26,823   

State and municipal

     58,466         59,781         46,535         47,952   

Federal agency collateralized mortgage obligations

     134,494         135,567         122,930         122,860   

Federal agency mortgage-backed pools

     212,717         215,516         122,583         125,395   

Private labeled mortgage-backed pools

     —           —           670         689   

Corporate notes

     32         54         32         45   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 430,434       $ 435,673       $ 319,746       $ 323,764   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

U.S. Treasury and federal agencies

   $ 5,852       $ 5,989       $ 9,804       $ 9,886   

State and municipal

     142,763         147,847         129,595         132,887   

Federal agency collateralized mortgage obligations

     9,356         9,403         4,039         4,073   

Federal agency mortgage-backed pools

     24,216         25,336         22,329         23,058   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 182,187       $ 188,575       $ 165,767       $ 169,904   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investment securities increased by approximately $128.3 million at September 30, 2015 compared to December 31, 2014 primarily due to the investing of cash from the closing of the Peoples merger.

Total loans increased $347.4 million since December 31, 2014 to $1.7 billion as of September 30, 2015. This increase was the result of an increase in commercial loans of $121.0 million, mortgage warehouse loans of $9.8 million, residential mortgage loans of $176.3 million and consumer loans of $40.8 million. The growth in total loans during the nine months ended September 30, 2015 is the direct result of increased calling efforts to increase Horizon’s market share within the Company’s footprint and market expansion as well as the loans added through the Peoples acquisition.

The following table presents the amount and growth rate of loans by product type for the nine months ended September 30, 2015, excluding the loans added through the Peoples acquisition.

 

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

Loan Growth by Type, Excluding Acquired Loans

Nine Months Ended September 30, 2015

(Dollars in Thousands)

 

                               Excluding Acquired Loans  
     September 30
2015
     December 31
2014
     Amount
Change
    Acquired
Peoples
Loans
    Amount
Change
    Percent
Change
    Annualized
Percent
Change
 
     (Unaudited)                                        

Commercial loans

   $ 795,271       $ 674,314       $ 120,957      $ (67,435   $ 53,522        7.9     10.6

Residential mortgage loans

     430,946         254,625         176,321        (137,331     38,990        15.3     20.5

Consumer loans

     361,298         320,459         40,839        (19,593     21,246        6.6     8.9
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

     

Subtotal

     1,587,515         1,249,398         338,117        (224,359     113,758        9.1     12.2

Held for sale loans

     5,583         6,143         (560     —          (560     -9.1     -12.2

Mortgage warehouse loans

     138,974         129,156         9,818        —          9,818        7.6     10.2

Total loans

   $ 1,732,072       $ 1,384,697       $ 347,375      $ (224,359   $ 123,016        8.9     11.9
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

     

Total deposits increased $430.8 million since December 31, 2014 to $1.9 billion as of September 30, 2015. This increase was primarily the result of increased calling and marketing efforts, market expansion and the $351.1 million in deposits added through the Peoples acquisition. Non-interest bearing deposit accounts increased by $70.8 million, interest-bearing transaction accounts increased by $234.2 million and time deposits increased by $125.8 million during the nine months ended September 30, 2015.

The Company’s borrowings increased $22.7 million from December 31, 2014 primarily due to $47.8 million of long-term borrowings assumed as part of the Peoples acquisition net of maturities of long-term debt. At September 30, 2015, the Company had $133.0 million in short-term funds borrowed compared to $145.0 million at December 31, 2014. 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 municipal deposits and mortgage warehouse lending.

Stockholders’ equity totaled $264.7 million at September 30, 2015 compared to $194.4 million at December 31, 2014. The increase in stockholders’ equity during the period was the result of the generation of net income, net of dividends declared, as well as the stock issued in the Peoples acquisition and the exercise of stock warrants. At September 30, 2015, the ratio of average stockholders’ equity to average assets was 10.38% compared to 9.56% for December 31, 2014. Book value per common share at September 30, 2015 increased to $21.14 compared to $19.75 at December 31, 2014.

