Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

Commission file number 0-10792

 

 

HORIZON BANCORP, INC.

(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 Street, 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  ☒     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  ☒    No  ☐

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

 

Large Accelerated Filer      Accelerated Filer  
Non-accelerated Filer   ☐  (Do not check if smaller reporting company)    Smaller Reporting Company  
Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.    ☐

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 38,362,640 shares of Common Stock, no par value, at August 6, 2018.

 

 

 


Table of Contents

HORIZON BANCORP, INC.

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      46  

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      63  

Item 4.

  Controls and Procedures      63  

PART II. OTHER INFORMATION

  

Item 1.

  Legal Proceedings      64  

Item 1A.

  Risk Factors      64  

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      64  

Item 3.

  Defaults Upon Senior Securities      64  

Item 4.

  Mine Safety Disclosures      64  

Item 5.

  Other Information      64  

Item 6.

  Exhibits      65  

Index to Exhibits

  

Signatures

  

 

2


Table of Contents

PART 1 — FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

HORIZON BANCORP, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Dollar Amounts in Thousands)

 

     June 30
2018
    December 31
2017
 
     (Unaudited)        

Assets

    

Cash and due from banks

   $ 69,018     $ 76,441  

Investment securities, available for sale

     526,195       509,665  

Investment securities, held to maturity (fair value of $206,730 and $201,085)

     209,767       200,448  

Loans held for sale

     3,000       3,094  

Loans, net of allowance for loan losses of $17,071 and $16,394

     2,907,445       2,815,601  

Premises and equipment, net

     75,063       75,529  

Federal Home Loan Bank stock

     18,105       18,105  

Goodwill

     119,880       119,880  

Other intangible assets

     11,359       12,402  

Interest receivable

     12,993       16,244  

Cash value of life insurance

     76,576       75,931  

Other assets

     47,210       40,963  
  

 

 

   

 

 

 

Total assets

   $ 4,076,611     $ 3,964,303  
  

 

 

   

 

 

 

Liabilities

    

Deposits

    

Non-interest bearing

   $ 615,018     $ 601,805  

Interest bearing

     2,401,145       2,279,198  
  

 

 

   

 

 

 

Total deposits

     3,016,163       2,881,003  

Borrowings

     524,846       564,157  

Subordinated debentures

     37,745       37,653  

Interest payable

     1,441       886  

Other liabilities

     25,881       23,526  
  

 

 

   

 

 

 

Total liabilities

     3,606,076       3,507,225  
  

 

 

   

 

 

 

Commitments and contingent liabilities

    

Stockholders’ Equity

    

Preferred stock, Authorized, 1,000,000 shares, Issued 0 shares

     —         —    

Common stock, no par value, Authorized 99,000,000 shares (Restated - See Note 1)

    

Issued 38,387,709 and 38,323,604 shares (Restated - See Note 1), Outstanding 38,362,640 and 38,294,729 shares (Restated - See Note 1)

     —         —    

Additional paid-in capital

     275,587       275,059  

Retained earnings

     205,535       185,570  

Accumulated other comprehensive loss

     (10,587     (3,551
  

 

 

   

 

 

 

Total stockholders’ equity

     470,535       457,078  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 4,076,611     $ 3,964,303  
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

3


Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income

(Unaudited)

(Dollar Amounts in Thousands, Except Per Share Data)

 

     Three Months Ended     Six Months Ended  
     June 30     June 30  
     2018      2017     2018      2017  

Interest Income

          

Loans receivable

   $ 36,308      $ 26,795     $ 71,439      $ 51,586  

Investment securities

          

Taxable

     2,563        2,244       4,993        4,650  

Tax exempt

     1,870        1,766       3,735        3,403  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest income

     40,741        30,805       80,167        59,639  
  

 

 

    

 

 

   

 

 

    

 

 

 

Interest Expense

          

Deposits

     3,920        1,721       6,791        3,474  

Borrowed funds

     2,679        1,338       5,251        2,275  

Subordinated debentures

     592        548       1,164        1,124  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total interest expense

     7,191        3,607       13,206        6,873  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Interest Income

     33,550        27,198       66,961        52,766  

Provision for loan losses

     635        330       1,202        660  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Interest Income after Provision for Loan Losses

     32,915        26,868       65,759        52,106  
  

 

 

    

 

 

   

 

 

    

 

 

 

Non-interest Income

          

Service charges on deposit accounts

     1,907        1,566       3,795        2,966  

Wire transfer fees

     180        178       330        328  

Interchange fees

     1,555        1,382       2,883        2,558  

Fiduciary activities

     1,818        1,943       3,743        3,865  

Gains on sale of investment securities (includes $0 and $(3) for the three months ended June 30, 2018 and 2017, respectively, and $11 and $32 for the six months ended June 30, 2018 and 2017, respectively, related to accumulated other comprehensive earnings reclassifications)

     —          (3     11        32  

Gain on sale of mortgage loans

     1,896        2,054       3,319        3,968  

Mortgage servicing income net of impairment

     511        359       860        806  

Increase in cash value of bank owned life insurance

     442        408       877        872  

Death benefit on bank owned life insurance

     154        —         154        —    

Other income

     469        325       1,278        376  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest income

     8,932        8,212       17,250        15,771  
  

 

 

    

 

 

   

 

 

    

 

 

 

Non-interest Expense

          

Salaries and employee benefits

     13,809        12,466       28,182        24,175  

Net occupancy expenses

     2,520        2,196       5,486        4,648  

Data processing

     1,607        1,502       3,303        2,809  

Professional fees

     376        535       877        1,148  

Outside services and consultants

     1,267        1,265       2,531        2,487  

Loan expense

     1,525        1,250       2,782        2,357  

FDIC insurance expense

     345        243       655        506  

Other losses

     269        78       415        128  

Other expense

     3,224        2,953       6,548        5,751  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-interest expense

     24,942        22,488       50,779        44,009  
  

 

 

    

 

 

   

 

 

    

 

 

 

Income Before Income Taxes

     16,905        12,592       32,230        23,868  

Income tax expense (includes $0 and $(1) for the three months ended June 30, 2018 and 2017, respectively, and $2 and $11 for the six months ended June 30, 2018 and 2017, respectively, related to income tax expense from reclassification items)

     2,790        3,520       5,311        6,572  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Income

   $ 14,115      $ 9,072     $ 26,919      $ 17,296  
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic Earnings Per Share (Restated - See Note 1)

   $ 0.37      $ 0.27     $ 0.70      $ 0.52  

Diluted Earnings Per Share (Restated - See Note 1)

     0.37        0.27       0.70        0.51  

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Dollar Amounts in Thousands)

 

     Three Months Ended     Six Months Ended  
     June 30     June 30  
     2018     2017     2018     2017  

Net Income

   $ 14,115     $ 9,072     $ 26,919     $ 17,296  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss)

        

Change in fair value of derivative instruments:

        

Change in fair value of derivative instruments for the period

     354       46       1,113       446  

Income tax effect

     (75     (16     (234     (156
  

 

 

   

 

 

   

 

 

   

 

 

 

Changes from derivative instruments

     279       30       879       290  
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in securities:

        

Unrealized appreciation (depreciation) for the period on AFS securities

     (829     3,638       (8,943     6,235  

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

     (46     (58     (98     (146

Reclassification adjustment for securities (gains) losses realized in income

     —         3       (11     (32

Income tax effect

     187       (1,252     1,903       (2,119
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on securities

     (688     2,331       (7,149     3,938  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (Loss), Net of Tax

     (409     2,361       (6,270     4,228  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 13,706     $ 11,433     $ 20,649     $ 21,524  
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP, INC. 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
Loss
    Total  

Balances, January 1, 2018

   $ —        $ 275,059     $ 185,570     $ (3,551   $ 457,078  

Net income

     —          —         26,919       —         26,919  

Other comprehensive loss, net of tax

     —          —         —         (6,270     (6,270

Amortization of unearned compensation

     —          (79     —         —         (79

Exercise of stock options

     —          444       —         —         444  

Stock option expense

     —          163       —         —         163  

Reclassification of tax adjustment on accumulated other comprehensive loss

     —          —         766       (766     —    

Cash dividends on common stock ($0.20 per share)

     —          —         (7,720     —         (7,720
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balances, June 30, 2018

   $ —        $ 275,587     $ 205,535     $ (10,587   $ 470,535  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Dollar Amounts in Thousands)

 

     Six Months Ended  
     June 30  
     2018     2017  

Operating Activities

    

Net income

   $ 26,919     $ 17,296  

Items not requiring (providing) cash

    

Provision for loan losses

     1,202       660  

Depreciation and amortization

     3,300       2,820  

Share based compensation

     163       158  

Mortgage servicing rights, net impairment

     24       23  

Premium amortization on securities, net

     2,985       2,945  

Gain on sale of investment securities

     (11     (32

Gain on sale of mortgage loans

     (3,319     (3,968

Proceeds from sales of loans

     95,218       113,382  

Loans originated for sale

     (86,812     (107,473

Change in cash value life insurance

     (877     (872

Death benefit on bank owned life insurance

     (154     —    

(Gain)/loss on sale of other real estate owned

     (55     83  

Net change in:

    

Interest receivable

     3,251       (584

Interest payable

     555       81  

Other assets

     (4,220     3,714  

Other liabilities

     7,211       (1,794
  

 

 

   

 

 

 

Net cash provided by operating activities

     45,380       26,439  
  

 

 

   

 

 

 

Investing Activities

    

Purchases of securities available for sale

     (84,909     (97,482

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

     55,723       44,223  

Purchases of securities held to maturity

     (14,207     (19,948

Proceeds from maturities of securities held to maturity

     5,517       4,853  

Change in Federal Reserve and FHLB stock

     —         8,987  

Net change in loans

     (102,516     (128,271

Proceeds on the sale of OREO and repossessed assets

     794       1,057  

Change in premises and equipment, net

     (1,870     (1,052

Net cash received in acquisition of branch

     —         11,000  
  

 

 

   

 

 

 

Net cash used in investing activities

     (141,468     (176,633
  

 

 

   

 

 

 

Financing Activities

    

Net change in:

    

Deposits

     135,160       (67,254

Borrowings

     (39,219     217,921  

Proceeds from issuance of stock

     444       34  

Dividends paid on common stock

     (7,720     (5,346
  

 

 

   

 

 

 

Net cash provided by financing activities

     88,665       145,355  
  

 

 

   

 

 

 

Net Change in Cash and Cash Equivalents

     (7,423     (4,839

Cash and Cash Equivalents, Beginning of Period

     76,441       70,832  
  

 

 

   

 

 

 

Cash and Cash Equivalents, End of Period

   $ 69,018     $ 65,993  
  

 

 

   

 

 

 

Additional Supplemental Information

    

Interest paid

   $ 12,651     $ 6,786  

Income taxes paid

     3,966       6,350  

Transfer of loans to other real estate

     733       1,416  

Acquisition of LaPorte, measurement period adjustments

     —         704  

See notes to condensed consolidated financial statements

 

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Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(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, Inc. (“Horizon” or the “Company”) and its wholly-owned subsidiaries, including Horizon Bank (“Horizon Bank” or the “Bank”). Horizon Bank (formerly known as “Horizon Bank, N.A.”) was a national association until its conversion to an Indiana commercial bank effective June 23, 2017. All inter-company balances and transactions have been eliminated. The results of operations for the periods ended June 30, 2018 and June 30, 2017 are not necessarily indicative of the operating results for the full year of 2018 or 2017. 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 2017 filed with the Securities and Exchange Commission on February 28, 2018. The condensed consolidated balance sheet of Horizon as of December 31, 2017 has been derived from the audited balance sheet as of that date.

On May 15, 2018, the Board of Directors of the Company approved a three-for-two stock split of the Company’s authorized common stock, no par value. All share and per share amounts in the condensed consolidated financial statements and notes thereto have been retroactively adjusted, where necessary, to reflect this three-for-two stock split. The effect of the three-for-two stock split on the outstanding common shares is that shareholders of record as of the close of business on May 31, 2018, the record date, received an additional half share of common stock held, with shareholders receiving cash in lieu of any fractional shares. The additional shares issued in the stock split were payable and issued on June 15, 2018, and the common shares began trading on a split-adjusted basis on June 19, 2018.

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.

 

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Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

The following table shows computation of basic and diluted earnings per share.

 

     Three Months Ended      Six Months Ended  
     June 30      June 30  
     2018      2017      2018      2017  

Basic earnings per share

           

Net income

   $ 14,115      $ 9,072      $ 26,919      $ 17,296  

Weighted average common shares outstanding(1)

     38,347,612        33,264,697        38,327,118        33,263,997  

Basic earnings per share

   $ 0.37      $ 0.27      $ 0.70      $ 0.52  
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per share

           

Net income available to common shareholders

   $ 14,115      $ 9,072      $ 26,919      $ 17,296  

Weighted average common shares outstanding(1)

     38,347,612        33,264,697        38,327,118        33,263,997  

Effect of dilutive securities:

           

Restricted stock

     47,307        45,136        37,383        49,807  

Stock options

     124,482        173,751        119,820        172,975  
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding

     38,519,401        33,483,584        38,484,321        33,486,779  
   $ 0.37      $ 0.27      $ 0.70      $ 0.51  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

adjusted for 3:2 stock split on June 15, 2018

There were zero shares for the three months ended June 30, 2018 and 2017, respectively, which were not included in the computation of diluted earnings per share because they were non-dilutive. There were 67,575 and zero shares for the six months ended June 30, 2018 and 2017, respectively, which were not included in the computation of diluted earnings per share because they were non-dilutive.

Horizon has share-based employee compensation plans, which are described in the notes to the financial statements included in the December 31, 2017 Annual Report on Form 10-K.

Adoption of New Accounting Standards

Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

The FASB has issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. The amendments in this ASU also require certain disclosures about stranded tax effects. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company early adopted ASU 2018-02 on January 1, 2018 through a $766,000 cumulative-effect adjustment from AOCI to increase retained earnings related to unrealized gains and losses on available for sale securities and derivative instruments.

FASB ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

The FASB has issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance is intended to improve the recognition and measurement of financial instruments. The ASU affects public and private companies, not-for-profit organizations, and employee benefit plans that hold financial assets or owe financial liabilities.

The new guidance makes targeted improvements to existing U.S. GAAP by:

 

   

Requiring equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;

 

   

Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes;

 

   

Requiring separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements;

 

   

Eliminating the requirement to disclose the fair value of financial instruments measured at amortized cost for organizations that are not public business entities;

 

   

Eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; and

 

   

Requiring a reporting organization to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.

The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The new guidance permits early adoption of the own credit provision. In addition, the new guidance permits early adoption of the provision that exempts private companies and not-for-profit organizations from having to disclose fair value information about financial instruments measured at amortized cost. The Company adopted ASU 2016-01 on January 1, 2018, and it did not have a material effect on its accounting for equity investments, fair value disclosures and other disclosure requirements.

FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606)

The FASB has issued ASU No. 2014-09 creating, Revenue from Contracts with Customers (Topic 606). The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company adopted ASU 2014-09 on January 1, 2018 and did not identify any significant changes in the timing of revenue recognition when considering the amended accounting guidance. Additional disclosures related to revenue recognition appear in “Note 1 – Accounting Policies.”

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and some practical expedients.

In December 2016, the FASB issued ASU No. 2016-20, Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements. The FASB board decided to issue a separate update for technical corrections and improvements to Topic 606 and other Topics amended by ASU No. 2014-09 to increase awareness of the proposals and to expedite improvements to ASU No. 2014-09. The amendment affects narrow aspects of the guidance issued in ASU No. 2014-09.

Revenue Recognition

Accounting Standards Codification 606, “Revenue from Contracts with Customers” (ASC 606) provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance enumerates five steps that entities should follow in achieving this core principle. Revenue generated from financial instruments, including loans and investment securities, are not included in the scope of ASC 606. The adoption of ASC 606 did not result in a change to the accounting for any of the Company’s revenue streams that are within the scope of the amendments. Revenue-generating activities that are within the scope of ASC 606 and that are presented as non-interest income in the Company’s consolidated statements of income include:

 

   

Service charges and fees on deposit accounts – these include general service fees charged for deposit account maintenance and activity and transaction-based fees charged for certain services, such as debit card, wire transfer or overdraft activities. Revenue is recognized when the performance obligation is completed, which is generally after a transaction is completed or monthly for account maintenance services.

 

   

Fiduciary activities – this includes periodic fees due from trust and wealth management customers for managing the customers’ financial assets. Fees are charged based on a standard agreement and are recognized as they are earned.

Reclassifications

Certain reclassifications have been made to the 2017 condensed consolidated financial statements to be comparable to 2018. These reclassifications had no effect on net income.

Note 2 – Acquisitions

Wolverine Bancorp, Inc.

On October 17, 2017, Horizon completed the acquisition of Wolverine Bancorp, Inc., a Maryland corporation (“Wolverine”) and Horizon Bank’s acquisition of Wolverine Bank, a federally chartered savings bank and wholly-owned subsidiary of Wolverine, through mergers effective October 17, 2017. Under the terms of the Merger Agreement, shareholders of Wolverine received 1.5228 shares of Horizon common stock and $14.00 in cash for each outstanding share of Wolverine common stock. Wolverine shares outstanding at the closing to be exchanged were 2,129,331, and the shares of Horizon common stock issued to Wolverine shareholders totaled 3,241,045. Based upon the October 16, 2017 closing price of $19.37 per share of Horizon common stock immediately prior to the effectiveness of the merger, less the consideration used to pay off Wolverine Bancorp’s ESOP loan receivable, the transaction has an implied valuation of approximately $93.8 million. The Company incurred approximately $1.9 million in costs related to the acquisition. These expenses are classified in the non-interest expense section of the income statement and are primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company was able to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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

 

Assets

      Liabilities   

Cash and due from banks

   $ 44,450      Deposits   
     

Non-interest bearing

   $ 25,221  

Loans

     

NOW accounts

     8,026  

Commercial

     276,167     

Savings and money market

     129,044  

Residential mortgage

     30,603     

Certificates of deposit

     94,688  
        

 

 

 

Consumer

     3,897      Total deposits      256,979  
  

 

 

       

Total loans

     310,667        

Premises and equipment, net

     2,941      Borrowings      36,970  

FRB and FHLB stock

     2,700      Interest payable      214  

Goodwill

     26,827      Other liabilities      6,154  

Core deposit intangible

     2,024        

Interest receivable

     584        

Other assets

     3,897        
  

 

 

       

 

 

 

Total assets purchased

   $ 394,090      Total liabilities assumed    $ 300,317  
  

 

 

       

 

 

 

Common shares issued

   $ 62,111        

Cash paid

     31,662        
  

 

 

       

Total estimated purchase price

   $ 93,773        
  

 

 

       

Of the total purchase price of $93.8 million, $2.0 million has been allocated to core deposit intangible. Additionally, $26.8 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible is being amortized over 10 years on a straight line basis.

The Company acquired various loans in the acquisition that 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 assumptions, such as default rates, severity and prepayment speeds.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

The following table details the acquired loans that are accounted for in accordance with ASC 310-30 as of October 17, 2017.

 

Contractually required principal and interest at acquisition

   $ 21,912  

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

     1,832  
  

 

 

 

Expected cash flows at acquisition

     20,080  

Interest component of expected cash flows (accretable discount)

     2,267  
  

 

 

 

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

   $ 17,813  
  

 

 

 

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

Lafayette Community Bancorp

On September 1, 2017, Horizon completed the acquisition of Lafayette Community Bancorp, an Indiana corporation (“Lafayette”) and Horizon Bank’s acquisition of Lafayette Community Bank, a state-chartered bank and wholly-owned subsidiary of Lafayette, through mergers effective September 1, 2017. Under the terms of the Merger Agreement, shareholders of Lafayette received 0.8817 shares of Horizon common stock and $1.73 in cash for each outstanding share of Lafayette common stock. Lafayette shareholders owning fewer than 100 shares of common stock received $17.25 in cash for each common share. Lafayette shares outstanding at the closing to be exchanged were 1,856,679, and the shares of Horizon common stock issued to Lafayette shareholders totaled 1,636,888. Based upon the August 31, 2017 closing price of $17.45 per share of Horizon common stock immediately prior to the effectiveness of the merger, the transaction has an implied valuation of approximately $34.5 million. The Company incurred approximately $1.7 million in costs related to the acquisition. These expenses are classified in the non-interest expense section of the income statement and are primarily located in the salaries and employee benefits, professional services and other expense line items. As a result of the acquisition, the Company was able to increase its deposit base and reduce transaction costs. The Company also expects to reduce costs through economies of scale.

Horizon held 5% ownership in Lafayette immediately preceding the merger date. In accordance with ASC 805-10 – Business Combinations, Horizon was required to remeasure the equity interest in Lafayette’s common stock and recognize the resulting gain or loss, if any, in earnings. Since Lafayette was traded in the OTC market, the remeasurement was based on the closing price of Lafayette’s common stock immediately prior to the acquisition announcement and immediately prior to Horizon taking control of Lafayette. This remeasurement resulted in a gain of $530,000 which was recorded during the fourth quarter of 2017.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

Under the acquisition method of accounting, the total purchase price is allocated to net tangible and intangible assets based on their current estimated fair values on the date of the acquisition. Based on preliminary valuations of the fair value of tangible and intangible assets acquired and liabilities assumed, which are based on assumptions that are subject to change, the purchase price for the Lafayette acquisition is detailed in the following table.

 

Assets

     Liabilities   

Cash and due from banks

   $ 24,846     Deposits   

Investment securities, available for sale

     6    

Non-interest bearing

   $ 34,990  
    

NOW accounts

     30,174  

Loans

    

Savings and money market

     53,663  

Commercial

     116,258    

Certificates of deposit

     32,520  
       

 

 

 

Residential mortgage

     12,761     Total deposits      151,347  

Consumer

     5,280       
  

 

 

      

Total loans

     134,299       

Premises and equipment, net

     7,818     Interest payable      42  

FHLB stock

     395     Other liabilities      990  

Goodwill

     15,408       

Core deposit intangible

     2,085       

Interest receivable

     338       

Other assets

     1,649       
  

 

 

      

 

 

 

Total assets purchased

   $ 186,844     Total liabilities assumed    $ 152,379  
  

 

 

      

 

 

 

Common shares issued

   $ 30,044 (1)       

Cash paid

     4,421       
  

 

 

      

Total estimated purchase price

   $ 34,465       
  

 

 

      

 

(1)

This includes $955,000 of common shares previously held by Horizone.

Of the total estimated purchase price of $34.5 million, $2.1 million has been allocated to core deposit intangible. Additionally, $15.4 million has been allocated to goodwill and none of the purchase price is deductible. The core deposit intangible will be amortized over 10 years on a straight-line basis.

The Company acquired various loans in the acquisition that 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.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

The following table details an estimate of the acquired loans that are accounted for in accordance with ASC 310-30 as of September 1, 2017.

 

Contractually required principal and interest at acquisition

   $ 6,128  

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

     1,326  
  

 

 

 

Expected cash flows at acquisition

     4,802  

Interest component of expected cash flows (accretable discount)

     933  
  

 

 

 

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

   $ 3,869  
  

 

 

 

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

Bargersville Branch Purchase

On February 3, 2017, Horizon completed the purchase and assumption of certain assets and liabilities of a single branch of First Farmers Bank & Trust Company, in Bargersville, Indiana. Net cash of $11.0 million was received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for loans acquired in the transaction of $3.4 million and a 3.0% premium on deposits. Customer deposit balances were recorded at $14.8 million and a core deposit intangible of $452,000 was recorded in the transaction, which will be amortized over 10 years on a straight line basis. There was no goodwill generated in the transaction.

The results of operations of Wolverine and Lafayette have been included in the Company’s consolidated financial statements since the acquisition dates. The following schedule includes pro-forma results for the three and six months ended June 30, 2017 as if the Wolverine and Lafayette acquisitions had occurred as of the beginning of the comparable prior reporting period, which was January 1, 2016.

 

     Three Months Ended      Six Months Ended  
     June 30      June 30  
     2017      2017  

Summary of Operations:

     

Net Interest Income

   $ 32,038      $ 62,164  

Provision for Loan Losses

     (1,090      (1,337
  

 

 

    

 

 

 

Net Interest Income after Provision for Loan Losses

     33,128        63,501  

Non-interest Income

     8,662        16,565  

Non-interest Expense

     26,714        51,398  
  

 

 

    

 

 

 

Income before Income Taxes

     15,076        28,668  

Income Tax Expense

     4,549        8,412  
  

 

 

    

 

 

 

Net Income

     10,527        20,256  
  

 

 

    

 

 

 

Net Income Available to Common Shareholders

   $ 10,527      $ 20,256  
  

 

 

    

 

 

 

Basic Earnings per Share

   $ 0.32      $ 0.61  

Diluted Earnings per Share

   $ 0.31      $ 0.60  

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.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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

Note 3 – Securities

The fair value of securities is as follows:

 

     June 30, 2018  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available for sale

           

U.S. Treasury and federal agencies

   $ 24,654      $ —        $ (435    $ 24,219  

State and municipal

     136,732        300        (2,051      134,981  

Federal agency collateralized mortgage obligations

     168,382        112        (4,360      164,134  

Federal agency mortgage-backed pools

     203,593        28        (6,626      196,995  

Private labeled mortgage-backed pools

     —          —          —          —    

Corporate notes

     5,725        145        (4      5,866  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 539,086      $ 585      $ (13,476    $ 526,195  
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

State and municipal

   $ 190,079      $ 1,610      $ (4,309    $ 187,380  

Federal agency collateralized mortgage obligations

     5,409        8        (157      5,260  

Federal agency mortgage-backed pools

     14,279        55        (244      14,090  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 209,767      $ 1,673      $ (4,710    $ 206,730  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Available for sale

           

U.S. Treasury and federal agencies

   $ 19,277      $ —        $ (225    $ 19,052  

State and municipal

     148,045        2,189        (670      149,564  

Federal agency collateralized mortgage obligations

     132,871        45        (2,551      130,365  

Federal agency mortgage-backed pools

     211,487        155        (2,985      208,657  

Private labeled mortgage-backed pools

     1,650        —          (8      1,642  

Corporate notes

     272        113        —          385  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 513,602      $ 2,502      $ (6,439    $ 509,665  
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

State and municipal

   $ 179,836      $ 3,493      $ (2,932    $ 180,397  

Federal agency collateralized mortgage obligations

     5,734        17        (69      5,682  

Federal agency mortgage-backed pools

     14,878        216        (88      15,006  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 200,448      $ 3,726      $ (3,089    $ 201,085  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. At June 30, 2018, no individual investment security had an unrealized loss that was determined to be other-than-temporary.

The unrealized losses on the Company’s investments in securities of state and municipal governmental agencies, U.S. Treasury and federal agencies, federal agency collateralized mortgage obligations, and federal agency mortgage-backed pools were caused by interest rate volatility and not a decline in credit quality. The contractual terms of those investments do not permit the issuer to settle the securities at a price less than the amortized cost basis of the investments. The Company expects to recover the amortized cost basis over the term of the securities. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company did not consider those investments to be other-than-temporarily impaired at June 30, 2018.