Results of Operations

Overview

Consolidated net income for the three-month period ended September 30, 2015 was $4.3 million, a decrease of 13.5% from the $5.0 million for the same period in 2014. Earnings per common share for the three months ended September 30, 2015 were $0.37 basic and $0.36 diluted, compared to $0.53 basic and $0.51 diluted for the same three-month period in the previous year. The decrease in net income and earnings per share from the previous year reflects an increase in non-interest expenses of $6.9 million primarily due to an increase in salaries and employee benefits and outside services and consultants expense, partially offset by an increase in net interest income of $3.4 million, a decrease in provision for loan losses of $1.4 million and an increase in non-interest income of $1.0 million. The decrease in earnings per share also reflects an increase in diluted shares due to the Peoples acquisition. Excluding acquisition-related expenses and purchase

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

accounting adjustments and gain on sale of investment securities, net income for the third quarter of 2015 was $6.5 million or $.54 diluted earnings per share compared to $4.1 million or $.42 diluted earnings per share in the same period of 2014.

Consolidated net income for the nine-month period ended September 30, 2015 was $14.4 million, an increase of 9.3% from the $13.2 million for the same period in 2014. Earnings per common share for the nine-month period ended September 30, 2015 were $1.42 basic and $1.37 diluted, compared to $1.45 basic and $1.39 diluted for the same period in the previous year. The increase in net income from the previous year reflects an increase in net interest income of $8.1 million and an increase in non-interest income of $3.1 million, partially offset by an increase in the provision for loan losses of $740,000 and an increase in non-interest expenses of $8.7 million. The decrease in earnings per share also reflects an increase in diluted shares due to the Peoples acquisition. Excluding acquisition-related expenses and purchase accounting adjustments, gain on sale of investment securities and the death benefit on bank owned life insurance, net income for the first nine months of 2015 was $15.7 million or $1.50 diluted earnings per share compared to $12.1 million or $1.27 diluted earnings per share in the same period 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-month period ended September 30, 2015 was $19.8 million, an increase of $3.4 million from the $16.4 million earned during the same period in 2014. Yields on the Company’s interest-earning assets decreased by 15 basis points to 4.17% for the three months ending September 30, 2015 from 4.32% for the three months ended September 30, 2014. Interest income increased $3.7 million from $19.9 million for the three months ended September 30, 2014 to $23.6 million for the same period in 2015. This increase was due to an increase in interest-earning assets, partially offset by lower yields on loans and investment securities and a decrease in interest income from acquisition-related purchase accounting adjustments from $438,000 for the three months ending September 30, 2014 to $402,000 for the same period of 2015.

Rates paid on interest-bearing liabilities decreased by 9 basis points for the three-month period ended September 30, 2015 compared to the same period in 2014 due to the continued low interest rate environment. Interest expense increased $351,000 compared to the three-month period ended September 30, 2014 to $3.8 million for the same period in 2015. This increase was due to higher average balances of interest-bearing deposits and higher interest rates paid on borrowings, partially offset by lower rates paid on interest-bearing deposits and lower average balances of borrowings. The net interest margin decreased 8 basis points from 3.59% for the three-month period ended September 30, 2014 to 3.51% for the same period in 2015. The decrease in the margin for the three-month period ended September 30, 2015 compared to the same period in 2014 was due to a reduction in the yield on interest-earning assets and a decrease of approximately $36,000 of interest income from acquisition-related purchase accounting adjustments. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.44% for the three-month period ending September 30, 2015 compared to 3.50% for the same period in 2014.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

The following are the average balance sheets for the three months ending (dollars in thousands):

 

   

Three Months Ended

September 30, 2015

   

Three Months Ended

September 30, 2014

 
    Average
Balance
    Interest     Average
Rate
    Average
Balance
    Interest     Average
Rate
 

ASSETS

           

Interest-earning assets

           

Federal funds sold

  $ 23,086      $ 2        0.03   $ 4,033      $ 5        0.49

Interest-earning deposits

    16,340        5        0.12     5,941        4        0.27

Investment securities - taxable

    401,702        2,149        2.12     394,954        2,330        2.34

Investment securities - non-taxable (1)

    154,050        1,125        4.39     146,513        1,109        4.48

Loans receivable (2)(3)

    1,709,337        20,297        4.72     1,325,625        16,403        4.92
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-earning assets (1)

    2,304,515        23,578        4.17     1,877,066        19,851        4.32

Non-interest-earning assets

           

Cash and due from banks

    31,384            27,188       

Allowance for loan losses

    (16,427         (15,706    

Other assets

    151,035            155,021       
 

 

 

       

 

 

     
  $ 2,470,507          $ 2,043,569       
 

 

 

       

 

 

     

LIABILITIES AND SHAREHOLDERS’ EQUITY

           

Interest-bearing liabilities

           

Interest-bearing deposits

  $ 1,568,777      $ 1,566        0.40   $ 1,204,122      $ 1,352        0.45

Borrowings

    303,521        1,729        2.26     320,676        1,593        1.97

Subordinated debentures

    32,737        507        6.14     32,580        506        6.16
 

 

 

   

 

 

     

 

 

   

 

 

   

Total interest-bearing liabilities

    1,905,035        3,802        0.79     1,557,378        3,451        0.88

Non-interest-bearing liabilities

           

Demand deposits

    343,780            282,494       

Accrued interest payable and other liabilities

    15,149            12,979       

Stockholders’ equity

    206,543            190,718       
 

 

 

       

 

 

     
  $ 2,470,507          $ 2,043,569       
 

 

 

       

 

 

     

Net interest income/spread

    $ 19,776        3.38     $ 16,400        3.44
   

 

 

       

 

 

   

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

        3.51         3.59

 

(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.

Net interest income during the nine months ended September 30, 2015 was $54.5 million, an increase of $8.1 million from the $46.5 million earned during the same period in 2014. Yields on the Company’s interest-earning assets decreased by 12 basis points to 4.25% for the nine months ended September 30, 2015 from 4.37% for the same period in 2014. Interest income increased $8.4 million from $56.4 million for the nine months ended September 30, 2014 to $64.8 million for the same period in 2015. This increase was due to an increase in average loans balances and interest income from acquisition-related purchase accounting adjustments from $2.0 million for the nine months ending September 30, 2014 to $2.3 million for the same period of 2015, partially offset by lower yields on loans and investment securities and lower average investment securities balances.

Rates paid on interest-bearing liabilities decreased by 10 basis points for the nine months ended September 30, 2015 compared to the same period in 2014 due to the continued low interest rate environment. Interest expense increased $306,000 to $10.3 million for the nine-month period ending September 30, 2015. This increase was due to a higher volume of interest-bearing liabilities, partially offset by lower rates being paid on the Company’s interest-bearing liabilities. The net interest margin decreased 3 basis points from 3.62% for

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

the nine months ended September 30, 2014 to 3.59% for the same period in 2015. The decrease in the margin for the nine months ended September 30, 2015 compared to the same period in 2014 was due to a reduction in the yield on interest-earning assets. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.44% for the nine months ending September 30, 2015 compared to 3.47% for the same period in 2014.

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

 

    

Nine Months Ended

September 30, 2015

   

Nine Months Ended

September 30, 2014

 
     Average
Balance
    Interest      Average
Rate
    Average
Balance
    Interest      Average
Rate
 

ASSETS

              

Interest-earning assets

              

Federal funds sold

   $ 10,563      $ 11         0.14   $ 6,559      $ 9         0.18

Interest-earning deposits

     11,927        10         0.11     6,547        7         0.14

Investment securities - taxable

     375,548        6,356         2.26     395,255        7,108         2.40

Investment securities - non-taxable (1)

     145,576        3,281         3.96     146,643        3,328         4.33

Loans receivable (2)(3)

     1,528,662        55,140         4.83     1,215,183        45,988         5.07
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets (1)

     2,072,276        64,798         4.25     1,770,187        56,440         4.37

Non-interest-earning assets

              

Cash and due from banks

     30,729             26,736        

Allowance for loan losses

     (16,557          (15,892     

Other assets

     155,657             140,698        
  

 

 

        

 

 

      
   $ 2,242,105           $ 1,921,729        
  

 

 

        

 

 

      

LIABILITIES AND SHAREHOLDERS’ EQUITY

              

Interest-bearing liabilities

              

Interest-bearing deposits

   $ 1,347,882      $ 4,035         0.40   $ 1,171,343      $ 3,984         0.45

Borrowings

     340,593        4,747         1.86     274,322        4,493         2.19

Subordinated debentures

     32,698        1,504         6.15     32,541        1,503         6.18
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     1,721,173        10,286         0.80     1,478,206        9,980         0.90

Non-interest-bearing liabilities

              

Demand deposits

     303,309             253,331        

Accrued interest payable and other liabilities

     14,692             12,454        

Stockholders’ equity

     202,931             177,738        
  

 