The amortized cost and fair value of securities available for sale and held to maturity at June 30, 2018 and December 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     June 30, 2018      December 31, 2017  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Available for sale

           

Within one year

   $ 10,054      $ 10,013      $ 13,347      $ 13,326  

One to five years

     29,238        28,739        40,468        40,193  

Five to ten years

     80,973        79,937        50,473        51,156  

After ten years

     46,846        46,377        63,306        64,326  
  

 

 

    

 

 

    

 

 

    

 

 

 
     167,111        165,066        167,594        169,001  

Federal agency collateralized mortgage obligations

     168,382        164,134        132,871        130,365  

Federal agency mortgage-backed pools

     203,593        196,995        211,487        208,657  

Private labeled mortgage-backed pools

     —          —          1,650        1,642  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 539,086      $ 526,195      $ 513,602      $ 509,665  
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

Within one year

   $ 5,578      $ 5,546      $ 1,948      $ 1,934  

One to five years

     43,825        44,383        40,603        41,531  

Five to ten years

     103,804        103,252        89,801        91,249  

After ten years

     36,872        34,199        47,484        45,683  
  

 

 

    

 

 

    

 

 

    

 

 

 
     190,079        187,380        179,836        180,397  

Federal agency collateralized mortgage obligations

     5,409        5,260        5,734        5,682  

Federal agency mortgage-backed pools

     14,279        14,090        14,878        15,006  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 209,767      $ 206,730      $ 200,448      $ 201,085  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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.

 

     June 30, 2018  
     Less than 12 Months     12 Months or More     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Available for sale

               

U.S. Treasury and federal agencies

   $ 20,387      $ (352   $ 3,832      $ (83   $ 24,219      $ (435

State and municipal

     149,412        (4,495     37,546        (1,865     186,958        (6,360

Federal agency collateralized mortgage obligations

     67,216        (1,507     67,923        (3,010     135,139        (4,517

Federal agency mortgage-backed pools

     119,369        (3,073     84,772        (3,797     204,141        (6,870

Private labeled mortgage-backed pools

     —          —         —          —         —          —    

Corporate notes

     971        (4     —          —         971        (4
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 357,355      $ (9,431   $ 194,073      $ (8,755   $ 551,428      $ (18,186
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     December 31, 2017  
     Less than 12 Months     12 Months or More     Total  
     Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
    Fair
Value
     Unrealized
Losses
 

Available for sale

               

U.S. Treasury and federal agencies

   $ 15,882      $ (180   $ 2,870      $ (45   $ 18,752      $ (225

State and municipal

     54,312        (2,758     30,691        (844     85,003        (3,602

Federal agency collateralized mortgage obligations

     54,006        (589     73,462        (2,031     127,468        (2,620

Federal agency mortgage-backed pools

     103,926        (1,019     86,846        (2,054     190,772        (3,073

Private labeled mortgage-backed pools

     1,642        (8     —          —         1,642        (8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 229,768      $ (4,554   $ 193,869      $ (4,974   $ 423,637      $ (9,528
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Information regarding security proceeds, gross gains and gross losses are presented below.

 

     Three Months Ended      Six Months Ended  
     June 30      June 30  
     2018      2017      2018      2017  

Sales of securities available for sale

           

Proceeds

   $ —        $ 3,013      $ 9,836      $ 5,103  

Gross gains

     —          110        37        145  

Gross losses

     —          (113      (26      (113

 

18


Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

Note 4 Loans

 

     June 30      December 31  
     2018      2017  

Commercial

     

Working capital and equipment

   $ 744,842      $ 720,477  

Real estate, including agriculture

     857,336        880,861  

Tax exempt

     36,857        36,324  

Other

     33,963        32,066  
  

 

 

    

 

 

 

Total

     1,672,998        1,669,728  

Real estate

     

1-4 family

     627,137        599,217  

Other

     7,499        7,543  
  

 

 

    

 

 

 

Total

     634,636        606,760  

Consumer

     

Auto

     289,361        244,003  

Recreation

     13,158        8,728  

Real estate/home improvement

     38,096        37,052  

Home equity

     161,047        165,240  

Unsecured

     3,996        3,479  

Other

     2,208        2,497  
  

 

 

    

 

 

 

Total

     507,866        460,999  

Mortgage warehouse

     109,016        94,508  
  

 

 

    

 

 

 

Total loans

     2,924,516        2,831,995  

Allowance for loan losses

     (17,071      (16,394
  

 

 

    

 

 

 

Loans, net

   $ 2,907,445      $ 2,815,601  
  

 

 

    

 

 

 

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.

 

19


Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

Real Estate and Consumer

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

Mortgage Warehousing

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

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

 

20


Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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

 

     June 30, 2018  
     Loan
Balance
     Interest
Due
     Deferred
Fees/
(Costs)
     Recorded
Investment
 

Owner occupied real estate

   $ 591,273      $ 1,446      $ 2,000      $ 594,719  

Non-owner occupied real estate

     678,913        980        2,100        681,993  

Residential spec homes

     11,614        27        45        11,686  

Development & spec land

     34,384        97        28        34,509  

Commercial and industrial

     352,213        2,573        428        355,214  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     1,668,397        5,123        4,601        1,678,121  

Residential mortgage

     610,871        1,827        2,180        614,878  

Residential construction

     21,585        40        —          21,625  

Mortgage warehouse

     109,016        480        —          109,496  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     741,472        2,347        2,180        745,999  

Direct installment

     39,065        103        (576      38,592  

Indirect installment

     276,317        607        —          276,924  

Home equity

     194,637        883        (1,577      193,943  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     510,019        1,593        (2,153      509,459  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     2,919,888        9,063        4,628        2,933,579  

Allowance for loan losses

     (17,071      —          —          (17,071
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans

   $ 2,902,817      $ 9,063      $ 4,628      $ 2,916,508  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017  
     Loan
Balance
     Interest
Due
     Deferred
Fees/
(Costs)
     Recorded
Investment
 

Owner occupied real estate

   $ 571,982      $ 1,511      $ 1,917      $ 575,410  

Non-owner occupied real estate

     678,945        1,138        2,478        682,561  

Residential spec homes

     16,431        63        80        16,574  

Development & spec land

     48,838        117        579        49,534  

Commercial and industrial

     347,871        2,572        607        351,050  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     1,664,067        5,401        5,661        1,675,129  

Residential mortgage

     588,358        1,776        2,375        592,509  

Residential construction

     16,027        39        —          16,066  

Mortgage warehouse

     94,508        480        —          94,988  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     698,893        2,295        2,375        703,563  

Direct installment

     37,841        113        (552      37,402  

Indirect installment

     227,323        528        168        228,019  

Home equity

     197,578        889        (1,359      197,108  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     462,742        1,530        (1,743      462,529  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     2,825,702        9,226        6,293        2,841,221  

Allowance for loan losses

     (16,394      —          —          (16,394
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans

   $ 2,809,308      $ 9,226      $ 6,293      $ 2,824,827  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(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:

 

     June 30, 2018  
     Commercial      Real
Estate
     Consumer      Outstanding
Balance
     Allowance
for Loan
Losses
     Carrying
Amount
 

Heartland

   $ 254      $ 193      $ —        $ 447      $ —        $ 447  

Summit

     3,301        592        —          3,893        —          3,893  

Peoples

     296        112        —          408        —          408  

Kosciusko

     791        207        —          998        —          998  

LaPorte

     855        974        30        1,859        —          1,859  

Lafayette

     3,481        —          —          3,481        —          3,481  

Wolverine

     10,020        —          —          10,020        —          10,020  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,998      $ 2,078      $ 30      $ 21,106      $ —        $ 21,106  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2017  
     Commercial      Real
Estate
     Consumer      Outstanding
Balance
     Allowance
for Loan
Losses
     Carrying
Amount
 

Heartland

   $ 390      $ 229      $ —        $ 619      $ —        $ 619  

Summit

     3,653        870        —          4,523        —          4,523  

Peoples

     315        126        —          441        —          441  

Kosciusko

     838        403        —          1,241        —          1,241  

LaPorte

     1,034        1,004        33        2,071        —          2,071  

Lafayette

     4,271        —          —          4,271        —          4,271  

Wolverine

     16,697        —          —          16,697        —          16,697  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,198      $ 2,632      $ 33      $ 29,863      $ —        $ 29,863  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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

 

     Six Months Ended June 30, 2018  
     Beginning
balance
     Additions      Accretion     Reclassification
from
nonaccretable
difference
     Disposals     Ending
balance
 

Heartland

   $ 452      $ —        $ (68   $ —        $ (193   $ 191  

Summit

     147        —          (34     —          (6     107  

Kosciusko

     386        —          (40     —          —         346  

LaPorte

     980        —          (75     —          (7     898  

Lafayette

     933        —          (176     —          (2     755  

Wolverine

     2,267        —          (538     —          (680     1,049  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 5,165      $ —        $ (931   $ —        $ (888   $ 3,346  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     Six Months Ended June 30, 2017  
     Beginning
balance
     Additions      Accretion     Reclassification
from
nonaccretable
difference
     Disposals     Ending
balance
 

Heartland

   $ 557      $ —        $ (67   $ —        $ (6   $ 484  

Summit

     502        —          (182     —          (2     318  

Peoples

     389        —          (388     —          (1     —    

Kosciusko

     530        —          (58     —          (18     454  

LaPorte

     1,479        —          (150     —          (153     1,176  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 3,457      $ —        $ (845   $ —        $ (180   $ 2,432  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

During the six months ended June 30, 2018 and 2017 the Company increased the allowance for loan losses on purchased loans by a charge to the income statement of $0 and $71,000, respectively.

 

23


Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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 using the highest of the one, two or five-year historical loss experience is an appropriate methodology in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed. The actual allowance for loan loss activity is provided below.

 

     Three Months Ended      Six Months Ended  
     June 30      June 30  
     2018      2017      2018      2017  
     (Unaudited)      (Unaudited)      (Unaudited)      (Unaudited)  

Balance at beginning of the period

   $ 16,474      $ 15,054      $ 16,394      $ 14,837  

Loans charged-off:

           

Commercial

           

Owner occupied real estate

     —          —          13        —    

Non-owner occupied real estate

     —          —          —          —    

Residential spec homes

     —          —          —          —    

Development & spec land

     —          1        —          1  

Commercial and industrial

     —          254        —          259  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     —          255        13        260  

Real estate

           

Residential mortgage

     3        1        15        52  

Residential construction

     —          —          —          —    

Mortgage warehouse

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     3        1        15        52  

Consumer

           

Direct installment

     49        9        104        29  

Indirect installment

     365        323        870        608  

Home equity

     —          21        131        71  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     414        353        1,105        708  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans charged-off

     417        609        1,133        1,020  

Recoveries of loans previously charged-off:

           

Commercial

           

Owner occupied real estate

     —          1        12        1  

Non-owner occupied real estate

     12        3        17        25  

Residential spec homes

     2        2        4        4  

Development & spec land

     —          —          —          —    

Commercial and industrial

     26        30        58        141  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     40        36        91        171  

Real estate

           

Residential mortgage

     5        9        11        22  

Residential construction

     —          —          —          —    

Mortgage warehouse

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     5        9        11        22  

Consumer

           

Direct installment

     21        16        32        32  

Indirect installment

     132        152        271        265  

Home equity

     181        39        203        60  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     334        207        506        357  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loan recoveries

     379        252        608        550  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net loans charged-off

     38        357        525        470  
  

 

 

    

 

 

    

 

 

    

 

 

 

Provision charged to operating expense

           

Commercial

     985        41        (306      928  

Real estate

     (117      93        (369      (474

Consumer

     (233      196        1,877        206  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total provision charged to operating expense

     635        330        1,202        660  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance at the end of the period

   $ 17,071      $ 15,027      $ 17,071      $ 15,027  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

(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 of the underlying collateral, which is the appraised value less estimated selling costs.

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 contractually 90 days past due, and charges down to the net realizable value other secured loans when they are contractually 90 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection in full will occur regardless of delinquency status, are not charged off.