 

        

 

 

      
   $ 2,242,105           $ 1,921,729        
  

 

 

        

 

 

      

Net interest income/spread

     $ 54,512         3.45     $ 46,460         3.47
    

 

 

        

 

 

    

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

          3.59          3.62

 

(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 portfolio. During the three-month period ended September 30, 2015, a provision of $300,000 was required to adequately fund the ALLL compared to $1.7 million for the same period of 2014. Commercial loan net charge-offs during the three-month period ended September 30, 2015 were $77,000, residential mortgage loan net charge-offs were $96,000 and consumer loan net charge-offs were $380,000. The lower provision for loan losses in the third quarter of 2015 compared to the same period of 2014 was

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

due to the improvement of non-performing and substandard loans and a $1.0 million charge-off associated with one commercial credit during the third quarter of 2014. The ALLL balance at September 30, 2015 was $16.2 million or 0.93% of total loans. This compares to an ALLL balance of $16.5 million at December 31, 2014 or 1.19% of total loans. The decrease in the ratio at September 30, 2015 compared to December 31, 2014 was due to improving credit trends and $223.9 million in loans added through the Peoples transaction with purchase accounting adjustments.

The provision for loan losses was $2.8 million the first nine months of 2015 compared to $2.1 million for the same period of 2014. The higher provision for loan losses in the first nine months of 2015 compared to the same period of 2014 was due to the charge-off of one commercial credit of $1.3 million in the second quarter of 2015 as well as continued loan growth. The $1.3 million commercial charge-off was a legacy workout loan that was determined to be impaired due to the borrower’s inability to make payments and a decrease in collateral value.

Horizon’s loan loss reserve ratio, excluding loans with credit-related purchase accounting adjustments, stood at 1.12% as of September 30, 2015. The table below illustrates Horizon’s loan loss reserve ratio composition as of September 30, 2015.

Allowance for Loan and Lease Loss Detail

As of September 30, 2015

(Dollars in Thousands, Unaudited)

 

     Horizon
Legacy
    Heartland     Summit     Peoples     Total  

Pre-discount loan balance

   $ 1,419,778      $ 24,827      $ 78,215      $ 213,059      $  1,735,880   

Allowance for loan losses (ALLL)

     15,896        264        8        —          16,168   

Loan discount

     N/A        1,576        3,213        4,601        9,390   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALLL+loan discount

     15,896        1,840        3,221        4,601        25,558   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans, net

   $ 1,403,882      $ 22,987      $ 74,994      $ 208,458      $  1,710,322   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ALLL/ pre-discount loan balance

     1.12     1.06     0.01     0.00     0.93

Loan discount/ pre-discount loan balance

     N/A        6.35     4.11     2.16     0.54

ALLL+loan discount/ pre-discount loan balance

     1.12     7.41     4.12     2.16     1.47

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 September 30, 2015.

Non-performing loans totaled $21.0 million as of September 30, 2015, down from $22.4 million on December 31, 2014. Compared to December 31, 2014, non-performing commercial loans and consumer loans decreased by $708,000 and $927,000, respectively, while non-performing real estate loans increased by $253,000.

At September 30, 2015, loans acquired represented $1.9 million in non-performing, $3.0 million in substandard and $0 in 90 day delinquent loans.

Other Real Estate Owned (OREO) totaled $1.3 million on September 30, 2015 compared to $1.2 million on December 31, 2014 and $1.3 million on September 30, 2014.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

Non-interest Income

The following is a summary of changes in non-interest income (table dollar amounts in thousands):

 

    Three Months Ended              
    September 30
2015
    September 30
2014
    Amount
Change
    Percent
Change
 

Non-interest Income

       

Service charges on deposit accounts

  $ 1,359      $ 1,076      $ 283        26.3

Wire transfer fees

    160        151        9        6.0

Interchange fees

    1,625        1,223        402        32.9

Fiduciary activities

    1,520        1,131        389        34.4

Gain on sale of securities

    —          988        (988     0.0

Gain on sale of mortgage loans

    2,794        2,153        641        29.8

Mortgage servicing net of impairment

    246        116        130        112.1

Increase in cash surrender value of bank owned life insurance

    374        296        78        26.4

Other income

    322        256        66        25.8
 

 

 

   

 

 

   

 

 

   