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

 

     June 30, 2018  
     Commercial      Real
Estate
     Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

              

Individually evaluated for impairment

   $ 184      $ —        $ —        $ —        $ 184  

Collectively evaluated for impairment

     8,681        1,761        1,084        5,361        16,887  

Loans acquired with deteriorated credit quality

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 8,865      $ 1,761      $ 1,084      $ 5,361      $ 17,071  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated for impairment

   $ 8,999      $ —        $ —        $ —        $ 8,999  

Collectively evaluated for impairment

     1,669,122        636,503        109,496        509,459        2,924,580  

Loans acquired with deteriorated credit quality

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 1,678,121      $ 636,503      $ 109,496      $ 509,459      $ 2,933,579  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

     December 31, 2017  
     Commercial      Real
Estate
     Mortgage
Warehousing
     Consumer      Total  

Allowance For Loan Losses

              

Ending allowance balance attributable to loans:

              

Individually evaluated for impairment

   $ 184      $ —        $ —        $ —        $ 184  

Collectively evaluated for impairment

     8,909        2,188        1,030        4,083        16,210  

Loans acquired with deteriorated credit quality

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 9,093      $ 2,188      $ 1,030      $ 4,083      $ 16,394  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans:

              

Individually evaluated for impairment

   $ 7,187      $ —        $ —        $ —        $ 7,187  

Collectively evaluated for impairment

     1,667,942        608,575        94,988        462,529        2,834,034  

Loans acquired with deteriorated credit quality

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending loans balance

   $ 1,675,129      $ 608,575      $ 94,988      $ 462,529      $ 2,841,221  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Note 7 – Non-performing Loans and Impaired Loans

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

 

     June 30, 2018  
     Non-accrual      Loans Past
Due Over 90
Days Still
Accruing
     Non-peforming
TDRs
     Performing
TDRs
     Total
Non-performing
Loans
 

Commercial

              

Owner occupied real estate

   $ 5,629      $ —        $ —        $ —        $ 5,629  

Non-owner occupied real estate

     1,038        —          305        —          1,343  

Residential spec homes

     —          —          —          —          —    

Development & spec land

     72        —          —          —          72  

Commercial and industrial

     1,943        —          —          —          1,943  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     8,682        —          305        —          8,987  

Real estate

              

Residential mortgage

     1,823        11        440        1,641        3,915  

Residential construction

     —          —          —          —          —    

Mortgage warehouse

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     1,823        11        440        1,641        3,915  

Consumer

              

Direct installment

     54        —          —          —          54  

Direct installment purchased

     —          —          —          —          —    

Indirect installment

     619        38        —          —          657  

Home equity

     1,377        —          149        270        1,796  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     2,050        38        149        270        2,507  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 12,555      $ 49      $ 894      $ 1,911      $ 15,409  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

26


Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

     December 31, 2017  
     Non-accrual      Loans Past
Due Over 90
Days Still
Accruing
     Non-peforming
TDRs
     Performing
TDRs
     Total
Non-performing
Loans
 

Commercial

              

Owner occupied real estate

   $ 4,877      $ —        $ 11      $ 1      $ 4,889  

Non-owner occupied real estate

     115        —          440        —          555  

Residential spec homes

     —          —          —          —          —    

Development & spec land

     176        —          —          —          176  

Commercial and industrial

     1,734        —          —          —          1,734  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     6,902        —          451        1        7,354  

Real estate

              

Residential mortgage

     3,693        —          351        1,450        5,494  

Residential construction

     —          —          —          222        222  

Mortgage warehouse

     —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total real estate

     3,693        —          351        1,672        5,716  

Consumer

              

Direct installment

     160        —          —          —          160  

Direct installment purchased

     —          —          —          —          —    

Indirect installment

     1,041        167        —          —          1,208  

Home equity

     1,480        —          211        285        1,976  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total consumer

     2,681        167        211        285        3,344  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,276      $ 167      $ 1,013      $ 1,958      $ 16,414  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Included in the $12.6 million of non-accrual loans and the $894,000 of non-performing TDRs at June 30, 2018 were $2.0 million and $0, respectively, of loans acquired for which accretable yield was recognized.

From time to time, the Bank obtains information that may lead management to believe that the collection of payments may be doubtful on a particular loan. In recognition of this, it is management’s policy to convert the loan from an “earning asset” to a non-accruing loan. The entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date. Further, it is management’s policy to generally place a loan on a non-accrual status when the payment is delinquent in excess of 90 days or the loan has had the accrual of interest discontinued by management. The officer responsible for the loan and the Chief Commercial Banking Officer and/or the Chief Operations 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.

 

27


Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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 the three methods described above.

The Company’s TDRs are considered impaired loans and included in the allowance methodology using the guidance for impaired loans. At June 30, 2018, the type of concessions the Company has made on restructured loans has been temporary rate reductions and/or reductions in monthly payments and there have been no restructured loans with modified recorded balances. Any modification to a loan that is a concession and is not in the normal course of lending is considered a restructured loan. A restructured loan is returned to accruing status after six consecutive payments but is still reported as TDR unless the loan bears interest at a market rate. As of June 30, 2018, the Company had $2.8 million in TDRs and $1.9 million were performing according to the restructured terms and $32,000 in TDRs were returned to accrual status during the first six months of 2018. There were $70,000 specific reserves allocated to TDRs at June 30, 2018 based on the discounted cash flows or when appropriate the fair value of the collateral.

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

 

     June 30, 2018  
                          Three Months Ended      Six Months Ended  
     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

   $ 4,765      $ 4,762      $ —        $ 5,271      $ 59      $ 5,303      $ 96  

Non-owner occupied real estate

     1,344        1,360        —          1,591        5        1,559        10  

Residential spec homes

     —          —          —          —          —          —          —    

Development & spec land

     72        70        —          71        —          73        —    

Commercial and industrial

     1,943        1,943        —          1,916        7        1,886        7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     8,124        8,135        —          8,849        71        8,821        113  

With an allowance recorded

                    

Commercial

                    

Owner occupied real estate

     864        864        184        871        —          885        —    

Non-owner occupied real estate

     —          —          —          —          —          —          —    

Residential spec homes

     —          —          —          —          —          —          —    

Development & spec land

     —          —          —          —          —          —          —    

Commercial and industrial

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     864        864        184        871        —          885        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,988      $ 8,999      $ 184      $ 9,720      $ 71      $ 9,706      $ 113  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     June 30, 2017  
                          Three Months Ended      Six Months Ended  
     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

   $ 1,591      $ 1,592      $ —        $ 1,538      $ 22      $ 1,233      $ 22  

Non-owner occupied real estate

     467        467        —          471        2        432        2  

Residential spec homes

     —          —          —          —          —          —          —    

Development & spec land

     107        107        —          230        —          234        —    

Commercial and industrial

     1,474        1,474        —          1,023        16        619        16  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     3,639        3,640        —          3,262        40        2,518        40  

With an allowance recorded

                    

Commercial

                    

Owner occupied real estate

     —          —          —          —          —          —          —    

Non-owner occupied real estate

     —          —          —          —          —          —          —    

Residential spec homes

     —          —          —          —          —          —          —    

Development & spec land

     —          —          —          —          —          —          —    

Commercial and industrial

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     —          —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,639      $ 3,640      $ —        $ 3,262      $ 40      $ 2,518      $ 40  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

28


Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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

 

     June 30, 2018  
     30-59 Days
Past Due
    60-89 Days
Past Due
    90 Days or
Greater
Past Due
    Total
Past Due
    Loans Not
Past Due
    Total  

Commercial

            

Owner occupied real estate

   $ 897     $ 138     $ —       $ 1,035     $ 590,238     $ 591,273  

Non-owner occupied real estate

     42       895       —         937       677,976       678,913  

Residential spec homes

     —         —         —         —         11,614       11,614  

Development & spec land

     —         —         —         —         34,384       34,384  

Commercial and industrial

     175       966       —         1,141       351,072       352,213  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     1,114       1,999       —         3,113       1,665,284       1,668,397  

Real estate

            

Residential mortgage

     822       302       11       1,135       609,736       610,871  

Residential construction

     —         —         —         —         21,585       21,585  

Mortgage warehouse

     —         —         —         —         109,016       109,016  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     822       302       11       1,135       740,337       741,472  

Consumer

            

Direct installment

     78       26       —         104       38,961       39,065  

Indirect installment

     1,513       256       38       1,807       274,510       276,317  

Home equity

     451       30       —         481       194,156       194,637  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     2,042       312       38       2,392       507,627       510,019  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 3,978     $ 2,613     $ 49     $ 6,640     $ 2,913,248     $ 2,919,888  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     0.14     0.09     0.00     0.23     99.77  
     December 31, 2017  
     30-59 Days
Past Due
    60-89 Days
Past Due
    90 Days or
Greater
Past Due
    Total
Past Due
    Loans Not
Past Due
    Total  

Commercial

            

Owner occupied real estate

   $ 1,613     $ 1,950     $ —       $ 3,563     $ 568,419     $ 571,982  

Non-owner occupied real estate

     512       122       —         634       678,311       678,945  

Residential spec homes

     —         —         —         —         16,431       16,431  

Development & spec land

     31       —         —         31       48,807       48,838  

Commercial and industrial

     520       1       —         521       347,350       347,871  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     2,676       2,073       —         4,749       1,659,318       1,664,067  

Real estate

            

Residential mortgage

     1,248       49       —         1,297       587,061       588,358  

Residential construction

     63       —         —         63       15,964       16,027  

Mortgage warehouse

     —         —         —         —         94,508       94,508  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     1,311       49       —         1,360       697,533       698,893  

Consumer

            

Direct installment

     78       10       —         88       37,753       37,841  

Indirect installment

     1,859       244       167       2,270       225,053       227,323  

Home equity

     502       527       —         1,029       196,549       197,578  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     2,439       781       167       3,387       459,355       462,742  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 6,426     $ 2,903     $ 167     $ 9,496     $ 2,816,206     $ 2,825,702  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     0.23     0.10     0.01     0.34     99.66  

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

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

 

   

For new and renewed commercial loans, the Bank’s Credit Department, which acts independently of the loan officer, assigns the credit quality grade to the loan. Loan grades for loans with an aggregate credit exposure that exceeds the authorities in the respective markets (ranging from $1,000,000 to $3,500,000) are validated by the Loan Committee, which is chaired by the Chief Commercial Banking Officer (CCBO).

 

   

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

 

29


Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

   

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

 

   

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

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

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

Risk Grade 1: Excellent (Pass)

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

Risk Grade 2: Good (Pass)

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

Risk Grade 3: Satisfactory (Pass)

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

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

   

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 unstablized, high risk or in decline. These loans require an increased level of loan officer supervision and monitoring to assure that any deterioration is addressed in a timely fashion.

Risk Grade 5: Special Mention

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

Risk Grade 6: Substandard

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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.

The following table presents loans by credit grades.

 

     June 30, 2018  
     Pass     Special
Mention
    Substandard     Doubtful     Total  

Commercial

          

Owner occupied real estate

   $ 569,089     $ 5,772     $ 16,412     $ —       $ 591,273  

Non-owner occupied real estate

     667,031       5,888       5,994       —         678,913  

Residential spec homes

     11,614       —         —         —         11,614  

Development & spec land

     34,168       144       72       —         34,384  

Commercial and industrial

     335,442       4,719       12,052       —         352,213  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     1,617,344       16,523       34,530       —         1,668,397  

Real estate

          

Residential mortgage

     606,967       —         3,904       —         610,871  

Residential construction

     21,585       —         —         —         21,585  

Mortgage warehouse

     109,016       —         —         —         109,016  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     737,568       —         3,904       —         741,472  

Consumer

          

Direct installment

     39,011       —         54       —         39,065  

Indirect installment

     275,660       —         657       —         276,317  

Home equity

     192,841       —         1,796       —         194,637  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     507,512       —         2,507       —         510,019  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,862,424     $ 16,523     $ 40,941     $ —       $ 2,919,888  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     98.03     0.57     1.40     0.00  

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

     December 31, 2017  
     Pass     Special
Mention
    Substandard     Doubtful     Total  

Commercial

          

Owner occupied real estate

   $ 545,158     $ 8,622     $ 18,202     $ —       $ 571,982  

Non-owner occupied real estate

     670,074       3,864       5,007       —         678,945  

Residential spec homes

     16,431       —         —         —         16,431  

Development & spec land

     47,726       886       226       —         48,838  

Commercial and industrial

     326,756       7,448       13,667       —         347,871  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

     1,606,145       20,820       37,102       —         1,664,067  

Real estate

          

Residential mortgage

     582,864       —         5,494       —         588,358  

Residential construction

     15,805       —         222       —         16,027  

Mortgage warehouse

     94,508       —         —         —         94,508  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate

     693,177       —         5,716       —         698,893  

Consumer

          

Direct installment

     37,681       —         160       —         37,841  

Indirect installment

     226,115       —         1,208       —         227,323  

Home equity

     195,602       —         1,976       —         197,578  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total consumer

     459,398       —         3,344       —         462,742  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 2,758,720     $ 20,820     $ 46,162     $ —       $ 2,825,702  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total loans

     97.63     0.74     1.63     0.00  

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:

 

     June 30, 2018  
     Remaining Contractual Maturity of the Agreements  
     Overnight
and
Continuous
     Up to
one
year
     One
to
three
years
     Three
to
five
years
     Five
to ten
years
     Beyond
ten
years
     Total  

Repurchase Agreements and repurchase-to-maturity transactions

                    

Repurchase Agreements

   $ 43,702      $ —        $ —        $ —        $ —        $ —        $ 43,702  

Securities pledged for Repurchase Agreements

                    

Federal agency collateralized mortgage obligations

   $ 34,344      $ —        $ —        $ —        $ —        $ —        $ 34,344  

Federal agency mortgage-backed pools

     31,208        —          —          —          —          —          31,208  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 65,552      $ —        $ —        $ —        $ —        $ —        $ 65,552  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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 5.81% on a notional amount of $30.5 million at June 30, 2018 and December 31, 2017. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

The Company assumed additional interest rate swap agreements as the result of the LaPorte acquisition in July 2016. The agreements provide for the Company to receive interest from the counterparty at one month LIBOR and to pay interest to the counterparty at a weighted average fixed rate of 2.31% on a notional amount of $30.0 million at June 30, 2018 and December 31, 2017. Under the agreements, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense.

Management has designated the interest rate swap agreement as a cash flow hedging instrument. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At June 30, 2018, the Company’s cash flow hedge was effective and is not expected to have a significant impact on the Company’s net income over the next 12 months.

Fair Value Hedges

Fair value hedges are intended to reduce the interest rate risk associated with the underlying hedged item. The Company enters into fixed rate loan agreements as part of its lending policy. To mitigate the risk of changes in fair value based on fluctuations in interest rates, the Company has entered into interest rate swap agreements on individual loans, converting the fixed rate loans to a variable rate. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings. At June 30, 2018, the Company’s fair value hedges were effective and are not expected to have a significant impact on the Company’s net income over the next 12 months.

The change in fair value of both the hedge instruments and the underlying loan agreements are recorded as gains or losses in interest income. The fair value hedges are considered to be highly effective and any hedge ineffectiveness was deemed not material. The notional amounts of the loan agreements being hedged were $155.7 million at June 30, 2018 and $154.6 million at December 31, 2017.