Total non-interest income

  $ 8,400      $ 7,390      $ 1,010        13.7
 

 

 

   

 

 

   

 

 

   

Total non-interest income was $1.0 million higher in the third quarter of 2015 compared to the same period of 2014. Service charges on deposit accounts increased $283,000, interchange fees increased by $402,000 and fiduciary activities increased $389,000, primarily due to overall company growth and increased volume. Residential mortgage loan activity during the third quarter of 2015 generated $2.8 million of income from the gain on sale of mortgage loans, up $641,000 from the same period in 2014. The increase in the gain on sale of mortgage loans was due to an increase in total loans sold of $16.3 million from $70.6 million in the third quarter of 2014 to $86.9 million in the same period of 2015, partially offset by a decrease in the percentage earned on the sale of these loans from 3.32% in the third quarter of 2014 to 3.30% in the same period of 2015. Mortgage servicing net of impairment increased by $130,000 during the third quarter of 2015 compared to the same period of 2014 due to a larger portfolio of mortgage loans serviced.

 

    Nine Months Ended     2014 - 2015  
    September 30
2015
    September 30
2014
    Amount
Change
    Percent
Change
 

Non-interest Income

       

Service charges on deposit accounts

  $ 3,443      $ 3,037      $ 406        13.4

Wire transfer fees

    493        408        85        20.8

Interchange fees

    4,093        3,436        657        19.1

Fiduciary activities

    4,033        3,378        655        19.4

Gain on sale of investment securities

    124        988        (864     100.0

Gain on sale of mortgage loans

    7,815        6,101        1,714        28.1

Mortgage servicing net of impairment

    725        556        169        30.4

Increase in cash surrender value of bank owned life insurance

    889        781        108        13.8

Death benefit on officer life insurance

    145        —          145        100.0

Other income

    892        854        38        4.4
 

 

 

   

 

 

   

 

 

   

Total non-interest income

  $ 22,652      $ 19,539      $ 3,113        15.9
 

 

 

   

 

 

   

 

 

   

Total non-interest income was $3.1 million higher in the first nine months of 2015 compared to the same period of 2014. Service charges on deposit accounts increased $406,000, interchange fees increased by $657,000 and fiduciary activities increased $655,000, primarily due to overall company growth and increased volume. Gain on sale of securities was $864,000 lower during the first nine months of 2015 as the result of

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

an analysis that determined market conditions provided the opportunity to add gains to capital in the nine months ended September 30, 2014 without negatively impacting long-term earnings. Residential mortgage loan activity during the first nine months of 2015 generated $7.8 million of income from the gain on sale of mortgage loans, up $1.7 million from the same period in 2014. The increase in the gain on sale of mortgage loans was due to an increase in total loans sold of $74.5 million from $164.6 million in the first nine months of 2014 to $239.1 million in the same period of 2015, partially offset by a decrease in the percentage earned on the sale of these loans from 3.37% in the first nine months of 2014 to 3.19% in the same period of 2015. Mortgage servicing net of impairment increased by $169,000 during the first nine months of 2015 compared to the same period of 2014 primarily due to a larger portfolio of mortgage loans serviced. The cash surrender value of bank owned life insurance increased by $108,000 in the first nine months of 2015 compared to the same period in 2014 due to the addition of bank owned life insurance policies as a result of the Peoples acquisition. The Company also recognized a $145,000 death benefit on officer life insurance during the first nine months of 2015.

Non-interest Expense

The following is a summary of changes in non-interest expense (table dollar amounts in thousands):

 

     Three Months Ended                
     September 30
2015
     September 30
2014
     Amount
Change
     Percent
Change
 

Non-interest expense

           

Salaries

   $ 6,412       $ 5,730       $ 682         11.9

Commission and bonuses

     1,958         1,239         719         58.0

Employee benefits

     2,282         1,246         1,036         83.1

Net occupancy expenses

     1,723         1,404         319         22.7

Data processing

     1,281         907         374         41.2

Professional fees

     409         358         51         14.2

Outside services and consultants

     3,209         595         2,614         439.3

Loan expense

     1,351         1,202         149         12.4

FDIC deposit insurance

     423         313         110         35.1

Other losses

     246         (35      281         -802.9

Other expense

     2,941         2,394         547         22.8
  

 

 

    

 

 

    

 

 

    