Other Derivative Instruments

The Company enters into non-hedging derivatives in the form of mortgage loan forward sale commitments with investors and commitments to originate mortgage loans as part of its mortgage banking business. At June 30, 2018, 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.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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

 

     Asset Derivatives      Liability Derivatives  
     June 30, 2018      June 30, 2018  
     Balance Sheet
Location
     Fair
Value
     Balance Sheet
Location
     Fair
Value
 

Derivatives designated as hedging instruments

           

Interest rate contracts

     Loans      $ —          Other liabilities      $ 3,579  

Interest rate contracts

     Other Assets        3,579        Other liabilities        969  
     

 

 

       

 

 

 

Total derivatives desginated as hedging instruments

        3,579           4,548  
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments

           

Mortgage loan contracts

     Other assets        257        Other liabilities        4  
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

        257           4  
     

 

 

       

 

 

 

Total derivatives

      $ 3,836         $ 4,552  
     

 

 

       

 

 

 
     Asset Derivatives      Liability Derivatives  
     December 31, 2017      December 31, 2017  
     Balance Sheet
Location
     Fair
Value
     Balance Sheet
Location
     Fair
Value
 

Derivatives designated as hedging instruments

           

Interest rate contracts

     Loans      $ —          Other liabilities      $ 811  

Interest rate contracts

     Other Assets        811        Other liabilities        1,728  
     

 

 

       

 

 

 

Total derivatives desginated as hedging instruments

        811           2,539  
     

 

 

       

 

 

 

Derivatives not designated as hedging instruments

           

Mortgage loan contracts

     Other assets        143        Other liabilities        3  
     

 

 

       

 

 

 

Total derivatives not designated as hedging instruments

        143           3  
     

 

 

       

 

 

 

Total derivatives

      $ 954         $ 2,542  
     

 

 

       

 

 

 

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

 

     Amount of Loss Recognized in Other Comprehensive Income on
Derivative
(Effective Portion)
 
     Three Months Ended      Six Months Ended  
     June 30, 2018      June 30, 2017      June 30, 2018      June 30, 2017  

Derivatives in cash flow hedging relationship

           

Interest rate contracts

   $ 279      $ 30      $ 879      $ 290  

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.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

    

Location of gain (loss)
recognized on derivative

   Amount of Gain (Loss) Recognized
on Derivative
 
     Three Months
Ended
    Six Months Ended  
     June 30,
2018
    June 30,
2017
    June 30,
2018
    June 30,
2017
 

Derivative in fair value hedging relationship

           

Interest rate contracts

   Interest income - loans    $ 2,768     $ 679     $ 574     $ 426  

Interest rate contracts

   Interest income - loans      (2,768     (679     (574     (426
     

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ —       $ —       $ —       $ —    
     

 

 

   

 

 

   

 

 

   

 

 

 
    

Location of gain (loss)
recognized on derivative

   Amount of Gain (Loss) Recognized
on Derivative
 
     Three Months
Ended
    Six Months Ended  
     June 30,
2018
    June 30,
2017
    June 30,
2018
    June 30,
2017
 

Derivative not designated as hedging relationship

           

Mortgage contracts

   Other income -
gain on sale of loans
   $ 112     $ (153   $ 195     $ (212

Note 10 – Disclosures about Fair Value of Assets and Liabilities

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

 

Level 1

Quoted prices in active markets for identical assets or liabilities

 

Level 2

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

 

Level 3

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

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis and recognized in the accompanying condensed consolidated financial statements, as well as the general classification of such instruments pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the period ended June 30, 2018. For assets classified within Level 3 of the fair value hierarchy, the process used to develop the reported fair value is described below.

Available for sale securities

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

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

Hedged loans

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

Interest rate swap agreements

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

 

     June 30, 2018  
     Fair Value      Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Available for sale securities

           

U.S. Treasury and federal agencies

   $ 24,219      $ —        $ 24,219      $ —    

State and municipal

     134,981        —          134,981        —    

Federal agency collateralized mortgage obligations

     164,134        —          164,134        —    

Federal agency mortgage-backed pools

     196,995        —          196,995        —    

Private labeled mortgage-backed pools

     —          —          —          —    

Corporate notes

     5,866        —          5,866        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

     526,195        —          526,195        —    

Hedged loans

     155,742        —          155,742        —    

Forward sale commitments

     344        —          344        —    

Interest rate swap agreements

     3,939        —          3,939        —    

Commitments to originate loans

     (21      —          (21      —    

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

     December 31, 2017  
     Fair Value      Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Available for sale securities

           

U.S. Treasury and federal agencies

   $ 19,052      $ —        $ 19,052      $ —    

State and municipal

     149,564        —          149,564        —    

Federal agency collateralized mortgage obligations

     130,365        —          130,365        —    

Federal agency mortgage-backed pools

     208,657        —          208,657        —    

Private labeled mortgage-backed pools

     1,642        —          1,642        —    

Corporate notes

     385        —          385        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

     509,665        —          509,665        —    

Hedged loans

     154,575        —          154,575        —    

Forward sale commitments

     143        —          143        —    

Interest rate swap agreements

     (917      —          (917      —    

Commitments to originate loans

     (3      —          (3      —    

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

 

Non-interest Income    Three Months Ended      Six Months Ended  
     June 30,
2018
     June 30,
2017
     June 30,
2018
     June 30,
2017
 

Total gains and losses from:

           

Hedged loans

   $ 976      $ 679      $ 3,744      $ 426  

Fair value interest rate swap agreements

     (976      (679      (3,744      (426

Derivative loan commitments

     71        (153      183        (212
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 71      $ (153    $ 183      $ (212
  

 

 

    

 

 

    

 

 

    

 

 

 

Certain other assets are measured at fair value on a non-recurring 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):

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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

June 30, 2018

           

Impaired loans

   $ 8,804      $ —        $ —        $ 8,804  

Mortgage servicing rights

     11,670        —          —          11,670  

December 31, 2017

           

Impaired loans

   $ 6,957      $ —        $ —        $ 6,957  

Mortgage servicing rights

     11,602        —          —          11,602  

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 $24,000 during the first six months of 2018 and decreased by $23,000 during the first six months of 2017.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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

 

     June 30, 2018
     Fair      Valuation    Unobservable    Range
     Value     

Technique

  

Inputs

  

(Weighted Average)

Impaired loans

   $ 8,804      Collateral based measurement    Discount to reflect current market
conditions and ultimate
collectability
   0%-54.8% (2.0%)

Mortgage servicing rights

     11,670      Discounted cash flows    Discount rate,
Constant prepayment rate,
Probability of default
   10.3%-11.3% (10.3%),
8.3%-16.5% (8.6%),
0.1%-1.7% (0.6%)
     December 31, 2017
     Fair      Valuation    Unobservable    Range
     Value     

Technique

  

Inputs

  

(Weighted Average)

Impaired loans

   $ 6,957      Collateral based measurement    Discount to reflect current market
conditions and ultimate
collectability
   0%-46.8% (2.6%)

Mortgage servicing rights

     11,602      Discounted cash flows    Discount rate,
Constant prepayment rate,
Probability of default
   9.6%-10.8% (9.7%),
9.2%-27.7% (10.5%),
0%-1.5% (0.2%)

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 June 30, 2018 and December 31, 2017. These include financial instruments recognized as assets and liabilities on the condensed consolidated balance sheet as well as certain off-balance sheet financial instruments. The estimated fair values shown below do not include any valuation of assets and liabilities, which are not financial instruments as defined by the FASB ASC fair value hierarchy.

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

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

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

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

Net Loans — At June 30, 2018, the fair value of net loans are estimated on an exit price basis incorporating discounts for credit, liquidity and marketability factors. This is not comparable with the fair values disclosed at December 31, 2017, which were based on an entrance price basis. At December 31, 2017, the fair value of portfolio loans were 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.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

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.

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

 

     June 30, 2018  
     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

   $ 69,018      $ 69,018      $ —        $ —    

Investment securities, held to maturity

     209,767        —          206,730        —    

Loans held for sale

     3,000        —          —          3,000  

Loans (excluding loan level hedges), net

     2,751,703        —          —          2,585,501  

Stock in FHLB

     18,105        —          18,105        —    

Interest receivable

     12,993        —          12,993        —    

Liabilities

           

Non-interest bearing deposits

   $ 615,018      $ 615,018      $ —        $ —    

Interest bearing deposits

     2,401,145        —          2,263,817        —    

Borrowings

     524,846        —          520,701        —    

Subordinated debentures

     37,745        —          35,682        —    

Interest payable

     1,441        —          1,441        —    

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

     December 31, 2017  
     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

   $ 76,441      $ 76,441      $ —        $ —    

Investment securities, held to maturity

     200,448        —          201,085        —    

Loans held for sale

     3,094        —          —          3,094  

Loans (excluding loan level hedges), net

     2,661,026        —          —          2,585,879  

Stock in FHLB

     18,105        —          18,105        —    

Interest receivable

     16,244        —          16,244        —    

Liabilities

           

Non-interest bearing deposits

   $ 601,805      $ 601,805      $ —        $ —    

Interest bearing deposits

     2,279,198        —          2,156,487        —    

Borrowings

     564,157        —          560,057        —    

Subordinated debentures

     37,653        —          35,994        —    

Interest payable

     886        —          886        —    

Note 12 – Accumulated Other Comprehensive Income

 

     June 30      December 31  
     2018      2017  

Unrealized loss on securities available for sale

   $ (12,891    $ (3,937

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

     102        200  

Unrealized loss on derivative instruments

     (615      (1,728

Tax effect

     2,817        1,914  
  

 

 

    

 

 

 

Total accumulated other comprehensive loss

   $ (10,587    $ (3,551
  

 

 

    

 

 

 

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 June 30, 2018, 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.

To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based, common equity Tier I risk-based and Tier I leverage ratios as set forth in the table below. As of June 30, 2018 and December 31, 2017, the Bank met all capital adequacy requirements to be considered well capitalized. There have been no conditions or events since the end of the first quarter of 2018 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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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

Horizon and the Bank’s actual and required capital ratios as of June 30, 2018 and December 31, 2017 were as follows:

 

    Actual     Required for  Capital1
Adequacy
Purposes
    Required For Capital1
Adequacy Purposes
with Capital Buffer
    Well Capitalized Under
Prompt1
Corrective Action
Provisions
 
    Amount     Ratio     Amount     Ratio     Amount     Ratio     Amount     Ratio  

June 30, 2018

               

Total capital1 (to risk-weighted assets)

               

Consolidated

  $ 403,480       13.07     246,952       8.00     285,539       9.25     N/A       N/A  

Bank

    392,814       12.77     246,109       8.00     284,563       9.25   $ 307,636       10.00

Tier 1 capital1 (to risk-weighted assets)

               

Consolidated

    386,409       12.52     185,214       6.00     223,800       7.25     N/A       N/A  

Bank

    375,684       12.21     184,581       6.00     223,035       7.25     246,108       8.00

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

               

Consolidated

    347,946       11.27     138,910       4.50     177,497       5.75     N/A       N/A  

Bank

    375,684       12.21     138,436       4.50     176,890       5.75     199,963       6.50

Tier 1 capital1 (to average assets)

               

Consolidated

    386,409       9.94     155,556       4.00     155,556       4.00     N/A       N/A  

Bank

    375,684       9.65     155,805       4.00     155,805       4.00     194,756       5.00

December 31, 2017

               

Total capital1 (to risk-weighted assets)

               

Consolidated

  $ 384,800       12.91   $ 238,543       8.00   $ 275,816       9.25     N/A       N/A  

Bank

    382,788       12.85     238,386       8.00     275,634       9.25   $ 297,982       10.00

Tier 1 capital1 (to risk-weighted assets)

               

Consolidated

    368,355       12.35     178,907       6.00     216,180       7.25     N/A       N/A  

Bank

    366,343       12.29     178,790       6.00     216,038       7.25     238,386       8.00

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

               

Consolidated

    329,892       11.06     134,181       4.50     171,454       5.75     N/A       N/A  

Bank

    366,343       12.29     134,092       4.50     171,340       5.75     193,689       6.50

Tier 1 capital1 (to average assets)

               

Consolidated

    368,355       9.92     148,503       4.00     148,503       4.00     N/A       N/A  

Bank

    366,343       9.89     148,116       4.00     148,116       4.00     185,145       5.00

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

Note 14 – Future Accounting Matters

Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities

The FASB has issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. The new guidance improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this ASU also make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. For public entities, the new guidance will be effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the ASU. All transition requirements and elections should be applied to hedging relationships existing (that is, hedging relationships in which the hedging instrument has not expired, been sold, terminated, or exercised or the entity has not removed the designation of the hedging relationship) on the date of adoption. The effect of adoption should be reflected as of the beginning of the fiscal year of adoption (that is, the initial application date). We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

The FASB has issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance is intended to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the income tax effects of tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the qualitative impairment test is necessary. The amendments should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. The amendments in this update should be adopted for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted on testing dates after January 1, 2017. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but it is not expected to have a material impact.

FASB ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

The FASB has issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The main objective of this amendment is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendment requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to enhance their credit loss estimates. The amendment requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The

 

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Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

 

amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. Early adoption will be permitted beginning after December 15, 2018. We have formed a cross functional committee that is assessing our data and system needs and are evaluating the impact of adopting the new guidance. This committee has developed a timeline associated with the Company’s adoption of this ASU. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

FASB Accounting Standards Updates No. 2016-02, Leases (Topic 842)

The FASB has issued Accounting Standards Update (ASU) No. 2016-02, Leases. Under the new guidance, lessees will be required to recognize the following for all leases, with the exception of short-term leases, at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. Based on leases outstanding as of December 31, 2017, we do not expect the new standard to have a material impact on our balance sheet or income statement.

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 of operation and cash flows of the Company.

 

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Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

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, Inc. (“Horizon” or the “Company”) and Horizon Bank (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 and the outflow of deposits;

 

   

loss of key Horizon personnel;

 

   

increases in disintermediation, as new technologies allow consumers to complete financial transactions without the assistance of banks;

 

   

loss of fee income, including interchange fees, as new and emerging alternative payment platforms (e.g. Apple Pay or Bitcoin) take a greater market share of the payment systems;

 

   

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;

 

   

the possible impact of whole or partial dismantling of provisions of the Dodd-Frank Act under the current federal administration;

 

   

the potential for additional changes in tax laws, particularly corporate income tax reform, that may affect current returns, Horizon’s deferred tax assets and liabilities, the ability to utilize federal and state net operating loss carryforwards, and the market’s perception on overall value;

 

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

   

the impact of the Basel III capital rules;

 

   

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, and the increasing costs of cybersecurity for the Company;

 

   

containing costs and expenses;

 

   

an economic slowdown and/or possible recession;

 

   

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 us or on our behalf. 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 2017 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 regions of Indiana and the Southern, Central and Great Lakes Bay regions of 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 originally chartered as a national banking association in 1873 and has operated continuously since that time and converted to an Indiana state-chartered bank effective on June 23, 2017. 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. Upon approval of a name change by Horizon’s shareholders at the annual meeting on May 3, 2018, Horizon’s full corporate name became “Horizon Bancorp, Inc.”

On October 17, 2017, Horizon completed the acquisition of Wolverine Bancorp, Inc., a Maryland corporation (“Wolverine”) and Horizon Bank’s acquisition of Wolverine Bank, a federally-chartered savings bank and wholly-owned subsidiary of Wolverine, through mergers effective October 17, 2017. Under the terms of the Merger Agreement, shareholders of Wolverine received 1.5228 shares of Horizon common stock and $14.00 in cash for each outstanding share of Wolverine common stock. Wolverine shares outstanding at the closing to be exchanged were 2,129,331 and the shares of Horizon common stock issued to Wolverine shareholders totaled 3,241,045. Based upon the October 16, 2017 closing price of $19.37 per share of Horizon common stock immediately prior to the effectiveness of the merger, less the consideration used to pay off Wolverine Bancorp’s ESOP loan receivable, the transaction has an implied valuation of approximately $93.8 million.

On September 1, 2017, Horizon completed the acquisition of Lafayette Community Bancorp, an Indiana corporation (“Lafayette”) and Horizon Bank’s acquisition of Lafayette Community Bank, a state-chartered bank and wholly-owned subsidiary of Lafayette, through mergers effective September 1, 2017. Under the terms of the Merger Agreement, shareholders of Lafayette received 0.8817 shares of Horizon common stock and $1.73 in cash for each outstanding share of Lafayette common stock. Lafayette shareholders owning fewer than 100 shares of common stock received $17.25 in cash for each common share. Lafayette shares outstanding at the closing to be exchanged were 1,856,679, and the shares of Horizon common stock issued to Lafayette shareholders totaled 1,636,888. Based upon the August 31, 2017 closing price of $17.45 per share of Horizon common stock immediately prior to the effectiveness of the merger, the transaction has an implied valuation of approximately $34.5 million.

 

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Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

On February 3, 2017, Horizon completed the purchase and assumption of certain assets and liabilities of a single branch of First Farmers Bank & Trust Company, located in Bargersville, Indiana. Net cash of $11.0 million was received in the transaction, representing the deposit balances assumed at closing, net of amounts paid for loans acquired in the transaction and a premium on deposits assumed in the transaction.

Following are some highlights of Horizon’s financial performance through the first six months of 2018:

 

   

Net income for the quarter ended June 30, 2018 was $14.1 million, or $0.37 diluted earnings per share, compared to $9.1 million, or $0.27 diluted earnings per share, for the quarter ended June 30, 2017 resulting in a 37.0% increase in diluted earnings per share. This represents the highest quarterly net income and diluted earnings per share in the Company’s 145-year history.

 

   

Net income for the first six months of 2018 was $26.9 million, or $0.70 diluted earnings per share, compared to $17.3 million, or $0.51 diluted earnings per share, for the first six months of 2017 resulting in a 37.3% increase in diluted earnings per share. This represents the highest year-to-date net income and diluted earnings per share as of June 30th in the Company’s 145-year history.

 

   

Return on average assets was 1.41% for the second quarter of 2018 compared to 1.12% for the second quarter of 2017. Return on average assets for the first six months of 2018 was 1.36% compared to 1.10% for the first six months of 2017.

 

   

Return on average equity was 12.15% for the second quarter of 2018 compared to 10.24% for the second quarter of 2017. Return on average equity was 11.72% for the first six months of 2018 compared to 9.96% for the first six months of 2017.

 

   

Total loans increased by an annualized rate of 6.6%, or $92.4 million, during the first six months of 2018.

 

   

Consumer loans increased by an annualized rate of 20.5%, or $46.9 million, during the first six months of 2018.

 

   

Residential mortgage loans increased by an annualized rate of 9.3%, or $27.9 million, during the first six months of 2018.

 

   

Total deposits increased by an annualized rate of 9.5%, or $135.2 million, during the first six months of 2018.

 

   

Net interest income increased $6.4 million, or 23.4%, to $33.6 million for the three months ended June 30, 2018 compared to $27.2 million for the three months ended June 30, 2017. Net interest income increased $14.2 million, or 26.9%, to $67.0 million for the six months ended June 30, 2018 compared to $52.8 million for the six months ended June 30, 2017.

 

   

Net interest margin was 3.78% for the three months ended June 30, 2018 compared to 3.84% for the three months ended June 30, 2017. Net interest margin for the six months ended June 30, 2018 and 2017 was 3.81%.

 

   

Horizon’s tangible book value per share increased to $8.84 at June 30, 2018 compared to $8.48 and $8.13 at December 31, 2017 and June 30, 2017, respectively. This represents the highest tangible book value per share in the Company’s 145-year history.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

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 2017 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, goodwill and 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 June 30, 2018, Horizon had core deposit intangibles of $11.4 million subject to amortization and $119.9 million of goodwill, which is not subject to amortization. Goodwill arising from business combinations represents the value attributable to unidentifiable intangible assets in the business acquired. Horizon’s goodwill relates to the value inherent in the banking industry and that value is dependent upon the ability of Horizon to provide quality, cost effective banking services in a competitive marketplace. The goodwill value is supported by revenue that is in part driven by the volume of business transacted. A decrease in earnings resulting from a decline in the customer base or the inability to deliver cost effective services over sustained periods can lead to impairment of goodwill that could adversely affect earnings in future periods. FASB ASC 350-10 requires 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 June 30, 2018 was $20.69 per share compared to a book value of $12.27 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

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

its amortized book value. Future changes in management’s assessment of the impairment of these servicing assets, as a result of changes in observable market data relating to market interest rates, loan prepayment speeds, and other factors, could impact Horizon’s financial condition and results of operations either positively or negatively.

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

Derivative Instruments

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

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, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

Financial Condition

On June 30, 2018, Horizon’s total assets were $4.077 billion, an increase of approximately $112.3 million compared to December 31, 2017. The increase was primarily in net loans of $91.8 million, other assets of $6.2 million and investment securities available for sale and held to maturity of $16.5 million and $9.3 million, respectively, which were offset by decreases in cash and due from banks of $7.4 million and interest receivable of $3.3 million.

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

 

     June 30, 2018      December 31, 2017  
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Available for sale

           

U.S. Treasury and federal agencies

   $ 24,654      $ 24,219      $ 19,277      $ 19,052  

State and municipal

     136,732        134,981        148,045        149,564  

Federal agency collateralized mortgage obligations

     168,382        164,134        132,871        130,365  

Federal agency mortgage-backed pools

     203,593        196,995        211,487        208,657  

Private labeled mortgage-backed pools

     —          —          1,650        1,642  

Corporate notes

     5,725        5,866        272        385  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale investment securities

   $ 539,086      $ 526,195      $ 513,602      $ 509,665  
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity

           

State and municipal

   $ 190,079      $ 187,380      $ 179,836      $ 180,397  

Federal agency collateralized mortgage obligations

     5,409        5,260        5,734        5,682  

Federal agency mortgage-backed pools

     14,279        14,090        14,878        15,006  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity investment securities

   $ 209,767      $ 206,730      $ 200,448      $ 201,085  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans increased $92.4 million since December 31, 2017 to $2.928 billion as of June 30, 2018. This increase was the result of an increase in consumer loans of $46.9 million, residential mortgage loans of $27.9 million, mortgage warehouse loans of $14.5 million and commercial loans of $3.3 million, offset by a decrease in loans held for sale of $94,000. The growth markets of Fort Wayne, Grand Rapids, Indianapolis and Kalamazoo contributed total loan growth of $34.3 million during the first six months of 2018. Our experienced consumer loan team and increased focus on the consumer portfolio have been the main drivers for the increase in consumer loans.

Total deposits increased $135.2 million since December 31, 2017 to $3.016 billion as of June 30, 2018. Non-interest bearing transaction accounts and time deposits increased $13.2 million and $189.4 million, respectively, during the six months ended June 30, 2018 which was offset by a decrease in interest-bearing deposits of $67.5 million.

The Company decreased total borrowings from $564.2 million as of December 31, 2017 to $524.8 million as of June 30, 2018. At June 30, 2018, the Company had $366.4 million in short-term funds borrowed compared to $392.3 million at December 31, 2017. The decrease in borrowings was primarily due to the increase in deposits of $135.2 million from December 31, 2017.

Stockholders’ equity totaled $470.5 million at June 30, 2018 compared to $457.1 million at December 31, 2017. The increase in stockholders’ equity during the period was due to the generation of net income, net of dividends declared and a decrease in accumulated other comprehensive income. At June 30, 2018, the ratio of average stockholders’ equity to average assets was 11.60% compared to 11.70% at December 31, 2017. Book value per common share at June 30, 2018 increased to $12.27 compared to $11.93 at December 31, 2017.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

Results of Operations

Overview

Consolidated net income for the three-month period ended June 30, 2018 was $14.1 million compared to $9.1 million for the same period in 2017. Earnings per common share for the three months ended June 30, 2018 were $0.37 basic and diluted, compared to $0.27 basic and diluted for the same three-month period in the previous year. The increase in net income and earnings per share from the previous year reflects increases in net interest income of $6.4 million and non-interest income of $720,000, partially offset by increases in provision for loan losses of $305,000 and non-interest expense of $2.5 million. Non-interest expense increased primarily due to an increase in salaries, employee benefits, net occupancy expenses, data processing, loan expense, other losses and other expense. Excluding loss on sale of investment securities, death benefit on bank owned life insurance and purchase accounting adjustments, net income for the second quarter of 2018 was $12.7 million or $0.33 diluted earnings per share compared to $8.6 million or $0.26 diluted earnings per share in the same period of 2017.

Consolidated net income for the six-month period ended June 30, 2018 was $26.9 million compared to $17.3 million for the same period of 2017. Earnings per common share for the six months ended June 30, 2018 were $0.70 basic and diluted, compared to $0.52 basic and $0.51 diluted for the same six-month period in the previous year. The increase in net income and earnings per share from the previous year reflects increases in net interest income of $14.2 million and non-interest income of $1.5 million, partially offset by increases in provision for loan losses of $542,000 and non-interest expense of $6.8 million. Non-interest expense increased primarily due to an increase in salaries, employee benefits, net occupancy expenses, data processing, loan expense, other losses and other expense. Excluding acquisition-related expenses, gains on sale of investment securities, death benefit on bank owned life insurance and purchase accounting adjustments, net income for the six months ended June 30, 2018 was $23.9 million or $0.62 diluted earnings per share compared to $16.1 million or $0.47 diluted earnings per share in the same period of 2017.

Net Interest Income

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

Net interest income during the three months ended June 30, 2018 was $33.6 million, an increase of $6.4 million from the $27.2 million earned during the same period in 2017. Yields on the Company’s interest-earning assets increased by 24 basis points to 4.57% for the three months ending June 30, 2018 from 4.33% for the three months ended June 30, 2017. Interest income increased $9.9 million from $30.8 million for the three months ended June 30, 2017 to $40.7 million for the same period in 2018. This was due to an increase in average interest-earning assets through organic and acquisition-related growth. Interest income from acquisition-related purchase accounting adjustments was $1.6 million for the three months ending June 30, 2018 compared to $939,000 for the same period of 2017.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

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

 

     Three Months Ended     Three Months Ended  
     June 30, 2018     June 30, 2017  
     Average
Balance
    Interest      Average
Rate
    Average
Balance
    Interest      Average
Rate
 

Assets

              

Interest-earning assets

              

Federal funds sold

   $ 3,367     $ 15        1.79   $ 1,728     $ 6        1.39

Interest-earning deposits

     25,946       107        1.65     27,677       83        1.20

Investment securities - taxable

     416,182       2,441        2.35     423,815       2,155        2.04

Investment securities - non-taxable(1)

     307,219       1,870        3.15     290,494       1,766        3.40

Loans receivable(2)(3)

     2,886,087       36,308        5.08     2,199,913       26,795        4.94
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets(1)

     3,638,801       40,741        4.57     2,943,627       30,805        4.33

Non-interest-earning assets

              

Cash and due from banks

     44,213            42,331       

Allowance for loan losses

     (16,617          (15,131     

Other assets

     351,154            279,024       
  

 

 

        

 

 

      

Total average assets

   $ 4,017,551          $ 3,249,851       
  

 

 

        

 

 

      

Liabilities and Stockholders’ Equity

              

Interest-bearing liabilities

              

Interest-bearing deposits

   $ 2,403,780     $ 3,920        0.65   $ 1,980,025     $ 1,721        0.35

Borrowings

     489,608       2,679        2.19     359,462       1,338        1.49

Subordinated debentures

     36,525       592        6.50     36,340       548        6.05
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     2,929,913       7,191        0.98     2,375,827       3,607        0.61

Non-interest-bearing liabilities

              

Demand deposits

     605,188            499,446       

Accrued interest payable and other liabilities

     16,482            19,143       

Stockholders’ equity

     465,968            355,435       
  

 

 

        

 

 

      

Total average liabilities and stockholders’ equity

   $ 4,017,551          $ 3,249,851       
  

 

 

   

 

 

      

 

 

   

 

 

    

Net interest income/spread

     $ 33,550        3.59     $ 27,198        3.73
    

 

 

        

 

 

    

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

          3.78          3.84

 

(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. The average rate is presented on a tax equivalent basis.