Total non-interest expense

   $ 22,235       $ 15,353       $ 6,882         44.8
  

 

 

    

 

 

    

 

 

    

Total non-interest expenses were $6.9 million higher in the third quarter of 2015 compared to the same period of 2014. Salaries increased by $1.2 million and employee benefits increased by $552,000 due to a larger employee base. Commission and bonuses increased by $719,000 due to an increase in loan volume and a larger employee base. Net occupancy expense increased $319,000 due to Horizon’s investment in growth markets and the Peoples acquisition. Data processing expenses increased $374,000, FDIC deposit insurance expense increased by $110,000 and other expenses increased by $547,000 primarily due to company growth. Outside services and consultants expense increased by $2.6 million due to the one-time fees associated with Peoples acquisition. Loan expense increased $149,000 primarily due to an increase in loan origination volume. One-time non-interest expense related to the Peoples acquisition totaled $3.6 million in the third quarter of 2015.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

     Nine Months Ended                
     September 30
2015
     September 30
2014
     Amount
Change
     Percent
Change
 

Non-interest expense

           

Salaries

   $ 18,038       $ 17,088       $ 950         5.6

Commission and bonuses

     4,325         2,728         1,597         58.5

Employee benefits

     5,178         4,175         1,003         24.0

Net occupancy expenses

     4,649         4,188         461         11.0

Data processing

     3,170         2,714         456         16.8

Professional fees

     1,596         1,385         211         15.2

Outside services and consultants

     4,753         2,554         2,199         86.1

Loan expense

     3,975         3,489         486         13.9

FDIC deposit insurance

     1,099         854         245         28.7

Other losses

     351         98         253         258.2

Other expense

     7,819         7,002         817         11.7
  

 

 

    

 

 

    

 

 

    

Total non-interest expense

   $ 54,953       $ 46,275       $ 8,678         18.8
  

 

 

    

 

 

    

 

 

    

Total non-interest expenses were $8.7 million higher in the first nine months of 2015 compared to the same period of 2014. Salaries increased by $1.4 million and employee benefits increased by $519,000 due to a larger employee base. Commission and bonuses increased by $1.6 million due to an increase in loan volume and a larger employee base. Net occupancy expense increased $461,000 due to Horizon’s investment in growth markets and the Peoples acquisition. Data processing expenses increased $456,000, FDIC deposit insurance expense increased by $245,000 and other expenses increased by $817,000 primarily due to company growth. Outside services and consultants expense increased by $2.2 million due to the one-time fees associated with the Peoples acquisition. Loan expense increased $486,000 primarily due to an increase in loan origination volume. One-time non-interest expense related to the Peoples acquisition totaled $4.4 million in the first nine months of 2015.

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 the FHLB. During the nine months ended September 30, 2015, cash and cash equivalents increased by approximately $4.7 million. At September 30, 2015, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $328.0 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $301.4 million at December 31, 2014 and $284.0 million at September 30, 2014.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at September 30, 2015. Stockholders’ equity totaled $264.7 million as of September 30, 2015, compared to $194.4 million as of December 31, 2014. For the three months ended September 30, 2015, the ratio of average stockholders’ equity to average assets was 10.38% compared to 9.56% for the three months ended December 31, 2014. The increase in stockholders’ equity during the period was the result of the generation of net income and the shares issued as part of the purchase price for the Peoples acquisition, net of dividends declared.

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

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 September 30, 2015, the dividend cost was approximately $31,000, or 1.0% annualized. Quarterly dividend payments for the third and fourth quarters of 2015 will be approximately $31,000, or 1.0% annualized. The Company plans to reserve cash so that it has the ability to redeem this preferred stock if and when the cost of this capital exceeds the cost of other forms of capital, subject to regulatory approval.

Horizon declared common stock dividends in the amount of $0.43 per share during the first nine months of 2015 compared to $0.37 per share for the same period of 2014. The dividend payout ratio (dividends as a percent of basic earnings per share) was 30.2% and 25.5% for the first nine months of 2015 and 2014, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 2014.