 

(2) 

Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.

 

(3) 

Non-accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.

Rates paid on interest-bearing liabilities increased by 37 basis points for the three-month period ended June 30, 2018 compared to the same period in 2017 due to increases in the cost of interest-bearing deposits and borrowings. Interest expense increased $3.6 million compared to the three-month period ended June 30, 2017 to $7.2 million for the same period in 2018. This increase was due to higher average balances of interest-bearing deposits and borrowings in addition to the higher rates paid on both. Average balances of interest-bearing deposits increased $423.8 million and were due to the acquisitions of Lafayette and Wolverine during the third and fourth quarters of 2017, as well as organic growth during the first six months of 2018.

The net interest margin decreased 6 basis points from 3.84% for the three-month period ended June 30, 2017 to 3.78% for the same period in 2018. The decrease in the margin for the three-month period ended June 30, 2018 compared to the same period in 2017 was due to an increase in the cost of interest-bearing liabilities and the impact of the lower income tax rate on non-taxable interest-earning assets, offset by an increase in the yield of taxable interest-earning assets.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.60% for the three-month period ending June 30, 2018 compared to 3.71% for the same period in 2017.

Net interest income during the six months ended June 30, 2018 was $67.0 million, an increase of $14.2 million from the $52.8 million earned during the same period in 2017. Yields on the Company’s interest-earning assets increased by 26 basis points to 4.55% for the six months ending June 30, 2018 from 4.29% for the six months ended June 30, 2017. Interest income increased $20.5 million from $59.6 million for the six months ended June 30, 2017 to $80.2 million for the same period in 2018. This was due to an increase in average interest-earning assets through organic and acquisition-related growth. Interest income from acquisition-related purchase accounting adjustments was $3.7 million for the six months ending June 30, 2018 compared to $2.0 million for the same period of 2017.

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

 

     Six Months Ended     Six Months Ended  
     June 30, 2018     June 30, 2017  
     Average
Balance
    Interest      Average
Rate
    Average
Balance
    Interest      Average
Rate
 

Assets

              

Interest-earning assets

              

Federal funds sold

   $ 3,560     $ 29        1.64   $ 2,377     $ 11        0.93

Interest-earning deposits

     24,749       197        1.61     26,220       152        1.17

Investment securities - taxable

     409,669       4,767        2.35     411,417       4,487        2.20

Investment securities - non-taxable(1)

     307,462       3,735        3.13     280,563       3,403        3.40

Loans receivable(2)(3)

     2,855,236       71,439        5.05     2,150,307       51,586        4.85
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets(1)

     3,600,676       80,167        4.55     2,870,884       59,639        4.29

Non-interest-earning assets

              

Cash and due from banks

     43,984            41,788       

Allowance for loan losses

     (16,480          (15,035     

Other assets

     352,684            279,497       
  

 

 

        

 

 

      

Total average assets

   $ 3,980,864          $ 3,177,134       
  

 

 

        

 

 

      

Liabilities and Stockholders’ Equity

              

Interest-bearing liabilities

              

Interest-bearing deposits

   $ 2,354,578     $ 6,791        0.58   $ 1,970,235     $ 3,474        0.36

Borrowings

     508,731       5,251        2.08     305,116       2,275        1.50

Subordinated debentures

     37,695       1,164        6.23     36,315       1,124        6.24
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     2,901,004       13,206        0.92     2,311,666       6,873        0.60

Non-interest-bearing liabilities

              

Demand deposits

     600,214            495,262       

Accrued interest payable and other liabilities

     16,490            19,901       

Stockholders’ equity

     463,156            350,305       
  

 

 

        

 

 

      

Total average liabilities and stockholders’ equity

   $ 3,980,864          $ 3,177,134       
  

 

 

   

 

 

      

 

 

   

 

 

    

Net interest income/spread

     $ 66,961        3.64     $ 52,766        3.69
    

 

 

        

 

 

    

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

          3.81          3.81

 

(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. The average rate is presented on a tax equivalent basis.

(2) 

Includes fees on loans. The inclusion of loan fees does not have a material effect on the average interest rate.

(3) 

Non-accruing loans for the purpose of the computations above are included in the daily average loan amounts outstanding. Loan totals are shown net of unearned income and deferred loan fees. The average rate is presented on a tax equivalent basis.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

Rates paid on interest-bearing liabilities increased by 32 basis points for the six-month period ended June 30, 2018 compared to the same period in 2017 due to increases in the cost of interest-bearing deposits and borrowings. Interest expense increased $6.3 million compared to the six-month period ended June 30, 2017 to $13.2 million for the same period in 2018. This increase was due to higher average balances of interest-bearing deposits and borrowings in addition to the higher rates paid on both. Average balances of interest-bearing deposits increased $384.3 million and were due to the acquisitions of Lafayette and Wolverine during the third and fourth quarters of 2017, as well as organic growth during the first six months of 2018.

The net interest margin remained at 3.81% for the six-month periods ended June 30, 2018 and 2017, respectively. The increase in the cost of interest-bearing liabilities and the impact of the lower income tax rate on non-taxable interest-earning assets was offset by an increase in the yield of taxable interest-earning assets when comparing the six-month periods ended June 30, 2017 and 2018. Excluding the interest income recognized from the acquisition-related purchase accounting adjustments, the margin would have been 3.61% for the six-month period ending June 30, 2018 compared to 3.67% for the same period in 2017.

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 June 30, 2018, a provision of $635,000 was required to adequately fund the ALLL compared to $330,000 for the same period of 2017. Commercial loan net charge-offs during the three-month period ended June 30, 2018 were negative $40,000, residential mortgage loan net charge-offs were negative $2,000 and consumer loan net charge-offs were $80,000. The increase in the provision for loan losses in the second quarter of 2018 compared to the same period of 2017 was due to additional general and non-specific allocations for loan growth in new markets, higher than anticipated growth of the indirect loan portfolio and an increase in allocation for other economic factors, including the potential of a recession. The ALLL balance at June 30, 2018 was $17.1 million or 0.58% of total loans. This compares to an ALLL balance of $16.4 million at December 31, 2017 or 0.58% of total loans.

For the six-month period ended June 30, 2018, the provision for loan losses totaled $1.2 million compared to $660,000 in the same period of 2017. The increase in the provision for loan losses was due to additional general and non-specific allocations for loan growth in new markets, higher than anticipated growth of the indirect loan portfolio and an increase in allocation for other economic factors, including the potential of a recession.

Horizon’s loan loss reserve ratio, excluding loans with credit-related purchase accounting adjustments, stood at 0.75% as of June 30, 2018. Loan loss reserves and credit-related loan discounts on acquired loans as a percentage of total loans was 1.08% as of June 30, 2018. The table below illustrates Horizon’s loan loss reserve ratio composition as of June 30, 2018.

Non-GAAP Allowance for Loan and Lease Loss Detail

As of June 30, 2018

(Dollars in Thousands, Unaudited)

 

     Pre-discount
Loan
Balance
     Allowance
for Loan
Losses
(ALLL)
     Loan
Discount
     ALLL
+
Loan
Discount
     Loans, net      ALLL/
Pre-discount
Loan Balance
    Loan
Discount/
Pre-discount
Loan Balance
    ALLL+Loan
Discount/
Pre-discount
Loan Balance
 

Horizon Legacy

   $ 2,280,089      $ 17,071        N/A      $ 17,071      $ 2,263,018        0.75     0.00     0.75

Heartland

     10,290        —          725        725        9,565        0.00     7.05     7.05

Summit

     31,357        —          1,858        1,858        29,499        0.00     5.93     5.93

Peoples

     99,586        —          2,259        2,259        97,327        0.00     2.27     2.27

Kosciusko

     46,070        —          700        700        45,370        0.00     1.52     1.52

LaPorte

     108,429        —          3,283        3,283        105,146        0.00     3.03     3.03

CNB

     5,293        —          144        144        5,149        0.00     2.72     2.72

Lafayette

     112,352        —          2,036        2,036        110,316        0.00     1.81     1.81

Wolverine

     234,050        —          3,447        3,447        230,603        0.00     1.47     1.47
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

        

Total

   $ 2,927,516      $ 17,071      $ 14,452      $ 31,523      $ 2,895,993        0.58     0.49     1.08
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

        

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

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 June 30, 2018.

Non-performing loans totaled $15.4 million as of June 30, 2018, down from $16.4 million as of December 31, 2017. Non-performing real estate and consumer loans decreased by $1.8 million and $837,000, respectively, at June 30, 2018 compared to December 31, 2017. Non-performing commercial loans increased $1.6 million at June 30, 2018 compared to December 31, 2017.

Other Real Estate Owned (OREO) and repossessed assets totaled $3.0 million at June 30, 2018 compared to $838,000 on December 31, 2017 and $2.2 million on June 30, 2017. The majority of this increase was due to several bank owned properties acquired through acquisitions and listed for sale being re-classified to other real estate owned and recorded at fair value during the second quarter of 2018.

Non-interest Income

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

 

     Three Months Ended         
Non-interest Income    June 30
2018
     June 30
2017
     Amount
Change
     Percent
Change
 

Service charges on deposit accounts

   $ 1,907      $ 1,566      $ 341        21.8

Wire transfer fees

     180        178        2        1.1

Interchange fees

     1,555        1,382        173        12.5

Fiduciary activities

     1,818        1,943        (125      -6.4

Gain on sale of investment securities

     —          (3      3        -100.0

Gain on sale of mortgage loans

     1,896        2,054        (158      -7.7

Mortgage servicing net of impairment

     511        359        152        42.3

Increase in cash surrender value of bank owned life insurance

     442        408        34        8.3

Death benefit on bank owned life insurance

     154        —          154        0.0

Other income

     469        325        144        44.3
  

 

 

    

 

 

    

 

 

    

Total non-interest income

   $ 8,932      $ 8,212      $ 720        8.8
  

 

 

    

 

 

    

 

 

    

Total non-interest income was $720,000 higher during the second quarter of 2018 compared to the same period of 2017. Service charges on deposit accounts increased $341,000 and interchange fees increased by $173,000 primarily due to overall company growth and increased volume. Residential mortgage loan activity during the second quarter of 2018 generated $1.9 million of income from the gain on sale of mortgage loans, down $158,000 from the same period in 2017. The decrease in the gain on sale of mortgage loans was due to a decrease in the volume of mortgage loans sold from $57.5 million in the second quarter of 2017 to $51.0 million in the same period of 2018. Total mortgage loan originations, including mortgage loans sold, decreased to $109.0 million for the second quarter of 2018 compared to $110.4 million for the second quarter of 2017.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

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

 

     Six Months Ended         
Non-interest Income    June 30
2018
     June 30
2017
     Amount
Change
     Percent
Change
 

Service charges on deposit accounts

   $ 3,795      $ 2,966      $ 829        28.0

Wire transfer fees

     330        328        2        0.6

Interchange fees

     2,883        2,558        325        12.7

Fiduciary activities

     3,743        3,865        (122      -3.2

Gain on sale of investment securities

     11        32        (21      -65.6

Gain on sale of mortgage loans

     3,319        3,968        (649      -16.4

Mortgage servicing net of impairment

     860        806        54        6.7

Increase in cash surrender value of bank
owned life insurance

     877        872        5        0.6

Death benefit on bank owned life insurance

     154        —          154        0.0

Other income

     1,278        376        902        239.9
  

 

 

    

 

 

    

 

 

    

Total non-interest income

   $ 17,250      $ 15,771      $ 1,479        9.4
  

 

 

    

 

 

    

 

 

    

Total non-interest income was $1.5 million higher during the first six months of 2018 compared to the same period of 2017. Service charges on deposit accounts increased $829,000 and interchange fees increased by $325,000 primarily due to overall company growth and increased volume. Residential mortgage loan activity during the first six months of 2018 generated $3.3 million of income from the gain on sale of mortgage loans, down $649,000 from the same period in 2017. The decrease in the gain on sale of mortgage loans was due to a decrease in the volume of mortgage loans sold from $107.5 million during the first six months of 2017 to $86.8 million during the same period of 2018. Total mortgage loan originations, including mortgage loans sold, increased to $181.3 million for the first six months of 2018 compared to $176.3 million for the same period of 2017.

Non-interest Expense

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

 

     Three Months Ended         
Non-interest Expense    June 30
2018
     June 30
2017
     Amount
Change
     Percent
Change
 

Salaries

   $ 10,043      $ 9,116      $ 927        10.2

Commission and bonuses

     1,509        1,389        120        8.6

Employee benefits

     2,257        1,961        296        15.1

Net occupancy expenses

     2,520        2,196        324        14.8

Data processing

     1,607        1,502        105        7.0

Professional fees

     376        535        (159      -29.7

Outside services and consultants

     1,267        1,265        2        0.2

Loan expense

     1,525        1,250        275        22.0

FDIC deposit insurance

     345        243        102        42.0

Other losses

     269        78        191        244.9

Other expenses

     3,224        2,953        271        9.2
  

 

 

    

 

 

    

 

 

    

Total non-interest expense

   $ 24,942      $ 22,488      $ 2,454        10.9
  

 

 

    

 

 

    

 

 

    

Total non-interest expense was $2.5 million higher in the second quarter of 2018 compared to the same period of 2017. The increase was primarily due to an increase in salaries and employee benefits of $1.3 million, net occupancy expenses of $324,000, loan expense of $275,000, other expenses of $271,000, other losses of $191,000, data processing of $105,000 and FDIC deposit insurance of $102,000. The increase in salaries and employee benefits, net occupancy expense, other expense, data processing and FDIC deposit insurance reflect overall company growth and the acquisitions of Lafayette Community Bancorp and Wolverine Bancorp, Inc. during the third and fourth quarters of

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

2017. Loan expense increased due to a higher level of loan originations and loan collection expenses when compared to the second quarter of 2017. Other losses increased primarily due to write-downs on other bank owned properties and an accrual for a potential loss on a fiduciary account recorded during the second quarter of 2018.

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

 

     Six Months Ended         
Non-interest Expense    June 30
2018
     June 30
2017
     Amount
Change
     Percent
Change
 

Salaries

   $ 20,117      $ 17,622      $ 2,495        14.2

Commission and bonuses

     2,856        2,450        406        16.6

Employee benefits

     5,209        4,103        1,106        27.0

Net occupancy expenses

     5,486        4,648        838        18.0

Data processing

     3,303        2,809        494        17.6

Professional fees

     877        1,148        (271      -23.6

Outside services and consultants

     2,531        2,487        44        1.8

Loan expense

     2,782        2,357        425        18.0

FDIC deposit insurance

     655        506        149        29.4

Other losses

     415        128        287        224.2

Other expenses

     6,548        5,751        797        13.9
  

 

 

    

 

 

    

 

 

    

Total non-interest expense

   $ 50,779      $ 44,009      $ 6,770        15.4
  

 

 

    

 

 

    

 

 

    

Total non-interest expense was $6.8 million higher for the six months ended June 30, 2018 when compared to the six months ended June 30, 2017. The increase was primarily due to increases in salaries and employee benefits of $4.0 million, net occupancy expenses of $838,000, other expense of $797,000, data processing of $494,000 and loan expense of $425,000. The increase in salaries and employee benefits, net occupancy expense, other expense and data processing expense reflect overall company growth and recent acquisitions. Loan expense increased due to a higher level of loan originations and collection expenses during the six months ended June 30, 2018 when compared to the same period of 2017. Offsetting these increases was a decrease of $271,000 in professional fees primarily due to a lack of acquisition-related expenses in 2018.

Income Taxes

Income tax expense totaled $2.8 million for the second quarter of 2018, a decrease of $730,000 when compared to the second quarter of 2017. The decrease was primarily due to the impact of the new corporate tax rate which was signed into law at the end of 2017 reducing the effective federal tax rate from 35% to 21% and the benefits from the exercising of stock options. This decrease was offset by an increase in income before income taxes of $4.3 million when comparing the second quarter of 2018 to the same period of 2017.

Income tax expense totaled $5.3 million for the six months ended June 30, 2018, a decrease of $1.3 million when compared to the six months ended June 30, 2017. The decrease was primarily due to the impact of the new corporate tax rate which was signed into law at the end of 2017 reducing the effective federal tax rate from 35% to 21% and the benefits from the exercising of stock options. This decrease was offset by an increase in income before income taxes of $8.4 million when comparing the first six months of 2018 to the same period of 2017.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

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, unpledged investment securities and borrowing relationships with correspondent banks, including the FHLB. During the six months ended June 30, 2018, cash and cash equivalents decreased by approximately $7.4 million. At June 30, 2018, in addition to liquidity available from the normal operating, funding, and investing activities of Horizon, the Bank had approximately $207.3 million in unused credit lines with various money center banks, including the FHLB and the FRB Discount Window compared to $127.2 million at December 31, 2017 and $181.2 million at June 30, 2017. The Bank had approximately $561.3 million of unpledged investment securities at June 30, 2018 compared to $518.2 million at December 31, 2017 and $545.0 million at June 30, 2017.

Capital Resources

The capital resources of Horizon and the Bank exceeded regulatory capital ratios for “well capitalized” banks at June 30, 2018. Stockholders’ equity totaled $470.5 million as of June 30, 2018, compared to $457.1 million as of December 31, 2017. For the six months ended June 30, 2018, the ratio of average stockholders’ equity to average assets was 11.63% compared to 11.15% for the twelve months ended December 31, 2017. The increase in stockholders’ equity during the period was the result of the generation of net income, net of dividends declared.

Horizon declared common stock dividends in the amount of $0.20 per share during the first six months of 2018 and $0.16 per share for the same period of 2017. The dividend payout ratio (dividends as a percent of basic earnings per share) was 28.5% and 30.8% for the first six months of 2018 and 2017, respectively. For additional information regarding dividends, see Horizon’s Annual Report on Form 10-K for 2017.

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

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 relating to net income, diluted earnings per share, net interest margin, the allowance for loan and lease losses, tangible stockholders’ equity, tangible book value per share, the return on average assets and the return on average common equity. In each case, we have identified special circumstances that we consider to be non-recurring and have excluded them, to show the impact of such events as acquisition-related purchase accounting adjustments and the tax reform bill, among others we have identified in our reconciliations. 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. 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. See the tables and other information below and contained elsewhere in this Report on Form 10-Q for reconciliations of the non-GAAP figures identified herein and their most comparable GAAP measures.

Non-GAAP Reconciliation of Net Interest Margin

(Dollars in Thousands, Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30     March 31     June 30     June 30     June 30  
     2018     2018     2017     2018     2017  

Non-GAAP Reconciliation of Net Interest Margin

          

Net interest income as reported

   $ 33,550     $ 33,411     $ 27,198     $ 66,961     $ 52,766  

Average interest-earning assets

     3,638,801       3,580,143       2,943,627       3,600,676       2,870,884  

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

     3.78     3.81     3.84     3.81     3.81

Acquisition-related purchase accounting adjustments (“PAUs”)

   $ (1,634   $ (2,037   $ (939     (3,671     (1,955
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Core net interest income

   $ 31,916     $ 31,374     $ 26,259       63,290       50,811  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Core net interest margin

     3.60     3.55     3.71     3.61     3.67
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

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

(Dollars in Thousands, Except per Share Data, Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30     March 31     June 30     June 30     June 30  
     2018     2018     2017     2018     2017  

Non-GAAP Reconciliation of Net Income

          

Net income as reported

   $ 14,115     $ 12,804     $ 9,072     $ 26,919     $ 17,296  

Merger expenses

     —         —         200       —         200  

Tax effect

     —         —         (70     —         (70
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding merger expenses

     14,115       12,804       9,202       26,919       17,426  

Gain on sale of investment securities

     —         (11     3       (11     (32

Tax effect

     —         2       (1     2       11  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding gain on sale of investment securities

     14,115       12,795       9,204       26,910       17,405  

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

     (154     —         —         (154     —    

Tax effect

     32       —         —         32       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income excluding death benefit on BOLI

     13,993       12,795       9,204       26,788       17,405  

Acquisition-related purchase accounting adjustments (“PAUs”)

     (1,634     (2,037     (939     (3,671     (1,955

Tax effect

     343       428       329       771       684  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Core Net Income

   $ 12,702     $ 11,186     $ 8,594     $ 23,888     $ 16,134  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Reconciliation of Diluted Earnings per Share

          

Diluted earnings per share (“EPS”) as reported

   $ 0.37     $ 0.33     $ 0.27     $ 0.70     $ 0.51  

Merger expenses

     —         —         0.01       —         0.01  

Tax effect

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted EPS excluding merger expenses

     0.37       0.33       0.28       0.70       0.52  

Gain on sale of investment securities

     —         —         —         —         —    

Tax effect

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted EPS excluding gain on sale of investment securities

     0.37       0.33       0.28       0.70       0.52  

Death benefit on BOLI

     —         —         —         —         —    

Tax effect

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted EPS excluding death benefit on BOLI

     0.37       0.33       0.28       0.70       0.52  

Acquisition-related PAUs

     (0.04     (0.05     (0.03     (0.10     (0.06

Tax effect

     —         0.01       0.01       0.02       0.01  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Core Diluted EPS

   $ 0.33     $ 0.29     $ 0.26     $ 0.62     $ 0.47  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Reconciliation of Tangible Stockholders’ Equity and Tangible Book Value per Share

(Dollars in Thousands Except per Share Data, Unaudited)

 

     June 30      March 31      December 31      September 30      June 30  
     2018      2018      2017      2017      2017  

Total stockholders’ equity

   $ 470,535      $ 460,416      $ 457,078      $ 392,055      $ 357,259  

Less: Intangible assets

     131,239        131,724        132,282        103,244        86,726  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total tangible stockholders’ equity

   $ 339,296      $ 328,692      $ 324,796      $ 288,811      $ 270,533  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Common shares outstanding

     38,362,640        38,332,853        38,294,729        34,988,189        33,264,698  

Tangible book value per common share

   $ 8.84      $ 8.57      $ 8.48      $ 8.25      $ 8.13  

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Management’s Discussion and Analysis of Financial Condition

And Results of Operations

For the Three and Six Months ended June 30, 2018 and 2017

 

Non-GAAP Reconciliation of Return on Average Assets and Return on Average Common Equity

(Dollars in Thousands, Unaudited)

 

   
   
     Three Months Ended     Six Months Ended  
     June 30     March 31     June 30     June 30     June 30  
     2018     2018     2017     2018     2017  

Non-GAAP Reconciliation of Return on Average Assets

          

Average assets

   $ 4,017,551     $ 3,942,837     $ 3,249,851     $ 3,980,864     $ 3,177,134  

Return on average assets (“ROAA”) as reported

     1.41     1.32     1.12     1.36     1.10

Merger expenses

     0.00     0.00     0.02     0.00     0.01

Tax effect

     0.00     0.00     -0.01     0.00     0.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ROAA excluding merger expenses

     1.41     1.32     1.13     1.36     1.11

Gain on sale of investment securities

     0.00     0.00     0.00     0.00     0.00

Tax effect

     0.00     0.00     0.00     0.00     0.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ROAA excluding gain on sale of investment securities

     1.41     1.32     1.13     1.36     1.11

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

     -0.02     0.00     0.00     -0.01     0.00

Tax effect

     0.00     0.00     0.00     0.00     0.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ROAA excluding death benefit on BOLI

     1.39     1.32     1.13     1.35     1.11

Acquisition-related purchase accounting adjustments (“PAUs”)

     -0.16     -0.21     -0.12     -0.19     -0.12

Tax effect

     0.03     0.04     0.04     0.04     0.04
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Core ROAA

     1.26     1.15     1.05     1.20     1.03
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Reconciliation of Return on Average Common Equity

          

Average Common Equity

   $ 465,968     $ 460,076     $ 355,435     $ 463,156     $ 350,305  

Return on average common equity (“ROACE”) as reported

     12.15     11.29     10.24     11.72     9.96

Merger expenses

     0.00     0.00     0.23     0.00     0.12

Tax effect

     0.00     0.00     -0.08     0.00     -0.04
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ROACE excluding merger expenses

     12.15     11.29     10.39     11.72     10.04

Gain on sale of investment securities

     0.00     -0.01     0.00     0.00     -0.02

Tax effect

     0.00     0.00     0.00     0.00     0.01
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ROACE excluding gain on sale of investment securities

     12.15     11.28     10.39     11.72     10.03

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

     -0.13     0.00     0.00     -0.07     0.00

Tax effect

     0.03     0.00     0.00     0.01     0.00
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

ROACE excluding death benefit on BOLI

     12.05     11.28     10.39     11.66     10.03

Acquisition-related purchase accounting adjustments (“PAUs”)

     -1.41     -1.80     -1.06     -1.60     -1.13

Tax effect

     0.30     0.38     0.37     0.34     0.39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Core ROACE

     10.94     9.86     9.70     10.40     9.29
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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HORIZON BANCORP, INC. AND SUBSIDIARIES

Quantitative and Qualitative Disclosures About Market Risk

For the Three and Six Months ended June 30, 2018 and 2017

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We refer you to Horizon’s 2017 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 2017 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 June 30, 2018, 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 June 30, 2018, 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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Table of Contents

HORIZON BANCORP, INC. AND SUBSIDIARIES

Part II – Other Information

For the Three and Six Months ended June 30, 2018 and 2017

 

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 2017.

 

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, INC. AND SUBSIDIARIES

Part II – Other Information

For the Three and Six Months ended June 30, 2018 and 2017

 

ITEM 6.

EXHIBITS

(a) Exhibits

Exhibit Index

 

Exhibit
No.
   Description    Location
    3.1    Amended and Restated Articles of Incorporation of Horizon Bancorp, Inc., as amended by the Articles of Amendment effective May  16, 2018    Incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed May 16, 2018
  10.1    Horizon Bancorp Amended and Restated 2013 Omnibus Equity Incentive Plan (effective February  1, 2013; amended and restated as of December 19, 2017; approved by shareholders effective May 3, 2018    Incorporated by reference to Appendix B to Registrant’s Definitive Proxy Statement for its 2018 Annual Meeting of Shareholders
  31.1    Certification of Craig M. Dwight    Attached
  31.2    Certification of Mark E. Secor    Attached
  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
101    Interactive Data Files    Attached

 

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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: August 7, 2018    

/s/ Craig M. Dwight

 
    Craig M. Dwight  
    Chief Executive Officer  
Dated: August 7, 2018    

/s/ Mark E. Secor

 
    Mark E. Secor  
    Chief Financial Officer  

 

 

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