Use of Non-GAAP Financial Measures

Certain information set forth in this quarterly report on Form 10-Q refers to financial measures determined by methods other than in accordance with GAAP. Specifically, we have included non-GAAP financial measures of the net interest margin and the allowance for loan and lease losses excluding the impact of acquisition-related purchase accounting adjustments and net income and diluted earnings per share excluding the impact of one-time costs related to acquisitions, acquisition-related purchase accounting adjustments and other events that are considered to be non-recurring. Horizon believes that these non-GAAP financial measures are helpful to investors and provide a greater understanding of our business without giving effect to the purchase accounting impacts and one-time costs of acquisitions and non-core items, although these measures are not necessarily comparable to similar measures that may be presented by other companies and should not be considered in isolation or as a substitute for the related GAAP measure.

Non-GAAP Reconciliation of Net Interest Margin

(Dollar Amounts in Thousands, Unaudited)

 

    Three Months Ended     Nine Months Ended  
    September 30     June 30     September 30     September 30  
    2015     2015     2014     2015     2014  

Net Interest Margin As Reported

         

Net interest income

  $ 19,776      $ 17,850      $ 16,400      $ 54,512      $ 46,460   

Average interest-earning assets

    2,304,515        2,008,191        1,877,066        2,072,276        1,770,187   

Net interest income as a percent of average interest-earning assets (“Net Interest Margin”)

    3.51     3.67     3.59     3.59     3.62

Impact of Acquisitions

         

Interest income from acquisition-related purchase accounting adjustments (“PAUs”)

  $ (402   $ (797   $ (438   $ (2,282   $ (2,027

Excluding Impact of Acquisitions

         

Net interest income

  $ 19,374      $ 17,053      $ 15,962      $ 52,230      $ 44,433   

Average interest-earning assets

    2,304,515        2,008,191        1,877,066        2,072,276        1,770,187   

Core Net Interest Margin

    3.44     3.51     3.50     3.44     3.47

 

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HORIZON BANCORP AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Nine Months ended September 30, 2015

 

Non-GAAP Reconciliation of Net Income and Diluted Earnings per Share

(Dollar in Thousands Except per Share Data, Unaudited)

 

    Three Months Ended     Nine Months Ended  
    September 30     September 30  
    2015     2014     2015     2014  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  

Non-GAAP Reconciliation of Net Income

       

Net income as reported

  $ 4,288      $ 4,958      $ 14,374      $ 13,153   

Merger expenses

    3,648        124        4,364        1,335   

Tax effect

    (1,219     (43     (1,402     (467
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding merger expenses

    6,717        5,039        17,336        14,021   

Gain on sale of investment securities

    —          (988     (124     (988

Tax effect

    —          346        43        346   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding gain on sale of investment securities

    6,717        4,396        17,255        13,379   

Death benefit on bank owned life insurance (“BOLI”)

    —          —          (145     —     

Tax effect

    —                    51        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding death benefit on BOLI

    6,717        4,396        17,161        13,379   

Acquisition-related PAUs

    (402     (438     (2,282     (2,027

Tax effect

    141        153        799        709   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding PAUs

  $ 6,456      $ 4,112      $ 15,678      $ 12,061   
 

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Reconciliation of Diluted Earnings per Share

       

Diluted earnings per share as reported

  $ 0.36      $ 0.51      $ 1.37      $ 1.39   

Merger expenses

    0.30        0.01        0.42        0.14   

Tax effect

    (0.10     (0.00     (0.13     (0.05
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share excluding merger expenses

    0.56        0.52        1.66        1.48   

Gain on sale of investment securities

    —          (0.10     (0.01     (0.11

Tax effect

    —          0.03        0.00        0.04   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding gain on sale of investment securities

    0.56        0.45        1.65        1.41   

Death benefit on BOLI

    —          —          (0.01     —     

Tax effect

    —          —          0.00        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding death benefit on BOLI

    0.56        0.45        1.64        1.41   

Acquisition-related PAUs

    (0.03     (0.05     (0.22     (0.22

Tax effect

    0.01        0.02        0.08        0.08   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share excluding PAUs

  $ 0.54      $ 0.42      $ 1.50      $ 1.27   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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HORIZON BANCORP AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

For the Three and Nine Months ended June 30, 2015

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We refer you to Horizon’s 2014 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 2014 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 September 30, 2015, 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 September 30, 2015, 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 and Nine Months ended September 30, 2015

 

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 2014.

 

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 and Nine Months ended September 30, 2015

 

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: November 9, 2015    

/s/ Craig M. Dwight

    Craig M. Dwight
    Chief Executive Officer
Dated: November 9, 2015    

/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

 

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